UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment No. 1
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended November 1, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from _____________ to _______________
Commission File No. 1-4626
Harvey Electronics, Inc. (formerly The Harvey Group Inc. and Subsidiaries)
(Exact name of Small Business Issuer in its charter)
New York 13-1534671
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
205 Chubb Avenue, Lyndhurst, New Jersey 07071
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 842-0078
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
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 if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB/A or any amendment to this Form 10-KSB/A. [ ]
Check whether the issuer has 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 [ ]
<PAGE>
State issuer's revenues for its most recent fiscal year. $15,470,942
State the number of shares outstanding of each of the issuer's classes of
common equity, as of June 15, 1998.
3,282,833
As of June 15, 1998, the aggregate market value of the registrant's common
stock was $7,796,728. The shares are currently traded on the NASDAQ SmallCap
Market under the symbols "HRVE" for the Common Stock and "HRVEW" for the
Warrants to purchase Common Stock.
<PAGE>
Part I
Item 1. Description of Business.
General
Harvey Electronics, Inc. is engaged in the retail sale, service and custom
installation of high quality audio, video and home theater equipment. The
equipment includes high fidelity components and systems, video cassette
recorders ("VCR"), digital versatile disc players ("DVD"), direct view and
projection television sets, audio/video furniture, digital satellite systems,
conventional telephones and related accessories. The Company has been engaged in
this business in the New York Metropolitan area for seventy years. The Company
currently operates four retail stores. The two Manhattan stores are located on
Broadway at 19th Street and on 45th Street at Fifth Avenue. Its other two stores
are located on Route 17 in Paramus, New Jersey and on West Putnam Avenue in
Greenwich, Connecticut.
The Company's stores are designed to offer an attractive and pleasing
environment and to display its products in realistic home settings commonly
known in the industry as "lifestyle home vignettes." Sales personnel are highly
trained professionals with extensive product knowledge. This contrasts sharply
with a more rushed atmosphere and lesser-trained personnel of mass merchants.
Bankruptcy Proceeding and Reorganization
On August 3, 1995, the Company (then known as The Harvey Group Inc. and its
subsidiaries) filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code with the Bankruptcy Court for the Southern District of New York
(the "Court"). This filing was the result of certain factors including but not
limited to: (i) the negative effect of a $2,138,000 judgment entered against the
Company; (ii) liabilities arising from The Harvey Group Inc. and its
discontinued food brokerage division, which remained as liabilities of the
Company, the payment of which significantly reduced cash; (iii) the recession of
the early 1990's coupled with a soft market in the electronics industry, all of
which resulted in losses and a shortage of cash flow; and (iv) the delisting (in
June, 1995) of the Company's Common Stock from the American Stock Exchange,
which delisting rendered a proposed $4.2 million equity placement untenable.
On November 13, 1996, the Court confirmed the Company's Reorganization
Plan. The Effective date of the Reorganization Plan was December 26, 1996 (the
"Effective Date of Plan"), at which time the Company emerged from its Chapter 11
reorganization. At that time, Harvey Sound, Inc., the Company's subsidiary,
merged into the Harvey Group Inc., and the merged entity changed its name to
Harvey Electronics, Inc.
<PAGE>
Pursuant to the Reorganization Plan, as of the Effective Date of Plan, all
of the shares of common and preferred stock of the Company were canceled. The
Company amended its Restated Certificate of Incorporation to authorize, for
issuance, 10,010,000 shares of capital stock as follows: (a) 10,000 shares of 8
1/2% Cumulative Convertible Preferred Stock with a par value of $1,000 per
share; and (b) 10,000,000 shares of Common Stock with a par value of $.01 per
share. See "Description of Securities."
The Reorganization Plan also provided for the distribution of the Common
Stock of the reorganized Company as follows: (a) 2,000,000 shares to Harvey
Acquisition Company, L.L.C. ("HAC") in satisfaction of $2,822,500 of
subordinated secured financing provided to the Company during its bankruptcy
proceeding; (b) 186,306 shares to the Company's unsecured creditors in
satisfaction of the Company's pre-petition obligations owed to its unsecured
creditors; (c) 19,962 shares to the Company's former shareholders; and (d)
51,565 shares to InterEquity Capital Partners, L.P. ("InterEquity"), a
pre-bankruptcy subordinated secured creditor, in satisfaction of a Court allowed
finder's fee.
Prepetition amounts from the subordinated secured debtholders, InterEquity
($600,000) and four individuals who purchased the indebtedness from National
Westminster Bank, USA ($275,000), were exchanged for 875 shares of Preferred
Stock, in accordance with the Reorganization Plan.
Other significant provisions of the Reorganization Plan included: (a)
changing the close of the Company's fiscal year end from the Saturday nearest to
January 31 to the Saturday nearest to October 31; and (b) adoption of a stock
option plan ("Stock Option Plan"), whereby options to purchase up to 1,000,000
shares of Common Stock are authorized.
Sale of Common Stock and Warrants in 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 by HAC. 2,104,500 of Warrants
("Warrants") to acquire additional shares of the Company's common stock were
also sold by the Company. The net proceeds from the Offering, approximately $4.0
million, will be used for retail store explanation 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 exercisable 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 Warrants also are 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 Offering price per share.
<PAGE>
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 will record compensation expense equal to the fair
market value of the shares over the two-year period during which the shares are
subject to forfeiture by the transferees.
As compensation for the Offering, the Underwriters received a 10%
commission; a 3% non-accountable expense allowance and Warrants for 10% of the
number of shares of common stock and Warrants sold to the public. These Warrants
are non-exercisable for one year following the Effective Date and are
exercisable thereafter for a period of five years at 120% of the initial public
offering price. The Company also paid approximately $124,000 at the closing of
the Offering, which represents consulting fees to the Underwriters for a three
year period commencing on the Effective Date. The Underwriters also will, for a
period of three years, engage two designees as advisors to the Board of
Directors. Underwriting expenses are presently in negotiation.
Products
The Company offers its customers a wide selection of high-quality consumer
audio, video and home theater products, the distribution of which is limited to
specialty retailers (generally referred to in the industry as "esoteric
brands.") The Company is one of the country's largest retailers of "esoteric
brands" manufactured by Bang and Olufsen, Marantz, McIntosh, Meridian and Adcom,
whose products the Company has sold for a number of years. The Company believes
that it benefits from strong working relationships with these manufacturers.
For the fifty-three weeks ended November 1, 1997, the Company's audio
product sales represented approximately 74% of the Company's net sales and
yielded gross profit margins of approximately 38%. The Company's video product
sales represented approximately 23% of the Company's net sales and yielded gross
profit margins of approximately 23%. The Company also provides custom
installation of products it sells. Approximately 17% of net product sales
currently involve custom installation. The labor portion of custom installation
presently represents approximately 3% of net sales. The Company also sells
extended warranties on behalf of third party providers. Sales of extended
warranties which yield a gross profit margin in excess of 50%, represent between
1% and 2% of the Company's net sales.
The following table shows, by percentage, the Company's net product sales
attributable to each of the product categories for the periods indicated. Audio
components include speakers, subwoofers, receivers, amplifiers, preamplifiers,
compact disc players, cassette decks, turntables and tuners. The Company also
sells digital satellite systems (DSS) which are included in the VCR/DVD/DSS
category. Accessories primarily include headphones, surge protectors, blank
audio and videotapes and projection screens. The miscellaneous category includes
conventional telephones, answering machines, radios and other portable products.
<TABLE>
<CAPTION>
Fifty-Three Thirty-Nine Fifty-Two
Weeks Ended Week s Ended Weeks Ended
November 1, October 26, January 27,
1997 1996 1996
---------------------- --------------------- --------------------
<S> <C> <C> <C>
Audio Components 53% 51% 53%
Mini Audio Shelf Systems 6 7 8
TV and Projectors 16 18 16
VCR/DVD/DSS 6 5 6
Furniture 4 5 5
Cable and Wire 5 4 4
Accessories 6 4 3
Extended Warranties 1 2 2
Miscellaneous 3 4 3
====================== ===================== ====================
100% 100% 100%
====================== ===================== ====================
</TABLE>
<PAGE>
The percentage of sales by each product category is affected by promotional
activities, consumer preferences, store displays, the development of new
products and elimination or reduction of existing products and, thus, a current
sales mix may not be indicative of the future sales mix.
The Company believes that it is well positioned to benefit from advances in
technologies because new technologies tend to be expensive when first introduced
and the Company's target customers desire and can afford such products. Three
new technologies, DVD, flat screen television, and high definition television,
have recently been, or will shortly be, introduced. The DVD player provides
enhanced picture and sound quality in a format far more convenient and durable
than videotape. The flat screen television expected to be introduced in 1998
allows a 40 inch television to be only six inches from front to back. This
allows the set to be far less obtrusive and more easily integratable into the
home. High definition television, which is expected to significantly improve
picture quality, is expected to be introduced in the next year or two.
The Company intends to continue its recent emphasis on custom installation
which can extend from a single room audio/video system to an entire house with a
combined selling price of installation, labor and product from about $5,000 to
in excess of $100,000. The Company believes custom installation provides the
opportunity to bundle products and increase margins. For example, rather than
just selling a television with an approximate gross profit margin of 23%, custom
installation enables the Company to sell to the same customer speakers at a
margin exceeding 40%, accessories at a margin approximating 50% and installation
labor with margins of over 60%.
<PAGE>
Custom installation projects frequently expand on-site, based on customers'
desires during the installation. A single room home theater, for example, during
the course of the installation can grow into a multi-room system with increased
margins.
Offering custom installation affords the Company a unique selling
opportunity not only because it may not be available at mass merchants, but also
because custom installation can generate repeat customers and customer
referrals. Due to the complexity of the installation provided by the Company,
customers generally remain with the Company, providing the opportunity to sell
upgrades to existing customers. The recent introduction of DVD players and
advanced televisions, as well as other emerging technologies, present
significant opportunities for such upgrades.
Operations
Supplies, Purchasing and Distribution
The Company purchases its products from approximately eighty manufacturers,
ten of which accounted for approximately 56% of the Company's purchases for the
fifty-three weeks ended November 1, 1997. These ten manufacturers are Adcom,
Bang & Olufsen, KEF, Marantz, McIntosh, Meridian, Mitsubishi, Monster Cable,
Pioneer Elite and Sony. No individual manufacturer accounted for more than 10%
of the Company's purchases for the forty weeks ended November 1, 1997, but Sony,
Bang & Olufsen, Marantz, Mitsubishi and Pioneer Elite each accounted for more
than five (5%) percent of purchases for such period.
The Company has entered into substantially identical dealer agreements with
each of Marantz America, Inc., Audio Control, Sony, Cinemapro Corporation,
Mitsubishi Electronics America, Inc., Lenbrook America, LLC (a distributor of
KEF products), Pioneer Electronics (USA), Inc., NAD Electronics of America, Bang
& Olufsen of America, Inc., and Niles Audio Corporation, Inc. Under each dealer
agreement, the Company is authorized to sell the manufacturer's products from
specified retail locations to retail customers and cannot sell the products by
telephone or mail order. Each agreement is for a term of a year or two, subject
to renewal or extension.
Under the dealer agreement between the Company and Mitsubishi, the Company
is required to purchase an aggregate of $400,000 of equipment annually, subject
to an increase. The Company's dealer agreement with Niles Audio requires the
Company to purchase at least $300,000 of equipment per year. The Company's
dealer agreement with Bang & Olufsen requires the Company to purchase $160,000
of equipment annually.
<PAGE>
The Company believes that competitive sources of supply would be available
for many of the Company's products if a current vendor ceased to supply to the
Company. However, a loss of a major source of supply of limited distribution
product could have an adverse impact on the Company. The loss of Bang & Olufsen
as a supplier to the Company would have a significant adverse effect to the
Company because of the uniqueness of Bang & Olufsen's products.
Due to the Company's strong relationships with many of its suppliers and
its volume of purchases, the Company has also been able to obtain additional
manufacturers' rebates based on volume buying levels. On occasion, the Company
has been able to negotiate favorable terms on larger purchases, such as extended
payment terms, additional cooperative advertising contributions or lower prices,
particularly on large purchases. In addition to being a member of a consumer
electronics industry buying group called Home Theater Specialists of America
(HTSA), the Company is also a member of Professional Audio Retailers Association
(PARA) and Custom Electronics Design Installation Association (CEDIA), both of
which provide the Company with additional training in sales and technology.
Purchases are received at the Company's 5,500 sq. ft. warehouse located in
Fairfield, New Jersey. Merchandise is distributed to the Company's retail stores
at least twice a week (and more frequently, if needed), using the Company's
employees and equipment.
The Company's management information system tracks current levels of sales,
inventory, purchasing and other key information and provides management with
information which facilitates merchandising, pricing, sales management and the
management of warehouse and store inventories. This system enables management to
review and analyze the performance of each of its stores and sales personnel on
a periodic basis. The central purchasing department of the Company monitors
current sales and inventory at the stores on a daily basis. In addition, the
Company currently conducts a physical inventory two times a year and between
such physical inventories it conducts monthly and daily cycle counts on selected
types of inventory. The purchasing department also establishes appropriate
levels of inventory at each store and controls the replenishment of store
inventory based on the current delivery or replenishment schedule.
The Company historically has not had material losses of inventory and does
not experience material losses due to cost and market fluctuations, overstocking
or technology. The Company's inventory turnover for the fifty-three week period
ended November 1, 1997, was approximately 2.9 times. The Company has begun to
formulate a plan with its software and service provider to address the risks
associated with the year 2000 computer issue as it affects the Company's
management information system, the cost of which is not expected to be
significant.
Sales and Store Operations
Retail sales are primarily made for cash or by major credit cards. Revenues
are recorded by the Company when the product or service is delivered or rendered
to customers. Customer deposits are recorded as liabilities until the product is
delivered, at which time a sale is recorded and the liability for the customer
deposit is relieved.
In addition, customers who qualify can obtain longer term financing with a
Harvey credit card, which the Company makes available to its customers. The
Harvey credit card is issued by an unrelated finance company, without recourse
to the Company. The Company also periodically, as part of its promotional
activities, makes manufacturer, (i.e., Mitsubishi), sponsored financing
available to its customers. Generally, the cost of such financing is paid for by
the Company, but manufacturers periodically participate with, and contribute to
the Company in financing these promotions.
Each store is operated by a store manager and a senior sales manager. Store
managers report to a Vice President of Operations who oversees all sales and
store operations, and who is further responsible for sales training and the
hiring of all retail employees. Every company store has at least one in-home
audio/video specialist who will survey the job site at a customer's home, design
the custom installation and provide a cost estimate. Each store independently
services its custom installations through a project manager and experienced
installers employed at the store. All stores are staffed with professionally
trained salespeople and warehouse personnel. Salespeople are paid a base salary
plus commission based on gross margins.
All stores have an on-line point of sale computer system which enables the
store managers and corporate headquarters to track sales, margins, inventory
levels, customer deposits, back orders, merchandise on loan to customers,
salesperson performance and customer histories. Store managers perform sales
audit functions before reporting daily results to the main office in Lyndhurst,
New Jersey.
<PAGE>
Services and Repairs
Products under warranty are delivered to the appropriate manufacturer for
repair. Other repairs are sent to the manufacturers or an independent repair
company. Revenues from non-warranty services are not material.
The Company offers an extended warranty contract for most of the audio,
video and other merchandise it sells, which extended warranty contract provides
coverage beyond the manufacturer warranty period. Extended warranties are
provided by an unrelated insurance company on a non-recourse basis to the
Company. The Company collects the retail sales price of the extended warranty
contract from customers and remits the customer information and the cost of the
contract to the insurance company. Sales of extended warranty contracts
represent between 1% and 2% of the Company's net sales. The warranty obligation
is solely the responsibility of the insurance company.
Competition
The Company competes in the New York Metropolitan area with mass merchants,
mail order houses, discount stores and numerous other consumer electronics
specialty stores. The retail electronics industry is dominated by large
retailers with massive, "big box" retail facilities which aggressively discount
mass merchandise. These retailers operate on narrow profit margins and high
volume, driven by aggressive advertising emphasizing low prices. While
nationwide industry leaders are Circuit City and Best Buys, the New York region
has been dominated by local chains including P.C. Richard & Son, Nobody Beats
the Wiz, J&R Music World and Tops Appliance. There is likely to be a significant
change in the local environment inasmuch as Circuit City has begun to open
stores in the New York market.
Many of the competitors sell a broader range of electronic products,
including computers, camcorder and office equipment, and many have substantially
larger sales and greater financial and other resources than the Company. The
Company competes by positioning itself as a retailer of high quality limited
distribution audio and video products and by offering services such as custom
installations which are not generally offered by the mass merchants.
Very few, if any, of the audio products sold by the Company, other than
radios and other portable products, are available at the mass merchants. Of the
major video products sold by the Company, generally only Sony and Mitsubishi
televisions are sold by the mass merchants.
The Company seeks to reinforce its positioning by displaying its products
in lifestyle home vignettes in an attractive and pleasing store environment and
by offering personalized service through trained sales personnel who are fully
familiar with all of the Company's products.
Advertising
During the late 1980's and early 1990's, the Company introduced lesser
quality product lines to become more price competitive. This strategy placed it
in direct competition with mass merchants. This strategy sent a mixed message to
the traditional customers of the Company. Commencing in late 1995 the Company
refocused its operations by returning to its traditional marketing strategy.
The Company now uses smaller, but more frequent advertising, emphasizing
image, products, and technology in the New York Times, Wall Street Journal,
Village Voice, and New York Magazine. The Company also distributes direct mail
advertising several times a year to reach its customer database of over 100,000.
Some of the direct mail promotions are for specific manufacturers, products, or
technology, and are supported by the manufacturers.
Both the print and direct mail advertising consistently offer attractive
financing alternatives on purchases on credit without interest for six or twelve
months. The Company also maintains an Internet site on the World Wide Web, at
www.harveyonline.com. The site promotes the Company's manufacturers and their
products as well as the Company's retail stores and custom installation
services.
<PAGE>
The following table shows the Company's gross advertising costs and net
advertising expense as a percentage of net sales for the periods presented. Net
advertising expense represents gross advertising cost less market development
funds, cooperative advertising and other promotional amounts received from the
manufacturers.
<TABLE>
<CAPTION>
Fifty-Three Thirty-Nine
Weeks Ended Week s Ended
November 1, October 26,
1997 1996
---------------------- ----------------------
<S> <C> <C>
Gross advertising costs $1,048,000 $690,000
Net advertising expenses $ 401,000 $358,000
Percentage of net sales 2.6% 3.9%
</TABLE>
As the Company repositioned itself after its reorganization, it incurred
additional advertising expenses for the fifty-three weeks ended November 1, 1997
as compared to the thirty-nine weeks ended October 26, 1996. The Company has
retained an outside advertising agency who is paid a monthly retainer of $9,000
plus approved expenses. This agreement expires January 31, 1999.
Licenses and Intellectual Properties
The Company owns two registered service marks "HARVEY," issued on March 7,
1989, and "THE TEMPLE OF HOME THEATER," issued on May 13, 1997. Both service
marks are registered for International Class 42, which includes retail store
services in the field of audio, video, consumer electronics, home theater
products and custom installation of home theater products. The Company believes
that its service marks have significant value and are important in marketing the
Company's products.
Employees
As of January 31, 1998, the Company employed approximately 70 full-time
employees of which 11 were management personnel, 11 were administrative
personnel, 25 were salespeople, 13 were warehouse workers and 10 were engaged in
custom installation.
The salespeople, warehouse workers, and installation staff (48 people) are
covered by a collective bargaining agreement with the Company which expires
August 1, 2000. The Company has never experienced a material work stoppage and
believes that its relationships with its employees and the union are
satisfactory.
Item 2. Description of Properties.
All of the premises the Company presently occupies are leased. Management
believes that the Company's facilities are adequate and suitable for its present
business. The Company believes that adequate locations are available for its
proposed expansion.
The Company leases premises at 205 Chubb Avenue, Lyndhurst, New Jersey, a
24,400 square foot facility, which the Company uses as executive offices. The
lease expires April 30, 2001, subject to a 5 year renewal option. The warehouse
area of 19,500 square feet of the Lyndhurst facility was sublet in October 1997
for approximately $145,000 per year through April 2001. The Company currently
leases a 5,500 square foot warehouse in Fairfield, New Jersey at approximately
$40,000 per year, pursuant to a lease which expires September 2002.
<PAGE>
The Company leases the following retail premises:
<TABLE>
<CAPTION>
Expiration Date of Renewal Approximate Selling Current Annual
Location Lease Options Square Footage Rent
- --------------------------------------- -------------------- ------------- ----------------------- -----------------
<S> <C> <C> <C> <C>
2 West 45th Street 6/30/2005
New York, NY None 7,500 $488,000
556 Route 17 North 6/30/2003
Paramus, NJ None 7,000 $238,000
888 Broadway at 19th St. Month to month None 4,000 $180,000
New York, NY
(within ABC Carpet & Home)
19 West Putnam Ave. Greenwich, CT 9/30/2001 5 years 5,300 $176,000
</TABLE>
Item 3. Legal Proceedings.
Except as set forth herein, the Company believes that it is not a party to
any material legal proceedings other than those arising in the ordinary course
of business and which are fully covered by insurance. The Company maintains
general liability and commercial insurance in amounts believed to be adequate.
However, there can be no assurance that such amounts of insurance will fully
cover claims made against the Company in the future.
There are outstanding disputed tax claims of approximately $50,000 which
were made against the Company during its Chapter 11 proceeding. The Company has
provided reserves of $17,000 for such taxes, penalties and interest, which the
Company believes to be adequate. However, there can be no assurance that the
reserve will be sufficient to cover these tax claims
Item 4. Submission of Matters to a Vote of Security Holders.
No matters came to a vote by the Company's security holders during the
fiscal year ended November 1, 1997.
<PAGE>
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
Shares of Common Stock of The Harvey Group Inc., the predecessor of the
Company, were traded on the American Stock Exchange until June 16, 1995, and
were subsequently traded on the OTC Electronic Bulletin Board through November
1996, when such trading ceased as a result of the confirmation of the Company's
Reorganization Plan. Currently, the Company's securities are traded on the
NASDAQ SmallCap Market under the symbols "HRVE" for the Common Stock and "HRVEW"
for the Warrants to purchase Common Stock.
The outstanding shares of Common Stock are currently held by approximately
1,600 shareholders of record, and the Preferred Stock by five holders of record.
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016.
Description of Securities
The total authorized capital stock of the Company consists of 10,000,000
shares of Common Stock with a par value of $0.01 per share ("Common Stock"), and
10,000 shares of 8.5% Cumulative Convertible Preferred Stock with a par value of
$1,000 per share ("Preferred Stock"). The following descriptions contain all
material terms and features of the securities of the Company and are qualified
in all respects by reference to the Company's Certificate of Incorporation and
Amended and Restated By-Laws of the Company, copies of which are filed as
exhibits.
Common Stock
The Company is authorized to issue 10,000,000 shares of Common Stock with a
par value of $0.01 per share. As of June 15, 1998, 3,282,833 shares are
outstanding and held by approximately 1,600 shareholders of record.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders. There is no cumulative voting with
respect to the election of directors, with the result that holders of more than
50% of the shares voted for the election of directors can elect all of the
directors. The holders of Common Stock are entitled to receive dividends when,
as and if declared by the Board of Directors from sources legally available
therefor. In the event of liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, and after payment in full of the amount
payable in respect of the Preferred Stock, the holders of Common Stock are
entitled, to the exclusion of the holders of the Preferred Stock, to share
ratably in the assets of the Company available for distribution to stockholders
after payment of liabilities and after provision for each class of stock, if
any, having preference over the Common Stock. Holders of Common Stock have no
preemptive rights. All outstanding shares are, and all shares to be sold and
issued as contemplated hereby, will be fully paid and non-assessable and legally
issued. The Board of Directors is authorized to issue additional shares of
Common Stock within the limits authorized by the Company's charter and without
stockholder action.
<PAGE>
Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
10,000 shares of 8.5% Cumulative Convertible Preferred Stock ("Preferred Stock")
with a par value of $1,000 per share. As of June 15, 1998, 875 shares of
Preferred Stock were issued and outstanding and were held by five holders of
record.
The Preferred Stock may be issued from time to time without stockholder
approval in one or more classes or series. A holder of the Preferred Stock is
not entitled to vote except as required by law.
Dividends on the Preferred Stock are cumulative from the day of original
issuance, whether or not earned or declared. In the event the Board of Directors
declares dividends to be paid on the Preferred Stock, the holders of the
Preferred Stock will be entitled to receive semiannual dividends at the rate
(the "Preference Rate") of eighty-five ($85) dollars per share payable in cash
on the last business day of June and December in each year. For calendar year
1997, the Company has elected to defer payment of the dividends. The Preference
Rate for calendar year 1997 is $105 per share, which will be paid in three equal
installments with interest at the rate of 8.5% per annum on the last business
days of December 1998, 1999 and 2000. In addition, no dividend shall be paid, or
declared, or set apart for payment upon, and no other distribution shall at any
time be declared or made in respect of, any shares of Common Stock, other than a
dividend payable solely in, or a distribution of, Common Stock, unless full
cumulative dividends of the Preferred Stock for all past dividend periods and
for the then current dividend period have been paid or have been declared and a
sum sufficient for the payment thereof has been set apart.
The Preferred Stock shall be redeemable, at the Company's option, in whole
or in part, upon payment in cash of the Redemption Price in respect of the
shares so redeemed. The "Redemption Price" per share shall be equal to the sum
of (i) One Thousand and 00/100 ($1,000.00) Dollars and (ii) all dividends
accrued and unpaid on such shares to the date of redemption. If less than all of
the outstanding Preferred Stock is to be redeemed, the redemption will be in
such amount and by such method (which need not be by lot or pro rata), and
subject to such other provisions, as may from time to time be determined by the
Board of Directors.
In the event of liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, resulting in any distribution of its assets to
its shareholders, the holders of the Preferred Stock outstanding shall be
entitled to receive in respect of each such share an amount which shall be equal
to the Redemption Price, and no more, before any payment or distribution of the
assets of the Company is made to or set apart for the holders of Common Stock.
Each share of Preferred Stock may be convertible into shares of Common
Stock at the option of the holder, in whole or in part, as follows: until
December 31, 2000, (i) 50% of the Preferred Stock will be convertible at $6.00
per share; and (ii) $7.50 per share for the balance. Commencing January 1, 2001,
the Conversion Price shall be equal to the average of the closing bid price of
the Common Stock over the 45 trading days preceding January 1, 2001.
If at any time prior to the exercise of the conversion rights afforded the
holders of the Preferred Stock, the Preferred Stock is redeemed by the Company,
in whole or in part, then the conversion right shall be deemed canceled with
respect to such redeemed stock, as of the date of such redemption.
In case of any capital reorganization or any reclassification of the Common
Stock, or in case of the consolidation or merger of the Company with or into
another corporation, or the conveyance of all or substantially all of the assets
of the Company to another corporation, each Preferred Share shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock deliverable upon
conversion of such Preferred Stock would have been entitled upon such
reorganization, reclassification, consolidation, merger, or conveyance.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words "anticipate,"
"believe," "estimate," and "expect" and similar expressions as they relate to
the Company or its management are intended to identify such forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The Company's actual results, performance or achievements could differ
materially from the results expressed in or implied by these forward-looking
statements.
General
On November 13, 1996, the Company emerged from its Chapter 11 Bankruptcy
proceeding. The Company's Reorganization Plan provides 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, appearing
elsewhere in this Form 10-KSB/A. The unaudited financial information for
the fifty-two week period ended October 26, 1996 and the thirty-nine weeks ended
October 28, 1995 is presented for comparison purposes only.
<PAGE>
Statements of Operations Data:
<TABLE>
<CAPTION>
Post
Bankruptcy Pre Bankruptcy
--------------- --------------- ----------------- --------------
Fifty-Three Fifty-Two Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
--------------- --------------- ----------------- --------------
November 1, October 26, October 26, October 28,
1997 1996 1996 1995
--------------- --------------- ----------------- --------------
(Unaudited) (Unaudited)
(In thousands, except share
data)
<S> <C> <C> <C> <C>
Net sales $15,398 $14,025 $9,263 $11,107
Cost of sales 9,765 9,230 6,095 7,312
Gross profit 5,633 4,796 3,168 3,795
Gross profit percentage 36.6% 34.2% 34.2% 34.2%
Interest expense 325 506 356 307
Selling, general and administrative 6,706 6,473 4,937 5,782
expenses
Other income 73 96 88 78
Loss before reorganization expenses, (1,325) (2,087) (2,037) (2,216)
fresh start adjustments and
extraordinary item
Reorganization expenses, net - (885) (247) (520)
Fresh start adjustments - 1,858 1,858 -
Extraordinary gain on forgiveness of debt - 5,339 5,339 -
Net (loss) income (1,325) 4,225 4,913 (2,736)
Accretion of Preferred Stock (78) - - -
Preferred Stock dividend requirement (71) - - -
Net (loss) income attributable to Common $ (1,474) $4,225 $4,913 $(2,736)
Stock
Net (loss) income applicable to common $(.65) $1.33 $1.55 $(.86)
shareholders
Weighted average number of common shares
and common stock equivalent shares
outstanding during the period (1) 2,257,833
</TABLE>
(1) Common stock equivalent shares were not considered, since their
inclusion would be anti-dilutive.
<PAGE>
Balance Sheet Data:
<TABLE>
<CAPTION>
Unaudited
Pro Forma Actual
----------------------------------
November 1, November 1, October 26,
1997(1) 1997 1996
------------------ ----------------- ----------------
(In thousands)
<S> <C> <C> <C>
Working capital $1,215 $1,215 $1,436
Total assets 7,314 7,314 7,167
Long-term liabilities 2,364
including capital leases 2,364 942
Total liabilities and temporary equity 5,301 5,697 3,757
Total shareholders' equity 2,013 1,617 3,410
</TABLE>
- ------------
(1) The pro forma balance sheet at November 1, 1997 is presented to reflect
the Company's Preferred Stock in stockholders' equity as though the removal of a
Preferred Stock redemption feature, which occurred in December 1997, had taken
place on November 1, 1997.
Fifty-Three Weeks Ended November 1, 1997 (Successor) as Compared to the
Fifty-Two Weeks Ended October 26, 1996 (Unaudited--Predecessor)
The fiscal year ended November 1, 1997 is a fifty-three week year as
compared to fifty-two weeks for the prior year.
Net (Loss) Income. The net loss for the fifty-three weeks ended November 1,
1997 was $1,325,000 as compared to net income of $4,225,000 for the fifty-two
weeks ended October 26, 1996. Net income for the fifty-two weeks ended October
26, 1996, includes an extraordinary gain on forgiveness of debt of $5,339,000
and the effect of certain fresh start adjustments relating to the company's
successful reorganization increasing net income by $1,858,000. Net
reorganization expenses relating to the Company's Chapter 11 process for the
fifty-two weeks ended October 26, 1996 were $885,000. There were no
reorganization expenses for the fifty-three weeks ended November 1, 1997.
Revenues. Net sales for the fifty-three weeks ended November 1, 1997
increased 9.8% or $1,373,000 over the fifty-two weeks ended October 26, 1996,
despite 1996 consisting of revenues from five established stores as compared to
1997 revenues, which consisted of only three established stores and the new
store in Greenwich, Connecticut. Comparable store sales for the fifty-three
weeks ended November 1, 1997 increased by 26.7% or $2,786,000 as compared to the
fifty-two weeks ended October 26, 1996. The increase in the Company's revenues
is attributable to increases in the volume of goods and services sold, and to a
lesser extent, changes in product lines. The prices of its goods and services
have remained relatively constant. In 1996, the Company operated in Chapter 11
and at times during the year did not have adequate inventory levels. The Company
believes it currently has adequate inventory levels to support sales.
The increase in sales in fiscal 1997 is due primarily to the Company's
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 consumers attractive
financing alternatives on purchases, without paying or incurring interest
expenses for a six or twelve month period. Customers who qualify can obtain
longer term financing with a Harvey credit card, which the Company makes
available to its customers. The Harvey credit card is issued by an unrelated
finance company. The substantial use of such financing alternatives began in
June 1997. The total amount of additional fees paid by the Company for the five
month period ended November 1, 1997 is approximately $30,000. This credit
alternative is a linchpin of the Company's new advertising campaign. Additional
direct mail promotions were also successful during the period.
<PAGE>
Costs and Expenses. Total cost of sales for the fifty-three weeks ended
November 1, 1997 increased 5.8% or $535,000 from the fifty-two weeks ended
October 26, 1996. This was primarily the result of increased comparable store
sales offset by store closings.
Gross profit margin for the fifty-three weeks ended November 1, 1997 was
36.6%, as compared to 34.2% for the fifty-two weeks ended October 26, 1996. The
gross profit margin has increased as a result of the Company's marketing
campaign where product quality is emphasized rather than price. The gross margin
also increased as a result of increased sales of custom installation which has
higher gross profit margins. Additionally, an increase was realized from
merchandising changes made in late 1996 and throughout 1997, where new higher
margin products from new manufacturers were added and lower margin products,
such as camcorders, cellular phones, and home office equipment, were eliminated.
Selling, general and administrative expenses increased 3.6% or $233,000 for
the fifty-three weeks ended November 1, 1997 as compared to the fifty-two weeks
ended October 26, 1996. Comparable store selling, general and administrative
expenses increased 12.2% or $631,000 for the fifty-three weeks ended November 1,
1997 as compared to the fifty-two weeks ended October 26, 1996. The fifty-three
weeks ended November 1, 1997 includes net advertising expenses of $401,000, as
compared to $221,000 for the fifty-two weeks ended October 26, 1996.
Additionally, the fifty-three weeks ended November 1, 1997 includes an
aggregate amount for management fees and amortization of reorganization value in
excess of amounts allocable to identifiable assets of $96,000. The Company
incurred no expense for these items during the fifty-two weeks ended October 26,
1996. Payroll and payroll related expenses increased 15.2% or $418,000 for the
fifty-three weeks ended November 1, 1997 as compared to the fifty-two weeks
ended October 26, 1996. This was primarily the result of additional commissions
and incentives on increased sales and gross margins and the hiring of additional
sales, warehouse and custom installation personnel. The Company also hired a
full-time Vice President of Operations in June 1996.
Interest expense decreased 35.8% or $181,000 for the fifty-three weeks
ended November 1, 1997, as compared to the fifty-two weeks ended October 26,
1996. Interest expense decreased primarily from the reduction of
debtor-in-possession financing, including the loan servicing fees due to HAC in
the current period (which was converted to equity). The decrease was offset by
interest on a $350,000 loan made by E. H. Arnold, a Preferred Stockholder and
member of HAC, during February and March 1997.
Thirty-Nine Weeks ended October 26, 1996 (Predecessor) as Compared to
Thirty-Nine Weeks Ended October 28, 1995 (Predecessor)
Net Income (Loss). Net income for the thirty-nine weeks ended October 26,
1996 was $4,913,000 as compared to a net loss of $2,736,000 for the comparable
period in 1995. Net income for the thirty-nine weeks ended October 26, 1996,
includes an extraordinary gain on forgiveness of debt of $5,339,000 and the
effect of certain fresh start adjustments increasing net income by $1,858,000,
relating to the Company's successful reorganization. Net reorganization expenses
relating to the Company's Chapter 11 process for the thirty-nine weeks ended
October 26, 1996 were $247,000 as compared to $520,000 for the comparable period
in 1995.
Revenues. Net sales for the thirty-nine weeks ended October 26, 1996
decreased 16.6% or $1,844,000, as compared to the same period in 1995. This
decrease primarily related to four store closings relating to the reorganization
process and the reduction of lower margin corporate sales. Comparable store
sales for the thirty-nine weeks ended October 26, 1996 remained the same as
compared to the prior period, despite the difficulty in obtaining adequate
levels of inventory, the negative effects of the Chapter 11 reorganization and
the difficult market conditions experienced throughout the consumer electronics
industry.
Cost and Expenses. Cost of sales for the thirty-nine weeks ended October
26, 1996 decreased 16.7% or $1,218,000 from the same period in 1995. This
decrease was primarily due to the store closings and reduced corporate sales as
mentioned above. Gross margins for the thirty-nine weeks ended October 26, 1996
and October 28, 1995 remained consistent at 34.2%.
Selling, general and administrative expenses for the thirty-nine weeks
ended October 26, 1996 decreased 14.6% or $845,000 as compared to the comparable
period in 1995. This decrease was due to store closings and the Company's
ongoing cost reduction program, offset by an additional $358,000 of advertising
expense incurred to reposition the Company during its reorganization process in
1996.
Interest expense for the thirty-nine weeks ended October 26, 1996 increased
15.9% or $49,000 from the comparable period in 1995. This is primarily the
result of a full year of debtor-in-possession financing from HAC. In the prior
year, as a result of the reorganization process, interest on all liabilities
subject to compromise also ceased accruing on August 3, 1995.
<PAGE>
Liquidity and Capital Resources
On November 13, 1996, the Bankruptcy Court confirmed the Reorganization
Plan ("Confirmation Date"). The effective date of the Reorganization Plan was
December 26, 1996 (the "Reorganization Date"). Prior to the Reorganization Date,
all of the Company's old shares of common and preferred stock were canceled. The
Company simultaneously amended its Certificate of Incorporation and is
authorized to issue 10,010,000 shares consisting of 10,000 shares of 8-1/2%
Cumulative Convertible Preferred Stock with a par value of $1,000 per share and
10,000,000 shares of Common Stock with a par value of $.01 per share.
The Reorganization Plan provided for the redistribution of Common Stock as
follows:
Prior to the Reorganization Date, the new shares of Common Stock in Harvey
Electronics, Inc. were issued as follows:
2,000,000 shares were issued to HAC in satisfaction of the $2,822,500 of
subordinated secured financing provided to the Company during its reorganization
process.
186,306 shares were issued to the Company's unsecured creditors in
satisfaction of prepetition liabilities compromised.
19,962 shares were issued to the Company's former shareholders.
InterEquity Capital Partners, L.P. ("InterEquity"), a prereorganization
subordinated secured debtholder, received 51,565 shares of Common Stock as
payment in full of an allowed finders fee.
Prior to the Reorganization Date, 875 shares of the Company's Preferred
Stock were issued to the Company's preorganization subordinated secured debt
holders in exchange for $875,000 of such debt. The reorganization carrying value
of the Preferred Stock has been estimated to be $318,000 based on a sale of such
security, independent of the Company, for 36% of stated value. The difference
between the carrying amount of the prereorganization debt and the reorganization
carrying value has been included with the extraordinary gain on forgiveness of
debt in the accompanying statement of operations for the thirty-nine weeks ended
October 26, 1996.
Convenience claims of $1,000 or less were paid in cash approximately
$20,000. The Reorganization Plan also provided for cash distribution ($452) of
$1.00 to any former shareholders holding 100 or fewer shares of the Company's
old common stock.
As a result of the operational restructuring, the Company recorded
reorganization expenses for the thirty-nine weeks ended October 26, 1996 of
$497,206. Such charges consisted of costs associated with professional fees, and
the write-off of property, equipment, other assets and certain receivables.
Additionally, the Company recorded income from the sale of a lease during the
thirty-nine weeks ended October 26, 1996 in the amount of $250,000.
Liabilities subject to compromise immediately preceding the Reorganization
Plan ($4,782,000), were satisfied with the issuance of common stock as noted
above and the related forgiveness of debt has been recorded as an extraordinary
gain in the accompanying statement of operations for the thirty-nine weeks ended
October 26, 1996.
The balance sheet as of October 26, 1996 was prepared based on Fresh Start
Reporting which was adopted on the Confirmation Date and applied as of October
26, 1996, the end of the accounting period closest to the Confirmation Date. The
Company has adopted Fresh Start Reporting in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code." The Company
adopted Fresh Start reporting because the holders of existing voting shares
immediately before filing and confirmation of the plan received less than 50% of
the voting shares of the merging entity and its reorganization value was less
than its postpetition liabilities and allowed claims. Fresh Start Reporting has
resulted in changes to the balance sheet, including valuation of assets and
liabilities at fair market value and valuation of equity based on the
reorganization value of the ongoing business, and accordingly, the financial
statements for periods prior and subsequent to the adoption of Fresh Start
accounting are not comparable.
<PAGE>
The reorganization value of the Company was determined based on the
consideration received from HAC to obtain its ownership in the Company. A
carrying value of $318,000 was assigned to the Preferred Stock. Subsequent to
the Reorganization Date, the Company issued an additional 51,565 shares of
Common Stock to InterEquity, as authorized by the Court, for an approved finders
fee. The excess of the reorganization value over the fair value of net assets
and liabilities ($1,582,440 at November 1, 1997) is reported as "Reorganization
value in excess of amounts allocable to identifiable assets." See Note 1 to the
financial statements for further information.
The Company's ratio of current assets to current liabilities was 1.41 at
November 1, 1997 as compared to 1.51 at October 26, 1996. The decrease in the
current ratio at November 1, 1997 is primarily due to the net cash used in
operating activities as a result of the Company's net loss for the year,
partially offset by working capital provided by the Company's line of credit
facility.
Since its reorganization, the Company has reduced its net cash used in
operating activities to $550,000 for the fifty-three weeks ended November 1,
1997 from $851,000 for the thirty-nine weeks ended October 26, 1996. This
reduction of net cash used in operating activities was primarily the result of
increased net contributions from the Company's retail stores in 1997, and
despite additional trade accounts payable provided in 1996.
Investing activities resulted in a net use of cash of $663,000 for the
fifty-three weeks ended November 1, 1997 as compared to a net use of cash of
$65,000 for the thirty-nine weeks ended October 26, 1996. The increase in cash
used for 1997 was primarily due to the purchases of property and equipment
relating to the opening of the new store in Greenwich, Connecticut.
Financing activities resulted in an increase in net cash of $1,220,000 for
the fifty-three weeks ended November 1, 1997 as compared to an increase of
$891,000 for the thirty-nine weeks ended October 26, 1996. This increase was
primarily the result of additional net borrowings from the revolving line of
credit facility and a note from a preferred stockholder and member of HAC,
offset by increased payments of Chapter 11 obligations.
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% in excess of the rate of interest announced
publicly by Norwest Bank, Minnesota, National Association, from time to time as
its "prime rate" (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 maximum amount of borrowing available to the Company under this line is
limited to formulas prescribed in the loan agreements. 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 all 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 covenant 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).
<PAGE>
Paragon also received a warrant to purchase 125,000 shares of Common Stock
at an exercise price of $5.50 per share subject to adjustment under certain
circumstances, which is currently exercisable and expires on April 3, 2001.
Paragon's warrant and the underlying shares have not been registered under the
Securities Act.
On April 7, 1998, proceeds from the Offering were used to pay down the
amount outstanding ($2,362,000) under the Paragon revolving line of credit
facility. At June 15, 1998, there are no outstanding borrowings under the
Paragon revolving line of credit facility.
<PAGE>
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
Offering to open five new retail stores. The design and layout of the new stores
are expected to be similar to the Company's retail store located in Greenwich,
Connecticut. The Company plans to locate new stores in affluent suburbs similar
to Greenwich, Connecticut. The prospective areas include North Shore of Long
Island and Westchester County in New York, Monmouth County in New Jersey and
southern Connecticut.
The Company has preliminarily identified these general locations as
potential sites for the new stores because the demographics of these areas are
consistent with what the Company believes to be its target customer base and
because these areas are served by the media in which the Company already
advertises. By spreading the advertising costs over more stores and greater
revenues, the Company believes it will receive better value for its advertising
expenditures. The Company plans to open the four new stores during the following
twenty-four months. The timing may vary depending upon many factors including
the ability of the Company to locate suitable premises or to enter into
acceptable leases for the opening of the new 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
lenders), lease acquisition expenses, pre-opening expenses and additional
advertising and promotion in connection with the opening. However, expansion
entails significant risks including an increase in rent and expenses related to
the operation of a particular store. There can be no assurance that new stores,
if opened, will, in fact, generate sufficient revenue to cover the operating
expenses incurred by such stores, or contribute positively to the Company's
results of operations. The Company believes acceptable retail space is available
in the areas where it intends to expand.
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, will be
sufficient to meet the Company's anticipated working capital needs and expansion
plan through the twelve month period immediately following the Offering.
During the periods presented, the Company was not significantly impacted by
the effects of inflation or seasonality.
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age(1) Position
- ----------------------------- --------------- ---------------------------------
<S> <C> <C>
Michael Recca. 47 Chairman and Director
William F. Kenny, III 67 Director
Stewart L. Cohen 44 Director
Franklin C. Karp 44 President and Director
Joseph J. Calabrese 38 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Michael A. Beck 39 Vice President of Operations
Roland W. Hiemer 37 Director of Inventory Control
</TABLE>
- ----------------------
(1) As of May 31, 1998.
Michael E. Recca became the Chairman of the Board of Directors of the
Company in November 1996. Mr. Recca has been the president of Recca & Company,
Inc., a financial consulting firm based in New York City since 1992. Mr. Recca
is also a member and one of the three managers of Harvey Acquisition Company,
LLC, which is a principal shareholder of the Company. Mr. Recca is also an
employee of Taglich Brothers, D'Amadeo, Wagner & Co., Inc., an NASD registered
broker-dealer.
William F. Kenny, III has been a director of the Company since 1975. For
the past five years Mr. Kenny has been a consultant to Meenan Oil Co., Inc. Mr.
Kenny has also served as a director of the Empire State Petroleum Association,
Petroleum Research Foundation and is President of the East Coast Energy Council.
Mr. Kenny was also the president of the Independent Fuel Terminal Operators
Association and the Metropolitan Energy Council.
Stewart L. Cohen was elected a director of the Company in 1997. Mr. Cohen
is the Chief Executive Officer of Paragon Capital LLC, an asset-based lender
providing a revolving line of credit facility to the Company and other
retailers. Mr. Cohen is also a managing director of The Ozer Group LLC, an asset
and business restructuring firm which provides asset disposition, business
evaluation, advisory services, and asset appraisals for financial institutions
lending primarily to retail businesses. He is also the President of U.S. Dixon's
Holdings, Inc. and its non-operating subsidiaries, for which Mr. Cohen was
retained to wind down the affairs of, and pursue economic settlements for, the
company with other parties.
Mr. Cohen is also a member of the Board of Advisors of Verc Enterprises,
Inc., and is a Contributing Editor to the American Bankruptcy Institute Journal.
Franklin C. Karp has been with the Company since 1990. Before being
appointed as the Company's President in April 1996, Mr. Karp served as
Merchandise Manager and later as vice president in charge of merchandising. Mr.
Karp has been employed in various sales, purchasing and management positions in
the retail consumer electronics business in the New York Metropolitan area for
25 years.
<PAGE>
Joseph J. Calabrese, a certified public accountant, joined the Company as
Controller in 1989. Since 1991 Mr. Calabrese has served as Vice President, Chief
Financial Officer, Treasurer and Secretary of the Company. Mr. Calabrese was
elected Executive Vice President and a Director of the Company in 1996. Mr.
Calabrese began his career with Ernst & Young LLP in 1981 where for the eight
year period prior to his joining the Company he performed audit services with
respect to the Company.
Michael A. Beck has been Vice President of Operations of the Company since
April 1997. From June 1996 until such date he was the Company's Director of
Operations and from October 1995 until April 1996 he served as director of
operations for Sound City, a consumer electronics retailer. Mr. Beck was a store
manager for the Company from August 1989 until October 1995. Mr. Beck holds a BA
in Psychology from Merrimack College.
Roland W. Hiemer is an executive officer of the Company and Director of
Inventory Control. Mr. Hiemer has been with the Company for seven years. He
started with the Company as a salesman and advanced to Senior Sales Manager for
the Paramus store in 1991. He was further promoted to Inventory Control Manager
in 1991. In 1997, he was promoted to Director of Inventory Control. Mr. Hiemer
holds a BA in Business Administration from Hofstra University.
Committees of the Board of Directors
The Board of Directors has an Audit Committee and a Compensation and Stock
Option Committee.
Audit Committee. The function of the Audit Committee includes making
recommendations to the Board of Directors with respect to the engagement of the
Company's independent auditors and the review of the scope and effect of the
audit engagement. William F. Kenny, III and Stewart L. Cohen are the current
members of the Audit Committee.
Compensation and Stock Option Committee. The function of the Compensation
and Stock Option Committee is to make recommendations to the Board with respect
to the compensation of management employees and to administer plans and programs
relating to stock options, pension and other retirement plans, employee
benefits, incentives, and compensation. Stewart L. Cohen and William F. Kenny,
III are the current members of the Compensation and Stock Option Committee.
Item 10. Executive Compensation.
The following table sets forth the cash compensation paid by the Company,
as well as any other compensation paid to or earned by the Chairman of the
Company, the President of the Company and those executive officers compensated
at or greater than $100,000 for services rendered to the Company in all
capacities during the three most recent fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Name of Individual Long Term
and Principal Position Year Salary Bonus Compensation
- ------------------------------------------- ----------- ------------------- ------------ --------------------
<S> <C> <C> <C> <C>
1997 $ - $ - $ -
Michael Recca
Chairman(1) 1996 $ - - -
1995 $ - - -
1997 $ 126,000 - -
Franklin C. Karp
President 1996 $ 88,000 (2) - -
1995 $ 108,000 - -
Joseph J. Calabrese
Executive Vice President, 1997 $ 117,000 - -
Chief Financial Officer, 1996 $ 82,000 (2) - -
Treasurer and Secretary 1995 $ 101,000 - -
</TABLE>
<PAGE>
(1) Beginning on April 1, 1998, Mr. Recca will receive an annual directors
fee in the amount of $95,000 in his capacity as the Chairman of the Board of
Directors of the Company.
(2) Represents the nine month transition period ended October 26, 1996,
when the Company's fiscal year end was changed to the Saturday closest to
October 31 from the Saturday closest to January 31.
Severance Agreements
The Company has entered into substantially similar severance agreements
("Severance Agreement") with each of Franklin C. Karp, Joseph J. Calabrese,
Michael A. Beck, and Roland W. Hiemer.
Each Severance Agreement provides that in the event the Company is sold or
merged with another company, involved in a corporate reorganization, or if a
change of the current management takes place, and the party, for the foregoing
reasons, is terminated or asked to accept a position other than that of senior
officer requiring similar responsibilities to those that the party currently
performs, or if the current corporate office is moved to a new location which is
more than thirty miles from either Mineola, New York, or Lyndhurst, New Jersey,
depending on who the party is, as a result of a reorganization or change in
ownership or control, and the party declines the new position or relocation, the
Company or its successor in control will be obligated, and continue, to pay the
party at the same salary and car allowance, if any, the party had most recently
been earning, for a period of one year following termination of Mr. Karp and Mr.
Calabrese, and six months for Mr. Beck and Mr. Hiemer. In addition, the party
will be fully covered under the Company's benefit plans, including, without
limitation, the Company's medical, dental, life and disability insurance
programs, during the one-year period for Mr. Karp and Mr. Calabrese and during
the six month period for Mr. Beck and Mr. Hiemer (including family coverage for
medical and dental insurance).
In the event following any foregoing termination the party obtains
employment at a lesser compensation than the party's compensation by the
Company, the Company will pay the party the difference between the two salaries
for the remainder of the one-year or six month period, whichever is applicable,
plus continued coverage of the Company's benefit plans for the same period.
Each Severance Agreement also provides that in the event the party is
terminated for any other reasons, except conduct that is materially injurious to
the Company or conviction of any crime involving moral turpitude, the Company
will be obligated and continue to pay the party at the same salary the party has
most recently been earning, for a period of six months following termination for
Mr. Karp and Mr. Calabrese and three months for Mr. Beck and Mr. Hiemer, plus
full coverage of the Company's benefits for the same period.
Employment Agreement
On April 3, 1998, the Company entered into a two-year employment agreement
with Franklin C. Karp, the Company's President. The employment agreement
provides that Mr. Karp continue as the Company's President with the same
compensation and benefits which Mr. Karp currently receives, subject to annual
adjustment to be determined and made by the Board of Directors of the Company.
<PAGE>
Stock Option Plan
In April 1997, the Company adopted a stock option plan which currently
covers 1,000,000 shares of the Common Stock. Options may be designated as either
(i) incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code") or (ii) non-qualified stock options. ISOs may be granted
under the Stock Option Plan to employees and officers of the Company.
Non-qualified options may be granted to consultants, directors (whether or not
they are employees), employees or officers of the Company (collectively
"Options"). In certain circumstances, the exercise of Options may have an
adverse effect on the market price of the Common Stock.
The Stock Option Plan is intended to encourage stock ownership by employees
of the Company, so that they may acquire or increase their proprietary interest
in the Company and to encourage such employees and directors to remain in the
employ of the Company and to put forth maximum efforts for the success of the
business. Options granted under the Stock Option Plan may be accompanied by
either stock appreciation rights ("SARS") or limited stock appreciation rights
(the "Limited SARS"), or both.
The Plan is administered by the Company's Compensation and Stock Option
Committee as the Board may establish or designate (the "Administrators"). The
Committee shall be comprised of not less than two members, and all of whom shall
be outside directors. The members of the Compensation and Stock Option Committee
are Stewart L. Cohen and William F. Kenny III, outside directors.
The Administrators, within the limitation of the Stock Option Plan, shall
have the authority to determine the types of options to be granted, whether an
Option shall be accompanied by SARS or Limited SARS, the purchase price of the
shares of Common Stock covered by each Option (the "Option Price"), the persons
to whom, and the time or times at which, Options shall be granted, the number of
shares to be covered by each Option and the terms and provisions of the option
agreements.
The maximum aggregate number of shares of Common Stock as to which Options,
Rights and Limited Rights may be granted under the Stock Option Plan to any one
optionee during any fiscal year of the Company is 50,000.
With respect to the ISOs, in the event that the aggregate fair market
value, determined as of the date the ISO is granted, of the shares of Common
Stock with respect to which Options granted and all other option plans of the
Company, if any, become exercisable for the first time by any optionee during
any calendar year exceeds $100,000, Options granted in excess of such limit
shall constitute non-qualified stock options for all purposes. Where the
optionee of an ISO is a ten (10%) percent stockholder, the Option Price will not
be less than 110% of the fair market value of the Company's Common Stock,
determined on the date of grant, and the exercise period will not exceed five
(5) years from the date of grant of such ISO. Otherwise, the Option Price will
not be less than one hundred (100%) percent of the fair market value of the
shares of the Common Stock on the date of grant, and the exercise period will
not exceed ten (10) years from the date of grant. Options granted under the Plan
shall not be transferable other than by will or by the laws of descent and
distribution, and Options may be exercised, during the lifetime of the optionee,
only by the optionee or by his guardian or legal representative.
The Compensation and Stock Option Committee has approved the grant, as of
the Effective Date, of ISOs to purchase an aggregate of 70,000 shares of Common
Stock to certain employees of the Company. These Options will be exercisable as
to one-third of such shares at an exercise price of $5.00 per share commencing
one year from the Effective Date, as to an additional one-third of such shares
at an exercise price of $5.50 per share commencing two years from the Effective
Date; and as to an additional one-third of such shares at an exercise price of
$6.00 per share commencing three years from the Effective Date provided the
Optionee shall be employed by the Company at the time of exercise.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information with respect to the
beneficial ownership of shares of Common Stock as of March 31, 1998, based on
information obtained from the persons named below, by (i) each person known to
the Company to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) each executive officer and director of the Company, and (iii) all
officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership (2) Percentage
- ------------------------------------------------------ ----------------------------------- -----------------
<S> <C> <C>
Harvey Acquisition Company LLC
c/o Recca & Co., Inc.
100 Wall Street, 10th Floor
New York, NY 10005 1,750,000 (3) 53.3%
Michael Recca
Recca & Co., Inc.
100 Wall Street, 10th Floor
New York, NY 10005 1,755,000 (1) (3) 53.5%
Stewart L. Cohen
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071 10,000 *
William F. Kenny, III
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071 8,489 *
Franklin C. Karp
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071 15,000 *
Joseph J. Calabrese
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071 10,702 *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership (2) Percentage
- ------------------------------------------------------ ----------------------------------- -----------------
<S> <C> <C>
Michael A. Beck
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071 7,500 *
Roland W. Hiemer
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071 2,500 *
InterEquity Capital Partners
220 Fifth Avenue, 10th Floor
New York, NY 10001 131,565 (4)(5) 3.9%
All Directors and Officers as group
(7 Persons) 1,809,191(4) 55.1%
</TABLE>
* Less than 1% of outstanding shares of Common Stock.
(1) Includes Shares owned by HAC, of which Mr. Recca is a member and one of
three managers.
(2) Assumes no exercise of outstanding warrants, stock options granted
under the Company's Stock Option Plan, and no conversion of the outstanding
Preferred Stock.
(3) Assumes no exercise of a put option granted by HAC to InterEquity, the
exercise of which will allow InterEquity to require HAC to purchase the 51,565
shares held by InterEquity for $70,000 prior to the Effective Date ("Put
Option") and does not include the 10,000 shares to be purchased by HAC from
InterEquity at $5.00 per share within 10 days of the closing of the offering.
(4) Includes 10,000 Shares to be purchased by HAC from InterEquity at $5.00
pr Share within 10 days of the closing of the Offering, but assumes no exercise
of the Put Option. If the Over-Allotment Option were exercised in full, HAC
would own 1,570,000 Shares (or 47.8%) and all Directors and Officers as a group
would own 1,629,191 Shares (or 49.6%).
(5) Includes 90,000 Shares issuable on conversion of Preferred Stock.
<PAGE>
Item 12. Certain Relationships and Related Transactions.
In 1995 and 1996, during the Company's bankruptcy proceeding, the Company
borrowed, in the aggregate, approximately $2,822,500 (the "Loan") from HAC. As
of the Effective date of the Company's Reorganization Plan, and pursuant to
certain provisions contained therein, HAC's claims in connection with the Loan
was satisfied by issuing HAC 2,000,000 shares of the Company's Common Stock.
Subsequently, Michael Recca was elected as a member and Chairman of the
Company's Board of Directors. In connection with the Loan, the Company paid a
$5,000 per month loan servicing fee, which was to be paid to Recca & Co. Inc.,
of which Michael Recca is the sole shareholder, through October 1996.
Subsequently, through April 1997, a $5,000 per month management fee to Recca &
Co., Inc. was accrued. In fiscal 1998, Recca & Co., Inc. will receive a $40,000
management consulting fee.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" regarding
the Company's revolving line of credit facility with Paragon, which the Company
entered into on November 5, 1997. Stewart L. Cohen, a director of the Company,
is the Chief Executive Officer and a director of Paragon.
Harvey E. Sampson, former director and officer of the Company and a holder
of approximately 7% of the Company's Common Stock prior to the Company's
reorganization, executed a promissory note ("Note") to the Company in the
principal amount of $153,371, payable in 6 annual payments of $25,562 commencing
on January 1, 1997, with an annual interest rate of 6%. The Note was delivered
as payment for the purchase by Mr. Sampson of certain insurance policies and
their related cash surrender values, which were owned by the Company. On June
15, 1995, Mr. Sampson resigned as a director and officer of the Company, but
continued to hold approximately 7% of the Company's Common Stock. On the
effective date of the Company's reorganization, Mr. Sampson became a holder of
less than 1% of the Company's Common Stock. In July 1996, Mr. Sampson, with the
agreement of the Company, satisfied the note by paying $125,000 and the Company
obtained the release of personal guaranty of the Company's indebtedness to
Congress Financial Corporation.
On February 9, 1996 the Company entered into a severance agreement with
Arthur Shulman, the then President, Chief Executive Officer and a director of
the Company. In consideration of Mr. Shulman's resignation effective February
29, 1996 from all offices and positions be held in the Company and its
subsidiaries, the Company:
(1) paid Mr. Shulman $75,000;
(2) on February 29, 1996 paid Mr. Shulman a sum equal to 3 weeks accrued
vacation pay;
(3) provided Mr. Shulman with, and paid for, all medical benefits under
COBRA for an 18-month period following the termination; and
(4) agreed to provide Mr. Shulman with all indemnification, and all
limitation of liability, existing in favor of Mr. Shulman as provided in the
Company's certificate of incorporation and by-laws for six years from
termination.
In February and March, 1997, Mr. E. H. Arnold ("Arnold"), a member of HAC
and a holder of Preferred Stock, loaned the Company the principal amount of
$350,000, with an interest rate of 12% per annum. On April 9, 1998, this loan
was repaid with interest and without prepayment penalty.
<PAGE>
In November 1997, HAC transferred 85,000 shares of Common Stock to certain
employees and directors of the Company and Arnold. 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 will record compensation expense equal
to the fair market value of the shares (70% of the per share public offering
price) over a two year period, during which the shares are subject to forfeiture
by the transferees.
On April 7, 1998, HAC reimbursed the Company $70,000 of the estimated
expenses of $475,000 in the Offering in addition to the underwriting discounts
and commissions and non-accountable expense allowance related to the Shares sold
by it in the Offering. In the future the Company will present all proposed
transactions between the Company and its officers, directors or 5% shareholders,
and their affiliates to the Board of Directors for its consideration and
approval. Any such transaction, including forgiveness of loans, will require
approval by a majority of the disinterested directors and such transactions will
be on terms no less favorable than those available to disinterested third
parties.
Item 13. Exhibits and Reports on Form 8-K.
(a) The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed under the Company's Form SB-2 under Commission File
#333 - 42121:
Exhibit
Number Description
3.1.1 -- Restated Certificate of Incorporation of 1967
3.1.2 -- Certificate of Amendment of the Certificate of Incorporation of
1997
3.1.3 -- Certificate of Amendment of the Certificate of Incorporation of
December 1996
3.1.4 -- Certificate of Amendment of Certificate of Incorporation of July
1988
3.1.5 -- Certificate of Amendment of Certificate of Incorporation of July
1971
3.1.6 -- Certificate of Amendment of Certificate of Incorporation of
February 1971
3.1.7 -- Certificate of Amendment of Certificate of Incorporation of June
1969
3.1.8 -- Certificate of Amendment of Certificate of Incorporation of
September 1968
<PAGE>
4.1 -- Sections in Certificate of Incorporation and the Amended and
Restated By-Laws of Harvey Electronics, Inc., that define the rights of the
holders of shares of Common Stock, Preferred Stock and holders of Warrants
(included in Exhibit Nos. 3.1.2 and 3.1.3)
4.2 -- Form of Common Stock Certificate
4.3 -- Form of Redeemable Common Stock Purchase Warrant
4.4 -- Form of Representative's Warrant
4.5 -- Form of Warrant to Holders of Preferred Stock
10.1.1 -- Stock Option Plan of Harvey Electronics, Inc.
10.1.2 -- Form of Stock Option Agreement
10.2.1 -- Severance Agreement with Franklin C. Karp
10.2.2 -- Severance Agreement with Joseph J. Calabrese
10.2.3 -- Severance Agreement with Michael A. Beck
10.2.4 -- Severance Agreement with Roland W. Hiemer
10.3 -- Employment Agreement with Franklin C. Karp
10.4.1 -- Dealer Agreement between the Company and Mitsubishi Electronics
America, Inc.
10.4.2 -- Dealer Agreement between the Company and Niles Audio Corporation,
Inc.
10.5.1 -- Lease between the Company and Joseph P. Day Realty Corp. (2)
10.5.2 -- Lease between the Company and Goodrich Fairfield Associates,
L.L.C. (2)
10.5.3 -- Lease between the Company and Sprout Development Co. (2)
10.5.4 -- Lease between the Company and Service Realty Company (2)
10.5.5 -- Lease between the Company and 205 Associates (2)
10.5.6 -- Sublease between the Company and Fabian Formals, Inc. and
Affiliate First Nighter of Canada (2)
<PAGE>
10.6 -- Loan and Security Agreement, Master Note and Trademark Security
Agreement with Paragon Capital LLC
(ii) The following exhibits are hereby incorporated by reference from
Exhibit A filed as part of the registrant's Form 8-K dated November 3, 1997:
Exhibit
Number Description
2.1.1 -- Restated Modified Amended Joint and Substantially Consolidated
Plan of Reorganization of Harvey Electronics, Inc.
2.1.2 -- Order dated November 13, 1996 Confirming Plan of Reorganization
(iii) The following exhibits are hereby incorporated by reference from Item
7 filed as part of the registrant's Form 8-K dated April 7, 1998:
Exhibit
Number Description
4.4 -- Representative's Warrant Agreement
4.5 -- Warrant Agent Agreement
10.1 -- Underwriting Agreement
10.2 -- Financial Advisory and Investment Banking Agreement between the
Company and The Thornwater Company, L.P.
(iv) The following exhibit is annexed hereto:
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K dated November 3, 1997, which
reported events under Items 1, 3, 5, 7 and 8. The Company filed a Report on Form
8-K dated cf April 7, 1998, which reported the completion of the Company's
Offering.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HARVEY ELECTRONICS, INC.
By /s/Franklin C. Karp
----------------------------------
Franklin C. Karp, President
Dated: June 15, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dated indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Franklin C. Karp President and Director June 15, 1998
- -----------------------------
Franklin C. Karp
/s/ Joseph J. Calabrese Executive Vice President, Chief Financial June 15, 1998
- ----------------------------- Officer, Treasurer, Secretary and Director
Joseph J. Calabrese
/s/ Michael Recca Chairman and Director June 15, 1998
- -----------------------------
Michael Recca
/s/ William F. Kenny Director June 15, 1998
- -----------------------------
William F. Kenny, III
/s/ Stewart L. Cohen Director June 15, 1998
- -----------------------------
Stewart L. Cohen
</TABLE>
<PAGE>
Item 7. Financial Statements
Harvey Electronics, Inc.
(Formerly The Harvey Group Inc. and Subsidiaries)
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors...................................................................... F-2
Balance Sheet--November 1, 1997...................................................................... F-3
Statements of Operations--Fifty-Three Weeks Ended November 1, 1997 and
Thirty-Nine Weeks Ended October 26, 1996......................................................... F-4
Statements of Shareholders' Equity--Fifty-Three Weeks Ended
November 1, 1997 and Thirty-Nine Weeks Ended October 26, 1996.................................... F-5
Statements of Cash Flows--Fifty-Three Weeks Ended November 1, 1997
and Thirty-Nine Weeks Ended October 26, 1996..................................................... F-6
Notes to Financial Statements....................................................................... F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
Harvey Electronics, Inc.
We have audited the accompanying balance sheet of Harvey Electronics, Inc.
(formerly The Harvey Group Inc. and subsidiaries) as of November 1, 1997 and the
related statements of operations, shareholders' equity, and cash flows for the
fifty-three weeks ended November 1, 1997 (Successor) and the thirty-nine weeks
ended October 26, 1996 (Predecessor). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated January 9, 1998,
except for Note 5, as to which the date was March 12, 1998, which report
contained an explanatory paragraph regarding the Company's ability to continue
as a going concern, the Company, as discussed in Note 5, has completed an
issuance of its common stock and common stock warrants resulting in net proceeds
of $4,089,000. Therefore, the conditions that raised substantial doubt about
whether the Company will continue as a going concern no longer exist.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Harvey Electronics, Inc. at
November 1, 1997, and the results of its operations and its cash flows for
fifty-three weeks ended November 1, 1997 (Successor) and the thirty-nine weeks
ended October 26, 1996 (Predecessor), in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Melville, NY
January 9, 1998, except for Note 5,
as to which the date is April 7, 1998
F-2
<PAGE>
Harvey Electronics, Inc.
(Formerly The Harvey Group Inc. and Subsidiaries)
Balance Sheet
November 1, 1997
<TABLE>
<CAPTION>
Pro Forma
Unaudited
Actual (See Note 6)
--------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,033 $ 10,033
Accounts receivable, less allowance of $20,000 272,436 272,436
Certificate of deposit 200,000 200,000
Inventories 3,559,778 3,559,778
Prepaid expenses and other current assets 109,656 109,656
--------------------------------------
Total current assets 4,151,903 4,151,903
Property and equipment:
Leasehold improvements 644,646 644,646
Furniture, fixtures and equipment 738,872 738,872
--------------------------------------
1,383,518 1,383,518
Less accumulated depreciation and amortization 179,604 179,604
--------------------------------------
1,203,914 1,203,914
Equipment under capital leases 15,768 15,768
Reorganization value in excess of amounts allocable to identifiable assets,
less accumulated amortization of $68,130 1,582,440 1,582,440
Other, less accumulated amortization of $51,832 360,100 360,100
--------------------------------------
Total assets $ 7,314,125 $ 7,314,125
======================================
Liabilities and shareholders' equity
Current liabilities:
Trade accounts payable $ 1,716,755 $ 1,716,755
Accrued expenses and other current liabilities 1,139,918 1,139,918
Obligations relating to Chapter 11 reorganization 17,500 17,500
Income taxes 30,400 30,400
Current portion of capital lease obligations 32,542 32,542
--------------------------------------
Total current liabilities 2,937,115 2,937,115
Long-term liabilities:
Long-term debt 2,127,851 2,127,851
Cumulative Preferred Stock dividends payable 70,479 70,479
Other liabilities 157,411 157,411
Capital lease obligations 8,583 8,583
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) - 396,037
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 3,067,799 3,067,799
Accumulated deficit (1,473,728) (1,473,728)
--------------------------------------
Total shareholders' equity 1,616,649 2,012,686
--------------------------------------
Total liabilities and shareholders' equity $ 7,314,125 $ 7,314,125
======================================
</TABLE>
See notes to financial statements.
F-3
<PAGE>
Harvey Electronics, Inc.
(Formerly The Harvey Group Inc. and Subsidiaries)
Statements of Operations
<TABLE>
<CAPTION>
Successor Predecessor
-------------------------------------------------------------
Fifty-Three Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended
November 1, October 26, October 28,
1997 1996 1995
--------------------------------------------------------------
(Unaudited)(1)
<S> <C> <C> <C>
Net sales $ 15,398,290 $ 9,263,152 $ 11,107,258
Interest and other income 72,652 87,657 78,487
--------------------------------------------------------------
15,470,942 9,350,809 11,185,745
--------------------------------------------------------------
Cost of sales 9,764,755 6,094,499 7,312,311
Selling, general and administrative expenses 6,706,180 4,937,316 5,782,070
Interest expense 325,219 355,922 307,015
--------------------------------------------------------------
16,796,154 11,387,737 13,401,396
--------------------------------------------------------------
Loss before reorganization expenses, fresh start
adjustments and extraordinary item (1,325,212) (2,036,928) (2,215,651)
Reorganization expenses - (497,206) (520,418)
Reorganization income--sale of lease - 250,000 -
--------------------------------------------------------------
Loss before fresh start adjustments and
extraordinary item (1,325,212) (2,284,134) (2,736,069)
Fresh start adjustments - 1,857,844 -
--------------------------------------------------------------
Loss before extraordinary item (1,325,212) (426,290) (2,736,069)
Extraordinary gain on forgiveness of debt - 5,338,852 -
--------------------------------------------------------------
Net (loss) income (1,325,212) 4,912,562 (2,736,069)
Preferred Stock dividend requirement (70,479) - -
Accretion of Preferred Stock (78,037) - -
--------------------------------------------------------------
Net (loss) income attributable to Common Stock $ (1,473,728) $ 4,912,562 $ (2,736,069)
==============================================================
Net (loss) per common share $(.65)
=====================
Weighted average number of common and common equivalent
shares outstanding during the period 2,257,833
=====================
</TABLE>
(1) Presented for comparison purposes only.
See notes to financial statements.
F-4
<PAGE>
Harvey Electronics, Inc.
(Formerly The Harvey Group Inc. and Subsidiaries)
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Total
Preferred Stock Common Stock Additional Accumulated Treasury Shareholders'
Shares Amount Shares Amount Capital (Deficit) Stock Equity
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 27, 1996 (Predecessor) 3,498,968 $3,498,968 $5,899,010 $(13,174,955) $(865,601)$(4,642,578)
Net income for the thirty-nine weeks ended
October 26, 1996 - - - 4,912,562 - 4,912,562
Elimination of accumulated deficit upon
implementation of fresh start accounting - - - 8,262,393 - 8,262,393
Cancellation of Common Stock and treasury shares (3,498,968)(3,498,968)(5,899,010) - 865,601 (8,532,377)
Issuance of common stock at reorganization value 2,257,833 22,578 3,067,799 - - 3,090,377
-------------------------------------------------------------------------------
Balance at October 26, 1996 (Successor) 2,257,833 22,578 3,067,799 - - 3,090,377
Net (loss) for the year - - - (1,325,212) - (1,325,212)
Cumulative dividends on Preferred Stock - - - (70,479) - (70,479)
Accretion of Preferred Stock - - - (78,037) - (78,037)
-------------------------------------------------------------------------------
Balance at November 1, 1997 (Successor) 2,257,833 22,578 $3,067,799 $(1,473,728) $ - $ 1,616,649
====================================================================================
Pro forma balance (unaudited)
at November 1, 1997 875 $396,037 2,257,833 $22,578 $3,067,799 $(1,473,728) $ - $ 2,012,686
===============================================================================
</TABLE>
See notes to financial statements.
F-5
<PAGE>
Harvey Electronics, Inc.
(Formerly The Harvey Group Inc. and Subsidiaries)
Statements of Cash Flows
<TABLE>
<CAPTION>
Successor Predecessor
------------------------------------------
Fifty-Three Weeks Thirty-Nine Weeks
Ended November 1, Ended October 26,
1997 1996
------------------------------------------
<S> <C> <C>
Operating activities
Net (loss) income $ (1,325,212) $ 4,912,562
Adjustments to reconcile net (loss) income to net
cash used in operating activities
Extraordinary gain - (5,338,852)
Fresh start adjustments - (1,857,844)
Reorganization expenses - 428,989
Depreciation and amortization 371,434 293,278
Credit for losses on accounts receivable (5,000) (5,000)
Provisions for sales tax and warranty reserves - 39,000
Write-off of other assets 32,164 -
Straight-line impact of rent escalations 61,055 1,235
Miscellaneous (10,000) (22,401)
Changes in operating assets and liabilities:
Accounts receivable 38,360 43,412
Inventories (550,940) (147,850)
Prepaid expenses and other current assets 143,795 (11,718)
Trade accounts payable 390,937 1,121,362
Accrued expenses, other current liabilities and income taxes 303,407 (27,717)
------------------------------------------
Net cash used in operating activities (550,000) (571,544)
------------------------------------------
Investing activities
Proceeds from note receivable from former officer/shareholder - 125,000
Net book value of deletions 37,254 -
Purchases of property and equipment (629,618) (64,707)
Increase in other assets (70,879) (125,303)
------------------------------------------
Net cash used in investing activities (663,243) (65,010)
------------------------------------------
Financing activities
Proceeds from note payable 350,000 -
Public offering costs (126,665) -
Costs relating to refinancing (67,532) -
Debtor-in-possession financing 605,000 717,500
Payments relating to Chapter 11 reorganization (456,913) -
Net proceeds from revolving line of credit facility 999,634 23,547
Principal payments on long-term debt - (90,010)
Principal payments on capital lease obligations (83,627) (39,896)
------------------------------------------
Net cash provided by financing activities 1,219,897 611,141
------------------------------------------
Increase (decrease) in cash and cash equivalents 6,654 (25,413)
Cash and cash equivalents at beginning of period 3,379 28,792
------------------------------------------
Cash and cash equivalents at end of period $ 10,033 $ 3,379
==========================================
</TABLE>
See notes to financial statements.
F-6
<PAGE>
Harvey Electronics, Inc.
(Formerly The Harvey Group Inc. and Subsidiaries)
Notes to Financial Statements
November 1, 1997
1. Plan of Reorganization and Fresh Start Reporting
Plan of Reorganization
On August 3, 1995, the Company (then known as The Harvey Group Inc. and
Subsidiaries or "Predecessor") filed petitions for relief under Chapter 11 of
the United States Bankruptcy Code with the United States Bankruptcy Court for
the Southern District of New York (the "Court"). This filing was the result of
certain negative factors including but not limited to: (i) the negative effect
of a $2,138,000 judgment entered against the Company; (ii) liabilities of The
Harvey Group Inc., including the obligations of its discontinued food brokerage
division, the payment of which significantly reduced cash; (iii) the recession
in the early 1990's coupled with the soft market in the consumer electronics
industry, all of which resulted in losses and a shortage of cash flow; and (iv)
the delisting of the Predecessor's common stock from the American Stock Exchange
in June 1995, which delisting made a proposed $4.2 million equity placement
untenable.
On November 13, 1996 (the "Confirmation Date"), the Court confirmed the
Restated Modified Amended Joint and Substantially Consolidated Plan of
Reorganization of The Harvey Group Inc. (the "Reorganization Plan"). The
Effective date of the Reorganization Plan was December 26, 1996 (the
"Reorganization Date"), at which time The Harvey Group Inc. emerged from its
Chapter 11 reorganization and changed its name to Harvey Electronics, Inc. The
Company has given effect to the Reorganization Plan as of October 26, 1996, the
end of the accounting period nearest to the Confirmation Date.
Prior to the Reorganization Date, all of the Company's old shares of common
and preferred stock were canceled. The Company simultaneously amended its
Certificate of Incorporation and is authorized to issue 10,010,000 shares
consisting of 10,000 shares of 8.5% Cumulative Convertible Preferred Stock (see
Note 6) with a par value of $1,000 per share (the "Preferred Stock") and
10,000,000 shares of Common Stock with a par value of $.01 per share (the
"Common Stock").
F-7
<PAGE>
Harvey Electronics, Inc.
(Formerly The Harvey Group Inc. and Subsidiaries)
Notes to Financial Statements (continued)
1. Plan of Reorganization and Fresh Start Reporting (continued)
The Reorganization Plan provided for the following:
a. Redistribution of Common Stock
Prior to the Reorganization Date, the new shares of common stock in Harvey
Electronics, Inc. were issued as follows:
2,000,000 shares were issued to Harvey Acquisition Company, L.L.C. ("HAC")
in satisfaction of the $2,822,500 of subordinated secured financing provided to
the Company during its reorganization process.
186,306 shares were issued to the Company's unsecured creditors; in
satisfaction of prepetition liabilities compromised.
19,962 shares were issued to the Company's former shareholders.
InterEquity Capital Partners, L.P. ("InterEquity"), a prereorganization
subordinated secured debtholder, received 51,565 shares of Common Stock as
payment in full of an allowed finders fee.
As a result of the above, 2,257,833 shares of Common Stock were issued on
the Effective date.
b. Issuance of Preferred Stock (see Note 6)
Prior to the Reorganization Date, 875 shares of the Company's Preferred
Stock were issued to the Company's prereorganization subordinated secured debt
holders in exchange for $875,000 of such debt. The reorganization carrying value
of the Preferred Stock has been estimated to be $318,000 based on a sale of such
security, independent of the Company, for 36% of stated value. The difference
between the carrying amount of the prereorganization debt and the reorganization
carrying value has been included with the extraordinary gain on forgiveness of
debt in the accompanying statement of operations for the thirty-nine weeks ended
October 26, 1996.
F-8
<PAGE>
1. Plan of Reorganization and Fresh Start Reporting (continued)
c. Convenience Claims/Miscellaneous
Convenience claims of $1,000 or less were paid in cash approximating
$20,000. The Reorganization Plan also provided for cash distributions ($452) of
$1.00 to any former shareholders holding 100 or fewer shares of old common
stock.
d. Agreement and Plan of Merger
Pursuant to the Reorganization Plan, the Company's Board of Directors
approved the Agreement and Plan of Merger effective December 26, 1996 by and
between the Company and its 100% wholly-owned subsidiary, Harvey Sound, Inc.
("Sound"), pursuant to which Sound was merged with and into the Company.
e. Change in Fiscal Year
The Company's Board of Directors approved an amendment to its By-Laws to
reflect the change in the Company's fiscal year from the Saturday closest to
January 31 to the Saturday closest to October 31.
f. Stock Option Plan
The Company's Board of Directors approved the Harvey Electronics, Inc.
Stock Option Plan ("Stock Option Plan"). The Stock Option Plan provides for the
granting of options to purchase up to 1,000,000 shares of Common Stock of the
Company (see Note 6).
g. Prepetition Liabilities Subject to Compromise
Under Chapter 11, certain claims against the Company in existence prior to
the filing of the petitions for relief under the Code were stayed while the
Company continued its operations as a debtor-in-possession.
F-9
<PAGE>
1. Plan of Reorganization and Fresh Start Reporting (continued)
As a result of the operational restructuring, the Company recorded
reorganization expenses for the thirty-nine weeks ended October 26, 1996 of $
$497,206. Such charges consisted of costs associated with professional fees, and
the write-off of property, equipment, other assets and certain receivables.
Additionally, the Company recorded income from the sale of a lease during the
thirty-nine weeks ended October 26, 1996 in the amount of $250,000.
Liabilities subject to compromise immediately preceding the Reorganization
Plan ($4,782,000), were satisfied with the issuance of common stock as noted
above and the related forgiveness of debt has been recorded as an extraordinary
gain in the accompanying statement of operations for the thirty-nine weeks ended
October 26, 1996.
Fresh Start Reporting
Fresh Start Reporting was adopted on the Confirmation Date and applied as
of October 26, 1996, the end of the accounting period closest to the
Confirmation Date. Results of operations and balance sheet differences between
such dates were insignificant. The Company has adopted Fresh Start Reporting in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code." The Company adopted fresh-start reporting because the holders
of existing voting shares immediately before filing and confirmation of the plan
received less than 50% of the voting shares of the emerging entity and its
reorganization value is less than its postpetition liabilities and allowed
claims.
Fresh Start Reporting has resulted in changes to the balance sheet,
including valuation of assets and liabilities at fair market value and valuation
of equity based on the reorganization value of the ongoing business, and
accordingly, the financial statements for periods prior (referred to as
"Predecessor") and subsequent (referred to as "Successor" or "Company") to the
adoption of Fresh Start accounting are not comparable.
The reorganization value of the Company was determined based on the
consideration received from HAC to obtain its ownership in the Company. A
carrying value of $318,000 was assigned to the Preferred Stock (see Note 6).
Subsequent to the Reorganization Date, the Company issued an additional 51,565
shares of Common Stock to InterEquity, as authorized
F-10
<PAGE>
1. Plan of Reorganization and Fresh Start Reporting (continued)
by the Court, for an approved finders fee. The excess of the reorganization
value over the fair value of net assets and liabilities ($1,582,440 at November
1, 1997) is reported as "Reorganization value in excess of amounts allocable to
identifiable assets" and is being amortized over a twenty-five year period.
Amortization expense of $66,023 was recorded for fiscal year 1997.
The revaluation of the Company's assets and liabilities resulted in the
following Fresh Start adjustments for the thirty-nine weeks ended October 26,
1996:
<TABLE>
<CAPTION>
<S> <C>
Increase in property and equipment (based on appraisal) $ 292,236
Decrease in other assets (32,462)
Increase in other liabilities (52,500)
Reorganization value in excess of amounts allocable to
identifiable assets 1,650,570
================
$ 1,857,844
================
</TABLE>
The accumulated deficit of $8,262,393 at October 26, 1996, which included
the effects of the Fresh Start adjustments, was reclassified to additional paid
in capital.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. Operating losses subsequent to the
Company's emergence from Chapter 11 indicate that the reorganization value in
excess of amounts allocable to identifiable assets might be impaired. However,
the Company's estimate of undiscounted cash flows indicate that such carrying
amounts are expected to be recovered.
The statements of operations and cash flows presented for the thirty-nine
weeks ended October 26, 1996 represent the Debtor-in-Possession operations of
the Company, prior to the Reorganization Date.
F-11
<PAGE>
2. Summary of Significant Accounting Policies
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 customer
or, for certain installation services, when such services are performed and
accepted by the customer.
Accounting Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the financial statements and accompanying notes. Actual
results could differ from those estimates.
Unaudited Financial Statements
The unaudited statement of operations for the thirty-nine weeks ended
October 28, 1995 is presented for comparison purposes only, and in the opinion
of management, include all adjustments (consisting of normal recurring accruals)
necessary for the fair presentation of such financial statements.
Stock Options
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 defines a fair value method of accounting for the
issuance of stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Pursuant to SFAS No. 123, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, as the Company
has elected to do, but are required to disclose in the financial statement
footnotes, pro-forma net income and per share amounts as if the Company had
applied the new method of accounting for all grants made since 1996. SFAS No.
123 also requires increased disclosures for stock-based compensation
arrangements. The Company has adopted the disclosure requirements of SFAS No.
123.
F-12
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost (average-cost method, which
approximates the first-in, first-out method) or market.
Investments
The Company has classified its investment in a certificate of deposit as
available-for-sale. The certificate of deposit is stated at cost, which
approximates fair value. In January 1998, the certificate of deposit was
redeemed. There were no unrealized gains or losses on this investment for the
periods presented.
Depreciation and Amortization
Depreciation of property and equipment, including equipment acquired under
capital leases, is provided for by the straight-line method over the estimated
useful lives of the related equipment, ranging from three to ten years.
Leasehold improvements are amortized over the lease term or estimated useful
life of the improvements, whichever is shorter.
Loss Per Share
The loss per common share for the fifty-three weeks ended November 1, 1997
was computed based on the weighted average number of common shares outstanding.
Common equivalent shares were not considered for the fifty-three weeks ended
November 1, 1997 since their inclusion would have been antidilutive. Income
(loss) per share is not presented for the pre-bankruptcy periods because such
amounts are not comparable to the post-bankruptcy period.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
is effective for both interim and annual financial statements for periods ending
after December 15, 1997. At such time, the Company will be required to change
the method currently used to compute earnings per share and restate all periods.
Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options, warrants, and convertible securities will be
excluded. The impact of adopting SFAS No. 128 is not expected to be material.
F-13
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Statement of Cash Flows
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Total interest paid for the fifty-three weeks ended November 1, 1997 and
for the thirty-nine weeks ended October 26, 1996 was approximately $282,000 and
$269,000, respectively.
Concentration of Credit Risk
The Company's operations consist of the retail sale, service and custom
installation of high quality audio, video and home theater equipment in the New
York Metropolitan area. The Company performs credit evaluations of its customers
financial condition and payment history but does not require collateral.
Generally, accounts receivable are due within 30 days and credit losses have
historically been immaterial.
Advertising Expense
Advertising expense, net of cooperative advertising allowances, is charged
to operations when the advertising takes place. Advertising expense for the
fifty-three weeks ended November 1, 1997 and for the thirty-nine weeks ended
October 26, 1996 was approximately $401,000 and $358,000, respectively. Prepaid
advertising for print advertisements not run at November 1, 1997 and October 26,
1996 was approximately $15,000 and $183,000, respectively.
3. Debtor-in-Possession Financing
On October 24, 1995, in connection with the Reorganization Plan, the
Company entered into a Security Loan Agreement ("Loan Agreement") with HAC,
enabling the Company to borrow up to $1,500,000 in debtor-in-possession
financing. The Loan Agreement bore interest at 2% over the prime rate at
Citibank, N.A. and was subordinate only to the Company's primary lender,
Congress Financial Corporation ("Congress"), as evidenced by an intercreditor
agreement between HAC and Congress (see Note 4).
F-14
<PAGE>
3. Debtor-in-Possession Financing (continued)
The proceeds ($1,500,000) received in installments from HAC coupled with
credit support from the Company's vendors and bank primarily were used to build
inventory levels. On May 6, 1996, the Company received an additional $50,000
from HAC to be used for general operating purposes. In September 1996, the Loan
Agreement was amended, enabling the Company to borrow up to $3,000,000. As a
result of the amendment, additional proceeds of $1,272,500 were received from
HAC ($605,000 of such proceeds were received during fiscal 1997), for a total
aggregating $2,822,500. The proceeds were used for capital expenditures, to
build a new retail store in Greenwich, Connecticut, advertising, professional
fees and for working capital purposes. This debtor-in-possession financing was
converted into 2,000,000 shares of the Common Stock of the reorganized Company
in accordance with the Plan of Reorganization (see Note 1).
Under the Loan Agreement, the Company paid $5,000 per month representing a
loan servicing fee to HAC. Such amounts aggregated $45,000 for the thirty-nine
weeks ended October 26, 1996.
Subsequent to the Reorganization Date, an individual who is a member of HAC
and a holder of Preferred Stock, provided an additional $350,000 of financing to
the Company, to be used for working capital purposes. This amount is payable in
full on December 31, 1998 with interest at 12% per annum, and may be prepaid
without penalty. Interest expense and amount payable to this member of HAC was
$28,000 as of and for the year ended November 1, 1997.
4. Revolving Lines of Credit Facilities
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, reduce trade payables and pay
related costs of the refinancing. The Paragon facility provides an improved
advance rate on 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, as discussed below. The interest rate on
borrowings up to $2,500,000 is 1% over the prime rate. The rate charged on
outstanding balances over
F-15
<PAGE>
4. Revolving Lines of Credit Facilities (continued)
$2,500,000 is 1.75% above the prime rate. A commitment fee of $49,500 (to
be amortized over three years) 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 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, beginning with the first quarter of fiscal 1998, based upon the estimated
fair value of such warrant.
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.
In fiscal 1995, the Company entered into a three-year revolving line of
credit facility with Congress, whereby the Company could borrow up to
$3,000,000, based upon a lending formula (as defined) calculated on eligible
inventory. Amendments to the Congress revolving line of credit facility were
completed on January 7, 1997 and March 31, 1997, primarily extending the
facility through January 6, 2000, instituting a net worth covenant (as defined)
and increasing available borrowings by approximately $250,000, by amending the
lending formula (as defined). The interest rate per annum on this credit
facility was the prime rate (8.5% at October 26, 1996) plus 2%. An unused line
fee of one-quarter of one percent per annum and a prescribed early termination
fee also existed under the line of credit facility. At closing, $200,000 was
required to be placed in escrow in a certificate of deposit as additional
collateral for Congress. The Company had $1,777,851 outstanding under the
Congress credit facility at November 1, 1997. As mentioned above, this credit
facility was canceled and replaced by a new revolving credit facility with
Paragon.
F-16
<PAGE>
5. Sale of Common Stock and Warrants in Public Offering
On April 7, 1998, the Company completed an issuance of its common stock and
common stock warrants in public offering (the "Offering"). The Offering was
co-managed by The Thornwater Company, L.P. (the "Underwriter") which sold
1,200,000 shares of the Company's common stock, of which 1,025,000 shares were
sold by the Company and 175,000 shares were sold by HAC, and 2,104,500 of
Warrants ("Warrants") to acquire additional shares of the Company's common
stock. The net proceeds from the Offering, of approximately $4 million, are
expected to be used for retail store expansion and working capital purposes.
Each Warrant is exercisable for one share of common stock at 110% ($5.50
per share) of the Offering price for a period of three years commencing two
years from the effective date of the Offering. The Warrants also are 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 Offering price per share.
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 will record compensation expense equal to the fair
market value of the shares over the two-year period during which the shares are
subject to forfeiture by the transferees.
F-17
<PAGE>
6. 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 directors, officers and
employees. The Company's previous stock option plan was canceled in connection
with the Reorganization Plan. 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 of
$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 Fresh Start carrying value of the Preferred
Stock was estimated to be $318,000 at October 26, 1996.
In the event of liquidation of the Company, the holders of the Preferred
Stock shall receive preferential rights and shall be entitled to receive face
value plus any outstanding dividends, prior to any distributions to common
shareholders. The holders of the Preferred Stock shall receive a semiannual 8.5%
cumulative dividend ($85 per share annually), payable on the last business day
in June and December. The Company may and has elected to defer only the first
year's dividend at a preference rate of $105 per share annually. This amount,
plus interest at 8.5% per annum, will be payable in three equal annual
installments from December 31, 1998 through 2000.
F-18
<PAGE>
6. Stock Option Plan and Preferred Stock (continued)
The Preferred Stock may be converted into shares of Common Stock until
December 31, 2000 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 on 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 each share
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
with terms equivalent to the Warrants in the Offering (see Note 5). The pro
forma balance sheet (unaudited) at November 1, 1997 has been presented to
reflect the Preferred Stock in stockholder's equity as though the removal of the
redemption feature had taken place on such date.
Accumulated Preferred Stock dividends payable of $70,479 are outstanding
and were recorded as a long-term liability at November 1, 1997. Such dividends,
along with the accretion on the redeemable Preferred Stock, were recorded as a
reduction of retained earnings at November 1, 1997.
7. Income Taxes
At November 1, 1997, the Company has available net operating loss
carryforwards of approximately $9,400,000 which expire in various years through
fiscal 2012. Of this amount, approximately $8,100,000 relates to
pre-reorganization net operating loss carryforwards. As a result of the
Company's Reorganization Plan and significant ownership change, under Section
382 of the IRS Code, it is estimated that the pre-reorganization net operating
loss carryforward and other pre-reorganization tax attributes will be limited to
approximately $150,000 per year over the next fifteen years.
At October 26, 1996 and November 1, 1997, the Company had deferred tax
assets of approximately $765,000 and $1,207,000, respectively, arising primarily
from the future availability of the above tax attributes. Such amounts have been
offset in full by a valuation allowance in each year.
F-19
<PAGE>
7. Income Taxes (continued)
Future benefits realized, if any, from pre-reorganization net operating
loss carryforwards would first reduce reorganization value in excess of amounts
allocable to identifiable assets until exhausted and thereafter be reported as a
direct addition to paid in capital.
8. Pension and Profit Sharing Plan
The Harvey Group Inc. Savings and Investment Plan (the "Plan") includes
profit sharing, defined contribution and 401(k) provisions and is available to
all eligible employees of the Company. There were no contributions to the Plan
for the fifty-three weeks ended November 1, 1997 and for the thirty-nine weeks
ended October 26, 1996. Effective January 1, 1995, the Company's Board of
Directors temporarily elected to eliminate the employer 401(k) match on employee
contributions. Subsequent to the Effective Date, the Plan's name was amended and
changed to Harvey Electronics, Inc. Savings and Investment Plan.
9. Commitments and Contingencies
Commitments
The Company's financial statements reflect the accounting for equipment
leases as capital leases by recording the asset and liability for the lease
obligation. Additional capital leases for the fifty-three weeks ended November
1, 1997 total $11,000. Future minimum rental commitments, by year and in the
aggregate, under the capital leases and noncancelable operating leases with
initial or remaining terms of one year or more consisted of the following at
November 1, 1997:
Operating Leases Capital Leases
Fiscal 1998 $ 956,000 $ 35,000
Fiscal 1999 992,000 4,000
Fiscal 2000 1,018,000 4,000
Fiscal 2001 1,027,000 2,000
Fiscal 2002 98,900 -
Thereafter 2,348,000 -
---------- -----------
Total minimum lease payments $ 7,330,000 45,000
=============
Less amount representing interest 4,000
------------
Present value of net minimum lease payments 41,000
Less current portion 32,000
============
$ 9,000
============
F-20
<PAGE>
9. Commitments and Contingencies (continued)
Minimum rental commitments are offset by sublease income of approximately
$93,000 per annum through fiscal 2001.
Total rental expense for operating leases was approximately $1,517,000 and
$1,234,000, for the fifty-three weeks ended November 1, 1997 and for the
thirty-nine weeks ended October 26, 1996, respectively. Certain leases provide
for the payment of insurance, maintenance charges and taxes and contain renewal
options.
The Company is obligated under annual or biannual agreements with certain
of its vendors to attain certain minimum levels of inventory purchases,
aggregating approximately $900,000 per year over the next two years.
Contingencies
The Company is a defendant in certain legal actions which arose in the
normal course of business. The outcome of these legal actions, in the opinion of
management, will not have a material effect on the Company's financial position
or operations.
The Company had available standby letters of credit outstanding at November
1, 1997, aggregating $100,000.
10. Other Information
Accrued Expenses and Other Current Liabilities
November 1, 1997
------------------
Payroll and payroll related items $ 144,074
Accrued professional fees 403,213
Customer layaways 298,704
Accrued interest 99,855
Sales taxes 77,297
Other 116,775
===========
$1,139,918
===========
F-21
<PAGE>
10. Other Information (continued)
Other Long-Term Liabilities
November 1, 1997
-----------------
Straight-line impact of lease escalations $136,411
Other 21,000
========
$157,411
========
Other
The financial statement caption "Interest and other income" for the
thirty-nine weeks ended October 26, 1996, includes $45,605 of interest and other
income relating to proceeds of a division of the Predecessor in a previous year.
Interest expense relating to the HAC debtor-in-possession financing was
approximately $35,000 and $149,000 for the fifty-three weeks ended November 1,
1997 and for the thirty-nine weeks ended October 26, 1996, respectively.
Interest payable to HAC at November 1, 1997 was approximately $66,000.
Management fees of $30,000 relating to a Company affiliated with the
Company's Chairman, were expensed for the fifty-three weeks ended November 1,
1997. Approximately $24,000 of loan servicing fees and other miscellaneous
amounts were payable to this Company at November 1, 1997.
F-22
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000046043
<NAME> Harvey Electronics, Inc.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-01-1997
<PERIOD-START> OCT-27-1996
<PERIOD-END> NOV-01-1997
<CASH> 10,033
<SECURITIES> 200,000
<RECEIVABLES> 292,436
<ALLOWANCES> (20,000)
<INVENTORY> 3,559,778
<CURRENT-ASSETS> 4,151,903
<PP&E> 1,383,518
<DEPRECIATION> 179,604
<TOTAL-ASSETS> 7,314,125
<CURRENT-LIABILITIES> 2,937,115
<BONDS> 0
396,037
0
<COMMON> 22,578
<OTHER-SE> 1,616,649
<TOTAL-LIABILITY-AND-EQUITY> 7,314,125
<SALES> 15,398,290
<TOTAL-REVENUES> 15,470,942
<CGS> 9,764,755
<TOTAL-COSTS> 6,706,180
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 325,219
<INCOME-PRETAX> (1,325,212)
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<CHANGES> 0
<NET-INCOME> (1,325,212)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> 0
</TABLE>
