UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended May 1, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _________ to ___________.
Commission File Number 1-4626
Harvey Electronics, Inc.
(Exact name of small business issuer as specified in its charter)
New York 13-1534671
(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
205 Chubb Avenue, Lyndhurst, New Jersey
(Address of principal executive offices)
201-842-0078
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No[].
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
As of June 11, 1999, 3,282,833 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
Harvey Electronics, Inc.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information
Item 1. Financial Statements: Page no.
<S> <C>
Statements of Operations (Unaudited) - Twenty-six and thirteen weeks
ended May 1, 1999 and May 2, 1998 ........................................................3
Balance Sheets - May 1, 1999 (Unaudited) and October 31, 1998 ..............................4
Statement of Shareholders' Equity (Unaudited) - Twenty-six weeks
ended May 1, 1999 ........................................................................6
Statements of Cash Flows (Unaudited) - Twenty-six weeks ended
May 1, 1999 and May 2, 1998 ..............................................................7
Notes to Financial Statements (Unaudited) ..................................................8
Item 2. Management's Discussion and Analysis or Plan of Operation ..................................11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K ...........................................................19
Signatures ...............................................................................................19
</TABLE>
<PAGE>
Part I. Financial Information
Item I. Financial Statements
Harvey Electronics, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Twenty-Six Weeks Twenty-Six Weeks Thirteen Thirteen
Ended Ended Weeks Ended Weeks Ended
May 1, 1999 May 2, 1998 May 1, 1999 May 2, 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Net sales $11,423,491 $8,934,673 $5,015,007 $4,064,857
Interest and other income 44,586 37,442 16,145 21,900
--------------------------------------------------------------------------------
11,468,077 8,972,115 5,031,152 4,086,757
--------------------------------------------------------------------------------
Cost and expenses
Cost of sales 6,866,610 5,467,560 2,990,440 2,471,240
Selling, general and administrative expenses 4,292,522 3,286,195 2,126,437 1,618,674
Interest expense 57,643 162,690 33,643 71,390
--------------------------------------------------------------------------------
11,216,775 8,916,445 5,150,520 4,161,304
--------------------------------------------------------------------------------
Income (loss) before income tax equivalent
benefit 251,302 55,670 (119,368) (74,547)
Income tax equivalent benenefit - - 40,000 -
--------------------------------------------------------------------------------
Net income (loss) 251,302 55,670 (79,368) (74,547)
Preferred Stock dividend requirement (37,188) (46,218) (18,594) (27,718)
Accretion of Preferred Stock - (6,000) - -
--------------------------------------------------------------------------------
Net income (loss) attributable to common $214,114 $3,452 $ (97,962) $ (102,265)
stock
================================================================================
Net income (loss) per common share
applicable to common shareholders:
Basic $.07 - $(.03) $(.04)
================================================================================
Diluted $.06 - $(.03) $(.04)
================================================================================
Shares used in the calculation of net income (loss) per common share:
Basic 3,282,833 2,405,889 3,282,833 2,557,271
================================================================================
Diluted 3,346,889 2,405,889 3,282,833 2,557,271
================================================================================
Dividends per common share NONE NONE NONE NONE
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Harvey Electronics, Inc.
Balance Sheets
May 1, October 31,
1999 1998
(Unaudited) (1)
--------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 35,636 $ 221,444
Accounts receivables, less allowance of $25,000 353,234 365,635
Note receivable 70,667 73,321
Inventories 4,401,428 4,014,936
Prepaid expenses and other current assets 267,381 278,270
--------------------------------------------
Total current assets 5,128,346 4,953,606
Property and equipment:
Leasehold improvements 1,191,897 973,162
Furniture, fixtures & equipment 1,057,843 842,375
--------------------------------------------
2,249,740 1,815,537
Less accumulated depreciation & amortization 540,366 408,711
--------------------------------------------
1,709,374 1,406,826
Equipment under capital leases, net 58,321 10,599
Cost in excess of net assets acquired, less accumulated
amortization of $4,000 - 1999 and $1,000 - 1998 146,000 149,000
Reorganization value in excess of amounts allocable to
identifiable assets, less accumulated amortization of
$168,023 - 1999 and $132,023 - 1998 1,480,440 1,516,440
Other assets, less accumulated amortization of $193,307 -
1999 and $155,390 - 1998 343,668 352,788
--------------------------------------------
Total assets $8,866,149 $ 8,389,259
============================================
</TABLE>
(1) The balance sheet as of October 31, 1998 has been derived from the
audited financial statements at that date.
See accompanying notes.
4
<PAGE>
Harvey Electronics, Inc.
Balance Sheets (continued)
<TABLE>
<CAPTION>
May 1, October 31,
1999 1998
(Unaudited) (1)
--------------------------------------------
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Trade accounts payable $ 1,248,680 $ 1,577,126
Accrued expenses and other current liabilities 800,397 931,211
Income taxes 14,119 24,900
Cumulative preferred stock dividends payable 57,152 61,925
Current portion of capital lease obligations 54,732 3,352
Other current liabilities 95,662 -
---------------------------------------------
Total current liabilities 2,270,742 2,598,514
Long-term liabilities:
Long-term debt 610,482 -
Cumulative preferred stock dividends payable 30,625 61,556
Other liabilities 211,673 198,922
Capital lease obligations 3,956 5,710
---------------------------------------------
856,736 266,188
Commitments and contingencies
Shareholders' equity:
8 1/2% Cumulative Convertible Preferred Stock,
par value $1,000 per share;
authorized 10,000 shares; issued
875 shares (aggregate liquidation preference - $875,000) 402,037 402,037
Common stock, par value $.01 per share; authorized
10,000,000 shares; issued 3,282,833 - 1999 and 1998 32,828 32,828
Additional paid-in capital 7,481,667 7,481,667
Accumulated deficit (2,177,861) (2,391,975)
---------------------------------------------
Total shareholders' equity 5,738,671 5,524,557
=============================================
Total liabilities and shareholders' equity $8,866,149 $ 8,389,259
=============================================
</TABLE>
(1) The balance sheet as of October 31, 1998 has been derived from the
audited financial statements at that date.
See accompanying notes.
5
<PAGE>
Harvey Electronics, Inc.
Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------------------------------- Paid-In Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1998 875 $402,037 3,282,833 $32,828 $7,481,667 $(2,391,975) $5,524,557
Net income for the twenty-six weeks ended
May 1, 1999 - - - - - 251,302 251,302
Preferred Stock dividend - - - - - (37,188) (37,188)
--------------------------------------------------------------------------------------
Balance at May 1, 1999 875 $402,037 3,282,833 $32,828 $7,481,667 $(2,177,861) $5,738,671
======================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Harvey Electronics, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Twenty-six
Weeks Ended Weeks Ended
May 1, 1999 May 2, 1998
----------------------------------------------------
<S> <C> <C>
Operating activities
Net income $ 251,302 $ 55,670
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 218,892 211,285
Deferred compensation - 55,000
Straight-line impact of rent escalations 13,016 20,884
Miscellaneous 3,035 (6,000)
Changes in operating assets and liabilities:
Accounts receivable 12,401 (156,987)
Note receivable 2,654 -
Inventories (386,492) (96,655)
Prepaid expenses and other current assets 171,982 98,019
Accounts payable (328,446) (259,485)
Accrued expenses, other current liabilities and income taxes
(141,860) (380,926)
----------------------------------------------------
Net cash used in operating activities (183,516) (459,195)
----------------------------------------------------
Investing activities
Redemption of certificate of deposit - 200,000
Purchases of property and equipment (434,203) (21,567)
Increase in other assets (28,797) (7,155)
----------------------------------------------------
Net cash (used) in provided by investing activities (463,000) 171,278
----------------------------------------------------
Financing activities
Preferred stock dividends paid (75,927) -
Costs of new line of credit facility - (82,177)
Proceeds from Public Offering - 5,335,450
Public Offering costs - (1,252,041)
Net repayments of old revolving line of credit facility - (1,777,851)
Net proceeds from new revolving line of credit facility 610,482 2,262,306
Temporary repayment of new revolving line of credit facility from
proceeds of Offering - (2,262,306)
Repayment of term loan - (350,000)
Principal payments on other current liabilities (65,431) (49,821)
Principal payments on capital lease obligations (8,416) (30,920)
----------------------------------------------------
Net cash provided by financing activities 460,708 1,792,640
----------------------------------------------------
(Decrease) increase in cash and cash equivalents (185,808) 1,504,723
Cash and cash equivalents at beginning of period 221,444 10,033
====================================================
Cash and cash equivalents at end of period $ 35,636 $ 1,514,756
====================================================
Supplemental cash flow information:
Taxes paid $11,000 $14,000
Interest paid $74,000 $243,000
</TABLE>
See accompanying notes.
7
<PAGE>
1. Basis of Presentation and Description of Business
Basis of Presentation
The accompanying unaudited financial statements of Harvey Electronics, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial reporting and with the instructions
to Form 10-QSB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
Operating results for the six month period ended May 1, 1999 are not
necessarily indicative of the results that may be expected for the year ending
October 30, 1999. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended October 31, 1998.
The preparation of the financial statements, in conformity with generally
accepted accounting principals, requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosures at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates and assumptions.
Description of Business
The Company is a specialty retailer of high quality audio/video consumer
electronics and home theater products in the Metropolitan New York area. Revenue
from retail sales is recognized at the time goods are delivered to the consumer
or, for certain installation services, when such services are performed and
accepted by the customer.
2. Retail Store Openings
On July 2, 1998, as a part of its expansion plan, the Company acquired
certain assets and business of the Sound Mill, Inc. and its subsidiary, Loriel
Custom Audio/Video Corporation (the "Sound Mill"), a retailer and custom
installer of specialty high-end audio/video products for twenty-nine years with
one store located in Mt. Kisco, in Northern Westchester County, New York, for a
purchase price of $200,000 (as adjusted) in cash. The acquisition was accounted
for as a purchase. The purchase price was allocated to the assets acquired based
upon the fair values on the date of acquisition as follows: $50,000 for
leasehold improvements, equipment, vehicles and tools and $150,000 for cost in
excess of net assets acquired which is being amortized over a twenty-five-year
period. The Company also signed a ten-year lease with a five-year renewal option
for the 3,100 square foot retail store operated by the Sound Mill. This property
is owned by the former principals of the Sound Mill. The store was renovated
8
<PAGE>
2. Retail Store Openings (continued)
for a November, 1998 grand re-opening. Accordingly, the results of
operations for this new store have been included in the Company's operations for
the six and three month periods ended May 1, 1999. Pro-forma sales, net income
and basic and diluted earnings per share would not have been considered material
for the six and three month periods ended May 2, 1998.
On August 11, 1998, the Company signed a ten-year lease with a five-year
renewal option for its new 4,600 square foot retail showroom in
Greenvale/Roslyn, on the north shore of Long Island, New York. This new retail
store also opened in November, 1998. Its results of operations have also been
included in the Company's operations for the six and three months ended May 1,
1999.
3. Planned Opening of a Bang & Olufsen Branded Store
Bang & Olufsen products have been sold by the Company since 1980, and the
line represented approximately $565,000 or 4.9% of the Company's net sales for
the six month period ended May 1, 1999. Bang & Olufsen has decided that it will
now focus on developing Bang & Olufsen licensed stores ("Branded Stores")
throughout the world. Bang & Olufsen has, accordingly, canceled its dealer
agreement with the Company and, with one exception, all other retailers
effective May 31, 1999. After this date, Bang & Olufsen products will be
available only in Branded Stores.
The Company has received a commitment from Bang & Olufsen permitting, but
not requiring, the Company to open Branded Stores in Manhattan, Long Island and
Connecticut. Pursuant to this commitment, the Company must complete construction
of these locations at various dates through November 2000. Bang & Olufsen has
authorized the Company to open up to five Branded Stores.
On January 7, 1999, as part of its expansion plan in the New York region,
the Company signed a lease and a related Prime Site Marketing Agreement to open
a new 1,500 square foot Bang & Olufsen Branded Store in the Union Square area,
in lower Manhattan. The Company plans to open this new store in July, 1999. This
will be the Company's seventh store and will be the third opened since its
successful public offering, completed in April, 1998.
4. Segment Disclosures
Effective November 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("Statement
131"). Statement 131 superseded FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements
9
<PAGE>
4. Segment Disclosures (continued)
and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of Statement 131 did not affect results of
operations or financial position, and did not require the disclosure of segment
information.
5. Income Per Share
In 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Earnings per share amounts
for all periods have been presented and conform to the SFAS No. 128
requirements.
The basic income per common share for the twenty-six and thirteen weeks
ended May 1, 1999 and May 2, 1998 was computed based on the weighted average
number of common shares outstanding. Common equivalent shares relating to
employee stock options, aggregating 64,056, were included in the weighted
average number of common shares outstanding for diluted earnings per share.
Common equivalent shares of approximately 131,250, relating to the conversion of
Preferred Stock, were not considered since their conversion rates were greater
than the fair market value of the Company's common stock.
6. Income Taxes
In connection with the Company's emergence from its reorganization
proceeding under Chapter 11 of the United States Bankruptcy Code on December 26,
1996, the Company adopted Fresh Start Accounting in accordance with AICPA
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code." Fresh Start Reporting requires that the Company
report an income tax equivalent provision when there is book income and a
pre-reorganization net operating loss carryforward. This requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carryforward will be utilized to reduce the related income tax payable. The
current and any future year benefit arising from utilization of the
pre-reorganization carryforward is not reflected as a reduction of the tax
equivalent provision in determining net income, but instead is recorded first as
a reduction of reorganization value in excess of amounts allocable to
identifiable assets until exhausted and thereafter as a direct addition to
paid-in-capital.
10
<PAGE>
6. Income Taxes (continued)
The income tax equivalent provision and the associated reduction of
reorganization value in excess of amounts allocable to identifiable assets,
recorded in the Company's first fiscal quarter of 1999 aggregating $40,000, was
reversed in the Company's second fiscal quarter of 1999. The income tax
equivalent benefit recorded in the second quarter does not affect the Company's
tax liability or cash flows.
Item 2. Management's Discussion and Analysis or Plan of Operation
The following management's discussion and analysis and this Form 10-QSB
contain forward-looking statements which involve risks and uncertainties. When
used herein, the words "anticipate," "believe," "estimate," and "expect" and
similar expressions as they relate to the Company or its management are intended
to identify such forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company's actual results,
performance or achievements could differ materially from the results expressed
in or implied by these forward-looking statements. Historical results are not
necessarily indicative of trends in operating results for any future period.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date the statement was made.
General
The following discussion should be read in conjunction with the Company's
audited financial statements for the fifty-two weeks ended October 31, 1998 and
the fifty-three weeks ended November 1, 1997, included in the Company's Annual
Report on Form 10-KSB.
Twenty-Six and Thirteen Weeks Ended May 1, 1999 as Compared to Twenty-Six
and Thirteen Weeks Ended May 2, 1998
Net income. The Company's net income for the six months ended May 1, 1999
increased to $251,302 as compared to net income of $55,670 for the same period
last year. The net loss for the three months ended May 1, 1999 was $79,368 as
compared to $74,547 for the same quarter last year. The results of the six and
three month periods ended May 1, 1999 include approximately $45,000 of
preoperating expenses relating to the new Bang & Olufsen store to be opened in
the Union Square area of lower Manhattan in July 1999. All of the Company's six
retail stores were profitable for the six months ended May 1, 1999.
Net sales for the six months ended May 1, 1999, aggregated $11,423,000, an
increase of approximately $2,489,000 or 28% from the same period last year.
Comparable store sales for the six months ended May 1, 1999, increased
approximately $786,000 or 9% from the same period last year.
Net sales for the second fiscal quarter ended May 1, 1999 aggregated
$5,015,000, an increase of approximately $950,000 or 23% as compared to the
second quarter of fiscal 1998. Comparable store sales for the second fiscal
quarter ended May 1, 1999 increased $197,000 or 5% from the same quarter last
year.
Sales increased as the Company, in November 1998, successfully opened two
new retail store locations in Mt. Kisco, in Westchester County and in
Greenvale/Roslyn, on the north shore of Long Island. The revenues from these
locations, together with an increase in same store sales primarily accounted for
the significant sales increases. The Company also continues to benefit from new
digital technologies which have been embraced by the
11
<PAGE>
Twenty-Six and Thirteen Weeks Ended May 1, 1999 as Compared to Twenty-Six
and Thirteen Weeks Ended May 2, 1998 (continued)
Company's upscale clients and additionally from increased demand of its
custom installation services. The increase in the Company's sales is attributed
to the volume of goods and services sold and to a lesser extent, changes in
product lines or prices.
Custom installation services continue to expand and account for
approximately 24% of net sales for the six months ended May 1, 1999, as compared
to 22% for the same period last year.
Costs and Expenses. Total cost of sales for the six months ended May 1,
1999 increased approximately $1,399,000 or 26% from the same period last year.
Cost of sales for the second quarter of fiscal 1999 increased approximately
$519,000 or 21% from the same quarter in fiscal 1998. This was primarily the
result of increased sales, offset by improved gross profit margins.
The gross profit margin for the second fiscal quarter ended May 1, 1999
increased to 40.4% from 39.2% for the same quarter in fiscal 1998. Gross profit
margin for the six months ended May 1, 1999 increased to 39.9% from 38.8% for
the same period last year. The gross margin increased primarily from increased
custom installation sales and additional sales of new products such as DVD
players, high definition (HDTV) and plasma flat-screen televisions, which enjoy
higher gross margins. The Company's advertising campaign also placed less
emphasis on price sensitive advertisements during fiscal 1999. Sales training
efforts and merchandising emphasis on the sale of higher margin inventory
categories and accessories have also helped to increase gross profit margins.
Selling, general and administrative expenses ("SG&A expenses") increased
30.6% or approximately $1,006,000 for the six months ended May 1, 1999, as
compared to the same period last year. SG&A expenses for the second fiscal
quarter ended May 1, 1999 increased approximately $508,000 or 31.4% as compared
to the second quarter last year. Comparable store SG&A expenses increased 12.9%
(approximately $422,000) and 13.2% (approximately $213,000) for the six and
three month periods, respectively, as compared to the same periods last year.
Total SG&A expenses increased primarily from the two new retail stores opened in
November 1998. Comparable store SG&A expenses increased from additional payroll
and payroll related items, occupancy costs, professional expenses, insurance
costs and various store operating expenses including costs of offering extended
interest-free financing to its customers. These increases were partially offset
by reduced advertising and stock compensation expenses.
Interest expense decreased approximately $105,000 or 64.6% for the six
months ended May 1, 1999, as compared to the same period last year. Interest
expenses for the second fiscal quarter ended May 1, 1999 decreased approximately
$38,000 or 52.9% from the second quarter last year. The decrease in interest
expense was primarily due to the
12
<PAGE>
Twenty-Six and Thirteen Weeks Ended May 1, 1999 as Compared to Twenty-Six
and Thirteen Weeks Ended May 2, 1998 (continued)
elimination of outstanding borrowings under the revolving line of credit
facility through February 1999, as a result of the paydown of the credit
facility in April 1998 using part of the net proceeds from the public offering.
In March 1999, the Company began to borrow funds from its revolving line of
credit facility.
See Note 6 to the unaudited financial statements, regarding the income tax
equivalent benefit for the second quarter ended May 1, 1999.
Liquidity and Capital Resources
The Company's ratio of current assets to current liabilities was 2.26, or
approximately $2,858,000 at May 1, 1999 as compared to 1.91, or approximately
$2,355,000, at October 31, 1998. The increase in the current ratio at May 1,
1999 was primarily the result of the Company's net income for the six months,
coupled with an increase in inventory and a decrease in accounts payable and
accrued expenses. The decreases in accounts payable and accrued expenses were
funded by the Company's revolving line of credit facility, which is classified
as long-term debt as of May 1, 1999.
Net cash used in operating activities was approximately $184,000 for the
first six months of fiscal 1999 as compared to cash used in operating activities
of approximately $459,000 for the same period last year. The improvement in cash
used in operating activities was primarily due to the Company's increased net
income.
Net cash used in investing activities for the first six months of fiscal
1999 was approximately $463,000 as compared to net cash provided of
approximately $171,000 for the same period last year. Net cash used for the
first six months of fiscal 1999 was due primarily to capital expenditures
($434,000) relating to all new store openings. In fiscal 1998, the Company
benefited from the redemption of a $200,000 certificate of deposit.
Net cash provided from financing activities was approximately $461,000 for
the first six months of fiscal 1999 as compared with approximately $1,793,000
for the same period last year. In March 1999, the Company began to borrow cash
from its revolving line of credit facility and borrowed approximately $610,000
as of May 1, 1999. The increase in cash from financing activities for the first
six months in fiscal 1998 was primarily from the net proceeds from the Company's
successful public offering, offset by the repayment of the Company's revolving
line of credit facility and a term loan.
On November 5, 1997, the Company entered into a three-year revolving line
of credit facility with Paragon Capital LLC ("Paragon") whereby the Company may
borrow up to $3,300,000 based upon a lending formula (as defined) calculated on
eligible inventory.
13
<PAGE>
Liquidity and Capital Resources (continued)
The Paragon facility provides an improved advance rate on the Company's
inventory, as compared to the Company's previous facility with Congress
Financial Corporation. 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
(which is being amortized over three years) and a facility fee ($24,750) 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. At June 14, 1999, borrowings under the Paragon revolving
line of credit facility approximated $857,000.
The maximum amount of borrowings available to the Company under this line
of credit is limited to formulas prescribed in the loan agreement. The Company's
maximum borrowing availability is equal to 73% of acceptable inventory, minus
the then unpaid principal balance of the loan, minus the then aggregate of any
available 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 can not exceed a predetermined amount.
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).
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.
In April, 1998, the Company completed a public offering ("Offering") of its
common stock and common stock purchase warrants. The Offering was co-managed by
The Thornwater Company, L.P., which sold 1,200,000 shares of the Company's
common stock of which 1,025,000 shares were sold by the Company and 175,000
shares were sold by Harvey Acquisition Company, LLC, the Company's major
shareholder.
14
<PAGE>
Liquidity and Capital Resources (continued)
2,104,500 Warrants to acquire additional shares of the Company's common
stock were also sold by the Company. The net proceeds from the Offering,
approximately $4.1 million, were used for retail store expansion and general
working capital purposes.
Each Warrant is exerisable for one share of common stock at 110% ($5.50 per
share) of the Offering price, for a period of three years commencing March 31,
2000. The Warrants are also redeemable (at $.10 per Warrant), at the Company's
option, commencing March 31, 2000 if the closing bid price of the common stock
for 20 consecutive trading days exceeds 150% of the Offering price per share or
$7.50.
The Company's management believes that the Company's overhead structure has
the capacity to support additional stores without significant increases in cost
and personnel, and, consequently, that revenues and profit from new stores will
have a positive impact on the Company's operations. This was realized for the
two new stores opened in the first quarter of fiscal 1999.
As Bang & Olufsen focuses on developing Bang & Olufsen licensed branded
stores ("Branded Stores") throughout the world, it has canceled its dealer
agreement with the Company and, with one exception, all other retailers
effective May 31, 1999. After this date, Bang & Olufsen products will only be
available in Branded Stores.
The Company received a commitment from Bang & Olufsen permitting, but not
requiring, the Company to open Branded Stores in Manhattan, Long Island and
Connecticut. Pursuant to this commitment, the Company must complete construction
of these locations at various dates through November 2000. No assurance can be
given about the number of Branded Stores that the Company will open. Capital
expenditures necessary for each 1,500 square foot store, including inventory,
should approximate $300,000.
On January 7, 1999, as part of its expansion plan in New York region, the
Company signed a lease and a related Prime Site Marketing Agreement to open a
new 1,500 square foot Bang & Olufsen Brand Store in the Union Square area in
lower Manhattan. The Company plans to open this new store in July 1999.
This Branded Store will be the first of two stores the Company plans to
open in Manhattan. There is currently no location, lease agreement or timetable
for the second Bang & Olufsen store. The new store will sell highly
differentiated Bang & Olufsen products, including uniquely designed audio
systems, speakers, telephones, headphones and accessories and other approved
non-Bang & Olufsen products. The store will also offer professional custom
installation of multi-room audio and home theater systems. This new store will
be the Company's seventh, and will be the third store opened since its
successful public offering, completed in April 1998.
15
<PAGE>
Liquidity and Capital Resources (continued)
The Company seeks to open an additional Harvey Electronics store in New
Jersey within the next eighteen months, if the appropriate location or existing
business can be obtained. The Company estimates that the total cost of opening a
new Harvey Electronics retail store is approximately $650,000. The estimated
cost of opening this store includes the cost of leasehold improvements,
including design and decoration, machinery and equipment, furniture and
fixtures, security deposits, opening inventory (net of the portion to be
borrowed from the Company's lender), legal expense, preopening expenses and
additional advertising and promotion in connection with the opening.
Management believes that cash on hand, cash flow from operations and funds
made available under the credit facility with Paragon, will be sufficient to
meet the Company's anticipated working capital needs and expansion plan for at
least the next twelve month period.
During the periods presented, the Company was not significantly impacted by
the effects of inflation. The Company did benefit from a strong Christmas demand
in December, 1998.
Year 2000 Modifications
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather that the year 2000. This could result in systems
failures or miscalculations causing disruptions of operations, including,
among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on recent assessments, the Company determined that it will be
required to modify significant portions of it software so that those systems
will properly utilize dates beyond December 31, 1999. The Company presently
believes that with modifications of its existing software, the Year 2000 Issue
can be mitigated. As a result, the Company has formulated a plan with its
software and service provider called Rescue 2000, to make all modifications to
twelve operating modules in its software systems. As of June 1, 1999, all of the
core module modifications have been completed, implemented and tested. The only
remaining modification is the upgrade of the Company's operating system, which
the Company will be performed before September 30, 1999.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. As of June 1,
1999, the Company has fully completed its assessment of all systems that could
be significantly affected by the Year 2000. The completed assessment indicated
that most of the Company's significant information technology systems could be
affected, particularly the general ledger, billing and inventory systems. The
Company does not believe that the Year 2000 presents a material exposure as it
relates to the Company's products. To date, the Company is not aware of any
16
<PAGE>
Year 2000 Modifications (continued)
external agent with a Year 2000 issue that would materially impact the
Company's results of operations, liquidity or capital resources. However, the
Company has no means of ensuring that external agents will be Year 2000 ready.
The inability of external agents to complete their Year 2000 resolution process
in a timely fashion could materially and adversely impact the Company's
operations.
The Company will utilize its external software and service provider to
complete any additional remaining Year 2000 modifications or system upgrades,
the remaining cost of which is not expected to be significant. The Company will
evaluate that status of completion of the Year 2000 modifications in September
1999 and will undertake all remaining necessary steps to seek to ensure its
systems are Year 2000 compliant.
17
<PAGE>
PART II. OTHER INFORMATION:
Items 1, 2, 3 and 5 were not applicable in the second quarter ended May 1,
1999.
Item 4. Submission of Matters to a Vote of Security Holders
On May 20, 1999, the Company's shareholders at an Annual Meeting (i)
elected Franklin C. Karp (3,005,988 shares in favor, 13,056 shares against),
Joseph J. Calabrese (3,005,988 shares in favor, 13,056 shares against), Michael
E. Recca (3,005,988 shares in favor, 13,594 shares against), Fredric J. Gruder
(3,005,988 shares in favor, 13,094 shares against), Stewart L. Cohen (3,005,988
in favor, 13,056 shares against) and William F. Kenny (3,005,988 shares in
favor, 13,056 shares against) as directors of the Company; and (ii) approved the
appointment of Ernst & Young LLP as the Company's independent auditors for the
year ending October 30, 1999 (3,018,024 shares in favor, 1,009 shares against).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of fiscal 1999.
Signatures
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized on June 15, 1999.
Harvey Electronics, Inc.
By: /s/Franklin C. Karp
-----------------------------
Franklin C. Karp
President
By: /s/Joseph J. Calabrese
-----------------------------
Joseph J. Calabrese
Executive Vice President,
Chief Financial Officer,
Treasurer & Secretary
19
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