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 July 31, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
205 Chubb Avenue, Lyndhurst, New Jersey 07071
(Address of principal executive offices)
201-842-0078
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No []
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
As of September 8, 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. Condensed Financial Statements: Page no.
<S> <C>
Condensed Statements of Operations (Unaudited) - Thirty-nine and thirteen
weeks ended July 31, 1999 and August 1, 1998 ........................................... 3
Condensed Balance Sheets - July 31, 1999 (Unaudited) and
October 31, 1998 ....................................................................... 4
Condensed Statement of Shareholders' Equity (Unaudited) - Thirty-nine
weeks ended July 31, 1999 .............................................................. 6
Condensed Statements of Cash Flows (Unaudited) - Thirty-nine weeks
ended July 31, 1999 and August 1, 1998 ................................................. 7
Notes to condensed 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 ......................................................... 18
Signatures ............................................................................................. 18
</TABLE>
<PAGE>
Harvey Electronics, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Thirty-Nine Thirteen Thirteen
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
------------- -------------- ------------- --------------
Revenues
<S> <C> <C> <C> <C>
Net sales $ 16,272,398 $ 13,142,136 $ 4,848,907 $ 4,207,463
Interest and other income 62,794 54,493 18,208 17,051
---------- ---------- --------- ---------
16,335,192 13,196,629 4,867,115 4,224,514
Costs and expenses ---------- ---------- --------- ---------
Cost of sales 9,906,603 8,128,629 3,039,993 2,661,069
Selling, general and administrative expenses 6,575,336 4,977,971 2,282,814 1,691,776
Interest expense 108,181 181,990 50,538 19,300
---------- ---------- --------- ---------
16,590,120 13,288,590 5,373,345 4,372,145
---------- ---------- --------- ---------
(Loss) before income tax (254,928) (91,961) (506,230) (147,631)
Income tax -- -- -- --
---------- ---------- --------- ---------
Net (loss) (254,928) (91,961) (506,230) (147,631)
Preferred Stock dividend requirement (55,782) (64,812) (18,594) (18,594)
Accretion of Preferred Stock -- (6,000) -- --
---------- ---------- --------- ---------
Net (loss) applicable to common shareholders $ (310,710) $ (162,773) $ (524,824) $ (166,225)
========== ========== ========= =========
Net (loss) per common share applicable to common shareholders:
Basic $ (.09) $ (.06) $ (.16) $ (.05)
========== ========== ========= =========
Diluted $ (.09) $ (.06) $ (.16) $ (.05)
========== ========== ========= =========
Shares used in the calculation of net (loss) per common share:
Basic 3,282,833 2,694,965 3,282,833 3,282,833
========== ========== ========= =========
Diluted 3,282,833 2,694,965 3,282,833 3,282,833
========== ========== ========= =========
<FN>
See accompanying notes.
</FN>
</TABLE>
3
<PAGE>
Harvey Electronics, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
(Unaudited) (1)
------------ -----------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 16,323 $ 221,444
Accounts receivables, less allowance of $25,000 385,026 365,635
Note receivable - previous member of Underwriter 69,428 73,321
Inventories 4,000,635 4,014,936
Prepaid expenses and other current assets 216,479 278,270
----------- -----------
Total current assets 4,687,891 4,953,606
Property and equipment:
Leasehold improvements 1,483,322 973,162
Furniture, fixtures & equipment 1,129,027 842,375
----------- -----------
2,612,349 1,815,537
Less accumulated depreciation & amortization 616,458 408,711
----------- -----------
1,995,891 1,406,826
Equipment under capital leases, net 147,120 10,599
Cost in excess of net assets acquired, less accumulated
amortization of $5,500 - 1999 and $1,000 - 1998 144,500 149,000
Reorganization value in excess of amounts allocable to
identifiable assets, less accumulated amortization of
$186,023 - 1999 and $132,023 - 1998 1,462,440 1,516,440
Note receivable - officer 15,000 --
Other assets, less accumulated amortization of $212,163 -
1999 and $155,390 - 1998 325,402 352,788
----------- -----------
Total assets $ 8,778,244 $ 8,389,259
=========== ===========
<FN>
(1) The balance sheet as of October 31, 1998 has been derived from the audited financial statements at that date.
See accompanying notes.
</FN>
</TABLE>
4
<PAGE>
Harvey Electronics, Inc.
Condensed Balance Sheets (continued)
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
(Unaudited) (1)
------------ -------------
Liabilities and shareholders' equity
Current liabilities:
<S> <C> <C>
Trade accounts payable $ 1,210,930 $ 1,577,126
Accrued expenses and other current liabilities 979,321 931,211
Income taxes 10,414 24,900
Cumulative preferred stock dividends payable 38,864 61,925
Current portion of capital lease obligations 108,268 3,352
Other current liabilities 41,958 --
------------ -----------
Total current liabilities 2,389,755 2,598,514
Long-term liabilities:
Long-term debt 913,370 --
Cumulative preferred stock dividends payable 30,625 61,556
Other liabilities 207,755 198,922
Capital lease obligations 22,892 5,710
------------ -----------
1,174,642 266,188
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 (2,702,685) (2,391,975)
------------ -----------
Total shareholders' equity 5,213,847 5,524,557
------------ -----------
Total liabilities and shareholders' equity $ 8,778,244 $ 8,389,259
============ ===========
<FN>
(1) The balance sheet as of October 31, 1998 has been derived from the audited financial statements at that date.
See accompanying notes.
</FN>
</TABLE>
5
<PAGE>
Harvey Electronics, Inc.
Condensed Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid-In Accumulated Shareholders'
--------- ------ ------- ------ Capital Deficit Equity
Shares Amount Shares Amount ------- ------- ------
------ ------ ------ ------
<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 loss for the thirty-nine weeks ended
July 31, 1999 -- -- -- -- -- (254,928) (254,928)
Preferred Stock dividend -- -- -- -- -- (55,782) (55,782)
--- ----------- --------- ----------- ----------- ------------ -----------
Balance at July 31, 1999 875 $ 402,037 3,282,833 $ 32,828 $ 7,481,667 $(2,702,685) $ 5,213,847
=== =========== ========= =========== =========== ============ ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
6
<PAGE>
Harvey Electronics, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
July 31, 1999 August 1, 1998
------------- --------------
Operating activities
<S> <C> <C>
Net (loss) $(254,928) $ (91,961)
Adjustments to reconcile net (loss) to net cash used in operating activities:
Depreciation and amortization 339,700 302,293
Deferred compensation -- 88,000
Straight-line impact of rent escalations 19,120 31,733
Warranty reserve credit (10,000) (6,000)
Miscellaneous 3,035 --
Changes in operating assets and liabilities:
Accounts receivable (19,391) (147,303)
Note receivable - previous member of Underwriter 3,893 --
Inventories 14,301 (5,441)
Prepaid expenses and other current assets 222,884 (54,548)
Accounts payable (366,196) (342,430)
Accrued expenses, other current liabilities and income taxes 33,337 (428,008)
-------- --------
Net cash used in operating activities (14,245) (653,665)
-------- --------
Investing activities
Redemption of certificate of deposit -- 200,000
Purchases of property and equipment (796,812) (47,973)
Increase in other assets (44,387) (46,958)
-------- --------
Net cash (used in) provided by investing activities (841,199) 105,069
-------- --------
Financing activities
Preferred stock dividends paid (112,809) (36,882)
Costs of new line of credit facility -- (82,177)
Proceeds from public Offering -- 5,335,450
Public Offering costs -- (1,261,206)
Net repayments of old revolving line of credit facility -- (1,777,851)
Net proceeds from new revolving line of credit facility 913,370 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 (119,135) (91,143)
Principal payments on capital lease obligations (31,103) (31,145)
-------- ---------
Net cash provided by financing activities 650,323 1,705,046
-------- ---------
(Decrease) increase in cash and cash equivalents (205,121) 1,156,450
Cash and cash equivalents at beginning of period 221,444 10,033
----------- -----------
Cash and cash equivalents at end of period $ 16,323 $ 1,166,483
=========== ===========
Supplemental cash flow information:
Taxes paid $ 14,000 $ 15,000
Interest paid $ 115,000 $ 261,000
<FN>
See accompanying notes.
</FN>
</TABLE>
7
<PAGE>
Harvey Electronics, Inc.
Notes to Condensed Fianncial Statements
July 31, 1999
(Unaudited)
1. Basis of Presentation and Description of Business
Basis of Presentation
The accompanying unaudited financial statements of Harvey Electronics, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
Operating results for the nine month period ended July 31, 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
In July 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 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 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
thenine and three month periods ended July 31, 1999. Pro-forma sales, net income
and diluted loss per share would not have been considered material for the nine
and three month periods ended August 1, 1998.
In August 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 nine and three months ended July 31, 1999.
Bang & Olufsen products have been sold by the Company since 1980. 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. Since this date, Bang & Olufsen products
are available only in Branded Stores. For the period prior to May 31, 1999, the
line represented approximately $628,000 or 3.9% of the Company's net sales for
the nine month period ended July 31, 1999.
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, 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 of lower Manhattan. The Company opened this new store
in July, 1999. All related preoperating expenses and results of operations for
July 1999, have been included in the Company's results of operations for the
nine and three months ended July 31, 1999. This is the Company's seventh store
and is the third opened since its successful public offering, completed in
April, 1998.
3. 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 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 the Company's results of operations or financial position,
and did not require the disclosure of segment information.
4. Loss 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 and diluted loss per common share for the thirty-nine and thirteen
weeks ended July 31, 1999 and August 1, 1998, were computed based on the
weighted average number of common shares outstanding. Common equivalent shares
were not included in the weighted average number of common shares outstanding as
their effect was antidilutive. Common equivalent shares of approximately
131,250, relating to the conversion of Preferred Stock, were not considered
since their conversion rates were also greater than the fair market value of the
Company's common stock, and thus antidilutive.
<PAGE>
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.
Nine Months and Three Months Ended July 31, 1999 as Compared to Nine Months and
Three Months Ended August 1, 1998
Net loss. The Company's net loss for the nine months ended July 31, 1999 was
approximately $255,000 as compared to a net loss of approximately $92,000 for
the same period last year. The net loss for the third fiscal quarter ended July
31, 1999 was approximately $506,000 as compared to approximately $148,000 for
the same quarter last year. The net loss for the nine and three month periods
include preoperating expenses relating to the opening of the new Bang & Olufsen
store in the Union Square area of lower Manhattan of approximately $85,000 and
$40,000, respectively.
Net sales for the nine months ended July 31, 1999, aggregated $16,272,000, an
increase of approximately $3,130,000 or 23.8% from the same period last year.
Comparable store sales for the nine months ended July 31, 1999, increased
approximately $553,000 or 4.3% from the same period last year.
Net sales for the third fiscal quarter ended July 31, 1999, aggregated
$4,849,000, an increase of approximately $641,000 or 15.2% as compared to the
third quarter of fiscal 1998. Comparable store sales for the third fiscal
quarter ended July 31, 1999 decreased $233,000 or 5.6% from the same quarter
last year.
Net sales for the nine and three months ended July 31, 1999, increased from the
addition of two new Harvey store locations in Mount Kisco in Westchester County
and Greenvale/Roslyn on the North Shore of Long Island and from the new Bang &
Olufsen branded store opened in July 1999. Net sales in fiscal 1999 have also
been positively affected by the Company's e-commerce efforts, particularly with
product offerings on eBay and from an increase in demand for its custom
installation services. Custom installation services continue to expand and
account for approximately 25% of net sales for the nine months ended July 31,
1999, as compared to 23% for the same period last year. The increase in the
Company's net sales is attributed to the volume of goods and services sold and
to a lesser extent, changes in product lines or prices.
Comparable store sales were down in the third fiscal quarter, as a result of
lower sales levels in the months of June and particularly in May, 1999. July's
sales results were stronger due to promotional events, including a successful
private sale. Same store sales comparisons were also negatively affected by
strong year-earlier performance, when comparable store sales increased 18%.
Costs and Expenses. Total cost of sales for the nine months ended July 31, 1999
increased approximately $1,778,000 or 21.9% from the same period last year. Cost
of sales for the third quarter of fiscal 1999 increased approximately $379,000
or 14.2% 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 nine months ended July 31, 1999 increased to
39.1% from 38.1% for the same period last year. Gross profit margin for the
third fiscal quarter ended July 31, 1999, increased to 37.3% from 36.8% for the
same quarter in fiscal 1998. The gross profit margin continues to improve,
despite additional promotional activities in July 1999, as a result of increased
sales of new digital technologies, increased custom installation services and
from a strong product mix. 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 32.1%
or approximately $1,597,000 for the nine months ended July 31, 1999 as compared
to the same period last year. SG&A expenses for the third fiscal quarter ended
July 31, 1999 increased 34.9% or $591,000 from the third quarter last year.
Comparable SG&A expenses increased 11.8% ($585,000) and 12.1% ($204,000) for the
nine and three month periods, respectively, as compared to the same periods last
year. Total SG&A expenses increased primarily from the two new Harvey stores
opened in November 1998, coupled with the preoperating expenses and the opening
of the new Bang & Olufsen store in July 1999. Comparable store SG&A expenses
increased from additional payroll and payroll related items, occupancy costs,
professional expenses, insurance costs, advertising expenses and various store
operating expenses including costs of offering extended interest-free financing
to its customers. In fiscal 1999, the Company has incurred additional expenses
relating to the expansion of its custom installation business and its training
efforts. These increases were partially offset by reduced stock compensation
expenses.
Interest expense decreased approximately $74,000 or 40.6% for the nine months
ended July 31, 1999, as compared to the same period last year. The decrease was
primarily due to the paydown of outstanding borrowings under the revolving line
of credit facility through February 1999, from the net proceeds from the public
offering. Interest expense increased approximately $31,000 or 161.9% in the
third fiscal quarter ended July 31, 1999 from the same quarter last year. The
increase was due to borrowings under the revolving line of credit facility,
which began in March 1999. In the third quarter of 1998, there were no
borrowings under the revolving line of credit facility.
Liquidity and Capital Resources
The Company's ratio of current assets to current liabilities was 1.96, or
approximately $2,298,000 at July 31, 1999, as compared to 1.91, or approximately
$2,355,000, at October 31, 1998. The slight increase in the current ratio was
primarily due to the reduction of accounts payable, offset by the use of cash
for the period. The decreases in accounts payable were funded by the Company's
revolving line of credit facility, which is classified as long-term debt as of
July 31, 1999.
Net cash used in operating activities was approximately $14,000 for the nine
months ended July 31, 1999, as compared to net cash used of approximately
$654,000 for the same period last year. The improvement in cash used in
operating activities was primarily due to a reduction in cash used in fiscal
1999 to pay down accrued expenses coupled with a decrease in prepaid expenses
and offset by an increase in the net loss.
Net cash used in investing activities was approximately $841,000 for the nine
months ended July 31, 1999 as compared to net cash provided of approximately
$105,000 for the same period in fiscal 1998. Net cash used for the first nine
months of fiscal 1999 was due primarily to capital expenditures ($797,000)
relating to three 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 $650,000 for the
nine months ended July 31, 1999 as compared to approximately $1,705,000 for the
same period last year. In March 1999, the Company began to borrow from its
revolving line of credit facility and borrowed approximately $913,000 as of July
31, 1999. The increase in cash from financing activities for the first nine
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. 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 September 1, 1999, borrowings under the
Paragon revolving line of credit facility approximated $973,000.
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't 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).
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. 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.
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. Since this date, Bang & Olufsen products are 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 $350,000.
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 opened this new store in July 1999.
This Branded Store is 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 sells highly differentiated Bang &
Olufsen products, including uniquely designed audio systems, speakers,
telephones, headphones and accessories and other approved non-Bang & Olufsen
products. The store also offers professional custom installation of multi-room
audio and home theater systems. This new store is the Company's seventh, and is
the third store opened since its successful public offering, completed in April
1998.
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.
The Company intends to redirect its marketing funds beginning in the first
fiscal quarter of fiscal year 2000. This reallocation of funds will broaden the
Company's media presence through the use of cable and network television
advertising.
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 a system
failure 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 August 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 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 August 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
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 modification 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.
<PAGE>
PART II. OTHER INFORMATION:
Items 1, 2, 3, 4 and 5 were not applicable in the third quarter ended July 31,
1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of fiscal
1999.
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on September 8, 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
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