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 29, 2000
[ ] 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 incorporation (I.R.S. Employer
or organization) Identification No.)
205 Chubb Avenue, Lyndhurst, New Jersey
(Address of principal executive offices)
201-842-0078
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
As of September 11, 2000, 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
<S> <C> <C>
Item 1. Financial Statements: Page No.
Condensed Statements of Operations (Unaudited) - Thirty-nine and thirteen
weeks ended July 29, 2000 and July 31, 1999.................................... 3
Condensed Balance Sheets - July 29, 2000 (Unaudited) and October 30,
1999........................................................................... 4
Condensed Statement of Shareholders' Equity (Unaudited) - Thirty-nine weeks
ended July 29, 2000 ........................................................... 5
Condensed Statements of Cash Flows (Unaudited) - Thirty-nine weeks ended
July 29, 2000 and July 31, 1999 ............................................... 6
Notes to Condensed Financial Statements (Unaudited).............................. 7
Item 2. Management's Discussion and Analysis or Plan of Operation ....................... 10
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K ................................................ 16
Signatures..................................................................................... 16
</TABLE>
2
<PAGE>
Part I Financial Information
Item I. Financial Statements
Harvey Electronics, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Thirty-nine Thirteen Weeks Thirteen Weeks
Weeks Ended Weeks Ended Ended Ended
July 29, 2000 July 31, 1999 July 29, 2000 July 31, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $26,353,634 $16,272,398 $7,931,955 $4,848,907
Interest and other income 28,792 62,794 11,941 18,208
---------- ---------- --------- ---------
26,382,426 16,335,192 7,943,896 4,867,115
---------- ---------- --------- ---------
Cost of sales 15,911,156 9,906,604 4,782,339 3,039,994
Selling, general and administrative expenses 9,241,374 6,575,335 3,079,505 2,282,813
Interest expense 162,704 108,181 57,512 50,538
---------- ---------- --------- ---------
25,315,234 16,590,120 7,919,356 5,373,345
---------- ---------- --------- ---------
Income (loss) before income tax equivalent
provision 1,067,192 (254,928) 24,540 (506,230)
Income tax equivalent provision 390,000 0 10,000 0
--------- --------- ------ ---------
Net income (loss) 677,192 (254,928) 14,540 (506,230)
Preferred Stock dividend requirement 55,782 55,782 18,594 18,594
-------- ---------- -------- ----------
Net income (loss) applicable to Common Stock $621,410 ($310,710) ($4,054) ($524,824)
======== ========== ======== ==========
Net income (loss) per common share applicable to
common shareholders:
Basic $ 0.19 $ (0.09) $ (0.00) $ (0.16)
========= ========== ========== ==========
Diluted $ 0.19 $ (0.09) $ (0.00) $ (0.16)
========= ========== ========== ==========
Shares used in the calculation of net income (loss)
per common share:
Basic 3,282,833 3,282,833 3,282,833 3,282,833
========= ========= ========= =========
Diluted 3,345,896 3,282,833 3,282,833 3,282,833
========= ========= ========= =========
<FN>
See accompanying notes.
3
</FN>
</TABLE>
<PAGE>
Harvey Electronics, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
July 29, October 30, 1999(1)
2000
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $12,727 $23,947
Accounts receivable, less allowance of $25,000 525,229 449,057
Inventories 5,607,722 4,920,614
Prepaid expenses and other current assets 252,895 420,392
--------- ---------
Total current assets 6,398,573 5,814,010
Property and equipment:
Leasehold improvements 1,565,716 1,498,585
Furniture, fixtures and equipment 1,268,488 1,145,228
--------- ---------
2,834,204 2,643,813
Less accumulated depreciation and amortization 1,024,325 717,272
--------- ---------
1,809,879 1,926,541
Equipment under capital leases, less accummulated amortization
of $363,063 and $349,000 204,364 141,012
Cost in excess of net assets acquired, less accumulated amortization
of $11,500 and $7,000 138,500 143,000
Reorganization value in excess of amounts allocable to identifiable
assets, less accumulated amortization of $247,523 and $198,023 1,010,940 1,450,440
Note receivable--officer 7,500 15,000
Other assets, less accumulated amortization of $213,048 and $160,887 390,005 254,684
---------- ----------
Total assets $9,959,761 $9,744,687
========== ==========
Liabilities and shareholders' equity
Current liabilities:
Revolving line of credit facility $0 $1,477,603
Trade accounts payable 2,053,140 1,943,225
Accrued expenses and other current liabilities 1,687,606 1,302,848
Income taxes 15,773 25,200
Cumulative Preferred Stock dividends payable 38,429 61,057
Current portion of capital lease obligations 117,095 78,880
--------- ---------
Total current liabilities 3,912,043 4,888,813
Long-term liabilities:
Revolving line of credit facility 625,876 -
Cumulative Preferred Stock dividends payable - 30,625
Capital lease obligations 12,916 21,504
Deferred rent 182,854 199,083
-------- -------
821,646 251,212
Commitments and contingencies
Shareholders' equity:
8-1/2% Cumulative Convertible Preferred Stock, par value $1,000 per share;
authorized 10,000 shares; issued and outstanding 875 shares (aggregate
liquidation preference--$875,000)
402,037 402,037
Common Stock, par value $.01 per share; authorized 10,000,000 shares;
issued and outstanding 3,282,833 shares 32,828 32,828
Additional paid-in capital 7,481,667 7,481,667
Accumulated deficit (2,690,460) (3,311,870)
----------- ----------
Total shareholders' equity 5,226,072 4,604,662
========= ==========
Total liabilities and shareholders' equity $9,959,761 $9,744,687
========== ==========
<FN>
(1) The balance sheet as of October 30, 1999 has been derived from the audited
financial statements at that date.
See accompanying notes.
</FN>
</TABLE>
4
<PAGE>
Harvey Electronics, Inc.
Condensed Statement of Shareholders' Equity
For the Thirty-nine Weeks Ended July 29, 2000
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 30, 1999 875 $402,037 3,282,833 $32,828 $7,481,667 $(3,311,870) $4,604,662
Net income for the thirty-nine weeks ended
July 29, 2000 - - - - - 677,192 677,192
Preferred Stock dividend - - - - - (55,782) (55,782)
--- -------- --------- ------- ---------- ------------ -----------
Balance at July 29, 2000 875 $402,037 3,282,833 $32,828 $7,481,667 $(2,690,460) $5,226,072
=== ======== ========= ======= ========== ============ ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
5
<PAGE>
Harvey Electronics, Inc
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
July 29, 2000 July 31, 1999
------------- -------------
Operating activities
<S> <C> <C>
Net income (loss) $677,192 ($254,928)
Adjustments to reconcile net income to net cash provided
from (used) in operating activities:
Depreciation and amortization 437,691 339,700
Income tax equivalent provision 390,000 -
Straight-line impact of rent escalations (16,229) 19,120
Miscellaneous 1,171 (6,965)
Changes in operating assets and liabilities:
Accounts receivable (76,172) (19,391)
Note receivable - previous member of Underwriter 54,914 3,893
Inventories (609,006) 14,301
Prepaid expenses and other current assets 288,054 222,884
Trade accounts payable 109,915 (366,196)
Accrued expenses, other current liabilities and
income taxes 199,861 (85,798)
---------- ---------
Net cash provided from (used) in operating activities 1,457,391 (133,380)
Investing activities
Purchases of property and equipment (190,391) (796,812)
Website development (161,480) -
Purchase of other assets (26,002) (44,387)
Note receivable - officer 7,500 -
---------- ---------
Net cash used in investing activities (370,373) (841,199)
---------- ---------
Financing activities
Net (payments) proceeds from revolving credit facility (851,727) 913,370
Preferred Stock dividends paid (110,206) (112,809)
Principal payments on capital lease obligations (136,305) (31,103)
--------- ---------
Net cash (used) in provided from financing activities (1,098,238) 769,458
---------- ---------
(Decrease) in cash and cash equivalents (11,220) (205,121)
Cash and cash equivalents at beginning of period 23,947 221,444
---------- ---------
Cash and cash equivalents at end of period $12,727 $16,323
========== =========
Supplemental cash flow information:
Interest paid $175,000 $115,000
========== ========
Taxes paid $9,000 $14,000
========== ========
<FN>
See accompanying notes.
</FN>
</TABLE>
6
<PAGE>
Harvey Electronics, Inc.
Notes to Condensed Financial Statements
July 29, 2000
(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 and three month periods ended July 29, 2000 are
not necessarily indicative of the results that may be expected for the year
ending October 28, 2000. 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 30, 1999.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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. New Retail Store Opening and Planned Launch of New Website
On June 7, 2000, the Company signed a sublease and a related Dealer Agreement to
open a new 1,600 square foot Bang & Olufsen ("B&O") branded retail store in
Greenwich, Connecticut. This new retail store will be the second B&O branded
store opened by the Company. The first B&O store was opened in July 1999 in the
Union Square area of lower Manhattan. The Company plans to open this new B&O
store in October 2000. This new store will be the Company's eighth.
7
<PAGE>
Harvey Electronics, Inc.
Notes to Condensed Financial Statements
July 29, 2000
(Unaudited)
The Company is currently developing a fully interactive, e-commerce ready
website. This website will enable the Company to sell its products and custom
installation services to customers through the Internet in its traditional
market in the Metropolitan New York area. The Company plans to launch this new
website in October 2000.
3. Amendment and Extension of Revolving Line of Credit Facility
On July 7, 2000, the Company entered into a Second Amendment to the Loan and
Security Agreement ("Amended Agreement") with its existing lender, Paragon
Capital L.L.C. ("Paragon"). The Amended Agreement includes a three (3) year
extension enabling the Company to borrow up to $3.5 million (from $3.3 million)
based upon a lending formula calculated on eligible inventory, as defined. The
interest rate on borrowings up to $2.5 million was reduced to three-quarters of
1% (.75%) over the prime rate (9.25% at July 29, 2000). The rate charged on
outstanding balances over $2.5 million was also reduced to 1% above the prime
rate. Additionally, the Amended Agreement provides for a lower annual facility
fee and reduced monthly maintenance fees. Prepayment fees also exist under the
Amended Agreement. The balance outstanding under the revolving line of credit
facility at July 29, 2000 was $625,876. This balance was presented as a
long-term liability, due to the three-year extension of the revolving line of
credit facility, coupled with the projected cash needs from this facility,
whereby the balance outstanding at July 29, 2000 is expected to increase over
the next twelve months.
4. Advertising Expense
In accordance with Statement of Position 93-7, "Reporting of Advertising Costs,"
the Company's advertising expense, net of cooperative advertising allowances, is
charged to operations when the advertising first takes place. In November 1999,
the Company implemented its new advertising campaign, which significantly
increased advertising expenditures. For the first time, the advertising campaign
utilized network and cable television advertising. Advertising expense for the
nine months ended July 29, 2000 and July 31, 1999 was $760,000 and $160,000,
respectively. Advertising expense for the third quarter of fiscal 2000 and
fiscal 1999 was $280,000 and $100,000, respectively. The production costs
relating to the Company's television commercial (approximating $120,000) were
expensed in the first fiscal quarter of 2000, when such commercial was first
broadcast.
5. Per Share Information
Basic and diluted income (loss) per share are calculated in accordance with SFAS
No. 128, "Earnings Per Share". The basic income (loss) per common share for the
nine and three months ended July 29, 2000 and July 31, 1999 was computed based
on the weighted average number of common shares outstanding. For the nine months
ended July 29, 2000, common equivalent shares relating to stock options,
aggregating 63,063, were included in the weighted average number of common
shares outstanding for the diluted earnings per share computation. Common
equivalent shares relating to stock options were not included for the
8
Harvey Electronics, Inc.
Notes to Condensed Financial Statements
July 29, 2000
(Unaudited)
nine-month period ended July 31, 1999, as their effect was anti-dilutive. The
third quarter of fiscal 2000 and 1999 did not include common equivalent shares
relating to stock options in the weighted average number of common shares
outstanding for the diluted earnings per share computation as their effect was
anti-dilutive. 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, and
thus anti-dilutive.
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 Accounting 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.
For the nine and three months ended July 29, 2000, the income tax equivalent
provision and the associated reduction of reorganization value in excess of
amounts allocable to identifiable assets amounted to $390,000 and $10,000,
respectively. 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 quarter of 1999 aggregating $40,000, was
reversed in the Company's second fiscal quarter of 1999. The income tax
equivalent provision for the nine and three months ended July 29, 2000 will not
affect the Company's tax liability and does not require a cash payment.
9
<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 30, 1999 and
October 31, 1998, included in the Company's Annual Report on Form 10-KSB.
Nine and Three Months Ended July 29, 2000 as Compared to Nine and Three Months
Ended July 31, 1999.
Net Income. The Company's pretax income for the nine months ended July 29, 2000
increased 519% to $1,067,192 as compared to a pretax loss of $254,928 for the
same period last year. Net income for the nine months ended July 29, 2000
increased 366% to $677,192 as compared to a net loss of $254,928 for the same
period last year.
The Company's pretax income for the third fiscal quarter ended July 29, 2000
increased 105% to $24,540 as compared to a pretax loss of $506,230 for the same
quarter last year. Net income for the third fiscal quarter ended July 29, 2000
increased 103% to $14,540 as compared to a net loss of $506,230 for the same
quarter last year.
The Company recorded an income tax equivalent provision for the nine and three
months ended July 29, 2000 of $390,000 and $10,000, respectively. The income tax
equivalent provision for the nine and three months ended July 29, 2000 will not
affect the Company's tax liability and does not require the use of cash.
The Company's net income for the nine and three months ended July 29, 2000 also
includes advertising expense of $760,000 and $280,000, respectively, as compared
to only $160,000 and $100,000 for the same periods last year. Approximately
$120,000 of production costs relating to the Company's television commercial was
recorded in the Company's first fiscal quarter of 2000. The discussion below
further explains the increase in advertising expense.
10
<PAGE>
Revenues. For the third fiscal quarter ended July 29, 2000, net sales totaled
$7,931,955, an increase of approximately $3,083,000 or 63.6% from the same
period last year. For the nine months ended July 29, 2000, net sales totaled
$26,353,634, an increase of approximately $10,081,000 or 62% from the same
period last year. The Company's nine-month sales for fiscal 2000 of $26.4
million have far exceeded full year fiscal 1999 sales of $21.4 million.
Comparable store sales for the third fiscal quarter ended July 29, 2000
increased by approximately $2,757,000 or 57.5% from the same quarter last year.
Comparable store sales for the nine months ended July 29, 2000 increased
approximately $8,225,000 or 51% from the same period last year.
Historically, the summer months beginning in May are a slower time of the year
for the Company's sales performance. Despite the expected slowdown, the Company
decided to continue its aggressive advertising and marketing efforts, which have
led Harvey's sales momentum since its new advertising campaign was implemented
in November 1999. This successful campaign has significantly increased
advertising expenditures, which for the first time included network and cable
television advertising. This television advertising complimented the Company's
larger print ads, radio commercials, direct mail and Internet advertising.
Additionally, overall sales were positively affected by the strong sales
performance of the Company's new Bang & Olufsen store in lower Manhattan, which
opened in July 1999, and to a lesser extent, the additional sales from its
product offerings on eBay.
The Company experienced strong sales increases in all of its retail locations.
Comparable store sales benefited from strong customer demand for new,
higher-priced digital products led by HDTV, HD ready projection sets and DVD as
well as flat-screen plasma televisions. Harvey's custom installation business
continues to grow as the Company's customers opt for its quality, in-home
installations of these sophisticated products and home theaters. Custom
installation services, including related product, account for approximately 32%
of total sales for the nine months ended July 29, 2000 as compared to 25% for
the same period in fiscal 1999.
Each of the Company's two new Harvey retail stores (in Mount Kisco, Westchester
County and Greenvale, Long Island, both of which opened in November 1998, the
beginning of fiscal 1999) have shown significant improvement in their second
year of operations. The improvement in sales at these two stores significantly
impacted comparable store sales for fiscal 2000.
Costs and Expenses. Total cost of goods sold for the nine months ended July 29,
2000 increased $6,004,552 or 60.6% from the same period last year. Cost of goods
sold for the third fiscal quarter increased $1,742,345 or 57.3% from the same
quarter last year. This was primarily due to the increase in sales, as discussed
above.
The gross profit margin for the nine months ended July 29, 2000 increased to
39.6% as compared to 39.1% for the same period last year. The gross profit
margin for the third fiscal quarter of 2000 significantly increased to 39.7% as
compared to only 37.3% for the same quarter last year. The gross profit margin
improved despite the overall increased sale of video products, which typically
have lower margins than audio products. Customer demand for new digital video
products such as HDTV, DVD and plasma flat-screen televisions, is
11
<PAGE>
Costs and Expenses (Continued)
driving the Company's overall business. Interest in these new video products
will also cultivate larger projects including new sales of audio components,
speakers, home theater systems, accessories and custom installation services,
which all realize higher margins for the Company. Due to strong consumer demand,
the Company has been less promotional and has also experienced less price
competition in the market for these new products and related installation
services in fiscal 2000 as compared to fiscal 1999 and this has helped improve
the gross profit margin.
It should be noted that sales of these new video products do benefit from higher
gross margins and much higher overall sales prices as compared to commodity
analog televisions and VCR's. For the nine and three months ended July 29, 2000,
the Company's sales of video products accounted for 30.5% and 32.8%,
respectively, of its net sales as compared to 25.1% and 24.2% respectively, for
the same periods last year.
Additionally, for the nine and three months ended July 29, 2000, the Company's
two newest Harvey showrooms (opened November 1998) have shown significant
improvement in the gross profit margin as compared to fiscal 1999. Continued
training and maturity of the sales force and custom installation teams at these
stores have helped to increase the Company's overall gross profit margin.
Selling, general and administrative expenses ("SG&A expenses") increased 40.5%
or $2,666,039 for the nine months ended July 29, 2000, as compared to the same
period last year. SG&A expenses for the third fiscal quarter of 2000 increased
34.9% or $796,692 from the same quarter last year.
Comparable SG&A expenses for the nine months ended July 29, 2000 increased 34.8%
or approximately $2,259,000 from the same period last year. Comparable SG&A
expenses for the third fiscal quarter of 2000 increased 31.7% or approximately
$713,000 from the same quarter last year.
In addition to the increase in advertising expenses, as noted above, the
increase in total SG&A expenses was also affected by costs relating to the new
Bang & Olufsen store and additionally from costs relating to the Company's
e-commerce endeavors. Comparable SG&A expenses increased primarily from
additional advertising costs, payroll and payroll related items, professional
expenses, depreciation expense and various store operating expenses. The Company
also continues to incur additional expenses relating to the expansion of its
custom installation business, its training efforts and its warehousing and
distribution of inventory.
Interest expense for the nine months ended July 29, 2000 increased 50.4% or
$54,523 as compared to the same period last year. Interest expense for the third
fiscal quarter of 2000 increased 13.8% or $6,974 as compared to the same quarter
last year. The increase was primarily due to borrowings under the revolving line
of credit facility, which began in March 1999. In the first quarter of fiscal
1999, there were no borrowings under the revolving line of credit facility.
12
<PAGE>
Costs and Expenses (Continued)
In connection with the Company's emergence from its reorganization proceeding,
the Company adopted Fresh Start Accounting. Fresh Start Accounting 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 thereafter as a direct addition to
paid-in-capital.
As noted above, during the nine and three month periods ended July 29, 2000, the
income tax equivalent provision and the associated reduction of reorganization
value in excess of amounts allocable to identifiable assets amounted to $390,000
and $10,000, respectively. This income tax equivalent provision does not affect
the Company's tax liability and does not require a cash payment.
Liquidity and Capital Resources
The Company's ratio of current assets to current liabilities was 1.64, or
$2,486,530 at July 29, 2000 as compared to 1.19, or $925,197, at October 30,
1999. At October 30, 1999, the balance outstanding under the Company's revolving
line of credit facility ($1,477,603) was classified as a current liability as
the line of credit was temporarily paid down in December 1999 from the increased
sales of the Christmas selling season. At July 29, 2000, only $625,876 was
outstanding under the revolving line of credit facility and was presented as a
long-term liability at such date. The long-term classification was due to the
three-year extension of the line of credit facility, coupled with the projected
cash needs from the line of credit facility, whereby the balance outstanding at
July 29, 2000 is expected to increase over the next twelve months. The
improvement in the current ratio was positively impacted by the Company's
nine-month pretax income and an increase in inventory, and was offset by an
increase in accounts payable, accrued expenses and other current liabilities.
Net cash provided from operating activities was $1,457,391 for the nine months
ended July 29, 2000, as compared to net cash used from operating activities of
$133,380 for the same period last year. The improvement in cash provided from
operating activities was due primarily from the increase in pretax income of
$1,322,120, coupled with an increase in accounts payable, accrued expenses and
other current liabilities and offset by an increase in inventories.
Net cash used in investing activities was $370,373 for the nine months ended
July 29, 2000 as compared to cash used of $841,199 for the same period last
year. Net cash used for the purchase of property and equipment was $796,812,
relating to new store openings in fiscal 1999 as compared to only $190,391 in
fiscal 2000 where cash was used for various capital expenditures. Fiscal 2000
also includes $161,480 of cash used relating to website development.
13
<PAGE>
Liquidity and Capital Resources (Continued)
Net cash used in financing activities was $1,098,238 for the nine months ended
July 29, 2000 as compared to net cash provided from financing activities of
$769,458 for the same period last year. Financing activities for the first nine
months of fiscal 2000 includes net payments of $851,727, reducing the revolving
line of credit facility. This period also includes Preferred Stock dividends
paid of $110,206 and principal payments on capital leases of $136,305. Financing
activities for the first nine months of fiscal 1999 included net borrowings from
the revolving line of credit facility of $913,370 and Preferred Stock dividend
payments of $112,809.
In November 1997, the Company entered into a three-year revolving line of credit
facility with Paragon Capital L.L.C. ("Paragon") whereby the Company could
borrow up to $3,300,000 based upon a lending formula (as defined) calculated on
eligible inventory. On July 7, 2000, the Company entered into a Second Amendment
to the Loan and Security Agreement ("Amended Agreement") with Paragon. The
Amended Agreement includes a three (3) year extension enabling the Company to
now borrow up to $3,500,000 based on the lending formula described above. The
interest rate on borrowings up to $2.5 million was reduced to three-quarters of
1% (.75%) over the prime rate. The rate charged on outstanding balances over
$2.5 million was also reduced to 1% above the prime rate. Additionally, the
Amended Agreement provides for a lower annual facility fee and reduced monthly
maintenance fees. Prepayment fees also exist under the Amended Agreement. At
September 6, 2000, there was $763,165 in outstanding borrowings under the
Paragon revolving credit facility. The increase in the Company's revolving line
of credit facility from the amount outstanding at July 29, 2000 ($625,876), is
primarily due to the funding of additional inventory and website development. At
September 6, 2000, the Company had $2,736,835 available to borrow under the
revolving line of credit facility.
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 eligible inventory, less
existing borrowings and certain reserves established by Paragon.
Pursuant to the credit facility, the Company cannot exceed certain advance rates
on eligible inventory and must maintain certain levels of net income or loss and
minimum gross profit margins. Additionally, the Company's capital expenditures
cannot 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 covenants or the
occurrence of certain customary events of default. The Company is also
restricted from paying dividends on common stock, retiring or repurchasing its
common stock, and generally from entering into additional indebtedness (as
defined).
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Liquidity and Capital Resources (Continued)
The Company has 2,104,500 common stock warrants ("Warrants") outstanding from
its public offering of common stock and Warrants in fiscal 1998, (the
"Offering"). Each outstanding 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 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 has been demonstrated by the
Company for all store openings since the Company's public offering.
As Bang & Olufsen ("B&O") focuses on developing B&O 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, B&O products are available only in Branded Stores.
The Company opened its first B&O Branded Store in the Union Square area of lower
Manhattan in July 1999. This Branded Store is the first of two stores the
Company plans to open in Manhattan. The Company has not identified a location or
lease agreement for the second B&O store in Manhattan and no assurance can be
given about the number of Branded Stores that the Company will ultimately open.
On May 13, 2000, the Company signed a sublease and a related Dealer Agreement to
open a new 1600 square foot B&O Branded Store in Greenwich, Connecticut. The new
retail store will be the second B&O store opened by the Company. The Company
plans to open this new B&O store in October 2000. This new store will be
Company's eighth.
The Company estimates that capital expenditures necessary for each 1,500-1,600
square foot B&O store, including inventory, should be approximately $400,000.
The Company seeks to open a minimum of two additional Harvey Electronics stores
in New Jersey within the next twelve months, if the appropriate locations can be
obtained or an existing business can be acquired. Depending on the availability
of outside subordinated funding and identifying appropriate real estate, of
which there can be no assurance, the Company will attempt to open four new
Harvey locations in fiscal 2001. If successful, at least two stores will be
opened in New Jersey and the remainder either on Long Island or Connecticut. The
Company estimates that the total cost of opening a new Harvey Electronics retail
store (6,500 square feet of selling space) is approximately $1,000,000. The
estimated cost of opening a 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, pre-opening expenses and
additional advertising and promotion in connection with the opening.
15
<PAGE>
Liquidity and Capital Resources (Continued)
The Company is currently negotiating a lease for a new Harvey Electronics retail
showroom in Monmouth County, New Jersey. There can be no assurance that a lease
will be successfully completed.
The Company intends to continue to redirect and substantially increase its
marketing expenditures, which began in the first quarter of fiscal 2000. This
will broaden the Company's media presence with the continuation of cable and
network television advertising.
The Company plans to broaden its e-commerce business with the development of a
fully-interactive website giving its customers access to product specifications,
information about custom installation services and new technologies, store
locations and on-line sales, seven days a week, twenty-four hours a day. The
website will enable the Company to sell its products and services, through the
Internet to customers in its traditional market in the Metropolitan New York
area, however, the Company's objective is to give its customers a unique
shopping experience offering valuable information, high-quality products,
professional installation and other services which will continue to
differentiate Harvey from its mass merchant competitors. The Company will give
its customers access to one of Harvey's upscale retail showrooms or offer its
customers a private in-home consultation through the convenience of the
Internet. The Company plans to expend approximately $375,000 in developing and
launching this interactive website. The Company plans to launch the new website
in October 2000
Management believes that cash on hand, cash flow from operations and funds made
available under the extended 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
November and December 1999.
Year 2000 Modifications
In fiscal 1999, the Company successfully implemented all Year 2000 modifications
to upgrade its operating systems. Currently, the Company's computer environment
is operating as designed, as all systems are Year 2000 compliant. The Company
does not anticipate any additional material capital expenditures or management
efforts in this regard for fiscal 2000.
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PART II. OTHER INFORMATION:
Items 1, 2, 3 and 5 were not applicable in the third quarter ended July 29,
2000.
Item 4. Submission of Matters to a Vote of Security Holders
On August 18, 2000, the Company's shareholders at an Annual Meeting (i) elected
Franklin C. Karp (2,893,815 shares in favor, 47,952 shares against), Joseph J.
Calabrese (2,893,815 shares in favor, 47,952 shares against), Michael E. Recca
(2,893,712 shares in favor, 48,055 shares against), Frederic J. Gruder
(2,893,815 shares in favor, 47,952 shares against), Jeffrey A. Wurst (2,893,815
shares in favor, 47,952 shares against), and William F. Kenny, III (2,893,815
shares in favor, 47,952 shares against) as directors of the Company: (ii)
ratified the appointment of Ernst & Young LLP as the Company's independent
auditors for the year ending October 28, 2000 (2,890,271 shares in favor, 35,770
shares against and 15,726 abstained); and (iii) approved the amendment to the
Harvey Electronics, Inc. stock option plan (2,703,080 shares in favor, 220,256
shares against and 18,431 abstained).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
10.11 Second Amendment to the Loan and Security
Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of fiscal 2000.
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 11, 2000.
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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