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 April 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 (I.R.S. Employer Identification No.)
incorporation or organization)
205 Chubb Avenue, Lyndhurst, New Jersey
(Address of principal executive offices)
201-842-0078
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [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 2, 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>
PART I. Financial Information
<S> <C> <C>
Item 1. Financial Statements: Page No.
Condensed Statements of Operations (Unaudited) - Twenty-six and thirteen
weeks ended April 29, 2000 and May 1, 1999.................................... 3
Condensed Balance Sheets - April 29, 2000 (Unaudited) and October 30,
1999.......................................................................... 4
Condensed Statement of Shareholders' Equity (Unaudited) - Twenty-six weeks
ended April 29, 2000 ......................................................... 5
Condensed Statements of Cash Flows (Unaudited) - Twenty-six weeks ended
April 29, 2000 and May 1, 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>
Twenty-Six Twenty-Six Thirteen Weeks Thirteen Weeks
Weeks Ended Weeks Ended Ended Ended
April 29, 2000 May 1, 1999 April 29, 2000 May 1, 1999
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Net sales $18,421,679 $11,423,491 $8,567,195 $5,015,007
Interest and other income 16,851 44,586 6,912 23,289
------ ------ ----- ------
18,438,530 11,468,077 8,574,107 5,038,296
---------- ---------- --------- ---------
Cost of sales 11,128,817 6,866,610 5,120,576 2,990,440
Selling, general and administrative expenses 6,161,869 4,292,522 3,060,559 2,133,581
Interest expense 105,192 57,643 50,702 33,643
------- ------ ------ ------
17,395,878 11,216,775 8,231,837 5,157,664
---------- ---------- --------- ---------
Income (loss) before income tax equivalent
provision (benefit) 1,042,652 251,302 342,270 (119,368)
Income tax equivalent provision (benefit) 380,000 - 120,000 (40,000)
------- ------- ------- -------
Net income (loss) 662,652 251,302 222,270 (79,368)
Preferred Stock dividend requirement 37,188 37,188 18,594 18,594
------ ------ ------ ------
Net income applicable to Common Stock $625,464 $214,114 $203,676 ($97,962)
======== ======== ======== ========
Net income (loss) per common share applicable to
common shareholders:
Basic $0.19 $0.07 $0.06 ($0.03)
===== ===== ===== ======
Diluted $0.19 $0.06 $0.06 ($0.03)
===== ===== ===== ======
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 3,341,360 3,346,889 3,350,432 3,282,833
========= ========= ========= =========
</TABLE>
3
<PAGE>
Harvey Electronics, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
April 29, October 30, 1999(1)
2000
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $42,880 $23,947
Accounts receivable, less allowance of $25,000 480,237 449,057
Note receivable--previous member of Underwriter 23,813 68,430
Inventories 5,529,275 4,920,614
Prepaid expenses and other current assets 336,207 351,962
------- -------
Total current assets 6,412,412 5,814,010
Property and equipment:
Leasehold improvements 1,541,122 1,498,585
Furniture, fixtures and equipment 1,237,628 1,145,228
--------- ---------
2,778,750 2,643,813
Less accumulated depreciation and amortization 919,366 717,272
------- -------
1,859,384 1,926,541
Equipment under capital leases, less accummulated amortization
of $356,790 and $349,000 177,415 141,012
Cost in excess of net assets acquired, less accumulated amortization
of $10,000 and $7,000 140,000 143,000
Reorganization value in excess of amounts allocable to identifiable
assets, less accumulated amortization of $231,023 and $198,023 1,037,440 1,450,440
Note receivable--officer 15,000 15,000
Other assets, less accumulated amortization of $195,663 and $160,887 223,575 254,684
------- -------
Total assets $9,865,226 $9,744,687
========== ==========
Liabilities and shareholders' equity
Current liabilities:
Revolving line of credit facility $250,093 $1,477,603
Trade accounts payable 2,279,941 1,943,225
Accrued expenses and other current liabilities 1,727,759 1,302,848
Income taxes 20,520 25,200
Cumulative Preferred Stock dividends payable 56,717 61,057
Current portion of capital lease obligations 96,056 78,880
------ ------
Total current liabilities 4,431,086 4,888,813
Long-term liabilities:
Cumulative Preferred Stock dividends payable - 30,625
Capital lease obligations 15,046 21,504
Deferred rent 188,968 199,083
------- -------
204,014 251,212
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 (2,686,406) (3,311,870)
----------- -----------
Total shareholders' equity 5,230,126 4,604,662
--------- ---------
Total liabilities and shareholders' equity $9,865,226 $9,744,687
========== ==========
<FN>
(1) The balance sheet as of October 30, 1999 has been derived from the audited
financial statements at that date.
</FN>
See acccompanying notes.
</TABLE>
4
<PAGE>
Harvey Electronics, Inc.
Condensed Statement of Shareholders' Equity
(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 twenty-six weeks ended
April 29, 2000 - - - - - 662,652 662,652
Preferred Stock dividend - - - - - (37,188) (37,188)
--- -------- --------- ------- ---------- ------------ ----------
Balance at April 29, 2000 875 $402,037 3,282,833 $32,828 $7,481,667 $(2,686,406) $5,230,126
=== ======== ========= ======= ========== ============ ==========
<FN>
See accompanying notes.
</FN>
</TABLE>
5
<PAGE>
Harvey Electronics, Inc
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Twenty-six
Weeks Ended Weeks Ended
April 29, 2000 May 1, 1999
-------------- -----------
<S> <C> <C>
Operating activities
Net income $662,652 $251,302
Adjustments to reconcile net income to net cash provided
from (used) in operating activities:
Depreciation and amortization 289,872 218,892
Income tax equivalent provision 380,000 -
Straight-line impact of rent escalations (10,115) 13,016
Miscellaneous 1,171 3,035
Changes in operating assets and liabilities:
Accounts receivable (31,180) 12,401
Note receivable - previous member of Underwriter 44,617 2,654
Inventories (559,815) (386,492)
Prepaid expenses and other current assets 191,225 171,982
Trade accounts payable 336,716 (328,446)
Accrued expenses, other current liabilities and
income taxes 244,761 (207,291)
------- --------
Net cash provided from (used) in operating activities 1,549,904 (248,947)
Investing activities
Purchases of property and equipment (134,937) (434,203)
Purchase of other assets (3,665) (28,797)
------ -------
Net cash used in investing activities (138,602) (463,000)
-------- --------
Financing activities
Net (payments) proceeds from revolving credit facility (1,227,510) 610,482
Preferred Stock dividends paid (73,324) (75,927)
Principal payments on capital lease obligations (91,535) (8,416)
------- ------
Net cash (used) in provided from financing activities (1,392,369) 526,139
---------- -------
Increase (decrease) in cash and cash equivalents 18,933 (185,808)
Cash and cash equivalents at beginning of period 23,947 221,444
Cash and cash equivalents at end of period $42,880 $35,636
======= =======
Supplemental cash flow information:
Interest paid $124,000 $74,000
======== =======
Taxes paid $5,000 $11,000
====== =======
<FN>
See accompanying notes.
</FN>
</TABLE>
6
<PAGE>
Harvey Electronics, Inc.
Notes to Condensed Financial Statements
April 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 six and three month periods ended April 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
On June 7, 2000, the Company signed a sublease and a related Dealer Agreement to
open a new 1600 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 September 2000. The new store will be the Company's eighth.
7
<PAGE>
Harvey Electronics, Inc.
Notes to Condensed Financial Statements
April 29, 2000
(Unaudited)
3. 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
six months ended April 29, 2000 and May 1, 1999 was $480,000 and $60,000,
respectively. Advertising expense for the second quarter of fiscal 2000 and
fiscal 1999 was $130,000 and $30,000, 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.
4. 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
six and three months ended April 29, 2000 and May 1, 1999 was computed based on
the weighted average number of common shares outstanding. For the six months
ended April 29, 2000 and May 1, 1999, common equivalent shares relating to stock
options, aggregating 58,527 and 64,056, respectively, were included in the
weighted average number of common shares outstanding for the diluted earnings
per share computation. For the second quarter of fiscal 2000, common equivalent
shares relating to stock options aggregating 67,599 were included in the
weighted average number of common shares outstanding for the diluted earnings
per share computation. No common equivalent shares relating to stock options
were included in the weighted average number of common shares outstanding for
the diluted earnings per share computation for the second quarter of fiscal 1999
as their affect 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.
5. 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.
8
<PAGE>
Harvey Electronics, Inc.
Notes to Condensed Financial Statements
April 29, 2000
(Unaudited)
5. Income Taxes (Continued)
For the six and three months ended April 29, 2000, the income tax equivalent
provision and the associated reduction of reorganization value in excess of
amounts allocable to identifiable assets amounted to $380,000 and $120,000,
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 six and three months ended April 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.
Twenty-Six and Thirteen Weeks Ended April 29, 2000 as Compared to Twenty-Six and
Thirteen Weeks Ended May 1, 1999
Net income. The Company's pretax income for the six months ended April 29, 2000
increased 315% to $1,042,652, as compared to pretax income of $251,302 for the
same period last year. Net income for the six months ended April 29, 2000
increased 164% to $662,652 as compared to net income of $251,302 for the same
period last year.
The Company's pretax income for the second fiscal quarter ended April 29, 2000
increased 387% to $342,270 as compared to a pretax loss of $119,368 for the same
quarter last year. Net income for the second quarter ended April 29, 2000
increased 380% to $222,270 as compared to a net loss of $79,368 for the same
quarter last year.
The Company recorded an income tax equivalent provision for the six and three
months ended April 29, 2000 of $380,000 and $120,000 respectively. The income
tax equivalent provision of $40,000 recorded in the Company's first fiscal
quarter of 1999 was reversed in the Company's second fiscal quarter of 1999. The
income tax equivalent provision for the six and three months ended April 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 six and three months ended April 29, 2000 also
includes advertising expense of $480,000 and $130,000, respectively, as compared
to only $60,000 and $30,000 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 net advertising expense.
Revenues. For the six months ended April 29, 2000, net sales totaled
$18,421,679, an increase of $6,998,188 or 61% from the same period last year.
For the second fiscal quarter of 2000, net sales totaled $8,567,195, an increase
of $3,552,188 or 71% from the same quarter last year.
10
<PAGE>
Twenty-Six and Thirteen Weeks Ended April 29, 2000 as Compared to Twenty-Six and
Thirteen Weeks Ended May 1, 1999 (continued)
Comparable store sales for the six months ended April 29, 2000 increased
approximately $5,468,000 or 48% from the same period last year. Comparable store
sales for the second fiscal quarter of 2000 increased by approximately
$2,919,000 or 59% from the same quarter last year.
Sales have benefited from the Company's new advertising campaign, which 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 our new Bang & Olufsen store in lower Manhattan, which
opened in July 1999, and to a lesser extent, the additional sales from our
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. Our custom installation business
continues to grow as the Company's customers opt for our quality, in-home
installations of these sophisticated products and home theaters. Custom
installation services, including related product, account for approximately 29%
of total sales for the six months ended April 29, 2000 as compared to 24% for
the same period in fiscal 1999.
Each of the Company's new Harvey retail stores (in Mount Kisco, Westchester
County and Greenvale, Long Island, 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 six months ended April 29,
2000 increased $4,262,207 or 62% from the same period last year. Cost of sales
for the second fiscal quarter of 2000 increased $2,130,136 or 71% from the same
quarter last year. This was primarily due to the increase in sales, as discussed
above.
The gross profit margin for the six months ended April 29, 2000 was 39.6% as
compared to 39.9% for the same period last year. The gross profit margin for the
second fiscal quarter of 2000 was 40.2% as compared to 40.4% for the same
quarter last year. The slight decrease in the gross profit margin was due to a
change in the mix of products sold, primarily the increased sale of video
products, which typically have lower gross margins than audio products. The
increase in video sales was primarily due to additional customer demand for new
technologies such as HDTV, DVD and plasma flat-screen televisions. It should be
noted that sales of these new products do benefit from higher gross margins, as
compared to commodity analog televisions and VCR's. For the six and three months
ended April 29, 2000, the Company's sales of video products accounted for 30%
and 29%, respectively, of its net sales as compared to 25% and 23% respectively,
for the same periods last year. Additionally, the gross profit margin for the
six and three month periods of fiscal 2000 was positively affected by increased
custom installation income, where higher margins were realized, as compared to
the same periods last year.
11
<PAGE>
Twenty-Six and Thirteen Weeks Ended April 29, 2000 as Compared to Twenty-Six and
Thirteen Weeks Ended May 1, 1999 (continued)
Selling, general and administrative expenses ("SG&A expenses") increased 44% or
$1,869,347 for the six months ended April 29, 2000, as compared to the same
period last year. SG&A expenses for the second fiscal quarter of 2000 increased
43% or $926,978 from the same quarter last year.
Comparable SG&A expenses for the six months ended April 29, 2000 increased
approximately 36% or $1,546,000 from the same period last year. Comparable SG&A
expenses for the second fiscal quarter of 2000 increased approximately 38% or
$785,000 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 and its training efforts.
Interest expense for the six months ended April 29, 2000 increased 82% or
$47,549 as compared to the same period last year. Interest expense for the
second fiscal quarter of 2000 increased 51% or $17,059 as compared to 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 first quarter of fiscal
1999, there were no borrowings under the revolving line of credit facility.
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 six and three month periods ended April 29, 2000, the
income tax equivalent provision and the associated reduction of reorganization
value in excess of amounts allocable to identifiable assets amounted to $380,000
and $120,000, 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 1.45, or
$1,981,326 at April 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
12
<PAGE>
Liquidity and Capital Resources (continued)
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 April 29, 2000, only $250,093 was outstanding under the revolving line of
credit facility, which was also classified as a current liability. The
improvement in the current ratio was positively impacted by the Company's six
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 $1,549,904 for the six months
ended April 29, 2000, as compared to net cash used in operating activities of
$248,947 for the same period last year. The improvement in cash provided from
operating activities was due primarily from the increase in pretax income of
$791,350, coupled with an increase in accounts payable, accrued expenses and
other current liabilities of $581,477, as mentioned above. For the six months
ended May 1, 1999, the Company had reduced current liabilities by $535,737.
Net cash used in investing activities was $138,602 for the six months ended
April 29, 2000, as compared to cash used of $463,000 for the same period last
year. Net cash used for the purchase of property and equipment was $434,203,
relating to new store openings in fiscal 1999, as compared to only $134,937 in
fiscal 2000, where net cash was used for various capital expenditures.
Net cash used in financing activities was $1,392,369 for the first six months of
fiscal 2000, as compared to net cash provided from financing activities of
$526,139 for the same period last year. Financing activities for the first six
months of fiscal 2000 includes net payments of $1,227,510, reducing the
revolving line of credit facility. This period also includes Preferred Stock
dividends paid of $73,324 and principal payments on capital leases of $91,535.
Financing activities for the first six months of fiscal 1999 include net
borrowings from the revolving line of credit facility of $610,482 and Preferred
Stock dividend payments of $75,927.
In November 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 interest rate on borrowings up to $2,500,000 is 1% in excess of
the prime rate of interest (as defined). The rate charged on outstanding
balances over $2,500,000 is 1.75% above the prime rate (9.0% at April 29, 2000).
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 fiscal
year. Monthly maintenance charges also exist under the line of credit. At June
2, 2000, there was $607,691 in outstanding borrowings under the Paragon
revolving line of credit facility. The increase in the Company's revolving line
of credit facility from the amount outstanding at April 29, 2000 ($250,093), is
primarily due to the funding of additional inventory. As of June 2, 2000, the
Company had $2,692,309 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.
13
<PAGE>
Liquidity and Capital Resources (continued)
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).
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 September 2000. The new store will the
Company's eighth.
Capital expenditures necessary for each 1,500-1,600 square foot B&O store,
including inventory, should be approximately $350,000.
14
<PAGE>
Liquidity and Capital Resources (continued)
The Company seeks to open at least two additional Harvey Electronics stores in
New Jersey within the next eighteen months, if the appropriate locations can be
obtained or an existing business can be acquired. The Company estimates that the
total cost of opening a new Harvey Electronics retail store is approximately
$650,000. 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.
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 reviews and
specifications, information about custom installation services and new
technologies, store locations, product auctions 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 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 $300,000 in developing and
launching this interactive website. The Company plans to launch the new website
at the end of fiscal 2000.
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
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.
15
<PAGE>
PART II. OTHER INFORMATION:
Items 1, 2, 3, 4 and 5 were not applicable in the second quarter ended April 29,
2000.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit Number Description
-------------- -----------
<S> <C>
10.2.5 Severance Agreement between the Company and Michael E. Recca
10.2.6 Amended and Restated Severance Agreement between the Company and Franklin C. Karp
10.2.7 Amended and Restated Severance Agreement between the Company and Joseph J. Calabrese
10.2.8 Amended and Restated Severance Agreement between the Company and Michael A. Beck.
10.5.9 Sublease Agreement between the Company and Bang & Olufsen America, Inc.
10.10 Repurchase Agreement between the Company, Bang & Olufsen America, Inc. and Paragon Capital, LLC.
27 Financial Data Schedule
(b) Reports on Form 8-K
</TABLE>
No reports on Form 8-K were filed during the second 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 June 9, 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
16
