UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(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 27, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File Number 1-4626
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Harvey Electronics, Inc.
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(Exact name of small business registrant as specified in its charter)
New York 13-1534671
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
205 Chubb Avenue, Lyndhurst, New Jersey, 07071
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(Address of principal executive offices and zip code)
201-842-0078
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(Registrant's telephone number)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 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 [ ]
As of September 10, 2002, 3,324,525 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
Harvey Electronics, Inc.
FORM 10-Q
INDEX
PART I. Financial Information
Item 1. Financial Statements: Page No.
Statements of Operations (Unaudited) - Thirty-nine and thirteen weeks ended
July 27, 2002 and July 28, 2001...................................................... 3
Balance Sheets - July 27, 2002 (Unaudited) and October 27,
2001................................................................................. 4
Statement of Shareholders' Equity (Unaudited) - Thirty-nine weeks
ended July 27, 2002 ................................................................. 5
Statements of Cash Flows (Unaudited) - Thirty-nine weeks ended
July 27, 2002 and July 28, 2001...................................................... 6
Notes to Financial Statements (Unaudited).............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................................... 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K ...................................................... 18
Signatures .......................................................................................... 19
Part I Financial Information
Item I. Financial Statements
Harvey Electronics, Inc.
Statements Of Operations
(Unaudited)
Thirty-nine Weeks Ended Thirteen Weeks Ended
July 27, July 28, July 27, July 28,
2002 2001 2002 2001
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Net sales $32,367,755 $29,525,795 $9,583,471 $8,838,309
Interest and other income 86,437 34,873 64,496 2,398
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32,454,192 29,560,668 9,647,967 8,840,707
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Cost of sales 19,587,893 18,079,052 5,794,457 5,469,036
Selling, general and administrative expenses 11,937,467 11,503,507 3,894,149 3,810,845
Interest expense 253,698 224,698 85,284 97,584
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31,779,058 29,807,257 9,773,890 9,377,465
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Income (loss) before income taxes (benefit) 675,134 (246,589) (125,923) (536,758)
Income taxes (benefit) 275,000 0 (45,000) (115,000)
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Net income (loss) 400,134 (246,589) (80,923) (421,758)
Preferred Stock dividend requirement 55,212 55,782 18,024 18,594
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Net income (loss) applicable to Common Stock $344,922 ($302,371) ($98,947) ($440,352)
===================================================================
Net income (loss) per share applicable to
common shareholders:
Basic $0.10 ($0.09) ($0.03) ($0.13)
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Diluted $0.08 ($0.09) ($0.03) ($0.13)
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Shares used in the calculation of net income
(loss) per common share:
Basic 3,289,200 3,282,833 3,301,739 3,282,833
===================================================================
Diluted 4,081,100 3,282,833 3,301,739 3,282,833
===================================================================
See accompanying notes.
Harvey Electronics, Inc.
Balance Sheets
July 27, October 27,
2002 2001(1)
Assets (Unaudited)
-----------------------------------
Current assets:
Cash and cash equivalents $15,489 $28,336
Accounts receivable, less allowance of $25,000 497,949 578,905
Inventories 7,194,345 6,709,125
Prepaid expenses and other current assets 349,653 214,270
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Total current assets 8,057,436 7,530,636
Property and equipment:
Leasehold improvements 3,292,322 3,194,392
Furniture, fixtures and equipment 1,888,862 1,799,369
Internet website 421,670 415,630
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5,602,854 5,409,391
Less accumulated depreciation and amortization 2,546,486 1,981,683
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3,056,368 3,427,708
Equipment under capital leases, less accummulated amortization
of $381,354 and $377,131 63,206 119,365
Cost in excess of net assets acquired, less accumulated amortization
of $23,500 and $19,000 126,500 131,000
Reorganization value in excess of amounts allocable to identifiable
assets, less accumulated amortization of $364,523 and $324,023 848,940 1,164,440
Other assets, less accumulated amortization of $163,960 and $111,347 310,321 354,051
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Total assets $12,462,771 $12,727,200
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Liabilities and shareholders' equity Current liabilities:
Revolving line of credit facility $3,261,004 $3,442,020
Trade accounts payable 2,481,778 2,823,781
Accrued expenses and other current liabilities 2,523,415 2,555,242
Income taxes 26,177 28,200
Cumulative Preferred Stock dividends payable 5,853 24,792
Current portion of long-term debt 0 21,985
Current portion of capital lease obligations 40,056 50,921
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Total current liabilities 8,338,283 8,946,941
Long-term liabilities:
Capital lease obligations - 5,265
Deferred rent 159,232 154,660
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159,232 159,925
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
827 and 875 shares (aggregate liquidation preference--$827,000
and $875,000) 379,982 402,037
Common Stock, par value $.01 per share; authorized 10,000,000 shares;
issued and outstanding 3,324,525 and 3,282,833 shares 33,245 32,828
Additional paid-in capital 7,601,305 7,579,667
Accumulated deficit (4,049,276) (4,394,198)
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Total shareholders' equity 3,965,256 3,620,334
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Total liabilities and shareholders' equity $12,462,771 $12,727,200
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(1) The balance sheet as of October 27, 2001 has been derived from the audited
financial statements at that date.
See accompanying notes.
Harvey Electronics, Inc.
Statement of Shareholders' Equity
(Unaudited)
Additional Total
Preferred Stock Common Stock Paid-in Accumulated Shareholders'
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Shares Amount Shares Amount Capital Deficit Equity
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Balance at October 27, 2001 875 $402,037 3,282,833 $32,828 $7,579,667 $(4,394,198) $3,620,334
Net income for the thirty-nine weeks
ended July 27, 2002 - - - - - 400,134 400,134
Preferred Stock dividend - - - - - (55,212) (55,212)
Conversion of Preferred Stock - 0
to Common Stock (48) (22,055) 38,920 389 21,666 - 0
Exercise of cash-less Common Stock
warrant - - 2,772 28 (28) - 0
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Balance at July 27, 2002 827 $379,982 3,324,525 33,245 $7,601,305 ($4,049,276) $3,965,256
==========================================================================================
See accompanying notes.
Harvey Electronics, Inc
Statements of Cash Flows
(Unaudited)
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
July 27, 2002 July 28, 2001
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Operating activities
Net income (loss) $400,134 ($246,589)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 697,179 726,491
Income tax equivalent provision 275,000 -
Straight-line impact of rent escalations 4,572 (14,416)
Miscellaneous (11,678) (11,579)
Changes in operating assets and liabilities:
Accounts receivable 80,956 (123,643)
Inventories (408,085) 648,940
Prepaid expenses and other current assets (31,466) 150,395
Trade accounts payable (467,003) (1,030,403)
Accrued expenses, other current liabilities and
income taxes (137,767) (183,514)
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Net cash provided by (used in) operating activities 401,842 (84,318)
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Investing activities
Purchases of property and equipment excluding
Internet website development (71,423) (1,376,423)
Internet website development (6,040) (70,869)
Purchases of other assets (9,140) (1,857)
Security deposits-net 11,935 -
Note receivable - officer - 7,500
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Net cash used in investing activities (74,668) (1,441,649)
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Financing activities
Net (payments) proceeds from revolving credit facility (181,016) 1,874,241
Commitment fee from increased revolving credit facility - (75,000)
Preferred Stock dividends paid (74,151) (107,603)
Principal payments on note payable (21,985) (10,373)
Principal payments on capital lease obligations (62,869) (168,071)
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Net cash (used in) provided by financing activities (340,021) 1,513,194
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Decrease in cash and cash equivalents (12,847) (12,773)
Cash and cash equivalents at beginning of period 28,336 35,373
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Cash and cash equivalents at end of period $15,489 $22,600
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Supplemental cash flow information:
Interest paid $282,000 $194,000
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Taxes paid $5,000 $14,000
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See accompanying notes.
Harvey Electronics, Inc.
Notes to Financial Statements
July 27, 2002
(Unaudited)
1. Basis of Presentation and Description of Business
Basis of Presentation
The accompanying unaudited interim financial statements of Harvey Electronics,
Inc. (the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
reporting and with the instructions to Form 10-Q. 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 thirty-nine and thirteen-week periods ended July 27,
2002 are not necessarily indicative of the results that may be expected for the
year ending October 26, 2002. Net sales and operating results for the Company's
first quarter of its fiscal year are positively affected by a strong holiday
demand. 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 27, 2001.
The preparation of the unaudited interim financial statements, in conformity
with accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures at the date of the interim
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and
assumptions.
In prior fiscal years, the Company had been a small business issuer, filing its
unaudited interim and fiscal year end financial statements in accordance with
Regulation S-B of the Securities and Exchange Act of 1934, as amended. In fiscal
2002, the Company is required to file its financial statements in accordance
with Regulation S-X of the Securities and Exchange Act of 1934, as amended.
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. Revolving Line of Credit Facility
The Company has a three-year revolving line of credit facility ("Credit
Facility") with Wells Fargo Retail Finance ("Wells Fargo"), whereby the Company
can borrow up to $7 million based upon a lending formula (as defined) calculated
on eligible inventory. The Credit Facility expires November 30, 2003.
The maximum amount of borrowings available to the Company under this Credit
Facility is limited by formulas, as prescribed by Wells Fargo. The Company's
maximum borrowing availability is equal to 75% of eligible inventory, less
existing borrowings and certain reserves established by Wells Fargo.
The interest rate on all borrowings under the Credit Facility is one percent
(1%) over the prime rate with a minimum interest rate of 8%. Effective January
1, 2002, the minimum interest rate was reduced to 6.5% and will be in effect
throughout fiscal 2002. Prepayment fees, an annual facility fee of $17,500 and
maintenance fees of $1,500 per month, also exist under the Credit Facility. A
commitment fee of $75,000 (being amortized over the three years) was also paid
by the Company. The balance outstanding under the Credit Facility at July 27,
2002 was $3,261,000 and is presented as a current liability in accordance with
EITF 95-22, "Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements that include both a Subjective Acceleration clause
and a Lock-Box Arrangement", since the Company's daily receipts are used to
reduce the outstanding balance under the revolving credit facility.
Wells Fargo has a senior security interest in all of the Company's assets. The
Credit Facility provides Wells Fargo with rights of acceleration upon the
occurrence of certain customary events of default including, among others, the
event of bankruptcy. The Company is restricted from paying dividends on common
stock, retiring or repurchasing its common stock and entering into additional
indebtedness (as defined). The Credit Facility also contains certain financial
covenants, with which the Company was in compliance at July 27, 2002.
In connection with the Credit Facility, Wells Fargo received an additional
warrant to purchase 100,000 shares of the Company's common stock, subject to
adjustment, which is currently exercisable at a price of $2.00 per share and
expires November 30, 2003. Wells Fargo also received an extension of an existing
warrant to purchase 125,000 shares of common stock, subject to adjustment, which
is currently exercisable at a price of $5.50 per share and also expires November
30, 2003. Accordingly, the Company recorded the fair value of the warrants
($75,000) (included in Other Assets in the accompanying balance sheets), which
is being amortized over a three-year period.
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 takes place. Advertising expense for
the thirty-nine weeks ended July 27, 2002 and July 28, 2001 was $550,000 and
$800,000, respectively. Advertising expense for the third quarter of fiscal 2002
and 2001 was $100,000 and $240,000, respectively.
4. Income (Loss) Per Share
Basic and diluted income per share are calculated in accordance with SFAS No.
128, "Earnings Per Share". The basic and diluted income per common share for the
thirty-nine and thirteen weeks ended July 27, 2002 and July 28, 2001 was
computed based on the weighted average number of common shares outstanding. For
the thirty-nine weeks ended July 27, 2002, common equivalent shares relating to
stock options aggregating 93,313 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 shares outstanding for the diluted earnings per share
computation for the thirty-nine weeks ended July 28, 2001 and also the thirteen
weeks ended July 27, 2002 and July 28, 2001, as their effect was antidilutive.
Commencing January 1, 2001, the conversion price of the Company's preferred
stock was $1.2333. In June 2002, 48 shares of preferred stock were converted to
38,920 shares of the Company's common stock by a preferred shareholder. As a
result, 5,910 and 17,535 shares of common stock were included in the weighted
average number of common shares outstanding for the diluted earnings per share
computation for the thirty-nine and thirteen weeks ended July 27, 2002,
respectively. Common equivalent shares of 670,559, relating to the conversion of
the remaining outstanding preferred stock, were included in the weighted average
number of common shares outstanding for the diluted earnings per share
calculation for the thirty-nine weeks ended July 27, 2002 and were not included
for the earnings per share calculation for the third quarter of fiscal 2002 as
their effect was antidilutive. Common equivalent shares (of 551,817 weighted for
only seven months of the nine months ended July 28, 2001, and 709,479 for the
third quarter of fiscal 2001) relating to the conversion of preferred stock for
the nine and three month periods ended July 28, 2001 were not included in the
weighted average number of common shares outstanding for the diluted earnings
per share computation as their effect was antidilutive.
In June 2002, 15,000 warrants to purchase the Company's common stock were
exchanged for 2,772 shares of common stock, effected under a cash-less exercise.
As a result, 457 and 1,371 shares were included in the weighted average number
of common shares outstanding for the diluted earnings per share computation for
the thirty-nine and thirteen weeks ended July 27, 2002, respectively.
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.
For the nine months ended July 27, 2002, the income tax equivalent provision and
the associated reduction of reorganization value in excess of amounts allocable
to identifiable assets amounted to $275,000 (41% effective tax rate). For the
third quarter of fiscal 2002 and fiscal 2001, the Company recorded an income tax
equivalent benefit of $45,000 (36% effect tax benefit) and 115,000 (21%
effective tax benefit), respectively. The income tax equivalent provision will
not affect the Company's tax liability and does not require a cash payment.
6. Retail Store Expansion
In fiscal 2000, the Company entered into a ten-year lease for a new 6,500 square
foot Harvey showroom in Eatontown, New Jersey. The new store opened in April
2001. Results of operations from this new store have been included in the
Company's results of operations for the thirty-nine and thirteen weeks ended
July 27, 2002 and July 28, 2001. The results of operations for the thirty-nine
weeks ended July 28, 2001 also included pre-opening expenses as the store opened
in mid-April 2001. This is the Company's ninth store and is the fifth opened
since its public offering, completed in April 1998.
7. Inventories
Inventories have been valued at average cost, based upon gross profit
percentages applied to sales.
8. New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and other intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to annual impairment tests in
accordance with the Statement. Other intangible assets will continue to be
amortized over their useful lives. In addition, Statement 141 eliminates the
pooling-of-interest method of accounting for business combinations. The Company
will adopt SFAS No. 141 and 142 beginning in the first quarter of fiscal 2003.
During fiscal 2003, the Company will perform the first of the required
impairment tests of goodwill and indefinite lived intangible assets as of
October 27, 2002. Management has not yet determined what impact these new
pronouncements will have on the Company's financial position and results of
operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations," for a disposal of a segment of a business. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001. The Company
expects to adopt SFAS No. 144 as of October 27, 2002, the first day of fiscal
2003, and management does not expect the adoption of SFAS No 144 to have a
material effect on the Company's financial position and results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following management's discussion and analysis and this Form 10-Q 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.
Results of Operations
General
The following discussion should be read in conjunction with the Company's
audited financial statements for the fiscal years ended October 27, 2001 and
October 28, 2000, included in the Company's Annual Report on Form 10-KSB.
Thirty-Nine and Thirteen Weeks Ended July 27, 2002 as Compared to Thirty-Nine
and Thirteen Weeks Ended July 28, 2001
Net Income (Loss). The Company's pretax income for the nine months ended July
27, 2002, significantly increased to $675,000 as compared to a pre-tax loss of
$247,000 for the same period last year. Net income for the nine months ended
July 27, 2002 increased to $400,000 as compared to a net loss of $247,000 for
the same period last year. Earnings before interest, taxes, depreciation and
amortization ("EBITDA") increased 131% to $1,626,000 as compared to EBITDA of
$705,000 for the same period last year.
The Company significantly reduced its pre-tax third quarter loss for fiscal 2002
to $126,000 from a pre-tax loss of $537,000 for the same quarter last year. The
net loss for the third quarter of fiscal 2002 was substantially reduced to
$81,000, as compared to $422,000 for the same quarter last year. EBITDA for the
third quarter of fiscal 2002 substantially increased to $189,000, as compared to
a loss before interest, taxes depreciation and amortization of $150,000 for the
same quarter last year.
The net income for the nine months ended July 27, 2002 and the net loss for the
third quarter of fiscal 2002, were negatively impacted by operating losses of
approximately $185,000 and $35,000, respectively, relating to the Company's
newest Bang & Olufsen branded store opened in Greenwich, Connecticut in October
2000 and from the Company's website, also launched in October 2000. The net loss
for the same nine and three month periods in 2001, was increased by $520,000 and
$100,000, respectively, relating to both pre-opening expenses (before April
2001) and operating losses from new stores and the website.
In the third quarter of fiscal 2002, the Company received $50,000 from a vendor,
to be used for general operating purposes relating to one of the Company's
stores. This amount was presented as Interest and Other Income in the Company's
unaudited Statements of Operations for the nine and three-month periods ended
July 27, 2002.
The Company's net income for the nine months ended July 27, 2002 and July 28,
2001 included advertising expenses of $550,000 and $800,000, respectively. The
Company's third quarter of fiscal 2002 included advertising expenses of $100,000
as compared to $240,000 for the same quarter last year. While net advertising
expense has declined for the nine and three months ended July 27, 2002, as
compared to the same periods last year, the Company's advertising presence has
not diminished.
Results of operations for the nine months ended July 27, 2002 and July 28, 2001
also included depreciation and amortization expense of $697,000 and $726,000,
respectively. Results of operations for the third quarter of fiscal 2002 and
2001 included depreciation and amortization of $230,000 and $289,000,
respectively.
The Company recorded an income tax equivalent provision for the nine months
ended July 27, 2002 of $275,000 (41% effective tax rate). In the third quarter
of fiscal 2002 and fiscal 2001, the Company recorded an income tax equivalent
benefit of $45,000 (36% effective tax benefit) and $115,000 (21% effective tax
benefit), respectively. The income tax equivalent provision will not affect the
Company's tax liability and does not require the use of cash.
Revenues. For the nine months ended July 27, 2002, net sales aggregated
$32,368,000, an increase of $2,842,000 or approximately 9.6% from the same
period last year. For the third quarter of fiscal 2002, net sales aggregated
$9,583,000, an increase of $745,000 or approximately 8.4% from the same quarter
last year.
Comparable store sales results for the third quarter of fiscal 2002 increased
over $750,000 or approximately 8.5% from the same quarter last year. Comparable
store sales for the first nine months of fiscal 2002 increased over $970,000 or
approximately 3.3% from the same period last year.
Overall net sales benefited significantly from the new Eatontown, New Jersey
store opened in April 2001, which has exceeded management's expectations in
sales and store profitability. Additionally, overall and comparable store sales
benefited from the rebound in sales of our totally renovated flagship store on
45th Street in Midtown Manhattan and the continued strong sales growth of the
Company's Greenvale/Roslyn, Long Island store and the store located within ABC
Carpet and Home in lower Manhattan. The Company's two Bang & Olufsen retail
showrooms have also experienced strong sales increases for the third quarter of
fiscal 2002, as compared to the same quarter last year. Finally, the Company's
Harvey stores in Mount Kisco, New York and Greenwich, Connecticut, which had
experienced declines in sales for the first six months of fiscal 2002, have also
rebounded in sales in the third quarter of fiscal 2002, as compared to the same
quarter last year, primarily due to personnel changes and additional localized
advertising efforts, as implemented by management.
Customer demand continues to be strong for new digital video products including
plasma flatscreen, LCD flat panel, high-definition televisions, DVD and related
custom home installations. Custom installation projects continue to increase and
accounted for approximately 50% of net sales for the first nine months of fiscal
2002, as compared to approximately 39% of net sales for the same nine-month
period in fiscal 2001. Custom installation sales, including both equipment sales
and labor income, increased 42.6% to $16,262,000 for the first nine months of
fiscal 2002, as compared to $11,405,000 for the same period last year. The
Company's custom installation services yield higher gross profit margins and
stronger net profitability, as compared to normal retail store sales.
The Company's marketing efforts remained significant, and we believe these
efforts continued to drive sales for the first nine months of fiscal 2002. These
efforts included radio, newspaper, cable and network television, direct mail and
catalog advertisements, and the continued promotion of the Company's website,
www.harveyonline.com.
Costs and Expenses. Total cost of goods sold for the nine months ended July 27,
2002 increased $1,509,000 or 8.3% from the same period last year. Cost of sales
for the third quarter of fiscal 2002 increased $325,000 or 6.0% from the same
quarter last year. This was primarily related to the increase in sales as noted
above and from an increase in the gross margin.
The gross profit margin for the nine months ended July 27, 2002 increased to
39.5% as compared to 38.8% for the same period last year. The gross profit
margin for the third quarter of fiscal 2002 increased to 39.5% as compared to
38.1% for the same quarter last year.
The gross profit margin increases were achieved despite a continuing shift in
business towards video products, which generally have lower margins. Video
product sales for the first nine months of fiscal 2002, accounted for
approximately 43% of net sales as compared to approximately 35% of net sales in
fiscal 2001, or an increase of approximately 23%. For the third quarter of
fiscal 2002 and fiscal 2001, these percentages were nearly equivalent to the
aforementioned nine-month results. The reduction in margin from this shift in
product sales was offset by several factors. The new digital and flat screen
video products are sold at higher margins (and higher prices) than analog,
commodity televisions. Further, the Company has been successful in bundling the
sale of new video products with the sale of higher margin audio and home theater
components, including furniture, accessories and custom installation labor.
Custom installation labor income increased by approximately 30% for the nine and
three month periods of fiscal 2002 as compared to the same periods in fiscal
2001.
Selling, general and administrative expenses ("SG&A expenses") increased 3.8% or
$434,000 for the nine months ended July 27, 2002, as compared to the same period
last year. SG&A expenses for the third quarter of fiscal 2002 increased 2.2% or
$83,000 from the same quarter last year.
Comparable SG&A expenses for the nine months ended July 27, 2002 increased by
approximately $96,000 or less than 1% from the same period last year. Comparable
SG&A expenses for the third quarter of fiscal 2002 increased by $87,000 or 2.3%
from the same quarter last year.
The overall increase in SG&A expenses was primarily due to the increase in costs
relating to the new Eatontown, New Jersey store, which opened in April 2001.
Overall and comparable SG&A expenses also increased from additional payroll and
payroll related costs, insurance expense, occupancy costs, credit card fees,
professional fees, incentive bonuses and various other store-operating expenses,
offset by reduced net advertising expense.
Interest expense for the nine months ended July 27, 2002 increased 12.9% or
$29,000 as compared to the same period last year. Interest expense for the third
quarter of fiscal 2002 decreased 12.6% or $12,000 as compared to the same
quarter last year. The overall nine-month increase was primarily due to the
additional borrowings from the Company's Credit Facility in fiscal 2001, which
was used to fund the Company's retail store expansion, renovation and website,
offset by a reduction in the overall effective borrowing rate. Additionally, the
increased expense is due to amortization of warrants issued to the Company's
lender and from the amortization of the commitment fee paid by the Company to
its lender, relating to the increase and extension of the Credit Facility. Such
amortization was recorded for the entire nine months of fiscal 2002 as compared
to only seven months of the nine months ended July 28, 2001. The reduction of
interest expense in the third quarter of fiscal 2002, as compared to the same
quarter in fiscal 2001, was primarily due to a reduction in the overall
effective borrowing rate.
Liquidity and Capital Resources
At July 27, 2002 and October 27, 2001, the Company's ratio of current assets to
current liabilities was .97 and .84, respectively. The Company had negative
working capital of $281,000 and $1,416,000 at July 27, 2002 and October 27,
2001, respectively. However, it is important to note that at July 27, 2002 and
October 27, 2001, the Company's outstanding balances on its Credit Facility
($3,261,000 and $3,442,000, respectively) were classified as current
liabilities, despite the three-year term of the Company's Credit Facility. The
presentation as a current liability is in accordance with EITF 95-22 (See Note 2
to the Financial Statements for details).
The increase in the Credit Facility, in fiscal 2001, was necessary to fund
retail store expansion, renovation and the Company's website. The improvement in
the current ratio at July 27, 2002 was positively impacted by the Company's
nine-month pre-tax income. Other factors primarily improving working capital,
included the reduction of the Credit Facility and accounts payable, and an
increase in inventory and prepaid expenses, offset by a decrease in accounts
receivable
Net cash provided from operations for the nine months ended July 27, 2002 was
$402,000 as compared to net cash used in operations of $84,000 for the same
period last year. The improvement in cash provided from operations for the first
nine months of fiscal 2002 was primarily due to additional pre-tax income
($922,000), a decrease in accounts receivable ($205,000) and an increase in
accounts payable ($563,000), partially offset by an increase in inventory
($1,057,000) and an increase in prepaid expenses and other current assets
($182,000).
Net cash used in investing activities was $75,000 for the nine months ended July
27, 2002, as compared to net cash used of $1,442,000 for the same period last
year. Net cash used for the purchases of property and equipment and website
enhancements was $77,000 for the nine months ended July 27, 2002 as compared to
$1,447,000 for the same period last year. Additions for the first nine months of
fiscal 2001 related primarily to furniture, fixtures, computer equipment,
website improvements and leaseholds relating to the new store openings and for
the renovation of the Company's 45th Street store in Midtown Manhattan.
Net cash used in financing activities was $340,000 for the nine months ended
July 27, 2002, as compared to net cash provided from financing activities of
$1,513,000 for the same period last year. Financing activities for the nine
months ended July 27, 2002 included net payments of $181,000, reducing the
Credit Facility, preferred stock dividends paid of $74,000, principal payments
on capital leases of $63,000 and note payable payments of $22,000. Financing
activities for the first nine months of fiscal 2001 included net borrowings of
$1,874,000 from the Credit Facility, preferred stock dividend payments of
$108,000, payments on capital leases of $168,000, note payable payments of
$10,000 and a $75,000 commitment fee relating to the increase and extension of
the Credit Facility.
The Company has a three-year revolving line of credit facility ("Credit
Facility") with Wells Fargo Retail Finance ("Wells Fargo"), whereby the Company
can borrow up to $7 million based upon a lending formula (as defined) calculated
on eligible inventory. The Credit Facility expires November 30, 2002. The
interest rate on all borrowings under the Credit Facility is one percent (1%)
over the prime rate with a minimum interest rate of 8%. Effective January 1,
2002, the minimum interest rate was reduced to 6.5% and will be in effect
throughout fiscal 2002. At September 10, 2002, there was $3,448,000 in
outstanding borrowings under the Credit Facility, with approximately $2,100,000
available to borrow under the Credit Facility.
The maximum amount of borrowings available to the Company under this Credit
Facility is limited by formulas, as prescribed by Wells Fargo. The Company's
maximum borrowing availability is equal to 75% of eligible inventory, less
existing borrowings and certain reserves established by Wells Fargo.
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.
Wells Fargo obtained a senior security interest in substantially all of the
Company's assets. The Credit Facility provides Wells Fargo 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 redeemable common stock purchase 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 through March 31,
2003. 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 has authorized 10,000 shares of 8.5% Cumulative Convertible
Preferred Stock ("Preferred Stock") with a par value of $1,000 per share. The
conversion price of the Company's preferred stock is $1.2333. 875 shares of
preferred stock were originally issued by the Company. In June 2002, 48 shares
of preferred stock were converted to 38,920 shares of the Company's common stock
by a preferred shareholder. At July 27, 2002, 827 shares of Preferred Stock were
issued and outstanding. The Company's remaining Preferred Stock is convertible
into 670,559 shares of common stock.
In fiscal 2000, the Company entered into a ten-year lease for a new 6,500 square
foot Harvey showroom in Eatontown, New Jersey. This store opened in April 2001
and is the Company's ninth. Capital expenditures, including inventory, necessary
to operate this new retail store approximated $1,500,000.
The Company does not plan to open any new retail stores in fiscal 2002. The
Company is in the process of partially renovating its Harvey retail store within
ABC Carpet and Home in lower Manhattan, with assistance from its landlord, and
the additional costs to the Company will not be material. No other material
capital expenditures, improvements or purchases of equipment or other assets are
planned for the remainder of fiscal 2002. The Company's expansion plan, if any,
for fiscal 2003 has not been developed at this time, as the economic outlook
remains uncertain.
The Company intends to continue its advertising campaign in fiscal 2002 and
fiscal 2003, primarily with print, radio and direct mail.
The Company's website gives it customers access to one of Harvey's upscale
retail showrooms or offers its customers a private in-home consultation through
the convenience of the Internet. The anticipated costs of maintaining and
improving the website are not expected to be material for 2002.
In March 2001, the Company engaged Porter, LeVay & Rose, Inc. ("PL&R") as its
investor relations' advisor. The Company's goal in engaging PL&R was to heighten
its visibility as the Company pursued its business strategy and selective
expansion. For one year, the Company's management met with many brokers,
investors, shareholders and analysts. The recurrent theme in almost all meetings
was that while the Company's niche and reputation are excellent, Harvey was just
too small to garner any significant attention. Because of this, the Company's
Board of Directors decided that the services of an investor relations' advisor
would currently not be needed, and as a result, the Company discontinued the
services from PL&R effective May 1, 2002.
Management believes that cash on hand, cash flow from operations and funds made
available under the Credit Facility with Wells Fargo, will be sufficient to meet
the Company's anticipated working capital needs for at least the next
twelve-month period.
PART II. OTHER INFORMATION
Items 1 and 3 were not applicable in the third quarter ended July 27, 2002.
Item 2. Changes in Securities and Use of Proceeds
In June 2002, 48 shares of Preferred Stock were converted to 38,920 shares of
the Company's common stock by one of the Company's five preferred shareholders.
Additionally, in June 2002, 15,000 warrants to purchase the Company's common
stock were exchanged for 2,772 shares of common stock, effected under a
cash-less exercise, by the Company's prior investor relations advisor, Porter,
LeVay & Rose, Inc.
As a result of the above transactions, the number of common shares issued and
outstanding at July 27, 2002 was 3,324,525.
Item 4. Submission of Matters to a Vote of Security Holders
On July 2, 2002, the Company's shareholders at an Annual Meeting (i) elected
Franklin C. Karp (2,858,373 shares in favor, 201,701 shares against), Joseph J.
Calabrese (2,858,373 shares in favor, 201,701 shares against), Michael E. Recca
(2,853,573 shares in favor, 206,501 shares against), Frederic J. Gruder
(2,858,373 shares in favor, 201,701 shares against), Jeffrey A. Wurst (2,858,373
shares in favor, 201,701 shares against), and William F. Kenny, III (2,858,373
shares in favor, 201,701 shares against) as directors of the Company and (ii)
ratified the appointment of BDO Seidman, LLP, the Company's independent auditors
for the year ending October 26, 2002 (3,046,924 shares in favor, 7,468 shares
against and 5,682 shares abstained).
Item 5. Other Information
On September 6, 2002 the Company received a notice from NASDAQ stating that the
Company was not in compliance with Rule 4310 (c)(4), for failing to maintain a
closing bid price of $ 1.00 per share for thirty consecutive trading days.
Pursuant to Rule 4310 (c)(8)(D), the Company has 180 calendar days, until March
5, 2003, to regain compliance by having the closing bid price equal or exceed
$1.00 per share for 10 consecutive trading days. Management believes that the
improved results of the third quarter and the nine-months ended July 2002 will
enable the Company to regain compliance.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
Exhibit 99.1 Certification of Franklin C. Karp, President
Exhibit 99.2 Certification of Joseph J. Calabrese, Executive Vice
President, Chief Financial Officer, Treasurer and
Secretary
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of fiscal
2002.
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 10, 2002.
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
I, Franklin C. Karp, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harvey Electronics,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 10, 2002
/s/ Franklin C. Karp
--------------------
President
I, Joseph J. Calabrese, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harvey Electronics,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 10, 2002
/s/ Joseph J. Calabrese
-----------------------
Executive Vice President, Chief
Financial Officer, Treasurer &
Secretary