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 February 1, 2003
[ ] 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
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 of other jurisdiction of (I.R.S. Employer
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) 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 March 07, 2003, 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) - Fourteen and Thirteen weeks ended
February 1, 2003 and January 26, 2002............................................... 3
Balance Sheets - February 1, 2003 (Unaudited) and October 26,
2002................................................................................ 4
Statement of Shareholders' Equity (Unaudited) - Fourteen weeks
ended February 1, 2003 ............................................................. 5
Statements of Cash Flows (Unaudited) - Fourteen and thirteen weeks ended
February 1, 2003 and January 26, 2002............................................... 6
Notes to Financial Statements (Unaudited)............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................................. 12
Item 4. Disclosure Controls and Procedures.................................................... 17
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K ..................................................... 17
Signatures ......................................................................................... 18
Part I Financial Information
Item I. Financial Statements
Harvey Electronics, Inc.
Statements Of Operations
(Unaudited)
Fourteen Weeks Thirteen Weeks
Ended Ended
February 1, January 26,
2003 2002
-------------------------------------
Net sales $13,141,793 $12,420,559
Interest and other income 10,542 13,366
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13,152,335 12,433,925
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Cost of sales 7,867,469 7,540,199
Selling, general and administrative expenses 4,499,319 4,167,316
Interest expense 87,904 85,962
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12,454,692 11,793,477
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Income before income taxes 697,643 640,448
Income taxes 277,000 250,000
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Net income 420,643 390,448
Preferred Stock dividend requirement 17,574 18,594
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Net income applicable to Common Stock $403,069 $371,854
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Net income per share applicable to
common shareholders:
Basic $0.12 $0.11
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Diluted $0.10 $0.09
=====================================
Shares used in the calculation of net income
per common share:
Basic 3,324,525 3,282,833
=====================================
Diluted 4,042,979 4,074,188
=====================================
See accompanying notes.
Harvey Electronics, Inc.
Balance Sheets
February 1, October 26,
2003 2002(1)
Assets (Unaudited)
-------------------------------------
Current assets:
Cash and cash equivalents $16,989 $15,990
Accounts receivable, less allowance of $20,000 and $20,000 819,980 634,663
Inventories 6,971,670 6,804,161
Prepaid expenses and other current assets 400,327 212,692
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Total current assets 8,208,966 7,667,506
Property and equipment:
Leasehold improvements 3,422,213 3,363,928
Furniture, fixtures and equipment 1,961,455 1,941,765
Internet website 456,870 441,670
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5,840,538 5,747,363
Less accumulated depreciation and amortization 2,886,265 2,730,164
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2,954,273 3,017,199
Equipment under capital leases, less accummulated amortization
of $386,000 and $382,537 58,560 62,023
Cost in excess of net assets acquired, less accumulated amortization
of $25,000 and $25,000 125,000 125,000
Reorganization value in excess of amounts allocable to identifiable
assets, less accumulated amortization of $378,023 and $378,023 709,440 986,440
Other assets, less accumulated amortization of $193,767 and $183,794 283,324 293,297
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Total assets $12,339,563 $12,151,465
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Liabilities and shareholders' equity
Current liabilities:
Revolving line of credit facility $2,781,331 $3,119,493
Trade accounts payable 1,977,074 2,274,833
Customer deposits 1,649,239 1,484,237
Accrued expenses and other current liabilities 1,557,944 1,293,207
Income taxes 48,541 50,200
Cumulative Preferred Stock dividends payable 5,570 23,432
Current portion of capital lease obligations 6,147 22,420
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Total current liabilities 8,025,846 8,267,822
Deferred rent 182,620 155,615
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
shares (aggregate liquidation preference--$827,000)
379,982 379,982
Common Stock, par value $.01 per share; authorized 10,000,000 shares;
issued and outstanding 3,324,525 shares 33,245 33,245
Additional paid-in capital 7,601,305 7,601,305
Accumulated deficit (3,883,435) (4,286,504)
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Total shareholders' equity 4,131,097 3,728,028
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Total liabilities and shareholders' equity $12,339,563 $12,151,465
=====================================
See accompanying notes.
Harvey Electronics, Inc.
Statement of Shareholders' Equity
(Unaudited)
Preferred Stock Common Stock Additional Total
----------------------------------------------- Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
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Balance at October 26, 2002 827 $ 379,982 3,324,525 $ 33,245 $ 7,601,305 $(4,286,504) $ 3,728,028
Net income for the period - - - - - 420,643 420,643
Preferred Stock dividend - - - - - (17,574) (17,574)
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Balance at February 1, 2003 827 $ 379,982 3,224,525 $ 33,245 $ 7,601,305 ($3,883,435) $ 4,131,097
=========================================================================================
See accompanying notes.
Harvey Electronics, Inc.
Statements of Cash Flows
(Unaudited)
Fourteen Weeks Thirteen Weeks
Ended Ended
February 1, January 26,
2003 2002
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Operating activities
Net income $420,643 $390,448
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 191,026 232,934
Income tax equivalent provision 277,000 250,000
Straight-line impact of rent escalations 27,005 (90)
Miscellaneous (5,229) (3,541)
Changes in operating assets and liabilities:
Accounts receivable (185,317) (141,210)
Inventories (167,509) (30,565)
Prepaid expenses and other current assets 54,968 (36,118)
Trade accounts payable (297,759) (197,659)
Customer deposits 165,002 15,848
Accrued expenses, other current liabilities
and income taxes 20,475 (159,809)
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Net cash provided by operating activities 500,305 320,238
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Investing activities
Purchases of property and equipment excluding
Internet website development (94,235) (23,149)
Internet website development (15,200) -
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Net cash used in investing activities (109,435) (23,149)
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Financing activities
Net payments from revolving credit facility (338,162) (232,141)
Preferred Stock dividends paid (35,436) (37,493)
Principal payments on note payable - (10,739)
Principal payments on capital lease obligations (16,273) (26,519)
----------------------------------------
Net cash used in financing activities (389,871) (306,892)
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Increase (decrease) in cash and cash equivalents 999 (9,803)
Cash and cash equivalents at beginning of period 15,990 28,336
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Cash and cash equivalents at end of period $16,989 $18,533
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Supplemental cash flow information:
Interest paid $103,000 $112,000
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Taxes paid $2,000 $1,000
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See accompanying notes.
Harvey Electronics, Inc.
Notes to Financial Statements
February 1, 2003
(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.
Fiscal 2003 is a fifty-three week year and, as a result, the first quarter
included fourteen weeks as compared to thirteen weeks for the same quarter last
year. Operating results for the fourteen-week period ended February 1, 2003 are
not necessarily indicative of the results that may be expected for the
fifty-three weeks ending November 1, 2003. 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-K for the year ended October 26, 2002.
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.
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 2003. 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 February 1,
2003 was $2,781,000 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 February 1, 2003.
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 fourteen and thirteen weeks ended February 1, 2003 and January 26, 2002 was
$280,000 and $340,000, respectively.
4. Income 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
fourteen and thirteen weeks ended February 1, 2003 and January 26, 2002 was
computed based on the weighted average number of common shares outstanding. For
the first quarter of fiscal 2003 and 2002, common equivalent shares relating to
stock options, aggregating 47,895 and 81,876, respectively, were included in the
weighted average number of common shares outstanding for the diluted earnings
per share computation. All other stock options and warrants were not included
since they were anti-dilutive.
The conversion price of the Company's preferred stock is $1.2333. As a result,
common equivalent shares of 670,559 and 709,479 relating to the conversion of
the preferred stock were included in the weighted average number of common
shares outstanding for the diluted earnings per share computation for the first
quarter ended February 1, 2003 and January 26, 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 fourteen and thirteen weeks ended February 1, 2003 and January 26, 2002,
the income tax equivalent provision and the associated reduction of
reorganization value in excess of amounts allocable to identifiable assets
amounted to $277,000 (40% effective tax rate) and $250,000 (39% effective tax
rate), respectively. The income tax equivalent provisions will not affect the
Company's tax liability and does not require a cash payment.
6. Inventories
Inventories have been valued at average cost, based upon gross profit
percentages applied to net sales.
7. New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") 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 standards, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized but
are subject to annual impairment tests in accordance with SFAS 142. Other
intangible assets continue to be amortized over their estimated useful lives.
The Company has adopted the non amortization provision of the new standards
beginning in the first quarter of fiscal 2003. Effective with the adoption of
SFAS 142, both goodwill and the Company's other intangible asset, reorganization
value in excess of amounts allocable to identifiable assets, are no longer
amortized but are instead subject to an annual impairment test. The initial
transitional test of the impairment of goodwill will be completed during the
second quarter of fiscal 2003. Goodwill and intangible assets will be tested
annually to identify if impairment has occurred. Upon completion of such annual
review, if impairment is found to have occurred, a corresponding charge will be
recorded.
With the adoption of SFAS 142, the Company ceased amortization of goodwill as of
October 27, 2002. The following table presents the results of the Company for
all periods presented on a comparable basis:
Three Months Ended Three Months Ended
February 1, 2003 January 26, 2002
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Net income applicable to Common Stock $403,069 $371,854
Add back goodwill amortization - 15,000
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Adjusted net income $403,069 $386,854
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Diluted net income per share:
Net income $ .10 $ .09
Goodwill amortization - -
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Adjusted diluted net income
per share $ .10 $ .09
====== ======
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
adopted SFAS No. 144 as of October 27, 2002, the first day of fiscal 2003. The
adoption of SFAS No 144 did not effect the Company's financial position and
results of operations.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-based Compensation - Transition and Disclosure" - an
amendment of SFAS No. 123. SFAS No. 148 amends SFAS No. 123, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect on the method
used on reported results. The disclosure requirements apply to all companies for
fiscal years ending after December 15, 2002. Management does not believe that
the impact of this new pronouncement will have a material effect on the
Company's financial statements.
Item 2. Management's Discussion and Analysis or Plan of Operation
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 26, 2002 and
October 27, 2001, included in the Company's Annual Report on Forms 10K and
10-KSB. Fiscal 2003 is a fifty-three week year as compared to fifty-two weeks
for fiscal 2002. As a result, the Company's first quarter of fiscal 2003
includes fourteen weeks as compared to thirteen weeks for the first quarter of
fiscal 2002.
Fourteen Weeks Ended February 1, 2003 as Compared to Thirteen Weeks Ended
January 26, 2002
Net Income. The Company's pretax income for the fourteen weeks ended February 1,
2003 increased 8.9%, to $698,000 as compared to $640,000 for the thirteen weeks
ended January 26, 2002. Earnings before interest, taxes, depreciation and
amortization ("EBITDA") increased to $977,000 for the fourteen weeks ended
February 1, 2003 as compared to EBITDA of $959,000 for the thirteen weeks ended
January 26, 2002. Net income for the first quarter of fiscal 2003 increased to
$421,000 as compared to $390,000 for the same quarter in fiscal 2002.
Net income for the first quarter of fiscal 2003 was reduced by operating losses
of approximately $65,000 relating to the Company's website. Net income for the
first quarter of fiscal 2002 was reduced by operating losses of approximately
$70,000 relating to the Company's newest Bang & Olufsen branded store opened in
Greenwich, Connecticut and the Company's website.
The Company's net income for the first quarter of fiscal 2003 includes net
advertising expense of $280,000 as compared to $340,000 for the same quarter
last year.
Results of operations for the first quarter of fiscal 2003 and 2002 also
included depreciation and amortization expense of $191,000 and $233,000,
respectively.
The Company recorded income tax equivalent provisions for the fourteen and
thirteen weeks ended February 1, 2003 and January 26, 2002, of $277,000 (40%
effective tax rate) and $250,000 (39% effective tax rate), respectively. The
income tax equivalent provisions will not affect the Company's tax liability and
does not require the use of cash.
Revenues. Net sales for the fourteen weeks ended February 1, 2003 aggregated
$13,142,000, an increase of 5.8%, as compared to net sales for the thirteen
weeks ended January 26, 2002. Comparable store sales, encompassing only the
first thirteen weeks of the quarter, decreased by only 1.2% from the same period
last year. The Company's sales results continued to be strong despite a
difficult retail environment, and compared favorably with the announced results
of other consumer electronics retailers in the industry. The slight decrease in
comparable store sales for the Company's first quarter was primarily the result
of slower retail traffic during the holiday shopping period.
Overall net sales benefited from the continued growth of the Company's new
Harvey store in Eatontown, New Jersey, opened in April 2001, and additionally
from the maturation of its newest Bang & Olufsen branded store opened in October
2000. The Company continues to experience expanding revenues from the unabated
strong demand for its custom installation services.
Despite increased competition, customer demand continues to be strong for new
digital video products including plasma flat screen, LCD flat panel,
high-definition televisions and related custom home installations. Consumers
have embraced plasma and LCD flat screen technologies. Custom installation
projects continue to increase and accounted for approximately 47% of net sales
for the first quarter of fiscal 2003, as compared to approximately 44% of net
sales for the same quarter last year. Custom installation sales, including both
equipment sales and labor income, increased approximately 12% to $6,119,000 for
the first quarter 2003, as compared to $5,471,000 for the same quarter 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 differentiates itself by offering sophisticated custom installation
services, including programming capabilities that address complex technological
integration issues giving its customers easy remote control operations for a
variety of functions. Management believes installations of complete movie
theaters in the home as well as distributed audio, network cabling and in-home
lighting systems will continue to attract affluent customers to the Company,
which should continue to benefit sales, enhance gross margins and improve
overall store profitability.
The Company's marketing efforts remained significant in the first quarter of
fiscal 2003, which we believe continued to drive sales. These efforts included
radio, newspaper, direct mail and catalog advertisements, and the continued
promotion of the Company's website, www.harveyonline.com. In fiscal 2003, the
Company's advertising expenditures will not be reduced and will be used
primarily for radio, print and direct mail advertising. The Company will
continue to promote its brand and image to both men and women using the new
campaign, launched in November 2002, "Harvey. Extraordinary in Every Way."
Costs and Expenses. Total cost of goods sold for the fourteen weeks ended
February 1, 2003 increased 4.3% to $7,867,000 as compared to the thirteen weeks
ended January 26, 2002. This was primarily due to an increase in sales as noted
above, offset by an increase in the gross profit margin.
The gross profit margin for the fourteen weeks ended February 1, 2001 increased
to 40.1% from 39.3% for the thirteen weeks ended January 26, 2002. The gross
profit margin increased, despite the decreased sales of higher margin audio
products. Audio sales declined to 47.7% of net sales in the first quarter of
fiscal 2003 as compared to 50.3% of net sales for the same quarter last year.
Video sales remained constant at approximately 44% of net sales. The increase in
the gross profit margin was primarily due to a 54% increase in higher margin
custom installation labor income in the first quarter of fiscal 2003 as compared
to the same quarter last year. Labor income represents 8% of net sales for the
first quarter of fiscal 2003 as compared to 5.6% of net sales for the same
quarter last year. Additionally, the Company has been more successful in selling
higher margin extended warranties, as well as furniture, cable and wire and
other high margin accessories in the first quarter of fiscal 2003 as compared to
the same quarter last year.
Selling, general and administrative expenses ("SG&A expenses") increased by
$332,000 or 8% for the fourteen weeks ended February 1, 2003 as compared to the
thirteen weeks ended January 26, 2002. Comparable SG&A expenses increased by
approximately $110,000 or approximately 2.6% for the first quarter of fiscal
2003 as compared to the same quarter last year.
Comparable SG&A expenses increased from additional payroll and payroll related
costs, occupancy costs, professional fees, insurance expense and various other
store operating expenses, offset by a decrease in advertising expense,
depreciation and amortization, credit card fees and investor relations expense.
The Company will continue to hire additional custom installation personnel and
incur the necessary associated expenses relating to the expansion of its custom
installation services. These services differentiate Harvey and are vital to the
Company's business plan.
Interest expense increased by approximately $2,000 or 2.3% for the fourteen
weeks ended February 1, 2003, as compared to the thirteen weeks ended January
26, 2002.
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 pre-organization net operating loss carryforward. This requirement applies
despite the fact that the Company's pre-organization 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 or reorganization value in excess of amounts allocable to
identifiable assets until exhausted, and thereafter as a direct addition to
paid-in capital.
As noted above, in the first quarter of fiscal 2003 and fiscal 2002, the income
tax equivalent provision and the reduction of reorganization value in excess of
amounts allocable to identifiable assets was $277,000 and $250,000,
respectively. The income tax equivalent provisions will not require the use of
the Company's cash.
Liquidity and Capital Resources
At February 1, 2003 and October 26, 2002, the Company's ratio of current assets
to current liabilities was 1.02 and .93, respectively. The Company had negative
working capital of $600,000 at October 26, 2002. However, it is important to
note that at February 1, 2003 and October 26, 2002, the Company's outstanding
balances on its Credit Facility ($2,781,000 and $3,119,000, respectively) were
classified as current liabilities, despite the initial 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 improvement in the working capital ratio at February 1, 2003 was positively
impacted by the Company's first quarter pre-tax income.
Net cash provided by operating activities was $500,000 for the fourteen weeks
ended February 1, 2003, as compared to $320,000 for the thirteen weeks ended
January 26, 2002. The primary reason for the increase in cash provided from
operating activities for the first quarter of fiscal 2003 was due to the
improvement in pre-tax income and the increase in custom deposits and accrued
expenses and other current liabilities.
Net cash used in investing activities was $109,000 for the first quarter of
fiscal 2003, as compared to cash used of $23,000 for the same quarter last year.
Net cash used for the purchases of property, equipment and website assets was
$109,000 as compared to $23,000 for the prior year's quarter.
Net cash used in financing activities was $390,000 for the first quarter of
fiscal 2003, as compared to $307,000 for the same quarter last year. Financing
activities for the first quarter of fiscal 2003 included net payments of
$338,000, reducing the revolving line of credit facility, preferred stock
dividends paid of $35,000 and principal payments on capital leases of $16,000.
Financing activities for the first quarter of fiscal 2002 included net payments
of $232,000, reducing the revolving line of credit facility, preferred stock
dividends paid of $37,000, principal payments on capital leases of $27,000 and
notes payable payments of $11,000.
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
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 2003. At March 11, 2003, there was approximately $2,729,000 in
outstanding borrowings under the Credit Facility, with approximately $2,581,000
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 30,
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 Warrants will expire on March 30, 2003.
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 fiscal 2002, 48 shares
of Preferred Stock were converted to 38,920 shares of the Company's common stock
by a preferred shareholder. At February 1, 2003, 827 shares of Preferred Stock
were issued and outstanding which are convertible into 670,559 shares of common
stock.
The Company's expansion plan, if any, for fiscal 2003 and fiscal 2004 has not
been developed at this time, as the economic outlook remains uncertain. The
Company will, however, make improvements to certain of its Harvey retail
showrooms, including additional renovations at its Paramus, New Jersey store and
the installation of total movie theaters within certain of its stores.
Miscellaneous purchases of equipment and other assets for fiscal 2003 are not
expected to be significant.
The Company intends to continue its advertising campaign in fiscal 2003,
primarily with print, radio and direct mail.
The Company's website gives its 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 2003.
Net sales and operating results for the Company's first quarter of its fiscal
year are positively affected by a strong holiday demand.
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.
Item 4. Disclosure Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Within 90 days prior to the date of the filing of this quarterly report on
Form10-Q, the Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the President and the
Chief Financial Officer, of the effectiveness of the design and operation of the
disclosure controls and procedures, as defined in Rules 13a-14 and 15d-14 under
the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that
evaluation, the Company's President and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective in ensuring that
material information relating to Harvey Electronics, Inc., required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, including
ensuring that such material information is accumulated and communicated to the
Company's management, including the Company's president and chief financial
officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's internal controls
subsequent to the date of the Company's evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION:
Items 1, 2, 3, 4 and 5 were not applicable in the first quarter ended February
1, 2003.
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 first quarter of fiscal 2003.
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 March 18, 2003.
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, President of Harvey Electronics, Inc, (the "Registrant")
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harvey the
Registrant.;
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.
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is disclosed,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) any significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2003
/s/ Franklin C. Karp
--------------------
President
I, Joseph J. Calabrese, Executive Vice President, Chief Financial Officer,
Treasurer & Secretary of Harvey Electronics, Inc., (the "Registrant"), certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Harvey the
Registrant.;
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;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, is disclosed,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) any significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2003
/s/ Joseph J. Calabrese
-----------------------
Executive Vice President, Chief
Financial Officer, Treasurer &
Secretary