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 May 3, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
205 Chubb Avenue, Lyndhurst, New Jersey, 07071
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(Address of principal executive offices and zip code)
201-842-0078
(Registrant's telephone number)
Indicate by check mark 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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of The Exchange Act). Yes [ ] No [X]
As of June 17, 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) - Twenty-seven and Twenty-six
weeks ended May 3, 2003 and April 27, 2002 and Thirteen Weeks
ended May 3, 2003 and April 27, 2002....................................................3
Balance Sheets - May 3, 2003 (Unaudited) and October 26,
2002....................................................................................4
Statement of Shareholders' Equity (Unaudited) - Twenty-seven weeks
ended May 3, 2003 .....................................................................5
Statements of Cash Flows (Unaudited) - Twenty-seven and Twenty-six
weeks ended May 3, 2003 and April 27, 2002..............................................6
Notes to Financial Statements (Unaudited).................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................14
Item 4. Disclosure Controls and Procedures.......................................................20
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K.........................................................21
Signatures ............................................................................................22
Part I Financial Information
Item I. Financial Statements
Harvey Electronics, Inc.
Statements Of Operations
(Unaudited)
Twenty-seven Weeks Twenty-six Weeks Thirteen Weeks Thirteen Weeks
Ended Ended Ended Ended
May 3, April 27, May 3, April 27,
2003 2002 2003 2002
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Net sales $23,141,933 $22,784,284 $10,000,140 $10,363,725
Interest and other income 50,702 21,941 40,160 8,575
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23,192,635 22,806,225 10,040,300 10,372,300
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Cost of sales 13,876,617 13,793,436 6,009,148 6,253,237
Selling, general and administrative expenses 8,528,243 8,043,318 4,028,924 3,876,002
Interest expense 175,768 168,414 87,864 82,452
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22,580,628 22,005,168 10,125,936 10,211,691
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Income (loss) before income taxes (benefit) 612,007 801,057 (85,636) 160,609
Income taxes (benefit) 240,000 320,000 (37,000) 70,000
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Net income (loss) 372,007 481,057 (48,636) 90,609
Preferred Stock dividend requirement 35,148 37,188 17,574 18,594
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Net income (loss) applicable to Common Stock $336,859 $443,869 ($66,210) $72,015
===============================================================================
Net income (loss) per share applicable to
common shareholders:
Basic $0.10 $0.14 ($0.02) $0.02
===============================================================================
Diluted $0.08 $0.11 ($0.02) $0.02
===============================================================================
Shares used in the calculation of net
income (loss) per common share:
Basic 3,324,525 3,282,833 3,324,525 3,282,833
===============================================================================
Diluted 4,038,287 4,095,114 3,324,525 3,413,349
===============================================================================
See accompanying notes to financial statements.
Harvey Electronics, Inc.
Balance Sheets
May 3, October 26,
2003 2002(1)
Assets (Unaudited)
-----------------------------------
Current assets:
Cash and cash equivalents $18,988 $15,990
Accounts receivable, less allowance of $20,000 and $20,000 686,621 634,663
Inventories 6,994,390 6,804,161
Prepaid expenses and other current assets 380,644 212,692
-----------------------------------
Total current assets 8,080,643 7,667,506
Property and equipment:
Leasehold improvements 3,447,309 3,363,928
Furniture, fixtures and equipment 2,044,319 1,941,765
Internet website 456,870 441,670
-----------------------------------
5,948,498 5,747,363
Less accumulated depreciation and amortization 3,064,414 2,730,164
-----------------------------------
2,884,084 3,017,199
Equipment under capital leases, less accummulated amortization
of $381,284 and $382,537 16,536 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 $378,023 746,440 986,440
Other assets, less accumulated amortization of $214,198 and $183,794 271,025 293,297
-----------------------------------
Total assets $12,123,728 $12,151,465
===================================
Liabilities and shareholders' equity
Current liabilities:
Revolving line of credit facility $2,612,140 $3,119,493
Trade accounts payable 2,585,787 2,274,833
Customer deposits 1,487,406 1,484,237
Accrued expenses and other current liabilities 1,098,567 1,293,207
Income taxes 48,541 50,200
Cumulative Preferred Stock dividends payable 23,144 23,432
Current portion of capital lease obligations 0 22,420
-----------------------------------
Total current liabilities 7,855,585 8,267,822
Deferred rent 203,256 155,615
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 (3,949,645) (4,286,504)
-----------------------------------
Total shareholders' equity 4,064,887 3,728,028
-----------------------------------
Total liabilities and shareholders' equity $12,123,728 $12,151,465
===================================
(1) The balance sheet as of October 26, 2002 has been derived from the audited
financial statements at that date.
See accompanying notes to financial statements.
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 twenty-seven
week period - - - - - 372,007 372,007
Preferred Stock dividend - - - - - (35,148) (35,148)
------------------------------------------------------------------------------------------------
Balance at May 3, 2003 827 $379,982 3,224,525 $33,245 $7,601,305 ($3,949,645) $4,064,887
===============================================================================================
See accompanying notes to financial statements.
Harvey Electronics, Inc
Statements of Cash Flows
(Unaudited)
Twenty-seven Weeks Twenty-six Weeks
Ended Ended
May 3, April 27,
2003 2002
-------------------------------------------------------
Operating activities
Net income $372,007 $481,057
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 387,841 467,073
Income tax equivalent provision 240,000 320,000
Straight-line impact of rent escalations 47,641 (5,408)
Miscellaneous (8,132) (4,366)
Changes in operating assets and liabilities:
Accounts receivable (51,958) (88,985)
Inventories (151,669) (99,227)
Prepaid expenses and other current assets 33,832 (121,741)
Trade accounts payable 310,954 (784,881)
Customer deposits 3,169 (229,446)
Accrued expenses, other current liabilities
and income taxes (398,083) 305,519
-------------------------------------------------------
Net cash provided by operating activities 785,602 239,595
-------------------------------------------------------
Investing activities
Purchases of property and equipment excluding
Internet website development (202,195) (15,722)
Internet website development (15,200) -
Purchases of other assets - (2,940)
Security deposits-net - 11,935
-------------------------------------------------------
Net cash used in investing activities (217,395) (6,727)
-------------------------------------------------------
Financing activities
Net payments from revolving credit facility (507,353) (151,024)
Preferred Stock dividends paid (35,436) (37,493)
Principal payments on note payable - (10,739)
Principal payments on capital lease obligations (22,420) (45,958)
-------------------------------------------------------
Net cash used in financing activities (565,209) (245,214)
-------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,998 (12,346)
Cash and cash equivalents at beginning of period 15,990 28,336
-------------------------------------------------------
Cash and cash equivalents at end of period $18,988 $15,990
=======================================================
Supplemental cash flow information:
Interest paid $181,000 $192,000
=======================================================
Taxes paid $2,000 $1,000
=======================================================
See accompanying notes to financial statements.
Harvey Electronics, Inc.
Notes to Financial Statements
May 3, 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 twenty-seven week period ended May 3, 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 May 3, 2003
was $2,612,000 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 May 3, 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 twenty-seven and twenty-six weeks ended May 3, 2003 and April 27, 2002 was
$400,000 and $450,000, respectively. Advertising expense for the second quarter
of fiscal 2003 and 2002 was $120,000 and $110,000, 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
twenty-seven and twenty-six weeks ended May 3, 2003 and April 27, 2002 was
computed based on the weighted average number of common shares outstanding. For
these periods, common equivalent shares relating to stock options, aggregating
38,510 and 123,788, 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 for these periods since they
were anti-dilutive.
The basic and diluted income per share for the second quarter of 2003 and 2002
was computed based on the weighted average number of common shares outstanding.
For the second quarter ended April 27, 2002, common equivalent shares relating
to stock options aggregating 130,516 were included in the weighted average
number of common shares outstanding for the diluted earnings per share
computation. No common equivalent shares relating to stock options were included
in the weighted average number of common shares outstanding for the diluted
earnings per share computation for the second quarter ended May 3, 2003 as their
effect was anti-dilutive. No other options or warrants were included for the
second quarter of fiscal 2003 and 2002, 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
twenty-seven and twenty-six weeks ended May 3, 2003 and April 27, 2002,
respectively. For the second quarter of fiscal 2003 and 2002, common equivalent
shares (670,559 and 709,479, respectively) relating to the conversion of the
preferred stock were not included in the weighted average number of common
shares outstanding for the diluted earnings per share computation as their
effect was anti-dilutive.
5. Income Taxes
In connection with the Company's emergence from its reorganization proceeding
under Chapter 11 of the United States Bankruptcy Code on December 26, 1996, the
Company adopted Fresh Start Accounting in accordance with AICPA Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code." Fresh Start Accounting requires that the Company report an
income tax equivalent provision when there is book income and a
pre-reorganization net operating loss carryforward. This requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carryforward will be utilized to reduce the related income tax payable. The
current and any future year benefit arising from utilization of the
pre-reorganization carryforward is not reflected as a reduction of the tax
equivalent provision in determining net income, but instead is recorded first as
a reduction of reorganization value in excess of amounts allocable to
identifiable assets until exhausted and thereafter as a direct addition to
paid-in-capital.
For the twenty-seven and twenty-six weeks ended May 3, 2003 and April 27, 2002,
the income tax equivalent provision and the associated reduction of
reorganization value in excess of amounts allocable to identifiable assets
amounted to $240,000 (39.2% effective tax rate) and $320,000 (40% effective tax
rate), respectively. For the second quarter of fiscal 2003, the Company recorded
an income tax equivalent benefit of $37,000 (43% effective tax benefit) as
compared to an income tax equivalent provision of $70,000 (44% effective tax
rate) in the same quarter of fiscal 2002. The income tax equivalent provisions
will not affect the Company's tax liability and does not require a cash payment.
6. 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 No. 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.
In the second quarter of fiscal 2003, the Company engaged a qualified
independent firm, to perform a valuation of the Company and to prepare the
necessary goodwill impairment analysis. After completion, this independent firm
found no impairment of the Company's goodwill and other intangible asset,
reorganization value in excess of amounts allocable to identifiable assets.
Goodwill and this other intangible asset will be tested annually to identify if
impairment has occurred.
With the adoption of SFAS No. 142, the Company ceased amortization of goodwill
as of October 27, 2002. The following table presents the effect of adoption of
SFAS No. 142 on the reported net income or loss of the Company on a comparable
basis:
Twenty-Seven Weeks Twenty-Six Weeks
Ended May 3, 2003 Ended April 27, 2002
----------------- --------------------
Net Income applicable to Common Stock $336,859 $443,869
Add back goodwill amortization - 30,000
-------- --------
Adjusted net income $336,859 $473,869
======== ========
Diluted net income per share:
Net income $ .08 $ .11
Goodwill amortization - .01
-------- ---------
Adjusted diluted net income
per share $ .08 $ .12
======== =========
Three Months Ended Three Months Ended
May 3, 2003 April 27, 2002
-------------------------------------------------
Net (loss) income applicable to Common Stock $(66,210) $72,015
Add back goodwill amortization - 15,000
--------- ------
Adjusted net (loss) income $(66,210) $87,015
========= ======
Diluted net (loss) income per share:
Net (loss) income $ ( .02) $ .02
Goodwill amortization - -
------ -----
Adjusted diluted net (loss) income
per share $ ( .02) $ .02
====== ====
In June 2002, the Financial Accounting Standards Board finalized SFAS No. 146
"Accounting for the Costs Associated with Exit or Disposal Activities", which
requires the Company to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The provisions of SFAS No. 146 are to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
It is anticipated that the financial impact of SFAS No. 146 will not have a
material effect on the Company.
The Company applies the intrinsic-value based method of accounting prescribed by
Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, in accounting for its stock-based
compensation plans and accordingly, no compensation cost has been recognized for
its stock options in the consolidated financial statements. The Company has
elected not to implement the fair value based accounting method for employee
stock options under SFAS No. 123, "Accounting for Stock-Based Compensation", but
has elected to disclose the pro forma net income per share for employee stock
option grants made beginning in fiscal 1997 as if such method had been used to
account for stock-based compensation costs described in SFAS No. 148 "Accounting
for Stock Based Compensation-Transition and Disclosure", an amendment of SFAS
No. 123.
The following table illustrates the effects on net income or loss and per share
data as if the Company had applied the fair value recognition provisions of SFAS
No. 123 to its stock based incentive plans:
Twenty-Seven Twenty-Six Thirteen Weeks Thirteen Weeks
Weeks Ended Weeks Ended Ended Ended
May 3, 2003 April 27, 2002 May 3, 2003 April 27, 2002
----------- -------------- ----------- --------------
Net income (loss)
applicable to common stock $ 336,859 $ 443,869 $ (66,210) $ 72,015
Less compensation expense
determined under the fair
value method -- (113,000) -- (56,500)
----------- ----------- ---------- ----------
Adjusted net income (loss) $ 336,859 $ 330,869 $ (66,210) $ 15,515
=========== =========== ========== ==========
Net income (loss) per share
applicable to common stock:
Basic $ .10 $ .14 $ (.02) $ .02
Less compensation expense
determined under the fair
value method -- (.03) -- (.02)
----------- ----------- ---------- ----------
Adjusted basic net income
(loss) per share $ .10 $ .11 $ (.02) $ -
=========== =========== ========== ==========
Net income (loss) per share
applicable to common stock:
Diluted $ .08 $ .11 $ (.02) $ .02
Less compensation expense
determined under the fair
value method -- (.03) -- (.02)
----------- ----------- ---------- ----------
Adjusted diluted net income
(loss) per share $ .08 $ .08 $ (.02) $ -
=========== =========== ========== ==========
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),"Consolidation
of Variable Interest Entities" with the objective of improving financial
reporting by companies involved with variable interest entities. A variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
Historically, entities generally were not consolidated unless the entity was
controlled through voting interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
company that consolidates a variable interest entity is called the "primary
beneficiary" of that entity. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after June 15, 2003. The
consolidation requirements of FIN 46 apply to existing entities in the first
fiscal year or interim period after June 15, 2003, regardless of when the
variable interest entity was established. The Company has evaluated the
accounting provisions of the interpretations and there was no material impact on
the financial condition, results of operations or cash flows for the
twenty-seven and thirteen weeks ended May 3, 2003, because the Company does not
have any variable interest entities.
In April 2003, the FASB issued SFAS No. 149, an amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
This statement is effective for contracts entered into or modified after June
30, 2003. The Company currently does not have derivative instruments, therefore
this statement will not effect the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003 and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The statement is to be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the period of adoption. Management does not
believe this statement will have a material impact 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
included fourteen weeks as compared to thirteen weeks for the first quarter of
fiscal 2002.
Twenty-Seven and Thirteen Weeks Ended May 3, 2003 as Compared to Twenty-Six and
Thirteen Weeks Ended April 27, 2002
Net Income. The Company's pre-tax income for the twenty-seven weeks ended May 3,
2003 was $612,000 as compared to $801,000 for the twenty-six weeks ended April
27, 2002. Earnings before interest, taxes, depreciation and amortization
("EBITDA") was $1,176,000 for the twenty-seven weeks ended May 3, 2003 as
compared to EBITDA of $1,437,000 for the twenty-six weeks ended April 27, 2002.
Net income for the twenty-seven weeks ended May 3, 2003 was $372,000 as compared
to net income of $481,000 for the twenty-six weeks ended April 27, 2002.
The Company's pre-tax loss for the second quarter of fiscal 2003 was $86,000 as
compared to pre-tax income of $161,000 for the same quarter last year. EBITDA
for the second quarter of fiscal 2003 was $199,000 as compared to EBITDA of
$477,000 for the same quarter last year. The net loss for the second quarter of
fiscal 2003 was $49,000 as compared to a net profit of $91,000 for the same
quarter last year.
Management believes the Company's pre-tax loss and EBITDA for the second quarter
of 2003 was negatively impacted by restrained consumer spending prior to and
during the Iraq war as well as extreme winter weather conditions in the
Northeast.
Net income for twenty-seven and thirteen weeks ended May 3, 2003 was also
reduced by operating losses of approximately $125,000 and $60,000, respectively,
relating to Company's website. Net income for the twenty-six and thirteen weeks
ended April 27, 2002 was reduced by operating losses of approximately $150,000
and $80,000, respectively, 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 half of fiscal 2003 and 2002, included
net advertising expense of $400,000 and $450,000, respectively. The net loss for
the second quarter of fiscal 2003 included net advertising expense of $120,000
as compared to $110,000 for the same quarter last year.
Results of operations for the first half of fiscal 2003 and 2002, included
depreciation and amortization expense of $388,000 and $467,000, respectively.
For the twenty-seven and twenty-six weeks ended May 3, 2003 and April 27, 2002,
the income tax equivalent provision, recorded by the Company was $240,000 (39.2%
effective tax rate) and $320,000 (40% effective tax rate), respectively. In the
second quarter of fiscal 2003, the Company recorded an income tax equivalent
benefit of $37,000 (43% effective tax benefit) as compared to an income tax
equivalent provision of $70,000 (44% effective tax rate) in the same quarter of
fiscal 2002.
Revenues. For the twenty-seven weeks ended May 3, 2002, net sales aggregated
$23,142,000, an increase of $358,000 or approximately 1.6% from the twenty-six
weeks ended April 26 2002. It is important to note that the Company's fiscal
year for 2003 will include fifty-three weeks and that the first quarter included
fourteen weeks as compared to thirteen weeks for the same quarter last year.
Comparable store sales for the first half of 2003 decreased by 2.2% from the
same period last year.
For the second quarter of fiscal 2003, net sales and comparable store sales
aggregated $10,000,000, a decrease of $364,000 or approximately 3.5% from the
same quarter last year.
Despite the slight overall decline in comparable store sales, the Company
believes its sales results compare favorably to other reporting consumer
electronics specialty retailers in the industry. The Company believes the
overall 2.2% reduction in comparable store sales were primarily due to the
effect of the Iraq war and extreme weather conditions during the second quarter
and from slower retail traffic during the holiday shopping period.
Overall net sales benefited from the continued growth of the Company's newest
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 53% of net sales
for the first half of fiscal 2003, as compared to approximately 48% of net sales
for the same period last year. Custom installation sales, including both
equipment sales and labor income, increased approximately 11% to approximately
$12.1 million for the first half 2003, as compared to approximately $10.9
million 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 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 and network cabling 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 half 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 twenty-seven weeks ended
May 3, 2003 increased $83,000 or less than 1% from the twenty-six week period
ended April 27, 2002. This was primarily related to the increase in sales as
noted above and from an increase in the gross margin. Cost of goods sold for the
second quarter of fiscal 2003 decreased $244,000 or 3.9% from the same quarter
last year. This primarily related to the decrease in sales for the quarter as
noted above, offset by an increase in the gross margin.
The gross profit margin for the first half of fiscal 2002 increased to 40% from
39.5% for the same period last year. The gross profit margin for the second
quarter of fiscal 2003 increased to 39.9% from 39.7% for the same quarter last
year. The gross profit margin improved despite the decreased sales of higher
margin audio products. Audio sales accounted for 46.4% of net sales in the first
half of fiscal 2003 as compared to 49.5% of net sales for the same period last
year. For the second quarter of fiscal 2003, audio sales accounted for 44.6% of
net sales as compared to 48.4% of net sales for the same quarter last year.
Video sales have steadily been increasing due to strong customer demand for new
digital video products as mentioned above. For the first half of fiscal 2003,
video sales accounted for 45.1% of net sales as compared to 43.7% of net sales
for the same period last year. For the second quarter of fiscal 2003, video
sales accounted for 46.4% of net sales as compared to 43.2% for the same quarter
last year.
Custom installation labor income represented 8.5% of net sales for the first
half of fiscal 2003 as compared to 6.9% for the same period last year. For the
second quarter, labor income represented 9.0% of net sales as compared to 8.4%
for the same quarter last year.
The increase in the gross profit margin is primarily due to an increase in
higher margin custom installation labor income. 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.
Selling, general and administrative expenses ("SG&A expenses") for the
twenty-seven weeks ended May 3, 2003 increased by $485,000 or 6% from the
twenty-six weeks ended April 27, 2002. SG&A expenses for the second quarter of
fiscal 2003 increased $153,000 or 3.9% from the same quarter last year.
Comparable SG&A expenses for the first half of fiscal 2003 increased by $263,000
or 3.3% from the same period last year. Comparable SG&A expenses for the second
quarter of fiscal 2003 increased $153,000 or 3.9% from 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. The Company will also continue its significant
advertising expenditures for the latter part of fiscal 2003, which will remain
consistent with the prior year.
Interest expense for the twenty-seven weeks ended May 3, 2003 increased by
$7,000 or 4.4% from the twenty-six weeks ended April 27, 2002. For the second
quarter of fiscal 2003, interest expense increased by $5,000 or 6.6% from the
same quarter last year.
Liquidity and Capital Resources
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. It is important to note that the income tax equivalent
provisions for the first half of fiscal 2003 and 2002, will not require the use
of the Company's cash.
At May 3, 2003 and October 26, 2002, the Company's ratio of current assets to
current liabilities was 1.03 and .93, respectively. The Company had negative
working capital of $600,000 at October 26, 2002. However, it is important to
note that at May 3, 2003 and October 26, 2002, the Company's outstanding
balances on its Credit Facility ($2,612,000 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 May 3, 2003 was positively
impacted by the Company's first half pre-tax income.
Net cash provided by operating activities was $786,000 for the twenty-seven
weeks ended May 3, 2003 as compared to $240,000 for the twenty-six weeks ended
April 27, 2002. The primary reason for the increase in cash provided from
operating activities for the first half of fiscal 2003 was due to an increase in
trade accounts payable and customer deposits, offset by a reduction of pre-tax
income and accrued expenses and other current liabilities.
Net cash used in investing activities was $217,000 for the first half of fiscal
2003, as compared to cash used in investing activities of $7,000 for the same
period last year. Net cash used for the purchases of property, equipment and
website assets was $217,000 as compared to $16,000 for the same period last
year.
Net cash used in financing activities was $565,000 for the first half of fiscal
2003, as compared to $245,000 for the same period last year. Financing
activities for the first half of fiscal 2003 included net payments of $507,000,
reducing the revolving line of credit facility, preferred stock dividends paid
of $35,000 and principal payments on capital leases of $22,000. Financing
activities for the first half of fiscal 2002 included net payments of $151,000,
reducing the revolving line of credit facility, preferred stock dividends paid
of $37,000, principal payments on capital leases of $46,000 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 June 17, 2003, there was approximately $2,478,000 in
outstanding borrowings under the Credit Facility, with approximately $3,027,000
available to borrow under the Credit Facility. The Company is currently
negotiating a three-year extension of this credit facility with its lender.
There can be no assurance that an extension will be completed with this lender.
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 had 2,104,500 redeemable common stock purchase warrants ("Warrants")
outstanding from its public offering of common stock and Warrants in fiscal
1998. The Warrants expired 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 May 3, 2003, 827 shares of Preferred Stock were
issued and outstanding which are convertible into 670,559 shares of common
stock.
The Company does not plan to add any new retail stores for the remainder of
fiscal 2003. The Company's expansion plan, if any, for fiscal 2004 has not been
developed at this time, as the economic outlook remains uncertain. For the
remainder of fiscal 2003 and in fiscal 2004, the Company will 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 the remainder of 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 (assuming the proposed
extension, as previously discussed is completed), 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, 3, 4 and 5 were not applicable in the second quarter ended May 3, 2003.
Item 2. Changes in Securities and Use of Proceeds
The Company had 2,104,500 redeemable common stock purchase warrants ("Warrants")
outstanding from its public offering of common stock and Warrants in fiscal
1998. The Warrants expired on March 30, 2003. On March 31, 2003 the Company
filed Form 15 with the Securities and Exchange Commission, relating to the
notice of termination of registration under Section 12 (g) of The Securities
Exchange Act of 1934.
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
On May 7, 2003, the Company filed Form 8-K with the Securities and Exchange
Commission announcing it had received notice from NASDAQ that its common stock
failed to maintain a minimum bid price of $1.00 over the previous 30 consecutive
trading days as required by the NASDAQ SmallCap Market. On May 23, 2003, the
Company filed Form 8-K announcing compliance with NASDAQ Listing Qualifications.
On May 15, 2003, the Company filed Form 8-K with The Securities and
Exchange Commission, announcing that the Board of Directors of the Company, in
accordance with its by-laws, approved adding a new member to the Board. On May
7, 2003, the Board approved Nicholas A. Marshall as a new member of the
Company's Board of Directors. As of May 8, 2003, Mr. Marshall accepted the
position. Mr. Marshall will stand for election at the currently planned annual
shareholders meeting.
Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on June 17, 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
CERTIFICATION
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: June 17, 2003
/s/ Franklin C. Karp
--------------------
President
CERTIFICATION
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: June 17, 2003
/s/ Joseph J. Calabrese
-----------------------
Executive Vice President, Chief
Financial Officer, Treasurer &
Secretary