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 August 2, 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 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
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(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 September 12, 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) - Forty and Thirty-nine weeks
ended August 2, 2003 and July 27, 2002 and Thirteen Weeks ended
August 2, 2003 and July 27, 2002 .........................................................3
Balance Sheets - August 2, 2003 (Unaudited) and October 26,
2002....................................................................................4
Statement of Shareholders' Equity (Unaudited) - Forty weeks
ended August 2, 2003 ..................................................................5
Statements of Cash Flows (Unaudited) - Forty and Thirty-nine weeks
ended August 2, 2003 and July 27,
2002....................................................................................6
Notes to Financial Statements (Unaudited).................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................................15
Item 4. Disclosure Controls and Procedures........................................................21
PART II. Other Information
Item 1. Legal Matters.............................................................................22
Item 2. Changes in Securities and Use of Proceeds.................................................23
Item 4. Submission of Matters to a Vote of Security Holders.......................................23
Item 6. Exhibits and Reports on Form 8-K..........................................................24
Signatures .............................................................................................25
Exhibit Number 31.1.....................................................................................26
Exhibit Number 31.2.....................................................................................28
Exhibit Number 32.1.....................................................................................30
Exhibit Number 32.2.....................................................................................31
Part I Financial Information
Item I. Financial Statements
Harvey Electronics, Inc.
Statements Of Operations
(Unaudited)
Forty Weeks Thirty-nine Weeks Thirteen Weeks Thirteen Weeks
Ended Ended Ended Ended
August 2, July 27 August 2, July 27,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 33,209,978 $ 32,367,755 $ 10,068,045 $ 9,583,471
Interest and other income 56,702 86,437 6,000 64,496
------ ------ ----- ------
33,266,680 32,454,192 10,074,045 9,647,967
---------- ---------- ---------- ---------
Cost of sales 19,799,200 19,587,893 5,922,582 5,794,457
Selling, general and administrative expenses 12,568,874 11,937,467 4,040,631 3,894,149
Interest expense 263,197 253,698 87,429 85,284
------- ------- ------ ------
32,631,271 31,779,058 10,050,642 9,773,890
---------- ---------- ---------- ---------
Income (loss) before income taxes (benefit) 635,409 675,134 23,403 (125,923)
Income taxes (benefit) 250,000 275,000 10,000 (45,000)
------- ------- ------ -------
Net income (loss) 385,409 400,134 13,403 (80,923)
Preferred Stock dividend requirement 52,722 55,212 17,574 18,024
------ ------ ------ ------
Net income (loss) applicable to Common Stock $ 332,687 $ 344,922 ($ 4,171) ($ 98,947)
============ ============ ============ ============
Net income (loss) per share applicable to
common shareholders:
Basic $ 0.10 $ 0.10 ($ 0.00) ($ 0.03)
============ ============ ============ ============
Diluted $ 0.08 $ 0.08 ($ 0.00) ($ 0.03)
============ ============ ============ ============
Shares used in the calculation of net income (loss)
per common share:
Basic 3,324,525 3,289,200 3,324,525 3,301,739
========= ========= ========= =========
Diluted 4,036,265 4,081,100 3,324,525 3,301,739
========= ========= ========= =========
See accompanying notes to financial statements.
Harvey Electronics, Inc.
Balance Sheets
August 2, October 26,
2003 2002(1)
Assets (Unaudited)
Current assets: ----------- ----------
Cash and cash equivalents $18,989 $15,990
Accounts receivable, less allowance of $20,000 and $20,000 853,855 634,663
Inventories 7,043,145 6,804,161
Prepaid expenses and other current assets 240,184 212,692
------- -------
Total current assets 8,156,173 7,667,506
Property and equipment:
Leasehold improvements 3,473,967 3,363,928
Furniture, fixtures and equipment 2,065,024 1,941,765
Internet website 456,870 441,670
------- -------
5,995,861 5,747,363
Less accumulated depreciation and amortization 3,239,329 2,730,164
--------- ---------
2,756,532 3,017,199
Equipment under capital leases, less accummulated amortization
of $383,469 and $382,537 14,352 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 $378,023 736,440 986,440
Other assets, less accumulated amortization of $229,400 and $183,794 262,794 293,297
------- -------
Total assets $12,051,291 $12,151,465
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Revolving line of credit facility $2,657,652 $3,119,493
Trade accounts payable 1,908,012 2,274,833
Customer deposits 1,794,657 1,484,237
Accrued expenses and other current liabilities 1,359,277 1,293,207
Income taxes 37,741 50,200
Cumulative Preferred Stock dividends payable 5,859 23,432
Current portion of capital lease obligations 2,135 22,420
----- ------
Total current liabilities 7,765,333 8,267,822
Deferred rent 225,243 155,615
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 (3,953,817) (4,286,504)
---------- ----------
Total shareholders' equity 4,060,715 3,728,028
--------- ---------
Total liabilities and shareholders' equity $12,051,291 $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)
Additional Total
Preferred Stock Common Stock Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
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 forty
week period -- -- -- -- -- 385,409 385,409
Preferred Stock dividend -- -- -- -- -- (52,722) (52,722)
-----------------------------------------------------------------------------------
Balance at August 2, 2003 827 $ 379,982 3,324,525 $ 33,245 $ 7,601,305 ($3,953,817) $ 4,060,715
===================================================================================
See accompanying notes to financial statements.
Harvey Electronics, Inc
Statements of Cash Flows
(Unaudited)
Forty Weeks Thirty-nine Weeks
Ended Ended
August 2, July 27,
2003 2002
Operating activities -----------------------------
Net income $ 385,409 $ 400,134
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 580,142 697,179
Income tax equivalent provision 250,000 275,000
Straight-line impact of rent escalations 69,628 4,572
Miscellaneous (14,128) (11,678)
Changes in operating assets and liabilities:
Accounts receivable (219,192) 80,956
Inventories (200,424) (408,085)
Prepaid expenses and other current assets 62,255 (31,466)
Trade accounts payable (366,821) (467,003)
Customer deposits 310,420 (205,312)
Accrued expenses, other current liabilities
and income taxes (36,136) 67,545
------- ------
Net cash provided by operating activities 821,153 401,842
------- -------
Investing activities
Purchases of property and equipment excluding
Internet website development (249,558) (71,423)
Internet website development (15,200) (6,040)
Purchases of other assets (975) (9,140)
Security deposits-net -- 11,935
------- ------
Net cash used in investing activities (265,733) (74,668)
-------- -------
Financing activities
Net payments from revolving credit facility (461,841) (181,016)
Preferred Stock dividends paid (70,295) (74,151)
Principal payments on note payable -- (21,985)
Principal payments on capital lease obligations (20,285) (62,869)
------- -------
Net cash used in financing activities (552,421) (340,021)
-------- --------
Increase (decrease) in cash and cash equivalents 2,999 (12,847)
Cash and cash equivalents at beginning of period 15,990 28,336
------ ------
Cash and cash equivalents at end of period $ 18,989 $ 15,489
========= =========
Supplemental cash flow information:
Interest paid $ 251,000 $ 282,000
========= =========
Taxes paid $ 12,000 $ 5,000
========= =========
See accompanying notes to financial statements.
Harvey Electronics, Inc.
Notes to Financial Statements
August 2, 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 forty week period ended August 2, 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 August 2,
2003 was $2,658,000 and is presented as a current liability as the Credit
Facility expires November 30, 2003. The balance outstanding on the Credit
Facility at October 26, 2002 was 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 Credit Facility.
The Company is currently negotiating a three-year extension of this Credit
Facility with Wells Fargo and is also considering several proposals from other
lenders for a new revolving line of credit facility. Management believes that
the Company's existing Credit Facility will either be extended or replaced with
a new lender, prior to November 30, 2003, the expiration date of the existing
facility. However there can be no assurance of this extension or replacement.
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 August 2, 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), which is being amortized over a three-year period (the remaining book
value is included in Other Assets in the accompanying balance sheets).
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 forty and thirty-nine weeks ended August 2, 2003 and July 27, 2002 was
$500,000 and $550,000, respectively. Advertising expense for the third quarter
of fiscal 2003 and 2002 was $100,000 and $100,000, respectively.
4. Income (Loss) Per Share
Basic and diluted income or loss per share are calculated in accordance with
SFAS No. 128, "Earnings Per Share". The basic and diluted income per common
share for the forty and thirty-nine weeks ended August 2, 2003 and July 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 37,139 and 93,313, 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 loss per share for the third quarter of 2003 and 2002 was
computed based on the weighted average number of common shares outstanding. 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 third quarter ended August 2, 2003 and July 27, 2002 as
their effect was anti-dilutive. No other options or warrants were included for
the third 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 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 forty and thirty-nine
weeks ended August 2, 2003 and July 27, 2002, respectively. For the third
quarter of fiscal 2003 and 2002, no common equivalent shares 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 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 forty and thirty-nine weeks ended August 2, 2003 and July 27, 2002, the
income tax equivalent provision and the associated reduction of reorganization
value in excess of amounts allocable to identifiable assets amounted to $250,000
(39.3% effective tax rate) and $275,000 (40.7% effective tax rate),
respectively. For the third quarter of fiscal 2003, the Company recorded an
income tax equivalent provision of $10,000 (42.7% effective tax rate) as
compared to an income tax equivalent benefit of $45,000 (35.7% effective tax
benefit) 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:
Forty Weeks Thirty-nine Weeks
Ended August 2, 2003 Ended July 27, 2002
-------------------- -------------------
Net Income applicable to Common Stock $332,687 $344,922
Add back goodwill amortization - 45,000
-------- --------
Adjusted net income $332,687 $389,922
======== ========
Diluted net income per share:
Net income $ .08 $ .08
Goodwill amortization - .01
-------- ---------
Adjusted diluted net income
per share $ .08 $ .09
========= =========
Three Months Ended Three Months Ended
August 2, 2003 July 27, 2002
------------------ ------------------
Net loss applicable to Common Stock $( 4,171) $(98,947)
Add back goodwill amortization - 15,000
---------- ---------
Adjusted net loss $( 4,171) $(83,947)
========== =========
Diluted net loss per share:
Net loss $ - $ (.03)
Goodwill amortization - -
---------- ---------
Adjusted diluted net loss per share $ - $ (.03)
=== =========
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.
SFAS No. 146 did not have an 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 (loss) 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:
Forty Weeks Thirty-Nine Weeks Thirteen Weeks Thirteen Weeks
Ended Ended Ended Ended
August 2, 2003 July 27, 2002 August 2, 2003 July 27, 2002
-------------- ------------- -------------- -------------
Net income (loss) applicable to
common stock $332,687 $344,922 $( 4,171) $(98,947)
Less compensation expense
determined under the fair value
method - (170,000) - (56,500)
-------------------- ------------------- -------------------- --------------------
Adjusted net income (loss) $332,687 $174,922 $( 4,171) $(155,447)
==================== =================== ==================== ====================
Net income (loss) per share applicable to common stock:
Basic $.10 $.10 $ - $(.03)
Less compensation expense
determined under the fair value
method - (.05) - (.02)
-------------------- ------------------- -------------------- --------------------
Adjusted basic net income (loss)
per share $.10 $.05 $ - $(.05)
==================== =================== ==================== ====================
Net income (loss) per share applicable to common stock:
Diluted $.08 $.08 $ - $(.03)
Less compensation expense
determined under the fair value
method - (.04) - (.02)
-------------------- ------------------- -------------------- --------------------
Adjusted diluted net income
(loss) per share $.08 $.04 $ - $(.05)
==================== =================== ==================== ====================
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.
7. Inventories
Inventories have been valued at average cost, based upon gross profit
percentages applied to sales.
8. Other
In July 2003, the Company received a notice and information request from the
Pennsylvania Department of Environmental Protection ("PADEP"). The notice stated
that PADEP considers the Company a potentially responsible party for
contamination related to a septic drain field located at a former Chem Fab
Corporation ("Chem Fab") site in Doylestown, Pennsylvania.
PADEP's notice stated that if Chem Fab was previously owned by Harvey Radio,
Inc. ("Harvey Radio") and if the Company was a successor to Harvey Radio, then
the Company could be, in part, responsible for any environmental investigation
or clean up actions necessary at this site.
Harvey Radio was the predecessor of The Harvey Group, Inc. ("Harvey Group"),
which filed for relief under Chapter 11 of the United States Bankruptcy Code in
August 1995. The Company is the surviving retail business of the Harvey Group,
which emerged from bankruptcy in December 1996. Chem Fab was a wholly-owned
subsidiary of Harvey Radio as of September 1967. The capital stock of Chem Fab
(a then wholly-owned subsidiary of Harvey Group) was sold by the Company to the
Boarhead Corporation in January 1978. The disposition of Chem Fab was prior in
time to the Company's bankruptcy petition date of August 3, 1995.
On August 29, 2003, the Company sent its response letter to PADEP. The Company's
response stated that any action by PADEP to recover any money from the Company
relating to any environmental investigation or cleanup related to Chem Fab is in
violation of the injunctions imposed by virtue of the Company's 1995 Bankruptcy
proceeding. The response letter to PADEP specifically referred to two cases with
respect to entities subject to a discharge in bankruptcy by the Southern
District of New York and the Second Circuit Court of Appeals. These cases may
support the Company's position enjoining any further action against the Company.
The Company believes PADEP's claim, even absent the bankruptcy injunction, would
be improper against the Company, as Harvey Group was a shareholder of Chem Fab
and Chem Fab's capital stock was sold in 1978, as previously stated.
The Company advised PADEP that any further action to pursue a claim against the
Company would result in the Company bringing a motion to reopen its bankruptcy
case, solely to address the PADEP claim and further, the Company would commence
contempt proceedings against PADEP. The Company is awaiting PADEP's response.
The Company has also retained special Pennsylvania environmental counsel for
advice with respect to PADEP's request for information and other matters with
respect to the claim.
Furthermore, the number of other parties that may be responsible, their ability
to share in the cost of a clean up and whether the Company's existing or prior
insurance policies provide coverage for this matter is not known. At this time,
it is impossible for the Company to determine the outcome or cost to the Company
of this matter.
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.
Forty and Thirteen Weeks Ended August 2, 2003 as Compared to Thirty-Nine and
Thirteen Weeks Ended July 27, 2002
Net Income. The Company's pre-tax income for the forty weeks ended August 2,
2003 was $635,000 as compared to $675,000 for the thirty-nine weeks ended July
27, 2002. Earnings before interest, taxes, depreciation and amortization
("EBITDA") was $1,479,000 for the forty weeks ended August 2, 2003 as compared
to EBITDA of $1,626,000 for the thirty-nine weeks ended July 27, 2002. Net
income for the forty weeks ended August 2, 2003 was $385,000 as compared to net
income of $400,000 for the thirty-nine weeks ended July 27, 2002.
The Company's pre-tax income for the third quarter of fiscal 2003 was $23,000 as
compared to a pre-tax loss of $126,000 for the same quarter last year. EBITDA
for the third quarter of fiscal 2003 increased to $303,000 as compared to EBITDA
of $189,000 for the same quarter last year. Net income for the third quarter of
fiscal 2003 was $13,000 as compared to a net loss of $81,000 for the same
quarter last year.
The Company's pre-tax profit and EBITDA for the forty weeks ended August 2, 2003
were reduced by the results of its second quarter, which management believes
were 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 forty and thirteen weeks ended August 2, 2003 was also reduced by
expenses of approximately $182,000 and $58,000, respectively, relating to
Company's website. Net income or loss for the thirty-nine and thirteen weeks
ended July 27, 2002 was reduced by expenses of approximately $169,000 and
$71,000, respectively, relating to the Company's website.
The Company's net income for the first nine months of fiscal 2003 and 2002
included net advertising expense of $500,000 and $550,000, respectively. Net
income for the third quarter of fiscal 2003 included net advertising expense of
$100,000 as compared to $100,000 for the same quarter last year.
Results of operations for the first nine months of fiscal 2003 and 2002,
included depreciation and amortization expense of $580,000 and $697,000,
respectively.
For the forty and thirty-nine weeks ended August 2, 2003 and July 27, 2002, the
income tax equivalent provision, recorded by the Company was $250,000 (39.3%
effective tax rate) and $275,000 (40.7% effective tax rate), respectively. In
the third quarter of fiscal 2003, the Company recorded an income tax equivalent
provision of $10,000 (42.7% effective tax rate) as compared to an income tax
equivalent benefit of $45,000 (35.7% effective tax benefit) in the same quarter
of fiscal 2002.
Revenues. For the forty weeks ended August 2, 2002, net sales aggregated
$33,210,000, an increase of $842,000 or approximately 2.6% from the thirty-nine
weeks ended July 27, 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 nine months were approximately flat with
the same period last year.
For the third quarter ended August 2, 2003, net sales and comparable store sales
aggregated $10,068,000, a strong increase of $485,000 or approximately 5.1% from
the same quarter last year.
The Company believes its positive sales results for the third quarter and nine
months ended August 2, 2003 compare favorably to other reporting consumer
electronics specialty retailers in the industry. The Company also believes its
overall sales results were negatively impacted by 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 as well as DLP
televisions. Custom installation projects continue to increase and accounted for
approximately 54% of net sales for the first nine months of fiscal 2003, as
compared to approximately 50% of net sales for the same period last year. Custom
installation sales, including both equipment sales and labor income, increased
approximately 10.5% to approximately $18 million for the first nine months of
2003, as compared to approximately $16.3 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 for the first nine months
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 forty weeks ended August 2,
2003 increased $211,000 or 1.1% from the thirty-nine week period ended July 27,
2002. This was primarily related to the increase in sales as noted above and
offset by an increase in the gross margin. Cost of goods sold for the third
quarter of fiscal 2003 increased $128,000 or 2.2% from the same quarter last
year. This primarily related to the increase in sales for the quarter as noted
above and offset by an increase in the gross margin.
The gross profit margin for the first nine months of fiscal 2003 increased to
40.4% from 39.5% for the same period last year. The gross profit margin for the
third quarter of fiscal 2003 increased to 41.2% from 39.5% for the same quarter
last year. The gross profit margin improved despite the decreased sales of
higher margin audio products. Audio sales accounted for 46.6% of net sales for
the first nine months of fiscal 2003 as compared to 49.6% of net sales for the
same period last year. For the third quarter of fiscal 2003, audio sales
accounted for 47.2% of net sales as compared to 49.9% 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 previously mentioned. For the first nine months of
fiscal 2003, video sales accounted for 44.9% of net sales as compared to 42.9%
of net sales for the same period last year. For the third quarter of fiscal
2003, video sales accounted for 44.3% of net sales as compared to 40.9% for the
same quarter last year.
Custom installation labor income represented 8.5% of net sales for the first
nine months of fiscal 2003 as compared to 7.5% for the same period last year.
For the third quarter, labor income represented 8.5% of net sales as compared to
9.2% 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 forty
weeks ended August 2, 2003 increased by $631,000 or 5.3% from the thirty-nine
weeks ended July 27, 2002. SG&A expenses for the third quarter of fiscal 2003
increased $146,000 or 3.8% from the same quarter last year.
Comparable SG&A expenses for the first nine months of fiscal 2003 increased by
$409,000 or 3.4% from the same period last year. Comparable SG&A expenses for
the third quarter of fiscal 2003 increased $146,000 or 3.8% 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 management incentive bonuses,
advertising expense, depreciation and amortization and investor relations
expense.
The Company plans to hire additional custom installation personnel and incur the
necessary associated expenses relating to the expansion of its custom
installation services. We believe these services differentiate Harvey and are
vital to the Company's business plan. The Company also anticipates continuing
its significant advertising expenditures for the latter part of fiscal 2003,
which will remain consistent with the prior year.
Interest expense for the forty weeks ended August 2, 2003 increased by $9,000 or
3.7% from the thirty-nine weeks ended July 27, 2002. For the third quarter of
fiscal 2003, interest expense increased by $2,000 or 2.5% 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 nine months of fiscal 2003 and 2002 will not require
the use of the Company's cash.
At August 2, 2003 and October 26, 2002, the Company's ratio of current assets to
current liabilities was 1.05 and .93, respectively. The Company had negative
working capital of $600,000 at October 26, 2002. However, it is important to
note that at August 2, 2003 and October 26, 2002, the Company's outstanding
balances on its Credit Facility ($2,658,000 and $3,119,000, respectively) were
classified as current liabilities, (see Note 2 to the Financial Statements for
details). The improvement in the working capital ratio at August 2, 2003, was
positively impacted by the Company's pre-tax income.
Net cash provided by operating activities was $821,000 for the forty weeks ended
August 2, 2003 as compared to $402,000 for the thirty-nine weeks ended July 27,
2002. The primary reasons for the increase in cash provided from operating
activities for the first nine months of fiscal 2003 was due to an increase in
customer deposits and trade accounts payable and a reduction of inventory,
offset by a reduction of pretax income and an increase in accounts receivable.
Net cash used in investing activities was $266,000 for the first nine-months of
fiscal 2003, as compared to cash used in investing activities of $75,000 for the
same period last year. Net cash used for the purchases of property, equipment
and website assets was $265,000 as compared to $77,000 for the same period last
year.
Net cash used in financing activities was $552,000 for the first nine months of
fiscal 2003, as compared to $340,000 for the same period last year. Financing
activities for the first nine months of fiscal 2003 included net payments of
$462,000, reducing the revolving line of credit facility, preferred stock
dividends paid of $70,000 and principal payments on capital leases of $20,000.
Financing activities for the first nine months of fiscal 2002 included net
payments of $181,000, reducing the revolving line of credit facility, preferred
stock dividends paid of $74,000, principal payments on capital leases of $63,000
and notes payable payments of $22,000.
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 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 September 12, 2003, there was
approximately $2,625,000 in outstanding borrowings under the Credit Facility,
with approximately $3,229,000 available to borrow under the Credit Facility.
The Company is currently negotiating a three-year extension of this Credit
Facility with Wells Fargo and is also considering several proposals from other
lenders for a new revolving line of credit facility. Management believes that
the Company's existing Credit Facility will either be extended or replaced with
a new lender, prior to November 30, 2003, the expiration date of the existing
facility. However there can be no assurance of this extension or replacement.
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 August 2, 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, since we believe the economic outlook, while improving,
still remains uncertain. For the remainder of fiscal 2003 and in fiscal 2004,
the Company plans to 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 its 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 the remainder of 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 or replacement, 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 Form
10 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-15(e) and 15d-15(e)
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 3 and 5 were not applicable in the third quarter ended August 2, 2003.
Item 1. Legal Matters
In July 2003, the Company received a notice and information request from the
Pennsylvania Department of Environmental Protection ("PADEP"). The notice stated
that PADEP considers the Company a potentially responsible party for
contamination related to a septic drain field located at a former Chem Fab
Corporation ("Chem Fab") in Doylestown, Pennsylvania.
PADEP's notice stated that if Chem Fab was previously owned by Harvey Radio,
Inc. ("Harvey Radio") and if the Company was a successor to Harvey Radio, then
the Company could be, in part, responsible for any environmental investigation
or clean up actions necessary at this site.
Harvey Radio was the predecessor of The Harvey Group, Inc. ("Harvey Group"),
which filed for relief under Chapter 11 of the United States Bankruptcy Code in
August 1995. The Company is the surviving retail business of the Harvey Group,
which emerged from bankruptcy in December 1996. Chem Fab was a wholly-owned
subsidiary of Harvey Radio as of September 1967. The capital stock of Chem Fab
(a then wholly-owned subsidiary of Harvey Group) was sold by the Company to the
Boarhead Corporation in January 1978. The disposition of Chem Fab was prior in
time to the Company's bankruptcy petition date of August 3, 1995.
On August 29, 2003, the Company sent its response letter to PADEP. The Company's
response stated that any action by PADEP to recover any money from the Company
relating to any environmental investigation or cleanup related to Chem Fab is in
violation of the injunctions imposed by virtue of the Company's 1995 Bankruptcy
proceeding. The response letter to PADEP specifically referred to two cases,
with respect to entities subject to a discharge in bankruptcy by the Southern
District of New York and the Second Circuit Court of Appeals. These cases may
support the Company's position enjoining any further action against the Company.
The Company believes PADEP's claim, even absent the bankruptcy injunction, would
be improper against the Company, as Harvey Group was a shareholder of Chem Fab
and Chem Fab's capital stock was sold in 1978, as previously stated.
The Company advised PADEP that any further action to pursue a claim against the
Company would result in the Company bringing a motion to reopen its bankruptcy
case, solely to address the PADEP claim and further, the Company would commence
contempt proceedings against PADEP. The Company is awaiting PADEP's response.
The Company has also retained special Pennsylvania environmental counsel for
advice with respect to PADEP's request for information and other matters with
respect to the claim.
Furthermore, the number of other parties that may be responsible, their ability
to share in the cost of a clean up and whether the Company's existing or prior
insurance policies provide coverage for this matter is not known. At this time,
it is impossible for the Company to determine the outcome or cost of the Company
of this matter.
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 4. Submission of Matters to a Vote of Security Holders
On June 27, 2003, the Company's shareholders at an Annual Meeting (i) elected
Franklin C. Karp (3,061,541 shares in favor, 35,979 shares against), Joseph J.
Calabrese (3,061,141, shares in favor, 36,379 against), Michael E. Recca
(3,061,141 shares in favor, 36,379 shares against), Frederic J. Gruder
(3,059,067 shares in favor, 38,453 shares against), Jeffrey A. Wurst (3,061,141
shares in favor, 36,379 shares against), William F. Kenny, III (3,060,741 shares
in favor, 36,779 shares against) and Nicholas A. Marshall (3,059,029 shares in
favor, 38,491 shares against) as directors of the Company and (ii) ratified the
appointment of BDO Seidman, LLP, the Company's independent auditors for the year
ending November 1, 2003 (3,090,296 shares in favor, 1,311 shares against and
5,913 shares abstained).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
Exhibit 31.1 Certification
Exhibit 31.2 Certification
Exhibit 32.1 Certification of Franklin C. Karp, President, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Joseph J. Calabrese, Executive
Vice President, Chief Financial Officer, Treasurer
And Secretary, as adopted pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On July 2, 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 June 27, 2003,
the Board approved Ira Lamel as a new member of the Company's Board of
Directors. Mr. Lamel will serve as independent financial expert on the Company's
Audit Committee. As of June 27, 2003, Mr. Lamel accepted the position.
On July 18, 2003, the Company filed Form 8-K with the Securities and Exchange
Commission announcing that it had received notice dated June 30, 2003 from the
Pennsylvania Department of Environmental Protection ("PADEP"), that under
Pennsylvania State law, PADEP considers the Company a potentially responsible
party for contamination related to a site in Doylestown, Pennsylvania. This
matter has fully been disclosed in the notes to the financial statements, and in
Item 1 above, Legal Matters.
Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on September 16, 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