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 January 31, 2004
[ ] 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 March 15, 2004, 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) - Thirteen and Fourteen
Weeks ended January 31, 2004 and February 1, 2003 .................................3
Balance Sheets - January 31, 2004 (Unaudited) and November 1,
2003..................................................................................4
Statement of Shareholders' Equity (Unaudited) - Thirteen Weeks
ended January 31, 2004................................................................5
Statements of Cash Flows (Unaudited) - Thirteen and Fourteen Weeks
ended January 31, 2004 and February 1,
2003..................................................................................6
Notes to Financial Statements (Unaudited)...............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...............................................................12
Item 4. Disclosure Controls and Procedures.....................................................17
PART II. Other Information
Item 1. Legal Matters..........................................................................19
Item 6. Exhibits and Reports on Form 8-K.......................................................21
Signatures ..........................................................................................22
Exhibit Number 31.1..................................................................................23
Exhibit Number 31.2..................................................................................25
Exhibit Number 32.1..................................................................................27
Exhibit Number 32.2..................................................................................28
Part I Financial Information
Item I. Financial Statements
Harvey Electronics, Inc.
Statements Of Operations
(Unaudited)
Thirteen Weeks Fourteen Weeks
Ended Ended
January 31, February 1,
2004 2003
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Net sales $12,395,892 $13,014,583
Interest and other income 4,417 10,542
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12,400,309 13,025,125
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Cost of sales 7,400,494 7,740,259
Selling, general and administrative expenses 4,378,107 4,499,319
Interest expense 51,420 87,904
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11,830,021 12,327,482
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Income before income taxes 570,288 697,643
Income taxes 220,000 277,000
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Net income 350,288 420,643
Preferred Stock dividend requirement 17,574 17,574
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Net income applicable to Common Stock $332,714 $403,069
============================================
Net income per share applicable to common shareholders:
Basic $0.10 $0.12
============================================
Diluted $0.08 $0.10
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Shares used in the calculation of net income per common share:
Basic 3,324,525 3,324,525
============================================
Diluted 4,008,869 4,042,979
============================================
See accompanying notes to financial statements.
Harvey Electronics, Inc.
Balance Sheets
January 31, November 1,
2004 2003 (1)
Assets (Unaudited)
-------------------------------------
Current assets:
Cash and cash equivalents $16,489 $16,000
Accounts receivable, less allowance of $20,000 and $20,000 947,161 751,293
Inventories 7,645,434 7,416,978
Prepaid expenses and other current assets 426,141 177,394
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Total current assets 9,035,225 8,361,665
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Property and equipment:
Leasehold improvements 3,665,144 3,640,023
Furniture, fixtures and equipment 2,135,774 2,103,964
Internet website 456,870 456,870
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6,257,788 6,200,857
Less accumulated depreciation and amortization 3,586,470 3,433,969
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2,671,318 2,766,888
Equipment under capital leases, less accummulated amortization
of $386,416 and $384,706 11,404 13,115
Goodwill 125,000 125,000
Reorganization value in excess of amounts allocable to
identifiable assets 571,440 791,440
Other assets, less accumulated amortization of $254,895 and $248,769 312,244 266,498
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Total assets $12,726,631 $12,324,606
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Liabilities and shareholders' equity
Current liabilities:
Trade accounts payable $2,315,671 $2,280,019
Customer deposits 1,751,346 1,693,263
Accrued expenses and other current liabilities 1,726,912 1,310,278
Income taxes 0 104,500
Cumulative Preferred Stock dividends payable 5,570 23,432
Current portion of capital lease obligations 0 0
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Total current liabilities 5,799,499 5,411,492
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Long-term liabilities:
Revolving line of credit facility 2,394,028 2,725,603
Deferred rent 255,616 242,737
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Total long-term liabilities 2,649,644 2,968,340
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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 (3,737,044) (4,069,758)
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Total shareholders' equity 4,277,488 3,944,774
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Total liabilities and shareholders' equity $12,726,631 $12,324,606
=====================================
(1) Derived from the audited financial statements at November 1, 2003. See
accompanying notes to financial statements.
Harvey Electronics, Inc.
Statement of Shareholders' Equity
(Unaudited)
Additional Total
Preferred Stock Common Stock Paid-in Accumulated Shareholders'
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Shares Amount Shares Amount Capital Deficit Equity
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Balance at November 1, 2003 827 $379,982 3,324,525 $33,245 $7,601,305 $ (4,069,758) $3,944,774
Net income for the period - - - - - 350,288 350,288
Preferred Stock dividend - - - - - (17,574) (17,574)
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Balance at January 31, 2004 827 $379,982 3,324,525 $33,245 $7,601,305 ($3,737,044) $4,277,488
====================================================================================================
See accompanying notes to financial statements.
Harvey Electronics, Inc
Statements of Cash Flows
(Unaudited)
Thirteen Weeks Fourteen Weeks
Ended Ended
January 31, February 1,
2004 2003
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Operating activities
Net income $350,288 $420,643
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 160,338 191,026
Income tax equivalent provision 220,000 277,000
Straight-line impact of rent escalations 12,879 27,005
Miscellaneous 15,628 (5,229)
Changes in operating assets and liabilities:
Accounts receivable (195,868) (185,317)
Inventories (228,456) (167,509)
Prepaid expenses and other current assets 7,354 54,968
Trade accounts payable 35,652 (297,759)
Customer deposits 58,083 165,002
Accrued expenses, other current liabilities
and income taxes 56,033 20,475
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Net cash provided by operating activities 491,931 500,305
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Investing activities
Purchases of property and equipment excluding
Internet website development (56,931) (94,235)
Internet website development 0 (15,200)
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Net cash used in investing activities (56,931) (109,435)
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Financing activities
Net (payments) proceeds from revolving credit facility (331,575) (338,162)
Preferred Stock dividends paid (35,436) (35,436)
Principal payments on capital lease obligations 0 (16,273)
Fees in connection with new credit facility (67,500) -
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Net cash used in financing activities (434,511) (389,871)
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Increase in cash and cash equivalents 489 999
Cash and cash equivalents at beginning of period 16,000 15,990
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Cash and cash equivalents at end of period $16,489 $16,989
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Supplemental cash flow information:
Interest paid $94,000 $103,000
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Taxes paid $111,000 $2,000
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See accompanying notes to financial statements.
Harvey Electronics, Inc.
Notes to Financial Statements
January 31, 2004
(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 2004 is a fifty-two week year. Fiscal 2003 was a fifty-three week year
and, as a result, the first quarter included fourteen weeks as compared to
thirteen weeks for the same quarter this year. Operating results for the
thirteen week period ended January 31, 2004 are not necessarily indicative of
the results that may be expected for the fifty-two weeks ending October 30,
2004. 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 November 1, 2003.
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. Management bases its estimates on certain assumptions,
which they believe are reasonable in the circumstances, and does not believe
that any change in those assumptions would have a significant effect on the
financial position or results of operations. Actual results could differ from
those estimates and assumptions.
Certain items in the 2003 first quarter financial statements have been
reclassified to conform to 2004 first quarter presentation.
Description of Business
The Company is a specialty retailer and custom installer of high quality
audio/video consumer electronics and home theater products in the Metropolitan
New York area. Operations of the Company consist solely of this single segment.
The Company's fiscal year ends the Saturday closest to October 31.
Net sales includes the sale of goods to customers and custom installation
revenue. Retail sales are recorded at the time of the sale to the customer.
Custom installation revenue, which is comprised of both the sale of products and
the labor in connection with the installation of the products, are recorded in
accordance with the provisions of EITF 00-21, "Revenue Arrangements with
Multiple Deliverables". The revenue related to the sale of the products is
recognized when the product is delivered to the customers. The revenue related
to the labor in connection with the installation of the products, is recorded
when the service has been performed.
In addition, the Company sells extended warranty contracts for a third party
provider. The profit on extended warranty sales is considered commission at the
time of sale. The net amount earned on these sales, which is not significant, is
recorded in net sales, in accordance with EITF 99-19, "Reporting Revenue Gross
as a Principal Versus Net as an Agent."
2. New Revolving Line of Credit Facility
On November 21, 2003, the Company entered into a new five-year $7.5 million
credit facility with Webster Business Credit Corporation ("Webster"), a
subsidiary of Connecticut based Webster Bank. This new credit facility replaced
the line of credit facility with Wells Fargo Retail Finance ("Wells Fargo").
Under the new credit facility, the Company can borrow up to $7.5 million based
upon lending formulas calculated on eligible credit card receivables and
inventory, less certain reserves, as defined. The Webster credit facility
expires November 21, 2008.
The interest rate on all borrowings under the new credit facility is 0.25% over
Webster Bank's prime rate (4.25% at January 31, 2004) or LIBOR plus 2.75%, at
the Company's option. The Company agreed to pay Webster a $25,000 commitment
fee, payable in two equal installments of $12,500, on November 21, 2003 and
November 21, 2004, respectively. Under the credit facility, the Company will
also pay Webster a reduced maintenance fee of $1,000 per month and a monthly
unused line fee, as defined in the credit facility. Simultaneously, with the
closing of the Webster credit facility, the Company paid all outstanding amounts
due to Wells Fargo, aggregating $2,504,000, and Wells Fargo's senior security
interest in the Company's assets was terminated.
In connection with the new credit facility, the Company granted Webster a senior
security interest in all of the Company's assets. The credit facility provides
Webster with rights of acceleration upon the occurrence of certain customary
events of default. The Company is restricted from paying dividends on its Common
Stock, retiring or repurchasing its Common Stock and entering into additional
indebtedness (as defined).
Pursuant to the new credit facility, the Company cannot exceed certain advance
rates on eligible inventory and must maintain certain monthly and quarterly
levels of earnings before interest, taxes, depreciation and amortization.
Additionally, the Company's annual capital expenditures cannot exceed a
predetermined amount.
As the new credit facility expires in five years and does not include both a
subjective acceleration clause and a lock box arrangement, in accordance with
EITF 95-22, the Company classified the balance outstanding, at January 31, 2004
($2,394,000), under the new credit facility as a long-term liability.
3. Advertising Expense
In accordance with EITF 02-16, "Accounting by a Customer for Certain
Consideration Received from a Vendor" ("EITF 02-16") which addresses how and
when to reflect consideration received from suppliers in the financial
statements, the Company's advertising expense, net of cooperative advertising
allowances, is charged to operations when the advertising takes place. Net
advertising expense for the thirteen and fourteen weeks ended January 31, 2004
and February 1, 2003 was $205,000 and $280,000, 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
thirteen and fourteen weeks ended January 31, 2004 and February 1, 2003 was
computed based on the weighted average number of common shares outstanding. For
the first quarter of fiscal 2004 and 2003, common equivalent shares relating to
stock options, aggregating 13,785 and 47,895, respectively, were included in the
weighted average number of common shares outstanding for the diluted earnings
per share computation. All other stock options and warrants were not included
since they were anti-dilutive.
The conversion price of the Company's preferred stock is $1.2333. As a result,
common equivalent shares of 670,559 relating to the conversion of the preferred
stock were included in the weighted average number of common shares outstanding
for the diluted earnings per share computation for the first quarter ended
January 31, 2004 and February 1, 2003, respectively.
5. Income Taxes
In connection with the Company's emergence from its reorganization proceeding
under Chapter 11 of the United States Bankruptcy Code on December 26, 1996, the
Company adopted Fresh Start Accounting in accordance with AICPA Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code." Fresh Start Accounting requires that the Company report an
income tax equivalent provision when there is book income and a
pre-reorganization net operating loss carryforward. This requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carryforward will be utilized to reduce the related income tax payable. The
current and any future year benefit arising from utilization of the
pre-reorganization carryforward is not reflected as a reduction of the tax
equivalent provision in determining net income, but instead is recorded first as
a reduction of reorganization value in excess of amounts allocable to
identifiable assets until exhausted and thereafter as a direct addition to
paid-in-capital.
For the thirteen and fourteen weeks ended January 31, 2004 and February 1, 2003,
the income tax equivalent provision and the associated reduction of
reorganization value in excess of amounts allocable to identifiable assets
amounted to $220,000 (38.6% effective tax rate) and $277,000 (39.7% effective
tax rate), respectively. The income tax equivalent provisions will not
materially affect the Company's tax liability.
6. Inventories
Inventories have been valued at average cost, based upon gross profit
percentages applied to net sales.
7. 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. To date, the Company has not received a
response from PADEP.
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 November 1, 2003, and
October 26, 2002, included in the Company's Annual Report on Form 10K. Fiscal
2003 was a fifty-three week year as compared to fifty-two weeks for fiscal 2004.
As a result, the Company's first quarter of fiscal 2004 included thirteen weeks
as compared to fourteen weeks for the first quarter of fiscal 2003.
Thirteen Weeks Ended January 31, 2004 as Compared to Fourteen Weeks Ended
February 1, 2003
Net Income. The Company's pre-tax income for the thirteen weeks ended January
31, 2004 aggregated $570,000, as compared to $698,000 for the fourteen weeks
ended February 1, 2003. Net income for the first quarter of fiscal 2004 was
$350,000 as compared to $421,000 for the same quarter in fiscal 2003.
To supplement the Company's financial statements presented in accordance with
generally accepted accounting principles ("GAAP"), the Company uses non-GAAP
measures of earnings before interest, taxes, depreciation and amortization
("EBITDA"). The Company's Management reviews these non-GAAP measures internally
to evaluate the Company's performance and manage its operations and believes it
is an important measure in evaluating the Company's financial performance. In
addition, since the Company has historically provided non-GAAP results and
guidance to the investment community, the Company believes that the inclusion of
non-GAAP financial measures provides consistent and comparable measures to help
investors understand the Company's current and future operating results.
For the thirteen weeks ended January 31, 2004, EBITDA aggregated $782,000 as
compared to $977,000 for the fourteen weeks ended February 1, 2003. (EBITDA for
the first quarter of fiscal 2004 is calculated as follows: pre-tax income of
$570,000, plus interest of $52,000 and depreciation and amortization of
$160,000. EBITDA for the first quarter of fiscal 2003 is calculated as follows:
pre-tax income of $698,000 plus interest of $88,000 and depreciation and
amortization of $191,000).
The Company's net income for the first quarter of fiscal 2004 includes net
advertising expense of $205,000 as compared to $280,000 for the same quarter
last year. The Company's advertising presence has not materially diminished. The
Company's gross advertising expenditures were approximately $821,000 for the
thirteen weeks ended January 31, 2004 as compared to approximately $930,000 for
the fourteen weeks ended February 1, 2003.
The Company recorded income tax equivalent provisions for the thirteen and
fourteen weeks ended January 31, 2004 and February 1, 2003 of $220,000 (38.6%
effective tax rate) and $277,000 (39.7% effective tax rate), respectively. The
income tax equivalent provisions will not materially affect the Company's tax
liability.
Revenues. Net sales for the thirteen weeks ended January 31, 2004, aggregated
$12,396,000 as compared to $13,015,000 for the fourteen weeks ended February 1,
2003. The first quarter of the prior fiscal year included fourteen weeks. As a
result, comparable store sales for the thirteen weeks ended January 31, 2004,
increased approximately 2% from the same period last year. We believe the
Company's sales results continued to be strong despite a challenging retail
environment and extreme winter weather in the first quarter of fiscal 2004.
The Company's increase in comparable store sales was due primarily to the strong
results of its newly renovated Paramus, New Jersey showroom, its retail store
located within ABC Carpet & Home and its Bang & Olufsen branded store, both
located in lower Manhattan.
The Company continues to experience expanding revenues from the unabated strong
demand for its custom installation services. Additionally, despite increased
competition, customer demand continues to be strong for new digital video
products including plasma flat screen, LCD flat panel, high-definition and DLP
televisions and related custom home installations. Consumers have embraced
plasma and LCD flatscreen technologies as well as DLP televisions. Custom
installation projects continue to increase and accounted for 56% of net sales
for the first quarter of fiscal 2004 as compared to approximately 47% of net
sales for the same quarter last year. Custom installation sales, including both
equipment sales and labor income, increased approximately 13.8% to $6,963,000 in
the first quarter of fiscal 2004, as compared to $6,119,000 for the same quarter
last year The Company's custom installation services yield higher gross profit
margins and stronger net profitability, as compared to normal retail store
sales.
The Company believes it 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. 13
The Company's marketing efforts remained significant for the first quarter of
fiscal 2004, which the Company believes continued to drive sales. These efforts
included radio, newspaper and direct mail advertisements, and the continued
promotion of the Company's website, www.harveyonline.com. For the remainder of
fiscal 2004, the Company anticipates that its advertising expenditures will not
be materially reduced and will be used primarily for radio, print and direct
mail advertising. The Company anticipates that it will continue to promote its
brand and image to both men and women using its campaign, "Harvey. Extraordinary
in Every Way."
For the remainder of fiscal 2004, the Company also will endeavor to put
additional efforts and resources into its important customer relations
management initiatives.
Cost and Expenses. Total cost of goods sold for the thirteen weeks ended January
31, 2004 decreased 4.4% to $7,400,000 as compared to the fourteen weeks ended
February 1, 2003. This was primarily due to the overall decrease in sales as
noted above.
The gross profit margin for the thirteen weeks ended January 31, 2004 decreased
slightly to 40.3% from 40.5% for the fourteen weeks ended February 1, 2003. The
Company's gross profit margin remained relatively stable despite a continuing
shift in business towards video products, which generally have lower margins. We
believe the consumer electronics industry is generally suffering a decline in
gross margin from this shift in business. Video product sales for the first
quarter of fiscal 2004 accounted for approximately 50% of net sales as compared
to approximately 45% of net sales for the same quarter last year. Audio sales
for the first quarter of fiscal 2004 declined to approximately 44% of net sales
from approximately 48% of net sales for the same quarter last year. Labor income
for the first quarter of fiscal 2004 represented approximately 7.6% of net sales
as compared to approximately 8.2% of net sales for the same quarter last year.
This reduction in labor income also negatively affected the gross profit margin
in the first quarter of fiscal 2004.
The reduction in margin from the shift to lower margin video sales was offset by
several factors. The new digital and flat screen video products are sold at
higher margins than analog products. Analog video products have almost been
eliminated entirely from the Company's product mix. Further, the Company has
been successful in bundling the sale of new video products with the sale of
higher margin home theater components, including furniture, accessories, cable
and extended warranties.
Selling, general and administrative expenses ("SG&A expenses") decreased by
$121,000 or 2.7% for the thirteen weeks ended January 31, 2004 as compared to
the fourteen weeks ended February 1, 2003. Comparable SG&A expenses increased by
approximately $101,000 or 2.4% for the first quarter of fiscal 2004 as compared
to the same quarter last year.
Comparable SG&A expenses increased from additional payroll and payroll related
costs, occupancy costs, truck expenses and various other general and store
operating expenses, offset by a decrease in advertising expense, depreciation
and amortization and incentive bonuses.
The Company plans to continue 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.
Interest expense decreased by approximately $36,000 or 41.5% for the thirteen
weeks ended January 31, 2004, as compared to the fourteen weeks ended February
1, 2003. This was primarily due to reduced borrowings and lower costs relating
to the new credit facility.
In connection with the Company's emergence from its reorganization proceeding,
the Company adopted Fresh Start Accounting. Fresh Start Accounting requires that
the Company report an income tax equivalent provision when there is book income
and pre-organization net operating loss carryforward. This requirement applies
despite the fact that the Company's pre-organization net operating loss
carryforward will be utilized to reduce the related income tax payable. The
current and any future year benefit arising from utilization of the
pre-reorganization carryforward is not reflected as a reduction of the tax
equivalent provision in determining net income, but instead is recorded first as
a reduction or reorganization value in excess of amounts allocable to
identifiable assets until exhausted, and thereafter as a direct addition to
paid-in capital.
As noted above, in the first quarter of fiscal 2004 and fiscal 2003, the income
tax equivalent provision and the reduction of reorganization value in excess of
amounts allocable to identifiable assets was $220,000 and $277,000,
respectively. The income tax equivalent provisions will not materially affect
the Company's tax liability.
Liquidity and Capital Resources
At January 31, 2004 and November 1, 2003, the Company's ratio of current assets
to current liabilities was 1.56 and 1.55, respectively.
The improvement in the current ratio at January 31, 2004 was positively impacted
by the Company's pre-tax income. Other factors improving working capital
included an increase in inventory, accounts receivable, and prepaid expenses and
other current assets, offset by an increase in customer deposits and accrued
expenses.
Net cash provided by operating activities was $492,000 for the thirteen weeks
ended January 31, 2004, as compared to $500,000 for the fourteen weeks ended
February 1, 2003.
Net cash used in investing activities was $57,000 for the first quarter of
fiscal 2004, as compared to cash used of $109,000 for the same quarter last
year. Net cash used for the purchases of property, equipment and website assets
was $57,000 as compared to $109,000 for the prior year's quarter.
Net cash used in financing activities was $435,000 for the first quarter of
fiscal 2004, as compared to $390,000 for the same quarter last year. Financing
activities for the first quarter of fiscal 2004 included net payments of
$332,000, reducing the revolving line of credit facility, preferred stock
dividends paid of $35,000 and commitment and deferred legal fees relating to the
new credit facility of $68,000. Financing activities for the first quarter of
fiscal 2003 included net payments of $338,000, reducing the revolving line of
credit facility, preferred stock dividends paid of $35,000 and principal
payments on capital leases of $16,000.
On November 21, 2003, the Company entered into a new five-year $7.5 million
credit facility with Webster Business Credit Corporation ("Webster"), a
subsidiary of Connecticut based Webster Bank. This new credit facility replaced
the credit facility with Wells Fargo Retail Finance, ("Wells Fargo"). Under the
new credit facility, the Company can borrow up to $7.5 million based upon
lending formulas calculated on eligible credit card receivables and inventory,
less certain reserves, as defined. The credit facility expires November 21,
2008.
The interest rate on all borrowings under the new credit facility is 0.25% over
Webster Bank's prime rate (4.25% at January 31, 2004) or LIBOR plus 2.75%, at
the Company's option. The Company agreed to pay Webster a $25,000 commitment
fee, payable in two equal installments of $12,500, on November 21, 2003 and
November 21, 2004, respectively. Under the credit facility, the Company will
also pay Webster a reduced maintenance fee of $1,000 per month and an unused
line fee based on a formula, as defined in the credit facility. Simultaneously,
with the closing of the Webster credit facility, the Company satisfied all
outstanding amounts due to Wells Fargo, in the amount of $2,504,000, and Wells
Fargo's senior security interest in the Company's assets was terminated.
In connection with the new credit facility, the Company granted Webster a senior
security interest in all of the Company's assets. The credit facility provides
Webster with rights of acceleration upon the occurrence of certain customary
events of default. The Company is restricted from paying dividends on its Common
Stock, retiring or repurchasing its Common Stock and entering into additional
indebtedness (as defined).
Pursuant to the new credit facility, the Company cannot exceed certain advance
rates on eligible inventory and must maintain certain levels of earnings before
interest, taxes, depreciation and amortization. Additionally, the Company's
capital expenditures cannot exceed a predetermined amount.
At March 12, 2004, there was approximately $2,174,000 in outstanding borrowings
under the new credit facility, with approximately $3,372,000 available to borrow
under this credit facility.
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. At January 31,
2004, 827 shares of Preferred Stock were issued and outstanding. The Company's
Preferred Stock is convertible into 670,559 shares of Common Stock.
In fiscal 2004, the Company plans to enter into a new retail store lease for an
additional Harvey showroom in New Jersey. The Company has located a suitable
location and is currently negotiating a long-term lease. The Company will
finance all necessary leaseholds, security deposits, furniture and fixtures,
pre-opening costs and inventory, expected to aggregate between $1,200,000 -
$1,400,000, with its new credit facility. The new retail store is expected to
open at the end of fiscal 2004 or early in the first quarter of 2005. However,
we can provide no assurance that the Company will be able to open this new
store. The Company expects to make improvements to certain of its Harvey retail
showrooms, including the installation of a movie theater within one of its
stores. Miscellaneous purchases of equipment and other assets for the remainder
of fiscal 2004 are not expected to be significant.
The Company intends to continue its advertising campaign for the remainder of
fiscal 2004, 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 the remainder of 2004.
As previously noted 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 in Doylestown,
Pennsylvania. See Part II, Item 1 below, and the notes to the Company's
financial statements for details on this matter.
Net sales and operating results for the Company's first quarter of its fiscal
year are positively affected by a strong holiday demand.
Management does not believe that inflation has had a material effect on our
results of operations for the first quarter of fiscal 2004. However, we cannot
predict accurately the effect of inflation on future operating results.
Management believes that cash on hand, cash flow from operations and funds made
available under the new credit facility with Webster, will be sufficient to meet
the Company's anticipated working capital and capital expenditure needs for at
least the next twelve-month period.
Item 4. Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's Management,
including the President and the Chief Financial Officer, the Company carried out
an evaluation 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) of the
Securities Exchange Act of 1934, as amended (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, as of the
end of the period covered (January 31, 2004) by this report, in ensuring that
material information relating to the Company 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. There were
no significant changes in the Company's internal control over financial
reporting (as required by the Exchange Act) that occurred during our last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal controls over financial reporting.
PART II. OTHER INFORMATION:
Items 2, 3, 4 and 5 were not applicable in the first quarter ended January 31,
2004.
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. To date, the Company has not received a
response from PADEP.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
Exhibit 31.1 Certification - President
Exhibit 31.2 Certification - CFO
Exhibit 32.1 Certification - President
Exhibit 32.2 Certification - CFO
(b) Reports on Form 8-K
On November 25, 2003, the Company filed Form 8-K with the Securities and
Exchange Commission announcing the successful closing of a new $7.5 million
credit facility with Webster Business Credit Corporation.
On February 20, 2004, the Company filed Form 8-K with the Securities and
Exchange Commission announcing that it had received notice from NASDAQ Listing
Qualifications, stating that the closing bid price of the Company's common stock
has been at $1.00 per share or above for at least ten consecutive trading days.
As a result, the Company has regained compliance with NASDAQ SmallCap
Marketplace Rule 4310(c)(4), and the listing issue is now closed.
Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on March 15, 2004.
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