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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 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
incorporation or organization) Identification No.)
205 Chubb Avenue, Lyndhurst, New Jersey, 07071_
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(Address of principal executive offices and zip code)
201-842-0078
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 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) - Twenty-six and Twenty-seven
Weeks ended May 1, 2004 and May 3, 2003 and Thirteen Weeks Ended
May 1, 2004 and May 3, 2003.............................................................3
Balance Sheets - May 1, 2004 (Unaudited) and November 1,
2003.....................................................................................4
Statement of Shareholders' Equity (Unaudited) - Twenty-six Weeks
ended May 1, 2004.......................................................................5
Statements of Cash Flows (Unaudited) - Twenty-six and Twenty-seven
Weeks ended May 1, 2004 and May 3, 2003.................................................6
Notes to Financial Statements (Unaudited).................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................................13
Item 4. Disclosure Controls and Procedures........................................................19
PART II. Other Information
Item 1. Legal Matters.............................................................................21
Item 6. Exhibits and Reports on Form 8-K..........................................................22
Signatures ................................................ ............................................23
Exhibit Number 31.1.....................................................................................24
Exhibit Number 31.2.....................................................................................26
Exhibit Number 32.1.....................................................................................28
Exhibit Number 32.2.....................................................................................29
Part I Financial Information
Item I. Financial Statements
Harvey Electronics, Inc.
Statements Of Operations
(Unaudited)
Twenty-six Twenty-seven Thirteen Thirteen
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
---------- ---------- ---------- ---------
Net sales $ 22,741,970 $ 22,878,477 $ 10,346,078 $ 9,863,894
Interest and other income 22,160 50,702 17,743 40,160
---------- ---------- ---------- ---------
22,764,130 22,929,179 10,363,821 9,904,054
---------- ---------- ---------- ---------
Cost of sales 13,378,526 13,600,556 5,978,032 5,860,296
Selling, general and administrative expenses 8,549,481 8,540,848 4,171,374 4,041,530
Interest expense 110,745 175,768 59,325 87,864
---------- ---------- ---------- ---------
22,038,752 22,317,172 10,208,731 9,989,690
---------- ---------- ---------- ---------
Income (loss) before income taxes (benefit) 725,378 612,007 155,090 (85,636)
Income taxes (benefit) 290,000 240,000 70,000 (37,000)
---------- ---------- ---------- ---------
435,378 372,007 85,090 (48,636)
Preferred Stock dividend requirement 35,148 35,148 17,574 17,574
---------- ---------- ---------- ---------
Net income (loss) applicable to Common Stock $ 400,230 $ 336,859 $ 67,516 ($ 66,210)
============ ============ ============ ============
Net income (loss) per share applicable to common shareholders:
Basic $ 0.12 $ 0.10 $ 0.02 ($ 0.02)
============ ============ ============ ============
Diluted $ 0.10 $ 0.08 $ 0.02 ($ 0.02)
============ ============ ============ ============
Shares used in the calculation of net income (loss) per common share:
Basic 3,324,525 3,324,525 3,324,525 3,324,525
============ ============ ============ ============
Diluted 4,022,133 4,038,287 3,394,418 3,324,525
============ ============ ============ ============
See accompanying notes to financial statements.
Harvey Electronics, Inc.
Balance Sheets
May 1, November 1,
2004 2003 (1)
Assets (Unaudited)
-------------------------------------
Current assets:
Cash and cash equivalents $17,489 $16,000
Accounts receivable, less allowance of $20,000 and $20,000 537,167 751,293
Inventories 7,568,984 7,416,978
Prepaid expenses and other current assets 415,412 177,394
-------------------------------------
Total current assets 8,539,052 8,361,665
-------------------------------------
Property and equipment:
Leasehold improvements 3,688,125 3,640,023
Furniture, fixtures and equipment 2,187,289 2,103,964
Internet website 456,870 456,870
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6,332,284 6,200,857
Less accumulated depreciation and amortization 3,752,343 3,433,969
-------------------------------------
2,579,941 2,766,888
Equipment under capital leases, less accummulated amortization
of $388,127 and $384,706 9,694 13,115
Goodwill 125,000 125,000
Reorganization value in excess of amounts allocable to
identifiable assets 501,440 791,440
Other assets, less accumulated amortization of $260,994 and $248,769 310,493 266,498
-------------------------------------
Total assets $12,065,620 $12,324,606
=====================================
Liabilities and shareholders' equity
Current liabilities:
Trade accounts payable $2,205,896 $2,280,019
Customer deposits 1,801,084 1,693,263
Accrued expenses and other current liabilities 1,369,299 1,310,278
Income taxes 0 104,500
Cumulative Preferred Stock dividends payable 23,144 23,432
-------------------------------------
Total current liabilities 5,399,423 5,411,492
-------------------------------------
Long-term liabilities:
Revolving line of credit facility 2,054,018 2,725,603
Deferred rent 267,175 242,737
-------------------------------------
Total long-term liabilities 2,321,193 2,968,340
-------------------------------------
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 (3,669,528) (4,069,758)
-------------------------------------
Total shareholders' equity 4,345,004 3,944,774
-------------------------------------
Total liabilities and shareholders' equity $12,065,620 $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'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
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 - - - - - 435,378 435,378
Preferred Stock dividend - - - - - (35,148) (35,148)
-------------------------------------------------------------------------------------------
Balance at May 1, 2004 827 $379,982 3,324,525 $33,245 $7,601,305 ($3,669,528) $4,345,004
===========================================================================================
See accompanying notes to financial statements.
Harvey Electronics, Inc
Statements of Cash Flows
(Unaudited)
Twenty-six Twenty-seven
Weeks Ended Weeks Ended
May 1, May 3,
2004 2003
---- ----
Operating activities
Net income $435,378 $372,007
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 334,020 387,841
Income tax equivalent provision 290,000 240,000
Straight-line impact of rent escalations 24,438 47,641
Miscellaneous 12,994 (8,132)
Changes in operating assets and liabilities:
Accounts receivable 214,126 (51,958)
Inventories (152,006) (151,669)
Prepaid expenses and other current assets (31,211) 33,832
Trade accounts payable (74,123) 310,954
Customer deposits 107,821 3,169
Accrued expenses, other current liabilities
and income taxes (252,286) (398,083)
-------- --------
Net cash provided by operating activities 909,151 785,602
-------- --------
Investing activities
Purchases of property and equipment excluding
Internet website development (131,427) (202,195)
Internet website development 0 (15,200)
Purchases of other assets (1,510) 0
-------- --------
Net cash used in investing activities (132,937) (217,395)
-------- --------
Financing activities
Net payments on revolving credit facility (671,585) (507,353)
Preferred Stock dividends paid (35,436) (35,436)
Principal payments on capital lease obligations 0 (22,420)
Fees paid in connection with new credit facility (67,704) -
-------- --------
Net cash used in financing activities (774,725) (565,209)
-------- --------
Increase in cash and cash equivalents 1,489 2,998
Cash and cash equivalents at beginning of period 16,000 15,990
-------- --------
Cash and cash equivalents at end of period $17,489 $18,988
======== ========
Supplemental cash flow information:
Interest paid $128,000 $181,000
======== ========
Taxes paid $110,000 $2,000
======== ========
See accompanying notes to financial statements.
Harvey Electronics, Inc.
Notes to Financial Statements
May 1, 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
twenty-six week period ended May 1, 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 six-month and second quarter Statements of Operations
have been reclassified to conform to the 2004 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 May 1, 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. Among other things, 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 May 1, 2004
($2,054,000), under the new credit facility as a long-term liability.
3. Net 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 twenty-six and twenty-seven weeks ended May 1, 2004
and May 3, 2003 was $335,000 and $400,000, respectively. Net advertising expense
for the second quarter of fiscal 2004 and 2003 was $130,000 and $120,000,
respectively.
4. Income (Loss) Per Share
Basic and diluted income per share are calculated in accordance with SFAS No.
128, "Earnings Per Share". The basic and diluted income per common share for the
twenty-six and twenty-seven weeks ended May 1, 2004 and May 3, 2003 was computed
based on the weighted average number of common shares outstanding. For these
periods, common equivalent shares relating to stock options, aggregating 40,313
and 38,510, 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 basic and diluted income per share for the second quarter of fiscal 2004 and
2003 was computed based on the weighted average number of common shares
outstanding. For the second quarter ended May 1, 2004, common equivalent shares
relating to stock options aggregating 69,893 were included in the weighted
average number of common shares outstanding for the diluted earnings per share
computation. No common equivalent shares relating to stock options were included
in the weighted average number of common shares outstanding for the diluted
earnings per share computation for the second quarter ended May 3, 2003 as their
effect was anti-dilutive. No other options or warrants were included for the
second quarter of fiscal 2004 and 2003, 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 twenty-six and
twenty-seven weeks ended May 1, 2004 and May 3, 2003, respectively. For the
second quarter of fiscal 2004 and 2003, common equivalent shares of 670,559
relating to the conversion of the preferred stock were not included in the
weighted average number of common shares outstanding for the diluted earnings
per share computation as their effect was anti-dilutive.
5. Income Taxes (Benefit)
In connection with the Company's emergence from its reorganization proceeding
under Chapter 11 of the United States Bankruptcy Code on December 26, 1996, the
Company adopted Fresh Start Accounting in accordance with AICPA Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code." Fresh Start Accounting requires that the Company report an
income tax equivalent provision when there is book income and a
pre-reorganization net operating loss carryforward. This requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carryforward will be utilized to reduce the related income tax payable. The
current and any future year benefit arising from utilization of the
pre-reorganization carryforward is not reflected as a reduction of the tax
equivalent provision in determining net income, but instead is recorded first as
a reduction of reorganization value in excess of amounts allocable to
identifiable assets until exhausted and thereafter as a direct addition to
paid-in-capital.
For the twenty-six and twenty-seven weeks ended May 1, 2004 and May 3, 2003, the
income tax equivalent provision and the associated reduction of reorganization
value in excess of amounts allocable to identifiable assets amounted to $290,000
(40.0% effective tax rate) and $240,000 (39.2% effective tax rate),
respectively. For the second quarter of fiscal 2004, the Company recorded an
income tax provision of $70,000 (45.1% effective tax rate), as compared to an
income tax benefit of $37,000 (43.2% effective tax benefit) for the same quarter
of fiscal 2003. The income tax equivalent provisions will not materially affect
the Company's tax liability.
6. Goodwill and Other Intangible Assets
In accordance with Statements of Financial Accounting Standard ("SFAS") SFAS No.
142, Goodwill and Other Intangible Assets, 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 follows the provisions of SFAS No. 142, and accordingly, 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 2004 and 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 continue to be tested annually to
identify if impairment has occurred.
7. New Store Opening
On May 3, 2004, the Company entered into a ten-year lease for a new 4,500 square
foot Harvey showroom in Bridgewater, New Jersey. The building will be
constructed by the landlord and provided to the Company in the fall of 2004. The
Company expects to open this new showroom late in the year. This will be the
Company's tenth retail store.
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. To date, the Company has not received a
response from PADEP.
The Company has also retained special 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,
the Company believes 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.
Twenty-Six and Thirteen Weeks Ended May 1, 2004 as Compared to Twenty-Seven and
Thirteen Weeks Ended May 3, 2003
Net Income. The Company's pre-tax income for the twenty-six weeks ended May 1,
2004 increased approximately 18.5% to $725,000 from $612,000 for the
twenty-seven weeks ended May 3, 2003. Net income for the twenty-six weeks ended
May 1, 2004 increased approximately 17% to $435,000, from $372,000 for the
twenty-seven weeks ended May 3, 2003.
The Company's pre-tax income for the second quarter of fiscal 2004 increased to
$155,000, as compared to a pre-tax loss of $86,000 for the same quarter last
year. Net income for the second quarter of fiscal 2004 increased to $85,000, as
compared to a net loss of $49,000 for the same quarter last year.
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 twenty-six weeks ended May 1, 2004, EBITDA aggregated $1,170,000, as
compared to $1,176,000 for the twenty-seven weeks ended May 3, 2003. (EBITDA for
the first six months of 2004 was calculated as follows: pre-tax income of
$725,000, plus interest of $111,000 and depreciation and amortization of
$334,000. EBITDA for the first six months of fiscal 2003 was calculated as
follows: pre-tax income of $612,000, plus interest of $176,000 and depreciation
and amortization of $388,000.)
For the second quarter of fiscal 2004, EBITDA increased to $388,000, from
$199,000 for the second quarter of fiscal 2003. (EBITDA for the second quarter
of fiscal 2004 is calculated as follows: pre-tax income of $155,000, plus
interest of $59,000 and depreciation and amortization of $174,000. EBITDA for
the second quarter of fiscal 2003 is calculated as follows: pre-tax loss of
$86,000 plus interest of $88,000 and depreciation and amortization of $197,000.)
The Company's net income for the first half of fiscal 2004 and 2003, included
net advertising expense of $335,000 and $400,000, respectively. Net income for
the second quarter of fiscal 2004 included net advertising expense of $130,000,
while the net loss for the same quarter of fiscal 2003 included net advertising
expense of $120,000. The Company's advertising presence for the first half of
fiscal 2004 remained consistent with the same period in fiscal 2003. The
Company's gross advertising expenditures were approximately $1,467,000 for the
first half of fiscal 2004, as compared to approximately $1,490,000 for the same
period last year.
For the twenty-six and twenty-seven weeks ended May 1, 2004 and May 3, 2003, the
income tax equivalent provision recorded by the Company was $290,000 (40%
effective tax rate) and $240,000 (39.2% effective tax rate), respectively. In
the second quarter of fiscal 2004, the Company recorded an income tax equivalent
provision of $70,000 (45.1% effective tax rate) as compared to an income tax
equivalent benefit of $37,000 (43.2% effective tax benefit) for the same quarter
of fiscal 2003.
Management believes the Company's pre-tax loss for the second quarter of fiscal
2003, was negatively impacted by the Iraq war.
Revenues. For the second quarter of fiscal 2004, net sales aggregated
$10,346,000, an increase of approximately $482,000 or 4.9% from the same quarter
last year. Comparable store sales for the second quarter of fiscal 2004
increased approximately $548,000 or 5.6% from the same quarter last year.
For the twenty-six weeks ended May 1, 2004, net sales aggregated $22,742,000 as
compared to $22,878,000 for the twenty-seven weeks ended May 2, 2003. It is
important to note that fiscal 2003 was a fifty-three week year, as the first
quarter of fiscal 2003 included fourteen weeks. As a result, comparable store
sales for the twenty-six weeks ended May 1, 2004, increased approximately
$800,000 or 3.6% from the same period last year.
The Company believes its sales results compare favorably to other reporting
consumer electronics specialty retailers in the industry. Additionally,
Management believes that second quarter sales for fiscal 2003 were negatively
impacted by the Iraq war.
The Company's increase in comparable store sales for the second quarter of
fiscal 2004, was due primarily to the strong results of its Eatontown, New
Jersey, Mount Kisco, New York, Greenwich, Connecticut and its retail store
located within ABC Carpet & Home in lower Manhattan.
The Company continues to benefit from expanding revenues as a result of 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. Custom installation
projects continue to increase and accounted for 58% of net sales for the first
half of fiscal 2004 as compared to approximately 53% of net sales for the same
period last year. Custom installation sales, including both equipment sales and
labor income, increased approximately 10.5% to $13.4 million in the first half
of fiscal 2004, as compared to $12.1 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 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
dedicated theater rooms and lighting systems in the home, as well as distributed
audio and network cabling will continue to attract affluent customers to the
Company. The theater room will be the forefront of the smart home, for the
desired integration of all electronics, lighting, security and networking within
the home. These offerings should continue to benefit sales, enhance gross
margins and improve overall store profitability.
In the latter part of fiscal 2004, the Company will endeavor to expand its
service niche in offering custom labor and other accessories for both Harvey
customers and customers that have purchased products elsewhere, specifically on
the internet or from mass merchants. We will also attempt to reach out to real
estate agencies and new construction developments to expand our revenue base.
These will be significant initiatives for the remainder of fiscal 2004 and
beyond.
The Company's marketing efforts remained significant for the first half 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."
Also, for the remainder of fiscal 2004, the Company will endeavor to put
additional efforts and resources into its important customer relations
management initiatives and will be more aggressive with direct mail, specific
e-mail and customer loyalty programs.
Cost and Expenses. Total cost of goods sold for the twenty-six weeks ended May
1, 2004 decreased approximately 1.6% from the twenty-seven weeks ended May 3,
2003. Cost of goods sold for the second quarter of fiscal 2004 increased
approximately 2% from the same quarter last year. The decrease for the
twenty-six week period of fiscal 2004 was due to the slight decrease in sales,
and was offset by stronger gross profit margins. The increase for the second
quarter of fiscal 2004 was due to increased sales and was offset by the improved
gross profit margin.
The gross profit margin for the first half of fiscal 2004 increased to 41.2%
from 40.6% for the same period last year. The gross profit margin for the second
quarter of fiscal 2004 increased to 42.3% from 40.6% for the same quarter last
year.
The gross profit margin for the first half of fiscal 2004 improved despite an
overall reduction in sales of higher margin audio products. Management believes
the consumer electronics industry is generally suffering a decline in gross
margin from this shift in business. The Company is concentrating its efforts in
reviving its higher margin audio business by better demonstrating audio products
to its customers and successfully bundling more audio components with its video
sales. This has recently been successful for the Company. In the second quarter
of fiscal 2004, the Company's audio business increased to 46.3% of net sales
from 45.3% for the second quarter last year.
Additionally, the overall improvement in the gross profit margin was due to the
following 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 in fiscal 2004; and further,
the Company has been successful with the sales of higher margin labor income,
furniture, accessories, cable and extended warranties.
Selling, general and administrative expenses ("SG&A Expenses") for the
twenty-six weeks ended May 1, 2004 increased by approximately $9,000 or less
than one percent, as compared to the twenty-seven weeks ended May 3, 2003. SG&A
expenses for the second quarter of fiscal 2004 increased by approximately
$130,000 or 3.2%, as compared to the same quarter last year.
Comparable SG&A expenses, for the twenty-six weeks ended May 1, 2004, increased
approximately $301,000 or 3.7% as compared to the same period 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 communications expense.
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. Management believes these services differentiate
Harvey and are vital to the Company's business plan. The Company also plans to
continue its significant advertising expenditures for the latter part of fiscal
2004, which will remain consistent with the prior year.
Interest expense for the twenty-six weeks ended May 1, 2004 decreased by
approximately $65,000 or 37% from the twenty-seven weeks ended May 3, 2003. For
the second quarter of fiscal 2004, interest expense decreased approximately
$29,000 or 32.5% from the same quarter last year. This was primarily due to
reduced borrowings and lower costs relating to the new credit facility.
In connection with the Company's emergency from its reorganization proceeding,
the Company adopted Fresh Start Accounting. Fresh Start Accounting requires that
the Company report an income tax equivalent provision when there is book income
and pre-organization net operating loss carryforward. This requirement applies
despite the fact that the Company's pre-organization net operating loss
carryforward will be utilized to reduce the related income tax payable. The
current and any future year benefit arising from utilization of the
pre-reorganization carryforward is not reflected as a reduction of the tax
equivalent provision in determining net income, but instead is recorded first as
a reduction or reorganization value in excess of amounts allocable to
identifiable assets until exhausted, and thereafter as a direct addition to
paid-in capital It is important to note that the income tax equivalent
provisions for the first half of fiscal 2004 and 2003, will not require a
material use of the Company's cash.
Liquidity and Capital Resources
At May 1, 2004 and November 1, 2003, the Company's ratio of current assets to
current liabilities was 1.58 and 1.55, respectively.
The improvement in the current ratio at May 1, 2004 was positively impacted by
the Company's pre-tax income. Other factors improving working capital included
an increase in prepaid expenses and other current assets and a decrease in
accounts payable, offset by a decrease in accounts receivable and an increase in
customer deposits.
Net cash provided by operating activities was $909,000 for the twenty-six weeks
ended May, 1, 2004 as compared to $786,000 for the twenty-seven weeks ended May
3, 2003.
Net cash used in financing activities was $775,000 for the first half of fiscal
2004, as compared to $565,000 for the same period last year. Financing
activities for the first half of fiscal 2004 included net payments of $672,000,
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 half of fiscal 2003
included net payments of $507,000, reducing the revolving line of credit
facility, preferred stock dividends paid of $35,000 and principal payments on
capital leases of $22,000.
In November 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 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 June 14, 2004, there was approximately $2,175,000 in outstanding borrowings
under the new credit facility, with approximately $3,361,000 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 May 1, 2004,
827 shares of Preferred Stock were issued and outstanding. The Company's
Preferred Stock is convertible into 670,559 shares of Common Stock.
On May 3, 2004, the Company entered into a ten-year lease for a new 4,500 square
foot Harvey showroom in Bridgewater, New Jersey. The building will be
constructed by the landlord and provided to the Company in the fall of 2004. The
Company expects to open this new showroom late in the year. This will be the
Company's tenth retail store. The Company plans to finance all necessary
leaseholds, security deposits, furniture and fixtures, pre-opening costs and
inventory, expected to aggregate between $1,000,000 - $1,200,000, with its new
credit facility. The Company expects to make improvements to certain of its
Harvey retail showrooms, including the planned 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 half 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 (May 1, 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 second quarter ended May 1, 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 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 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.
On March 16, 2004, the Company filed Form 8-K with the Securities and Exchange
Commission announcing its results for the first quarter of fiscal 2004.
On May 6, 2004, the Company filed Form 8-K with the Securities and Exchange
Commission announcing that it had signed a ten-year lease for a new retail store
in Bridgewater, New Jersey.
On May 19, 2004, the Company filed Form 8-K with the Securities and Exchange
Commission announcing that it had signed a Lease Modification and Extension
Agreement, extending its lease for ten years, relating to its flagship store
located at 2 West 45th Street in Manhattan.
Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on June 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