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 July 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
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Harvey Electronics, Inc.
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(Exact name of small business registrant as specified in its charter)
New York 13-1534671
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
205 Chubb Avenue, Lyndhurst, New Jersey, 07071_
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(Address of principal executive offices and zip code)
201-842-0078
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(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of September 14, 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) - Thirty-nine and Forty Weeks
ended July 31, 2004 and August 2, 2003 and Thirteen Weeks Ended
July 31, 2004 and August 2, 2003
........................................................................................3
Balance Sheets - July 31, 2004 (Unaudited) and November 1, 2003 ......................4
Statement of Shareholders' Equity (Unaudited) - Thirty-nine Weeks
ended July 31, 2004...................................................................5
Statements of Cash Flows (Unaudited) - Thirty-nine and Forty Weeks
ended July 31, 2004 and August 2,
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 ...................................................20
PART II. Other Information
Item 1. Legal Matters ........................................................................21
Item 4. Submission of Matters to a Vote of Security Holders....................................22
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)
Thirty-nine Forty Thirteen Thirteen
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 32,784,753 $ 32,784,134 $ 10,042,783 $ 9,905,657
Interest and other income 48,324 56,702 26,164 6,000
------ ------ ------ -----
32,833,077 32,840,836 10,068,947 9,911,657
---------- ---------- ---------- ---------
Cost of sales 19,267,409 19,373,356 5,888,883 5,772,800
Selling, general and administrative expenses 12,630,325 12,568,874 4,080,844 4,028,026
Interest expense 149,685 263,197 38,940 87,429
------- ------- ------ ------
32,047,419 32,205,427 10,008,667 9,888,255
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Income before income taxes (benefit) 785,658 635,409 60,280 23,402
Income taxes (benefit) 260,000 250,000 (30,000) 10,000
------- ------- ------- ------
525,658 385,409 90,280 13,402
Preferred Stock dividend requirement 52,722 52,722 17,574 17,574
Net income (loss) applicable to Common Stock $ 472,936 $ 332,687 $ 72,706 ($ 4,172)
============ ============ ============ ============
Net income (loss) per share applicable to common shareholders:
Basic $ 0.14 $ 0.10 $ 0.02 ($ 0.00)
============ ============ ============ ============
Diluted $ 0.12 $ 0.08 $ 0.02 ($ 0.00)
============ ============ ============ ============
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 4,029,912 4,036,265 3,397,143 3,324,525
========= ========= ========= =========
See accompanying notes to financial statements
Harvey Electronics, Inc.
Balance Sheets
July 31, 2004 November 1,
Assets (Unaudited) 2003 (1(1)
- ------ ----------- ----------
Current assets:
Cash and cash equivalents $18,990 $16,000
Accounts receivable, less allowance of $20,000 and $20,000 683,001 751,293
Inventories 7,380,905 7,416,978
Prepaid expenses and other current assets 275,600 177,394
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Total current assets 8,358,496 8,361,665
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Property and equipment:
Leasehold improvements 3,685,990 3,640,023
Furniture, fixtures and equipment 2,262,437 2,103,964
Internet website 456,870 456,870
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6,405,297 6,200,857
Less accumulated depreciation and amortization 3,913,979 3,433,969
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2,491,318 2,766,888
Equipment under capital leases, less accummulated amortization
of $389,838 and $384,706 7,983 13,115
Goodwill 125,000 125,000
Reorganization value in excess of amounts allocable to
identifiable assets 531,440 791,440
Other assets, less accumulated amortization of $267,196 and $248,769 320,870 266,498
------- -------
Total assets $11,835,107 $12,324,606
=========== ===========
Liabilities and shareholders' equity Current liabilities:
Trade accounts payable $2,319,863 $2,280,019
Customer deposits 1,653,234 1,693,263
Accrued expenses and other current liabilities 1,441,570 1,310,278
Income taxes 0 104,500
Cumulative Preferred Stock dividends payable 5,859 23,432
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Total current liabilities 5,420,526 5,411,492
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Long-term liabilities:
Revolving line of credit facility 1,710,631 2,725,603
Deferred rent 264,841 242,737
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Total long-term liabilities 1,975,472 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 7,622,704 7,601,305
Accumulated deficit (3,596,822) (4,069,758)
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Total shareholders' equity 4,439,109 3,944,774
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Total liabilities and shareholders' equity $11,835,107 $12,324,606
=========== ===========
(1) Derived from the audited financial statements at November 1, 2003. See
accompanying notes to financial statements.
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 - - - - - 525,658 525,658
Preferred Stock dividend - - - - - (52,722) (52,722)
Return of a shareholder's profits
from short-swing trades
- - - - 21,399 - 21,399
------ ------
Balance at July 31, 2004 827 $ 379,982 3,324,525 $ 33,245 $ 7,622,704 ($3,596,822) $ 4,439,109
=== =========== ========= =========== =========== =========== ===========
See accompanying notes to financial statements.
Harvey Electronics, Inc
Statements of Cash Flows
(Unaudited)
Thirty-nine Forty
Weeks Ended Weeks Ended
July 31, August 2,
2004 2003
---- ----
Operating activities
Net income $525,658 $385,409
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 503,569 580,142
Income tax equivalent provision 260,000 250,000
Straight-line impact of rent escalations 22,104 69,628
Miscellaneous 26,710 (14,128)
Changes in operating assets and liabilities:
Accounts receivable 68,292 (219,192)
Inventories 36,073 (200,424)
Prepaid expenses and other current assets (6,777) 62,255
Trade accounts payable 39,844 (366,821)
Customer deposits (40,029) 310,420
Accrued expenses, other current liabilities
and income taxes (64,637) (36,136)
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Net cash provided by operating activities 1,370,807 821,153
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Investing activities
Purchases of property and equipment excluding
Internet website development (204,440) (249,558)
Internet website development 0 (15,200)
Purchases of other assets (3,948) (975)
Security deposits-net (27,765) 0
------- -
Net cash used in investing activities (236,153) (265,733)
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Financing activities
Net payments on revolving credit facility (1,014,972) (461,841)
Preferred Stock dividends paid (70,295) (70,295)
Principal payments on capital lease obligations 0 (20,285)
Proceeds from shareholder short-swing profits 21,399 0
Fees paid in connection with new credit facility (67,796) 0
------- -
Net cash used in financing activities (1,131,664) (552,421)
---------- --------
Increase in cash and cash equivalents 2,990 2,999
Cash and cash equivalents at beginning of period 16,000 15,990
------ ------
Cash and cash equivalents at end of period $18,990 $18,989
======= =======
Supplemental cash flow information:
Interest paid $175,000 $251,000
======== ========
Taxes paid $137,000 $12,000
======== =======
See accompanying notes to financial statements.
Harvey Electronics, Inc.
Notes to Financial Statements
July 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
thirty-nine week period ended July 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, as previously reported, 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
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
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 July 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. 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 July 31, 2004
($1,711,000), under the new credit facility as a long-term liability.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
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 thirty-nine and forty weeks ended July 31, 2004 and
August 2, 2003 was $440,000 and $500,000, respectively. Net advertising expense
for the third quarter of fiscal 2004 and 2003 was $105,000 and $100,000,
respectively.
4. Income (Loss) Per Share
Basic and diluted income (loss) per share are calculated in accordance with SFAS
No. 128, "Earnings Per Share". The basic and diluted income per common share for
the thirty-nine and forty weeks ended July 31, 2004 and August 2, 2003 was
computed based on the weighted average number of common shares outstanding. For
these periods, common equivalent shares relating to stock options, aggregating
50,385 and 37,139, 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 (loss) per share for the third quarter of fiscal
2004 and 2003 was computed based on the weighted average number of common shares
outstanding. For the third quarter ended July 31, 2004, common equivalent shares
relating to stock options aggregating 72,618 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 third quarter ended August 2, 2003 as
their effect was anti-dilutive. No other options or warrants were included for
the third 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 thirty-nine and forty
weeks ended July 31, 2004 and August 2, 2003, respectively. For the third
quarter of fiscal 2004 and 2003, common equivalent shares of 670,559 relating to
the conversion of the preferred stock were excluded from the weighted average
number of common shares outstanding for the diluted earnings per share
computation, as their effect was anti-dilutive.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
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 thirty-nine and forty weeks ended July 31, 2004 and August 2, 2003, the
income tax equivalent provision and the associated reduction of reorganization
value in excess of amounts allocable to identifiable assets amounted to $260,000
(33.1% effective tax rate) and $250,000 (39.3% effective tax rate),
respectively. For the third quarter of fiscal 2004, the Company recorded an
income tax benefit of $30,000 (49.8% effective tax benefit), as compared to an
income tax provision of $10,000 (42.7% effective tax rate) 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.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
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 winter of 2004.
The Company expects to open this new showroom in early 2005. This will be the
Company's tenth retail store.
8. Inventories
Inventories have been valued at average cost, based upon gross profit
percentages apply to sales.
9. 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.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
9. Other (continued)
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.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
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.
Thirty-Nine and Thirteen Weeks Ended July 31, 2004 as Compared to Forty and
Thirteen Weeks Ended August 2, 2003
Net Income. The Company's pre-tax income for the thirty-nine weeks ended July
31, 2004 increased approximately 23.8% to $786,000 from $635,000 for the forty
weeks ended August 2, 2003. Net income for the thirty-nine weeks ended July 31,
2004 increased approximately 36.6% to $526,000 from $385,000 for the forty weeks
ended August 2, 2003.
The Company's pre-tax income for the third quarter of fiscal 2004 increased to
$60,000 from $23,000 for the same quarter last year. Net income for the third
quarter of fiscal 2004 increased to $90,000, after a $30,000 tax benefit, as
compared to $13,000 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.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
Net Income (continued)
For the thirty-nine weeks ended July 31, 2004, EBITDA aggregated $1,439,000, as
compared to $1,479,000 for the forty weeks ended August 2, 2003. (EBITDA for the
first nine months of 2004 was calculated as follows: pre-tax income of $786,000,
plus interest of $150,000 and depreciation and amortization of $503,000. EBITDA
for the first nine months of fiscal 2003 was calculated as follows: pre-tax
income of $635,000, plus interest of $263,000 and depreciation and amortization
of $581,000).
For the third quarter of fiscal 2004, EBITDA aggregated $269,000 as compared to
$303,000 for the same quarter last year. (EBITDA for the third quarter of fiscal
2004 is calculated as follows: pre-tax income of $60,000 plus interest of
$39,000 and depreciation and amortization of $170,000. EBITDA for the third
quarter of fiscal 2003 is calculated as follows: pre-tax income of $23,000 plus
interest of $88,000 and depreciation and amortization of $192,000).
The Company's net income for the first nine months of fiscal 2004 and 2003
included net advertising expense of $440,000 and $500,000, respectively. Net
income for the third quarter of fiscal 2004 and 2003 included net advertising
expense of $105,000 and $100,000, respectively. The Company's gross advertising
expenditures for the nine months of fiscal 2004 increased approximately 4.2% to
$2,125,000, as compared to $2,040,000 for the same period last year. The
decrease in net advertising expense for the nine months ended July 31, 2004, was
due to the estimated increases in advertising income for this period.
For the thirty-nine and forty weeks ended July 31, 2004 and August 2, 2003, the
income tax equivalent provision recorded by the Company was $260,000 (33.1%
effective tax rate) and $250,000 (39.3% effective tax rate), respectively. In
the third quarter of fiscal 2004, the Company recorded an income tax equivalent
benefit of $30,000 (49.8% effective tax benefit) as compared to an income tax
equivalent provision of $10,000 (42.7% effective tax rate) for the same quarter
of fiscal 2003.
Management believes the Company's results for the second quarter of fiscal 2003
were negatively impacted by the Iraq war.
Revenues. For the third quarter ended July 31, 2004, net sales aggregated
$10,043,000, an increase of $137,000 or 1.4% from the same quarter last year.
Comparable store sales for the third quarter of fiscal 2004 increased
approximately $195,000 or 2% from the same quarter last year.
For the thirty-nine weeks ended July 31, 2004, net sales aggregated $32,785,000
and remained consistent with net sales for the forty weeks ended August 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 thirty-nine weeks ended July 31, 2004 increased
approximately $991,000 or 3.1% from the same period last year.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
Revenues (continued)
The Company believes its sales results compare favorably to other similar
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 third quarter of fiscal
2004 was due primarily to the strong results of its Paramus, New Jersey and
Greenvale, Long Island Harvey stores and its Bang and Olufsen branded store in
lower Manhattan.
The Company believes it 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 59% of net
sales for the first nine months of fiscal 2004 as compared to approximately 55%
of net sales for the same period last year. Custom installation sales, including
both equipment sales and labor income, increased approximately 8.1% to $19.4
million for the first nine months of fiscal 2004, as compared to $18 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 plans 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 new construction
developments to expand our revenue base. These will be initiatives for the
remainder of fiscal 2004 and beyond.
The Company's marketing efforts remained significant for the nine months 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." The Company expects to make certain improvements to its website
in the first half of fiscal 2005.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
Revenues (continued)
Also, for the remainder of fiscal 2004, the Company plans to put additional
efforts and resources into its important customer relations management
initiatives and plans to be more aggressive with direct mail and specific e-mail
to its customers.
Cost and Expenses. Total cost of goods sold for the thirty-nine weeks ended July
31, 2004 decreased approximately .6% from the forty weeks ended August 2, 2003.
Cost of goods sold for the third quarter of fiscal 2004 increased approximately
2% from the same quarter last year. The decrease for the thirty-nine week period
of fiscal 2004 was due to stronger gross profit margins. The increase for the
third quarter of fiscal 2004 was due to increased sales and by the slight
decrease in the gross profit margin.
The gross profit margin for the first nine months of fiscal 2004 increased to
41.2% from 40.9% for the same period last year. The gross profit margin for the
third quarter of fiscal 2004 decreased slightly to 41.4% from 41.7% for the same
quarter last year.
The gross profit margin for the first nine months 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 and third quarters of fiscal 2004, the Company's audio
business has increased, compared to the same quarters 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
thirty-nine weeks ended July 31, 2004 increased by approximately $61,000 or less
than one percent, as compared to the forty weeks ended August 2, 2003. SG&A
expenses for the third quarter of fiscal 2004 increased by approximately $53,000
or 1.3%, as compared to the same quarter last year.
Comparable SG&A expenses, for the thirty-nine weeks ended July 31, 2004,
increased approximately $321,000 or 2.6% 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, communications expense and professional fees.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
Cost and Expenses. (Continued)
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.
Interest expense for the thirty-nine weeks ended July 31, 2004 decreased by
approximately $114,000 or 43.1% from the forty weeks ended August 2, 2003. For
the third quarter of fiscal 2004, interest expense decreased approximately
$48,000 or 55.5% 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 nine months of fiscal 2004 and 2003, will not require a
material use of the Company's cash.
Liquidity and Capital Resources
At July 31, 2004 and November 1, 2003, the Company's ratio of current assets to
current liabilities remained relatively stable at 1.54 and 1.55, respectively.
Net cash provided by operating activities was $1,371,000 for the thirty-nine
weeks ended July 31, 2004, as compared to $821,000 for the forty weeks ended
August 2, 2003. Cash provided from operating activities for the nine months
ended July 31, 2004 was positively impacted by the increase in pre-tax income.
The increase in cash provided from operating activities was also due to a
decrease in accounts receivable and inventories, an increase in accounts payable
and was offset by a decrease in customer deposits.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
Liquidity and Capital Resources (continued)
Net cash used in investing activities was $236,000 for the first nine months of
fiscal 2004, as compared to $266,000 for the same period last year. Net cash
used for the purchase of property and equipment was $204,000 for the first nine
months of fiscal 2004, as compared to $250,000 for the same period last year.
Net cash used in financing activities was $1,132,000 for the first nine months
of fiscal 2004, as compared to $552,000 for the same period last year. Financing
activities for the first nine months of fiscal 2004 included net payments of
$1,015,000, reducing the revolving line of credit facility, preferred stock
dividends paid of $70,000 and commitment and deferred legal fees relating to the
new credit facility of $68,000. The Company also received $21,000 in the third
quarter of fiscal 2004, representing the return of short-swing profits from a
shareholder owning more than 5% of the Company's common stock. This amount
offset net cash used in financing activities for the first nine months of fiscal
2004. Financing activities for the first nine months of fiscal 2003 included net
payments of $462,000, reducing the revolving line of credit facility, preferred
stock dividends paid of $70,000 and principal payments on capital leases of
$20,000.
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.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
Liquidity and Capital Resources (continued)
At September 7, 2004, there was approximately $1,670,000 in outstanding
borrowings under the new credit facility, with approximately $3,643,000
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 July 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 May 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 winter of 2004.
The Company expects to open this new showroom in early 2005. 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.
The Company plans to make improvements to its website in fiscal 2005, which are
not expected to require a significant use of cash.
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.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
Liquidity and Capital Resources (continued)
Management does not believe that inflation has had a material effect on our
results of operations for the first nine months 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 (July 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.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
PART II. OTHER INFORMATION:
Items 2, 3 and 5 were not applicable in the third quarter ended July 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 environmental counsel for advice with
respect to PADEP's request for information and other matters with respect to the
claim.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
Item 1. Legal Matters (continued)
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 4. Submission of Matters to a Vote of Security Holders
On June 24, 2004, the Company's shareholders at an Annual Meeting (i) elected
Franklin C. Karp (2,679,694 shares in favor, 165,463 shares against), Joseph J.
Calabrese (2,680,836 shares in favor, 164,321 against), Michael E. Recca
(2,681,336 shares in favor, 163,821 shares against), Frederic J. Gruder
(2,692,836 shares in favor, 152,321 shares against), Jeffrey A. Wurst (2,681,136
shares in favor, 164,021 shares against), William F. Kenny, III (2,693,036
shares in favor, 152,121 shares against), Nicholas A. Marshall (2,693,036 shares
in favor, 152,121 shares against), and Ira J. Lamel (2,693,036 shares in favor,
152,121 shares against) as directors of the Company and (ii) ratified the
appointment of BDO Seidman, LLP, the Company's independent auditors for the year
ending October 30, 2004 (2,826,344 shares in favor, 107 shares against and
18,706 shares abstained).
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 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.
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.
Harvey Electronics, Inc.
Notes to Financial Statements
July 31, 2004
(Unaudited)
Signatures
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on September 14, 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