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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 January 29, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------- to ------------.
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
------------------------------- ---------------------------------------
(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
------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of March 15, 2005, 3,508,584 shares of the registrant's common stock, par
value $.01 per share, were outstanding.
Harvey Electronics, Inc.
FORM 10-Q
INDEX
PART I. Financial Information
Item 1. Financial Statements: Page No.
Statements of Operations (Unaudited) - Thirteen Weeks
ended January 29, 2005 and January 31, 2004 ...............3
Balance Sheets - January 29, 2005 (Unaudited) and October 30,
2004 .........................................................4
Statement of Shareholders' Equity (Unaudited) - Thirteen Weeks
ended January 29, 2005 .......................................5
Statements of Cash Flows (Unaudited) - Thirteen Weeks ended
January 29, 2005 and January 31, 2004 ........................6
Notes to Financial Statements (Unaudited) ......................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................11
Item 4. Disclosure Controls and Procedures .............................17
PART II. Other Information
Item 1. Legal Matters...................................................19
Item 6. Exhibits and Reports on Form 8-K................................21
Signatures ...................................................................22
Exhibit Number 31.1...........................................................23
Exhibit Number 31.2...........................................................25
Exhibit Number 32.1...........................................................27
Exhibit Number 32.2............................................................8
Part I Financial Information
Item I. Financial Statements
Harvey Electronics, Inc.
Statements Of Operations
(Unaudited)
Thirteen Weeks Thirteen Weeks
Ended Ended
January 29, January 31,
2005 2004
------------------------
Net sales $12,085,014 $12,395,892
Other income 6,000 4,417
----- -----
12,091,014 12,400,309
---------- ----------
Cost of sales 6,987,864 7,400,494
Selling, general and administrative expenses 4,603,962 4,378,107
Interest expense 45,243 51,420
------ ------
11,637,069 11,830,021
---------- ----------
Income before income taxes 453,945 570,288
Income taxes 180,000 220,000
------- -------
Net income 273,945 350,288
Preferred Stock dividend requirement 14,154 17,574
------ ------
Net income applicable to Common Stock $259,791 $332,714
======== ========
Net income per share applicable to common shareholders:
Basic $0.08 $0.10
===== =====
Diluted $0.06 $0.08
===== =====
Shares used in the calculation of net income per common share:
Basic 3,455,987 3,324,525
========= =========
Diluted 4,212,978 4,008,869
========= =========
See accompanying notes to financial statements.
Harvey Electronics, Inc.
Balance Sheets
January 29, 2005 October 30,
(Unaudited) 2004 41(1)
-------------------------------
Assets
Current assets:
Cash and cash equivalents $16,990 $15,990
Accounts receivable, less allowance of $20,000 and $20,000 745,207 898,088
Inventories 7,485,946 7,287,564
Prepaid expenses and other current assets 584,024 189,669
Deferred taxes 301,000 301,000
------- -------
Total current assets 9,133,167 8,692,311
--------- ---------
Property and equipment:
Leasehold improvements 3,532,701 3,459,826
Furniture, fixtures and equipment 2,621,121 2,355,549
Internet website 456,870 456,870
------- -------
6,610,692 6,272,245
Less accumulated depreciation and amortization 4,111,349 3,960,341
--------- ---------
2,499,343 2,311,904
Equipment under capital leases, less accummulated
amortization of $392,832 and $391,549 4,989 6,272
Deferred taxes 869,000 1,049,000
Goodwill 125,000 125,000
Reorganization value in excess of amounts allocable to
identifiable assets 283,440 283,440
Other assets, less accumulated amortization of
$279,600 and $273,398 321,877 330,736
- -------- -------- ------- -------
Total assets $13,236,816 $12,798,663
=========== ===========
Liabilities and shareholders' equity Current liabilities:
Trade accounts payable $2,099,102 $2,066,014
Customer deposits 1,685,533 1,955,440
Accrued expenses and other current liabilities 1,800,541 1,425,988
Income taxes payable 8,871 48,800
Cumulative Preferred Stock dividends payable 4,052 23,432
Current portion of long-term debt 40,695 -
------
Total current liabilities 5,638,794 5,519,674
--------- ---------
Long-term liabilities:
Revolving line of credit facility 1,789,719 1,825,320
Long-term debt 81,680 -
Deferred rent 297,054 283,891
------- -------
Total long-term liabilities 2,168,453 2,109,211
--------- ---------
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 600 shares-- 2005, 827 shares--
2004, (aggregate liquidation preference $600,000--
2005, $827,000--2004) 275,682 379,982
Common Stock, par value $.01 per share;
authorized 10,000,000 shares;
issued and outstanding 3,508,584 shares--2005
and 3,324,525 shares--2004 35,086 33,245
Additional paid-in capital 7,725,163 7,622,704
Accumulated deficit (2,606,362) (2,866,153)
---------- ----------
Total shareholders' equity 5,429,569 5,169,778
--------- ---------
Total liabilities and shareholders' equity $13,236,816 $12,798,663
=========== ===========
(1)--Derived from audited financial statements
at October 30, 2004.
See accompanying notes to financial statements.
Harvey Electronics, Inc.
Statement of Shareholders' Equity
(Unaudited)
Additional Total
Preferred Stock Common Stock Paid-in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
Balance at October 30, 2004 827 $379,982 3,324,525 $33,245 $7,622,704 $(2,866,153) $5,169,778
Net income for the period - - - - - 273,945 273,945
Preferred Stock dividend - - - - - (14,154) (14,154)
Conversion of Preferred Stock to
Common Stock (227) (104,300) 184,059 1,841 102,459 - 0
---- -------- ------- ----- ------- ------- -------
Balance at January 29, 2005 600 $275,682 3,508,584 $35,086 $7,725,163 $(2,606,362) $5,429,569
=== ======== ========= ======= ========== =========== ==========
See accompanying notes to financial statements.
Harvey Electronics, Inc
Statements of Cash Flows
(Unaudited)
Thirteen Weeks Thirteen Weeks
Ended Ended
January 29, January 31,
2005 2004
---- ----
Operating activities
Net income $273,945 $350,288
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 158,493 160,338
Income tax equivalent provision 180,000 220,000
Straight-line impact of rent escalations 13,163 12,879
Miscellaneous 2,657 15,628
Changes in operating assets and liabilities:
Accounts receivable 152,881 (195,868)
Inventories (198,382) (228,456)
Prepaid expenses and other current assets (75,730) 7,354
Trade accounts payable 33,088 35,652
Customer deposits (269,907) 58,083
Accrued expenses, other current liabilities
and income taxes 15,999 56,033
------ ------
Net cash provided by operating activities 286,207 491,931
------- -------
Investing activities
Purchases of property and equipment excluding
Internet website development (209,115) (56,931)
-------- -------
Net cash used in investing activities (209,115) (56,931)
-------- -------
Financing activities
Net payments on revolving credit facility (35,601) (331,575)
Preferred Stock dividends paid (33,534) (35,436)
Principal payments on note payable (6,957) -
Fees paid in connection with new credit facility - (67,500)
------- -------
Net cash used in financing activities (76,092) (434,511)
------- --------
Increase in cash and cash equivalents 1,000 489
Cash and cash equivalents at beginning of period 15,990 16,000
------ ------
Cash and cash equivalents at end of period $16,990 $16,489
======= =======
Supplemental cash flow information:
Interest paid $40,000 $94,000
======= =======
Taxes paid $40,000 $111,000
======= ========
See accompanying notes to financial statements.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29 2005
(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.
Operating results for the thirteen week period ended January 29, 2005 are not
necessarily indicative of the results that may be expected for the fifty-two
weeks ending October 29, 2005. Net sales and operating results for the Company's
first quarter of its fiscal year are positively affected by the holiday shopping
season. For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
October 30, 2004.
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.
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
January 29, 2005
(Unaudited)
Description of Business (Continued)
connection with the installation of the products, is recorded when the service
has been substantially 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
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 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 (5.25% at January 29, 2005) or LIBOR plus 2.75%, at
the Company's option. The Company paid Webster a $25,000 commitment fee in two
equal installments of $12,500, on November 21, 2003 and November 21, 2004,
respectively. Under the credit facility, the Company pays 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 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 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.
The Company was in compliance with all Webster covenants at January 29, 2005.
As the credit facility expires in four years and does not include both a
subjective acceleration clause and a lock box arrangement, in accordance with
EITF 95-22, the Company classified the balance outstanding, at January 29, 2005
($1,790,000), under the credit facility as a long-term liability.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(Unaudited)
3. Advertising Expense
In accordance with EITF 02-16, "Accounting by a Customer for Certain
Consideration Received from a Vendor" ("EITF 02-16") which addresses how and
when to reflect consideration received from suppliers in the financial
statements, the Company's advertising expense, net of cooperative advertising
allowances, is charged to operations when the advertising takes place. Net
advertising expense for the thirteen weeks ended January 29, 2005 and January
31, 2004 was $325,000 and $205,000, respectively.
4. Income Per Share
Basic and diluted income per share are calculated in accordance with SFAS No.
128, "Earnings Per Share". The basic and diluted income per common share for the
thirteen weeks ended January 29, 2005 and January 31, 2004 was computed based on
the weighted average number of common shares outstanding. For the first quarter
of fiscal 2005 and 2004, common equivalent shares relating to stock options,
aggregating 270,491 and 13,785, 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.
In December 2004, three holders of the Company's Preferred Stock converted their
227 shares into 184,059 shares of the Company's Common Stock. As a result, at
January 29, 2005, 600 shares of Preferred Stock were issued and outstanding and
are convertible into 486,500 shares of Common Stock. The basic and diluted
income per common share for the thirteen weeks ended January 29, 2005 was
computed using the weighted average of 131,462 shares of Common Stock from the
conversion of the Preferred Stock.
The conversion price of the Company's preferred stock is $1.2333. As a result,
common equivalent shares of 486,500 and 670,559 relating to the conversion of
the preferred stock were included in the weighted average number of common
shares outstanding for the diluted earnings per share computation for the first
quarter ended January 29, 2005 and January 31, 2004, respectively.
5. Income Taxes
In connection with the Company's emergence from its reorganization proceeding
under Chapter 11 of the United States Bankruptcy Code on December 26, 1996, the
Company adopted Fresh Start Accounting in accordance with AICPA Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code." Fresh Start Accounting requires that the Company report an
income tax equivalent provision when there is book income and a
pre-reorganization net operating loss carryforward. This requirement applies
despite the fact that the Company's pre-reorganization net operating loss
carryforward will be utilized to reduce the related income tax payable. The
current and any future year benefit arising from utilization of the
pre-reorganization carryforward, not presently reflected as deferred tax assets,
is not reflected as a
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(Unaudited)
5. Income Taxes (Continued)
reduction of the tax equivalent provision in determining net income, but instead
is recorded as a reduction of reorganization value in excess of amounts
allocable to identifiable assets until exhausted.
For the thirteen weeks ended January 31, 2004, the income tax equivalent
provision and the associated reduction of reorganization value in excess of
amounts allocable to identifiable assets amounted to $220,000 (38.6% effective
tax rate). The income tax equivalent provision will not materially affect the
Company's tax liability.
For the thirteen weeks ended January 29, 2005, the Company's income tax
provision represents deferred tax expense of $180,000 (39.7% effective tax
rate). As a result, the Company's long-term deferred tax asset was reduced by
the same amount. This income tax provision will not require the use of the
Company's cash.
6. Inventories
Inventories have been valued at average cost, based upon gross profit
percentages applied to net sales.
7. Retail Store Expansion
In fiscal 2004, the Company entered into a ten-year lease for a new Harvey
showroom in Bridgewater, New Jersey. This new store is expected to open in June
2005.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following management's discussion and analysis and this Form 10-Q contain
forward-looking statements, which involve risks and uncertainties. When used
herein, the words "anticipate," "believe," "estimate," and "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company's actual results,
performance or achievements could differ materially from the results expressed
in or implied by these forward-looking statements. Historical results are not
necessarily indicative of trends in operating results for any future period.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date the statement was made.
Results of Operations
General
The following discussion should be read in conjunction with the Company's
audited financial statements for the fiscal years ended October 30, 2004 and
November 1, 2003, included in the Company's Annual Report on Form 10K.
Thirteen Weeks Ended January 29, 2005 as Compared to Thirteen Weeks Ended
January 31, 2004
Net Income. The Company's pre-tax income for the thirteen weeks ended January
29, 2005 aggregated $454,000 as compared to $570,000 for the same period ended
January 31, 2004. Net income for the first quarter of fiscal 2005 was $274,000
as compared to $350,000 for the same quarter in fiscal 2004.
To supplement the Company's financial statements presented in accordance with
generally accepted accounting principles ("GAAP"), the Company uses non-GAAP
measures of earnings before interest, taxes, depreciation and amortization
("EBITDA"). The Company's Management reviews these non-GAAP measures internally
to evaluate the Company's performance and manage its operations and believes it
is an important measure in evaluating the Company's financial performance. In
addition, since the Company has historically provided non-GAAP results and
guidance to the investment community, the Company believes that the inclusion of
non-GAAP financial measures provides consistent and comparable measures to help
investors understand the Company's current and future operating results.
For the thirteen weeks ended January 29, 2005 and January 31, 2004, EBITDA
aggregated $658,000 and $782,000, respectively. (EBITDA for the first quarter of
fiscal 2005 is calculated as follows: pre-tax income of $454,000 plus interest
of $45,000 and depreciation and amortization of $159,000. EBITDA for the first
quarter of fiscal 2004 is calculated as follows: pre-tax income of $570,000,
plus interest of $52,000 and depreciation and amortization of $160,000.)
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2008
(Unaudited)
Net Income (continued)
The Company's net income for the first quarter of fiscal 2005 was reduced by net
advertising expense of $325,000 as compared to $205,000 for the same quarter
last year. The Company's advertising presence has increased for the first
quarter of fiscal 2005, as advertising expenditures increased to $965,000 from
$821,000 for the same quarter last year.
The Company recorded income tax provisions for the thirteen weeks ended January
29, 2005 and January 31, 2004 of $180,000 (39.7% effective tax rate) and
$220,000 (38.6% effective tax rate), respectively. The income tax provisions
will not materially affect the Company's tax liability.
Revenues. Net sales for the first quarter of fiscal 2005 aggregated $12,085,000
or a 2.5% decrease from the same quarter last year. Comparable store sales for
the first quarter of fiscal 2005 decreased approximately 2.6% from the same
quarter last year. The Company's November and December sales results were
essentially flat with the prior year. The decrease in the first quarter sales
resulted from slower January sales. Store traffic declined in January, despite
the Company's clearance event. Management believes extreme winter weather
conditions in New York in the last two weeks of January negatively affected
sales.
Overall net sales benefited by the strong sales results of the Company's Mount
Kisco, New York and Greenwich, Connecticut stores. These positive results were
offset by sales declines at the Company's other retail showrooms.
As previously disclosed, the Company has elected not to renew its Greenwich,
Connecticut Bang & Olufsen store lease which expires in April 2005, and to
relocate this store in the spring of 2005. The Company plans to move and
consolidate this Bang & Olufsen retail operation with the Company's Harvey
Greenwich location, one block away. This store-within-a-store concept, approved
by Bang & Olufsen, will present Bang & Olufsen products in a unique and separate
showcase within the Harvey store. The Company believes it will retain a
significant portion of the Bang & Olufsen store's revenue while significantly
reducing the overhead costs associated with this store.
The Company believes it continues to benefit from expanding revenues as a result
of strong demand for its custom installation services. Additionally, despite
increased competition, customer demand continues to be strong for digital video
products including plasma flat screen, LCD flat panel, high-definition and DLP
televisions, integrated remote controls and related custom home installations.
Custom installation projects continue to increase and accounted for 59% of net
sales for the first quarter of fiscal 2005 as compared to approximately 56% of
net sales for the same period last year. Custom installation sales, including
both equipment sales and labor income, increased approximately 2.8% to $7.2
million in the first quarter of fiscal 2005, as compared to $7.0 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.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(Unaudited)
Revenues (continued)
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.
The Company recently launched its new service initiative called "Harvey on
Demand". The Company believes it can 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. The Company is currently marketing this new service group and is
offering a forty-eight hour response time to address the needs of a qualified
customer at an additional labor cost. The Company plans to expand this
initiative in fiscal 2005 and beyond.
The Company's marketing efforts increased for the first quarter of fiscal 2005
as compared to the same period last year. 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 2005, 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 improvement to its website in fiscal 2005.
For the remainder of fiscal 2005, the Company also will endeavor to put
additional efforts and resources into its important customer relations
management initiatives and plans to be more aggressive with specific e-mail
promotions to its customers.
Cost and Expenses. Total cost of goods sold for the thirteen weeks ended January
29, 2005 decreased 5.6% to $6,988,000 as compared to the same quarter last year.
This was primarily due to the overall decrease in sales as noted above, offset
by an increase in the Company's gross profit margin.
The gross profit margin for the first quarter of fiscal 2005 increased
approximately 4.7% to 42.2% from 40.3% for the same quarter last year. This was
the result of a decline in the Company's overall video business, which generally
has lower margins than audio and labor sales. This was offset by stronger sales
from the Company's higher-margin custom installation business, labor revenues
and other higher margin accessory sales.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(Unaudited)
Cost and Expenses (continued)
The Company's overall video sales have been negatively impacted by price
compression in the industry as well as competitive pressures in the market.
Management believes this trend will continue. While video sales have declined to
approximately 42% of net sales in the first quarter of fiscal 2005, from 49% of
net sales for the same period last year, the Company's gross profit margin on
its video sales has actually improved. This is primarily due to the mix of video
products sold, coupled with the increase in related custom installation projects
and higher margin extended warranty sales relating to these video products.
The Company's higher margin audio sales for the first quarter of fiscal 2005
have increased to more than 48% of net sales from 44% of net sales for the same
period last year. Audio sales were positively impacted by additional cable
sales, headphones, furniture, radio and portables and other audio accessories.
Labor income for the first quarter of fiscal 2005 represented over 9% of net
sales as compared to approximately 7% of net sales for the same quarter last
year.
Selling, general and administrative expenses ("SG&A expenses") increased by
$226,000 or 5.2% for the thirteen weeks ended January 29, 2005 as compared to
the same quarter last year. Comparable SG&A expenses increased by approximately
$170,000 or 3.9% for the first quarter of fiscal 2005 as compared to the same
quarter last year.
Comparable SG&A expenses increased from additional payroll and payroll related
costs, net advertising expense, occupancy costs, truck expenses, EDP expenses
and various other general and store operating expenses, offset by a decrease in
communications expense.
The Company plans to continue to hire additional custom installation personnel,
as needed, 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 decreased by approximately $6,000 or 12% for the thirteen weeks
ended January 29, 2005, as compared to the same period last year. This was
primarily due to reduced borrowings offset by higher interest rates.
In connection with the Company's emergence from its reorganization proceeding,
the Company adopted Fresh Start Accounting. Fresh Start Accounting requires that
the Company report an income tax equivalent provision when there is book income
and pre-organization net operating loss carryforward. This requirement applies
despite the fact that the Company's pre-organization net operating loss
carryforward will be utilized to reduce the related income tax payable. The
current and any future year benefit arising from utilization of the
pre-reorganization carryforward is not reflected as a reduction of the tax
equivalent provision in determining net income, but instead is recorded first as
a reduction or reorganization value in excess of amounts allocable to
identifiable assets until exhausted, and thereafter as a direct addition to
paid-in capital.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(Unaudited)
Cost and Expenses (continued)
As noted above, in the first quarter of fiscal 2004, the income tax equivalent
provision and the reduction of reorganization value in excess of amounts
allocable to identifiable assets was $220,000. The income tax equivalent
provision will not materially affect the Company's tax liability.
For the thirteen weeks ended January 29, 2005, the Company's income tax
provision represents deferred tax expense of $180,000 (39.7% effective tax
rate). As a result, the Company's long-term deferred tax asset was reduced by
the same amount. This income tax provision will not require the use of the
Company's cash.
Liquidity and Capital Resources
At January 29, 2005 and October 30, 2004, the Company's ratio of current assets
to current liabilities was 1.62 and 1.57, respectively.
The improvement in the current ratio at January 29, 2005 was positively impacted
by the Company's pre-tax income. Other factors improving working capital
included an increase in inventory, prepaid expenses and other current assets, as
well as a decrease in customer deposits, offset by an increase in accrued
expenses.
Net cash provided by operating activities was $286,000 for the thirteen weeks
ended January 29, 2005, as compared to $492,000 for the same period last year.
Net cash used in investing activities was $209,000 for the first quarter of
fiscal 2005, as compared to cash used of $57,000 for the same quarter last year.
Net cash used for the purchases of leasehold improvements and equipment was
$209,000 as compared to $57,000 for the prior year's quarter.
Net cash used in financing activities was $76,000 for the first quarter of
fiscal 2005, as compared to $435,000 for the same quarter last year. Financing
activities for the first quarter of fiscal 2005 included net payments of
$36,000, reducing the revolving line of credit facility, preferred stock
dividends paid of $33,000 and principal payments on note payables of $7,000.
Financing activities for the first quarter of fiscal 2004 included net payments
of $332,000, reducing the revolving line of credit facility, preferred stock
dividends paid of $35,000 and commitment and deferred legal fees relating to the
new credit facility of $68,000.
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.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(Unaudited)
Liquidity and Capital Resources (continued)
The interest rate on all borrowings under the credit facility is 0.25% over
Webster Bank's prime rate (5.25% at January 29, 2005) or LIBOR plus 2.75%, at
the Company's option. The Company paid Webster a $25,000 commitment fee in two
equal installments of $12,500, on November 21, 2003 and November 21, 2004,
respectively.
In connection with the 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 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. The Company was in
compliance with all Webster covenants at January 29, 2005.
At March 14, 2005, there was approximately $1,384,000 in outstanding borrowings
under the credit facility, with approximately $3,376,000 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 October 30,
2004, 827 shares of Preferred Stock were issued and outstanding and were
convertible into 670,559 shares of Common Stock. In December 2004, 227 shares of
Preferred Stock were converted to 184,059 shares of the Company's Common Stock
by three preferred shareholders. As a result, 600 shares of Preferred Stock,
held by one shareholder, are currently outstanding and convertible into 486,500
shares of Common Stock at January 29, 2005.
The Company's newest 4,500 square foot Harvey retail showroom in Bridgewater,
New Jersey is under construction. The Company will finance all necessary
leaseholds, equipment, furniture and fixtures, pre-opening costs and inventory,
expected to aggregate between $1,000,000 - $1,200,000, with its new credit
facility. The new retail store is expected to open in June of 2005. In fiscal
2005, the Company expects to make improvements to certain of its Harvey retail
showrooms, including the move of its Bang & Olufsen store and the installation
of a movie theater within one of its stores and make miscellaneous purchases of
computer equipment and other assets, all approximating between $450,000 -
$550,000, and financed using the Company's credit facility.
In December 2004, the Company entered into a three-year note agreement to
finance the purchase of a new phone system. This note payable aggregated
$129,000 and was financed through an affiliate of Webster Bank. In fiscal 2005,
the Company expects to enter into a second three-year note agreement with this
affiliate of Webster to complete the installation the phone system which should
approximate $40,000.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(Unaudited)
Liquidity and Capital Resources (continued)
The Company intends to continue its advertising campaign in fiscal 2005,
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 2005.
In fiscal 2004, the Company amended and extended the lease for its flagship
store in Midtown Manhattan. This lease amendment will increase the Company's
occupancy costs in fiscal 2005 but to a greater extent beginning in fiscal 2006.
The increase in rent expense for this store, beginning in fiscal 2006 is
expected to approximate $200,000 per year.
In July 2003, the Company received a notice and information request from the
Pennsylvania Department of Environmental Protection ("PADEP"). See Part II, Item
1, Legal Matters, for details on this matter.
The Securities and Exchange Commission has extended the compliance dates for
non-accelerated filers, pursuant to 404 of the Sarbanes-Oxley Act of 2002. The
Company will further evaluate its implementation plan in fiscal 2005 to meet its
compliance requirements for fiscal year ending October 28, 2006. In connection
with this significant effort, Management believes that expenses related to
implementation of the required provisions of the Act may be in the range of
$250,000 - $350,000 for fiscal 2006.
Item 4. Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's Management,
including the Chief Executive Officer/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 Chief Executive
Officer/President and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective, as of the end of the period
covered by this Report (January 29, 2005), 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 Chief Executive Officer/President and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(Unaudited)
Item 4. Disclosure Controls and Procedures (continued)
As noted above, the Securities and Exchange Commission has extended the
compliance dates for non-accelerated filers, pursuant to 404 of the
Sarbanes-Oxley Act of 2002. The Company will further evaluate its implementation
plan in fiscal 2005 to meet its compliance requirements for fiscal year ending
October 28, 2006.
There were no significant changes in the Company's internal control over
financial reporting (as required by the Exchange Act) that occurred during the
Company's last fiscal quarter that have materially affected, or are reasonable
likely to materially affect, the Company's internal controls over financial
reporting.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(Unaudited)
PART II. OTHER INFORMATION:
Items 2, 3, 4 and 5 were not applicable in the first quarter ended January 29,
2005.
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.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(Unaudited)
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 to the Company
on this matter.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(Unaudited)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
Exhibit 31.1 Certification - Chief Executive Officer/President
Exhibit 31.2 Certification - Chief Financial Officer
Exhibit 32.1 Certification - Chief Executive Officer/President
Exhibit 32.2 Certification - Chief Financial Officer
(b) Reports on Form 8-K
On January 31, 2005, the Company filed Form 8-K with the Securities and Exchange
Commissions announcing the results of fiscal 2004 and its fourth quarter.
On February 7, 2005, the Company filed Form 8-K with the Securities and Exchange
Commission announcing sales results for its first quarter ended January 29,
2005.
Harvey Electronics, Inc.
Notes to Financial Statements
January 29, 2005
(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 March 15, 2005.
Harvey Electronics, Inc.
By:/s/Franklin C. Karp
- ----------------------
Franklin C. Karp
Chief Executive Officer/President
By:/s/Joseph J. Calabrese
- -------------------------
Joseph J. Calabrese
Executive Vice President, Chief Financial Officer, Treasurer &
Secretary