Harvey's Losses Deepen; Liquidity 'Strained'

By Alan Wolf On Oct 9 2006 - 6:00am




Harvey Electronics' reported a net loss of $2.2 million for its fiscal third quarter ended July 29, compared to a $635,000 loss during the year-ago period, and management is now pinning its hopes for survival on shareholder approval of a $4 million cash-for-equity investment led by Trinity Investment Partners.

While the red ink was due largely to a one-time tax charge of $1.4 million, sales for the quarter fell 15.5 percent to $7.6 million and same-store sales plummeted 19 percent.

Franklin Karp, president/CEO of the struggling New York metro area A/V specialty chain, said the sales declines have strained the company's liquidity and capital resources, making it “imperative” that shareholders approve the proposed equity investment at Harvey's Oct. 27 annual meeting. The funds will allow Harvey to “complete its transition from a traditional retailer to a value-added custom installer and integrator of home entertainment and home automation devices,” he said.

Approval of the amendment is seemingly riding on a single shareholder, who recently converted his preferred stock to 486,500 shares of common stock.

If the equity investment is voted down, said Karp, “We can give no assurance that Harvey Electronics will be able to regain profitability or perhaps even continue its operations in its present form.”

In the meantime, the company also faces delisting from the NASDAQ stock exchange for failure to maintain minimums of $35 million in market value, $2.5 million in stockholder equity or $500,000 in net income for two of the three most recent fiscal years. A NASDAQ panel is currently reviewing Harvey's status.

On a positive note, Harvey's credit facility, which has supported the cash loss and sales shortfalls, has increased by about $200,000 due largely to strong vendor support, the company said, and Harvey's lender has agreed to provide additional financing through month's end. Harvey's bank has also waived all existing default covenants and will continue to support the company with $900,000 in financing should shareholders vote down the amendment or should Harvey miss a Nov. 10 interest payment.

Karp pointed to Harvey's transition from retailer to installer/integrator as the company's salvation. “Despite increased competition and a decline in retail store traffic, customer demand continues to be strong for digital video products, integrated remote controls and related installations,” he said. “The company's business continues to migrate from traditional retail sales to more profitable custom installation projects. This presents a need for Harvey to adapt to this new environment and an opportunity for the company to grow and thrive.”

To underscore the point, Karp noted that Harvey's custom installation business now accounts for 64 percent of gross sales and continues to grow as a percentage of total revenue. CFO Joseph Calabrese added that gains in labor revenue had partially offset declines in A/V sales, and have benefited the company's overall gross margin, which increased from 41.4 percent to 42.3 percent for the three-month period year-over-year.

Calabrese said the company has recently raised its labor rates, and has been aggressively cutting costs related to payroll, management bonuses, selling expenses, professional fees, and communications. Harvey will also continue to seek rent reductions and deferrals from landlords, and is planning to launch a new computer system that should increase efficiencies and improve its purchasing, inventory replenishment and allocation, point of sale, job order costing capabilities, and merchandising functions.

Karp attributed the quarter's comp sales declines to decreased traffic in three of the chain's eight stores, including its flagship location in Midtown Manhattan. “Management is addressing these underperforming stores and believes that we can make meaningful changes that will help improve sales,” he said.

He said sales had been impacted overall by video price compression, shortages of flat panel TVs and, to a lesser extent, competitive retail pressures. These were compounded by “a very soft retail climate” and a further slowdown in retail store traffic in July. Sales remain slow through September, he said.

Karp concluded, “We urge all shareholders to vote in favor of all related proposals to complete the Trinity-led equity infusion. The infusion of this significant capital coupled with the talents and achievements of our new proposed board will help Harvey to continue to cultivate its brand and achieve its growth strategy in this market.”

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