HARVEY ELECTRONICS INC, 10KSB, 2000-01-28

HARVEY ELECTRONICS INC
10KSB, 2000-01-28
RADIO, TV & CONSUMER ELECTRONICS STORES

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United States

Securities and Exchange Commission

Washington, D.C. 20549
Form 10-KSB

Annual Report Under Section 13 or 15(d) of The Securities Exchange Act Of 1934

For the fiscal year ended October 30, 1999

Transition Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934 for the Transition Period from _____________ to _________________

Commission File No. 1-4626

Harvey Electronics, Inc.
(Exact name of small business issuer in its charter)

New York 131534671
----------------------------------- -----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

205 Chubb Avenue, Lyndhurst, New Jersey 07071
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (201) 842-0078

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrant
- --------------------------------------------------------------------------------
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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[ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.

Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]

State issuer's revenues for its most recent fiscal year. $21,386,507

State the number of shares outstanding of each of the issuer's classes of common
equity, as of January 10, 2000. 3,282,833

As of January 10, 2000, the aggregate market value of the registrant's common
stock held by nonaffiliates computed by reference to the price at which the
stock was sold was $4,558,108. The shares are currently traded on the NASDAQ
SmallCap Market under the symbols "HRVE" for the Common Stock and "HRVEW" for
the Warrants to purchase Common Stock.

<PAGE>

37
Part I

Item 1. Description of Business.

General

Harvey Electronics, Inc. ("Harvey" or the "Company") is engaged in the retail
sale, service and custom installation of high quality audio, video and home
theater equipment. The equipment includes high fidelity components and systems,
video cassette recorders ("VCR"), digital versatile disc players ("DVD"), high
definition television ("HDTV"), direct view projection and plasma flat-screen
television sets, audio/video furniture, digital satellite systems, conventional
telephones and related accessories. The Company has been engaged in this
business in the New York Metropolitan area for seventy-two years. The Company
currently operates six Harvey specialty retail stores and one Bang and Olufsen
branded store. The two Harvey Manhattan stores are located on Broadway at 19th
Street and on 45th Street at Fifth Avenue. The Company's newest Harvey stores
opened in November 1998 on Glen Cove Road in Greenvale/Roslyn, Long Island and
Main Street in Mount Kisco, Westchester County, New York. Its other two Harvey
stores are located on Route 17 in Paramus, New Jersey, and on West Putnam Avenue
in Greenwich, Connecticut. In July 1999, the Company opened a new Bang and
Olufsen branded store in the Union Square area of lower Manhattan.

The Company's stores are designed to offer an attractive and pleasing
environment and to display its products in realistic home settings commonly
known in the industry as "lifestyle home vignettes." Sales personnel are highly
trained professionals with extensive product knowledge. This contrasts sharply
with a more rushed atmosphere and lesser-trained personnel of mass merchants.

Sale of Common Stock and Warrants in Public Offering

On April 7, 1998, the Company completed an issuance of its common stock and
common stock warrants in a public offering (the "Offering"). The Offering was
co-managed by The Thornwater Company, L.P. (the "Representative"), which sold
1,200,000 shares of the Company's common stock of which 1,025,000 shares were
sold by the Company and 175,000 shares by Harvey Electronics, LLC ("HAC")
2,104,500 of Warrants ("Warrants") to acquire additional shares of the Company's
common stock were also sold by the Company. The net proceeds from the Offering,
approximately $4.1 million, were used to open three new retail stores and for
general working capital purposes.

<PAGE>

The net proceeds from the Offering were also used to repay temporarily the
Company's credit facility ($2,262,306) and to retire the principal ($350,000)
and interest ($47,627) of a term loan.

Each Warrant is exercisable for one share of common stock at 110% ($5.50 per
share) of the Offering price, for a period of three years commencing March 31,
2000. The Warrants are redeemable (at $0.10 per warrant), at the Company's
option commencing March 31, 2000 if the closing bid price of the common stock
for 20 consecutive trading days exceeds 150% of the Offering price per share.

In late November 1997, HAC transferred 85,000 shares of Common Stock to certain
employees and directors of the Company and an individual who is a preferred
shareholder and a member of HAC. Such transfer was treated for accounting
purposes as if such shares were issued by the Company as compensation to such
persons. The Company recorded a deferred compensation charge equal to the fair
market value of the shares ($297,500) and was amortizing this balance over a
two-year forfeiture period. However, in October 1998, HAC removed this two-year
forfeiture provision and the Company accelerated its charge to stock
compensation expense. As a result, $297,500 was recorded to expense for fiscal
1998.

As compensation for the Offering, the Underwriters received a 10% commission; a
3% non-accountable expense allowance and Warrants for 10% of the number of
shares of common stock and Warrants sold to the public. These Warrants are
non-exercisable for one year following the Effective Date and are exercisable
thereafter for a period of five years at 120% of the Offering price. At closing,
the Company paid the Representative $123,660, representing the prepayment of a
three-year financial advisory and consulting agreement. As of October 31, 1998,
this financial advisory and consulting agreement was mutually terminated.
Additionally, the Representative agreed to eliminate the lock-up arrangement
with respect to shares owned by the Company's majority shareholder, HAC, and
members of management. As a result, the Company accelerated the amortization of
the prepaid three-year financial advisory and consulting fee paid to the
Representative and recorded a charge to operations of $123,660 for fiscal 1998.

Products

The Company offers its customers a wide selection of high-quality consumer
audio, video and home theater products, the distribution of which is limited to
specialty retailers (generally referred to in the industry as "esoteric
brands.") The Company is one of the country's largest retailers of "esoteric
brands" manufactured by Bang and Olufsen, Marantz, McIntosh, Vienna Acoustics,
Sonus Faber, Kef, Nakamichi and Adcom, whose products the Company has sold for a
number of years. The Company believes that it benefits from strong working
relationships with these manufacturers. See Page 6, below, for a discussion
about Bang & Olufsen.

<PAGE>

For the fiscal year ended October 30, 1999, the Company's audio product sales
represented approximately 71% of the Company's net sales and yielded gross
profit margins of approximately 40%. The Company's video product sales
represented approximately 25% of the Company's net sales and yielded gross
profit margins of approximately 28%. The Company also provides custom
installation of products it sells. Approximately 22% of net product sales
currently involve custom installation. The labor portion of custom installation
presently represents approximately 4% of net sales. The Company also sells
extended warranties on behalf of third party providers. Sales of extended
warranties which yield a gross profit margin in excess of 49%, represent 1% of
the Company's net sales.

The following table shows, by percentage, the Company's net product sales
attributable to each of the product categories for the periods indicated. Audio
components include speakers, subwoofers, receivers, amplifiers, preamplifiers,
compact disc players, cassette decks, turntables and tuners. The Company also
sells digital satellite systems (DSS) which are included in the VCR/DVD/DSS
category. Accessories primarily include headphones, surge protectors, blank
audio and videotapes and projection screens. The miscellaneous category includes
conventional telephones, answering machines, radios and other portable products.

Fiscal Year Fiscal Year
Ended Ended
October 30, October 31,
1999 1998
-------------------------------------

Audio Components 49% 52%
Mini Audio Shelf Systems 8 7
TV and Projectors 18 17
VCR/DVD/DSS 7 7
Furniture 5 4
Cable and Wire 5 5
Accessories 6 6
Extended Warranties 1 1
Miscellaneous 1 1
_____________________________________
100% 100%
=====================================

The percentage of sales by each product category is affected by promotional
activities, consumer preferences, store displays, the development of new
products and elimination or reduction of existing products and, thus, a current
sales mix may not be indicative of the future sales mix.

<PAGE>

The Company believes that it is well positioned to benefit from advances in
technologies because new technologies tend to be expensive when first introduced
and the Company's target customers desire and can afford such products. Three
new technologies, HDTV, DVD and plasma flat-screen television have recently been
introduced. The DVD player provides enhanced picture and sound quality in a
format far more convenient and durable than videotape. The plasma flat-screen
television allows a 40 inch television to be only six inches from front to back.
This allows the set to be far less obtrusive and more easily integratable into
the home. High definition television has significantly improved picture quality.

The Company intends to continue its recent emphasis on custom installation
(currently representing 26% of net sales) which can extend from a single room
audio/video system to an entire house with a combined selling price of
installation, labor and product from about $5,000 to in excess of $100,000. The
Company believes custom installation provides the opportunity to bundle products
and increase margins. For example, rather than just selling a television with an
approximate gross profit margin of 28%, custom installation enables the Company
to sell to the same customer speakers at a margin exceeding 40%, accessories at
a margin approximating 50% and installation labor with margins of over 41%.

Based on customers' desires, custom installation projects frequently expand
on-site. A single room home theater, for example, during the course of the
installation can grow into a multi-room system with increased margins.

Offering custom installation affords the Company a unique selling opportunity
not only because it may not be available at mass merchants, but also because
custom installation can generate repeat customers and customer referrals. Due to
the complexity of the installation provided by the Company, customers generally
remain with the Company, providing the opportunity to sell upgrades to existing
customers. The recent introduction of DVD players and advanced televisions, as
well as other emerging technologies, present significant opportunities for such
upgrades.

Operations

Supplies, Purchasing and Distribution

The Company purchases its products from approximately eighty manufacturers, ten
of which accounted for approximately 54% of the Company's purchases for the
fiscal year ended October 30, 1999. These ten manufacturers are Bang & Olufsen,
Bose, Marantz, McIntosh, Mitsubishi, Monster Cable, Nakamichi, Pioneer Elite,
Sony and Vienna Acoustics. Sony accounted for more than 10% of the Company's
purchases for the fiscal year ended October 30, 1999, and Bang & Olufsen and
Marantz each accounted for more than five (5%) percent of purchases for such
period.

<PAGE>

The Company has entered into substantially identical dealer agreements with each
of Marantz America, Inc., Audio Control, Sony, Cinemapro Corporation, Mitsubishi
Electronics America, Inc., Lenbrook America, LLC (a distributor of KEF
products), Pioneer Electronics (USA), Inc., NAD Electronics of America, Niles
Audio Corporation, Inc. and Runco International. Under each dealer agreement,
the Company is authorized to sell the manufacturer's products from specified
retail locations to retail customers and cannot sell the products by telephone
or mail order. Each agreement is for a term of a year or two, subject to renewal
or extension. The Company's dealer agreement with Niles Audio requires the
Company to purchase at least $240,000 of equipment per year.

The Company believes that competitive sources of supply would be available for
many of the Company's products if a current vendor ceased to supply to the
Company. However, a loss of a major source of supply of limited distribution
product could have an adverse impact on the Company.

Bang & Olufsen products have been sold by the Company since 1980. Bang & Olufsen
has decided that it will now focus on developing Bang & Olufsen licensed stores
("Branded Stores") throughout the world. Bang & Olufsen has, accordingly,
canceled its dealer agreement with the Company and, with one exception, all
other retailers effective May 31, 1999. Since this date, Bang & Olufsen products
are available only in Branded Stores. For the period prior to May 31, 1999, the
line represented approximately $628,000 or 3% of the Company's net sales for
fiscal 1999.

On January 7, 1999, the Company signed a lease and a related Prime Site
Marketing Agreement to open a new 1,500 square foot Bang & Olufsen Branded Store
in the Union Square area of lower Manhattan. The Company opened this new store
in July 1999. All related preoperating expenses and results of operations have
been included in the Company's results of operations for the fiscal year ended
October 30, 1999. This is the Company's seventh store and is the third opened
since its successful public offering, completed in April 1998.

The Company has received a commitment from Bang & Olufsen permitting, but not
requiring, the Company to open two additional Branded Stores in Manhattan and
Connecticut. Pursuant to this commitment, the Company must agree to purchase
these locations by May 2000.

The new Branded Store sells highly differentiated Bang & Olufsen products,
including uniquely designed audio systems, speakers, telephones, headphones and
accessories. The store will also sell video products including LCD projectors,
HDTV's, DVD players, plasma flat-screen televisions, and A/V furniture and
accessories. The store also offers professional custom installation of
multi-room audio and home theater systems.

<PAGE>

Due to the Company's strong relationships with many of its suppliers and its
volume of purchases, the Company has also been able to obtain additional
manufacturers' rebates based on volume buying levels. On occasion, the Company
has been able to negotiate favorable terms on larger purchases, such as extended
payment terms, additional cooperative advertising contributions or lower prices,
particularly on large purchases. In addition to being a member of a consumer
electronics industry buying group called Home Theater Specialists of America
(HTSA), the Company is also a member of Professional Audio Retailers Association
(PARA) and Custom Electronics Design Installation Association (CEDIA), both of
which provide the Company with additional training in sales and technology.

Purchases are received at the Company's 5,500 sq. ft. warehouse located in
Fairfield, New Jersey. Merchandise is distributed to the Company's retail stores
at least twice a week (and more frequently, if needed), using the Company's
employees and equipment.

The Company's management information system tracks current levels of sales,
inventory, purchasing and other key information and provides management with
information which facilitates merchandising, pricing, sales management and the
management of warehouse and store inventories. This system enables management to
review and analyze the performance of each of its stores and sales personnel on
a periodic basis. The central purchasing department of the Company monitors
current sales and inventory at the stores on a daily basis. In addition, the
Company currently conducts a physical inventory two times a year and between
such physical inventories it conducts monthly and daily cycle counts on selected
types of inventory. The purchasing department also establishes appropriate
levels of inventory at each store and controls the replenishment of store
inventory based on the current delivery or replenishment schedule.

The Company historically has not had material losses of inventory and does not
experience material losses due to cost and market fluctuations, overstocking or
technology. The Company's inventory turnover for the fiscal year ended October
30, 1999, was approximately 2.9 times.

Sales and Store Operations

Retail sales are primarily made for cash or by major credit cards. Revenues are
recorded by the Company when the product or service is delivered or rendered to
customers. Customer deposits are recorded as liabilities until the product is
delivered, at which time a sale is recorded and the liability for the customer
deposit is relieved.

<PAGE>

In addition, customers who qualify can obtain longer term financing with a
Harvey credit card, which the Company makes available to its customers. The
Harvey credit card is issued by an unrelated finance company, without recourse
to the Company. The Company also periodically, as part of its promotional
activities, makes manufacturer, (i.e., Mitsubishi), sponsored financing
available to its customers. Generally, the cost of such financing is paid for by
the Company, but manufacturers periodically participate with, and contribute to
the Company in financing these promotions.

Each store is operated by a store manager and a senior sales manager. Store
managers report to a Vice President of Operations who oversees all sales and
store operations, and who is further responsible for sales training and the
hiring of all retail employees. Every Company store has at least one in-home
audio/video specialist who will survey the job site at a customer's home, design
the custom installation and provide a cost estimate. Each store independently
services its custom installations through a project manager and experienced
installers employed at the store. All stores are staffed with professionally
trained salespeople and warehouse personnel. Salespeople are paid a base salary
plus commission based on gross margins.

All stores have an on-line point of sale computer system which enables the store
managers and corporate headquarters to track sales, margins, inventory levels,
customer deposits, back orders, merchandise on loan to customers, salesperson
performance and customer histories. Store managers perform sales audit functions
before reporting daily results to the main office in Lyndhurst, New Jersey.

Services and Repairs

Products under warranty are delivered to the appropriate manufacturer for
repair. Other repairs are sent to the manufacturers or an independent repair
company. Revenues from non-warranty services are not material.

The Company offers an extended warranty contract for most of the audio, video
and other merchandise it sells, which extended warranty contract provides
coverage beyond the manufacturer warranty period. Extended warranties are
provided by an unrelated insurance company on a non-recourse basis to the
Company. The Company collects the retail sales price of the extended warranty
contract from customers and remits the customer information and the cost of the
contract to the insurance company. Sales of extended warranty contracts
represent 1% of the Company's net sales. The warranty obligation is solely the
responsibility of the insurance company.

<PAGE>

Competition

The Company competes in the New York Metropolitan area with mass merchants, mail
order houses, discount stores and numerous other consumer electronics specialty
stores. The retail electronics industry is dominated by large retailers with
massive, "big box" retail facilities which aggressively discount mass
merchandise. These retailers operate on narrow profit margins and high volume,
driven by aggressive advertising emphasizing low prices. Nationwide industry
leaders are Circuit City and Best Buys. The New York region is dominated by
Circuit City and local chains including P.C. Richard & Son, The Wiz, J&R Music
World and Tops Appliance.

Many of the competitors sell a broader range of electronic products,
including computers, camcorders and office equipment, and many have
substantially larger sales and greater financial and other resources than the
Company. The Company competes by positioning itself as a retailer of high
quality limited distribution audio and video products and by offering services
such as custom installations which are not generally offered by the mass
merchants.

Very few, if any, of the audio products sold by the Company, other than Bose
products, radios and other portable products, are available at the mass
merchants. Of the major video products sold by the Company, generally only Sony,
Panasonic and Mitsubishi televisions are sold by the mass merchants.

The Company seeks to reinforce its positioning by displaying its products in
lifestyle home vignettes in an attractive and pleasing store environment and by
offering personalized service through trained sales personnel who are fully
familiar with all of the Company's products.

Advertising

During the late 1980's and early 1990's, the Company introduced lesser quality
product lines to become more price competitive. This strategy placed it in
direct competition with mass merchants. This strategy sent a mixed message to
the traditional customers of the Company. Commencing in late 1995, the Company
refocused its operations by returning to its traditional marketing strategy.

In the latter part of fiscal 1999, the Company decided to materially modify its
advertising program, including the decision to begin network and cable
television advertising, which had not been done in the past by the Company. In
addition, the frequency and size of the Company's print ads were increased.
Finally, the Company returned to advertising on radio. The new campaign was
fully implemented in November 1999. The results of this significant investment
in increased advertising have been quite positive to date.

<PAGE>

The television, radio, direct mail and certain of the print advertising
differentiates the Company by emphasizing the Harvey home theater experience,
including superior audio/video products custom installed by the Company and
controlled by one easy to operate remote control.

The Company currently uses larger, more frequent print advertising, emphasizing
image, products, and technology in the New York Times, New York Magazine,
Greenwich Magazine, Newsday, Bergen Record, Greenwich Times, Stanford Advocate
and the Gannett Journal News. The Company also distributes direct mail
advertising several times a year to reach its customer database of over 65,000.
Some of the direct mail promotions are for specific manufacturers, products, or
technology, and are supported by the manufacturers.

Television advertising is currently a 30 second commercial run on the WNBC, WABC
and WCBS networks as well as cable advertising on CNN, ESPN, MSG and CNBC. Radio
advertising is currently running on news, sports and business stations on AM
radio.

All advertising consistently offer attractive financing alternatives on
purchases on credit without interest for six or twelve months. The Company also
maintains an Internet site on the World Wide Web, at www.harveyonline.com. The
site promotes the Company's manufacturers and their products as well as the
Company's retail stores and custom installation services.

The following table shows the Company's gross advertising costs and net
advertising expense as a percentage of net sales for the periods presented. Net
advertising expense represents gross advertising cost less market development
funds, cooperative advertising and other promotional amounts received from the
manufacturers.

Fiscal Year Fiscal Year
Ended Ended
October 30, October 31,
1999 1998
-----------------------------------------

Gross advertising costs $1,220,000 $ 962,000
Net advertising expenses 227,000 233,000
Percentage of net sales 1.1% 1.3%

The Company has retained an outside advertising agency who is paid a monthly
retainer of $10,000 plus approved expenses. This agreement expired December 31,
1999 and the Company has renewed this agreement for one year with a new monthly
retainer of $15,000.

<PAGE>

Licenses and Intellectual Properties

The Company owns two registered service marks "HARVEY," issued on March 7, 1989,
and "THE TEMPLE OF HOME THEATER," issued on May 13, 1997. Both service marks are
registered for International Class 42, which includes retail store services in
the field of audio, video, consumer electronics, home theater products and
custom installation of home theater products. The Company believes that its
service marks have significant value and are important in marketing the
Company's products.

Employees

As of October 30, 1999, the Company employed approximately 109 full-time
employees of which 15 were management personnel, 12 were administrative
personnel, 47 were salespeople, 16 were warehouse workers and 19 were engaged in
custom installation.

The salespeople, warehouse workers, and installation staff (82 people) are
covered by a collective bargaining agreement with the Company which expires
August 1, 2000. The Company has never experienced a material work stoppage and
believes that its relationships with its employees and the union are
satisfactory.

Item 2. Description of Properties

All of the premises the Company presently occupies are leased. Management
believes that the Company's facilities are adequate and suitable for its present
business. The Company believes that adequate locations are available for its
proposed expansion.

<PAGE>

The Company leases premises at 205 Chubb Avenue, Lyndhurst, New Jersey, a 24,400
square foot facility, which the Company uses as executive offices. The lease
expires April 30, 2001, subject to a 5 year renewal option. The warehouse area
of 19,500 square feet of the Lyndhurst facility was sublet in October 1997 for
approximately $145,000 per year through April 2001. The Company currently leases
a 5,500 square foot warehouse in Fairfield, New Jersey at approximately $40,000
per year, pursuant to a lease which expires September 2002.

The Company leases the following retail premises:

Expiration
Date of Approximate
Current Selling
Annual Renewal Square Rent
Lease Options Footage Expense
Location
________________________________________________________________________________

2 West 45th Street 6/30/2005 None 7,500 $498,000
New York, NY

556 Route 17 North 6/30/2003 None 7,000 $258,000
Paramus, NJ

888 Broadway 1/1/2001 None 4,000 $300,000
at 19th St.
New York, NY
(within ABC Carpet & Home)

19 West Putnam Ave. 9/30/2001 5 years 5,300 $213,000
Greenwich, CT

44 Glen Cove Road 8/15/2009 None 4,600 $192,000
Greenvale, NY

115 Main St. 8/31/2008 None 3,100 $67,000
Mt. Kisco, NY

973 Broadway 12/31/2005 5 year 1,500 $114,000
New York, NY
(Bang & Olufsen Branded Store)

Item 3. Legal Proceedings.

Except as set forth herein, the Company believes that it is not a party to any
material asserted legal proceedings other than those arising in the ordinary
course of business and which are fully covered by insurance. The Company
maintains general liability and commercial insurance in amounts believed to be
adequate. However, there can be no ssurance that such amounts of insurance will
fully cover claims made against the Company in the future.

<PAGE>

There are outstanding disputed tax claims of approximately $52,000 which were
made against the Company during its Chapter 11 proceeding. The Company has
provided reserves of $10,000 for such taxes, penalties and interest, which the
Company believes to be adequate. However, there can be no assurance that the
reserve will be sufficient to cover these tax claims.

Item 4. Submission of Matters to a Vote of Security Holders.

On May 20, 1999, the Company's shareholders at an Annual Meeting (i) elected
Franklin C. Karp (3,005,988 shares in favor, 13,056 shares against), Joseph J.
Calabrese (3,055,988 shares in favor, 13,056 shares against), Michael E. Recca
(3,055,450 shares in favor, 13,594 shares against), Fredric J. Gruder (3,005,950
shares in favor, 13,094 shares against), Stewart L. Cohen (3,005,988 in favor,
13,056 shares against) and William F. Kenny (3,005,988 shares in favor, 13,056
shares against) and William F. Kenny III (3,005,988 shares in favor, 13,056
shares against) as directors of the Company; and (ii) approved the appointment
of Ernst & Young LLP as the Company's independent auditors for the fiscal year
ending October 30, 1999 (3,018,024 shares in favor, 1,009 shares against).

Part II

Item 5. Market for Common Equity and Related Stockholder Matters.

The Company's securities are traded on the NASDAQ SmallCap Market under the
symbols "HRVE" for the Common Stock and "HRVEW" for the Warrants to purchase
Common Stock.

The outstanding shares of Common Stock are currently held by Approximately 1,600
shareholders of record, and the Preferred Stock by five holders of record. The
transfer agent and registrar for the Common Stock is Registrar and Transfer
Company, 10 Commerce Drive, Cranford, New Jersey 07016

The following table indicates the quarterly high and low stock prices for fiscal
year 1999 and 1998:

Quarter Ended High Low
- ------------------------- ---------------- -----------------

January 30, 1999 $2.0625 $ .875
May 1, 1999 3.250 1.4688
July 31, 1999 2.6875 1.875
October 30, 1999 1.9375 1.2812
January 31, 1998 N/A N/A
May 2, 1998 6.00 2.00
August 1, 1998 4.50 1.625
October 31, 1998 2.625 .625

The Company has paid no dividends on its common stock for the last two years
and does not expect to pay dividends on common stock in the future.

Description of Securities

The total authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock with a par value of $0.01 per share ("Common Stock"), and 10,000
shares of 8.5% Cumulative Convertible Preferred Stock with a par value of $1,000
per share ("Preferred Stock"). The following descriptions contain all material
terms and features of the securities of the Company and are qualified in all
respects by reference to the Company's Certificate of Incorporation and Amended
and Restated By-Laws of the Company, copies of which are filed as exhibits.

Common Stock

The Company is authorized to issue 10,000,000 shares of Common Stock with a par
value of $0.01 per share. As of January 10, 2000, 3,282,833 shares are
outstanding and held by approximately 1,600 shareholders of record.

The holders of Common Stock are entitled to one vote per share on all matters to
be voted on by stockholders. There is no cumulative voting with respect to the
election of directors, with the result that holders of more than 50% of the
shares voted for the election of directors can elect all of the directors. The
holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors from sources legally available therefor. In
the event of liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, and after payment in full of the amount payable in
respect of the Preferred Stock, the holders of Common Stock are entitled, to the
exclusion of the holders of the Preferred Stock, to share ratably in the assets
of the Company available for distribution to stockholders after payment of
liabilities and after provision for each class of stock, if any, having
preference over the Common Stock. Holders of Common Stock have no preemptive
rights. All outstanding shares are, and all shares to be sold and issued as
contemplated hereby, will be fully paid and non-assessable and legally issued.
The Board of Directors is authorized to issue additional shares of Common Stock
within the limits authorized by the Company's charter and without stockholder
action.

Preferred Stock

The Company's Certificate of Incorporation authorizes the issuance of 10,000
shares of 8.5% Cumulative Convertible Preferred Stock ("Preferred Stock") with a
par value of $1,000 per share. As of January 10, 2000, 875 shares of Preferred
Stock were issued and outstanding and were held by five holders of record.

The Preferred Stock may be issued from time to time without stockholder approval
in one or more classes or series. A holder of the Preferred Stock is not
entitled to vote except as required by law.

Dividends on the Preferred Stock are cumulative from the day of original
issuance, whether or not earned or declared. In the event the Board of Directors
declares dividends to be paid on the Preferred Stock, the holders of the
Preferred Stock will be entitled to receive semiannual dividends at the rate of
eighty-five ($85) dollars per share payable in cash on the last business day of
June and December in each year. For calendar year 1997, the Company elected to
defer payment of the dividends over a three-year period. The preference rate for
calendar year 1997 is $105 per share, with interest at the rate of 8.5% per
annum. The December 1999 ($35,000) and 1998 ($38,000) installments relating to
the 1997 dividends have been paid to date by the Company. Total Preferred Stock
dividends of $112,809 were paid in fiscal 1999. In addition, no dividend shall
be paid, or declared, or set apart for payment upon, and no other distribution
shall at any time be declared or made in respect of, any shares of Common Stock,
other than a dividend payable solely in, or a distribution of, Common Stock,
unless full cumulative dividends of the Preferred Stock for all past dividend
periods and for the then current dividend period have been paid or have been
declared and a sum sufficient for the payment thereof has been set apart.

The Preferred Stock shall be redeemable, at the Company's option, in whole or in
part, upon payment in cash of the Redemption Price in respect of the shares so
redeemed. The "Redemption Price" per share shall be equal to the sum of (i) One
Thousand and 00/100 ($1,000.00) Dollars and (ii) all dividends accrued and
unpaid on such shares to the date of redemption. If less than all of the
outstanding Preferred Stock is to be redeemed, the redemption will be in such
amount and by such method (which need not be by lot or pro rata), and subject to
such other provisions, as may from time to time be determined by the Board of
Directors.

In the event of liquidation, dissolution or winding-up of the Company, whether
voluntary or involuntary, resulting in any distribution of its assets to its
shareholders, the holders of the Preferred Stock outstanding shall be entitled
to receive in respect of each such share an amount which shall be equal to the
Redemption Price, and no more, before any payment or distribution of the assets
of the Company is made to or set apart for the holders of Common Stock.

Each share of Preferred Stock may be convertible into shares of Common Stock at
the option of the holder, in whole or in part, as follows: until December 31,
2000, (i) 50% of the Preferred Stock will be convertible at $6.00 per share; and
(ii) $7.50 per share for the balance. Commencing January 1, 2001, the Conversion
Price shall be equal to the average of the closing bid price of the Common Stock
over the 45 trading days preceding January 1, 2001.

If at any time prior to the exercise of the conversion rights afforded the
holders of the Preferred Stock, the Preferred Stock is redeemed by the Company,
in whole or in part, then the conversion right shall be deemed canceled with
respect to such redeemed stock, as of the date of such redemption.

In case of any capital reorganization or any reclassification of the Common
Stock, or in case of the consolidation or merger of the Company with or into
another corporation, or the conveyance of all or substantially all of the assets
of the Company to another corporation, each Preferred Share shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock deliverable upon
conversion of such Preferred Stock would have been entitled upon such
reorganization, reclassification, consolidation, merger, or conveyance.

Item 6. Management's Discussion and Analysis or Plan of Operations.

The following discussion and analysis contains 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.

General

The following discussion should be read in conjunction with the Company's
audited financial statements for the fiscal years ended October 30, 1999 and
October 31, 1998, appearing elsewhere in this Form 10-KSB.

Statements of Operations Data:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
October 30, October 31, November 1,
1999 1998 1997
---------------------------------------------------
(In thousands, except share data)

Net sales $ 21,386 $ 17,262 $ 15,398
Cost of sales 13,082 10,646 9,765
---------------------------------------------------
Gross profit 8,304 6,616 5,633
Gross profit percentage 38.8% 38.3% 36.6%
Interest expense 179 224 325
Selling, general and 9,043 6,756 6,706
administrative expenses
Other income 72 70 73
Stock compensation expense - 297 -
Financial advisory and
consulting fee to - 124 -
Underwriter
Costs associated with - 114 -
lease transaction
---------------------------------------------------
Net loss (846) (829) (1,325)

Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
October 30, October 31, November 1,
1999 1998 1997
----------------------------------------------------
(In thousands, except share data)

Accretion of - (6) (78)
Preferred Stock
Preferred Stock (74) (83) (71)
dividend requirement
====================================================
Net loss attributable $ (920) $ (918) $ (1,474)
to Common Stock
====================================================
Basic and diluted net loss
applicable to common $ (.28) $ (.32) $ (.65)
shareholders
====================================================
Basic and diluted weighted
average outstanding 3,282,833 2,844,751 2,257,833
during the period
====================================================

Balance Sheet Data:

October 30, October 31,
1999 1998
-------------------------------------
(in thousands)

Working capital $ 925 (1) $2,355 (1)
Total assets 9,745 8,389
Long-term liabilities 251 266
Total liabilities 5,140 (1) 2,865 (1)
Total shareholders' equity 4,605 5,525

(1) The balance outstanding under the Company's revolving line of credit
facility ($1,477,603) at October 30, 1999 is presented as a current liability as
the line was temporarily paid down in December 1999. At October 31, 1998, no
amounts were outstanding under the revolving line of credit facility.

Fiscal Year Ended October 30, 1999 as Compared
to Fiscal Year Ended October 31, 1998

Net Loss

The net loss for the fiscal year ended October 30, 1999 was $845,519 as compared
to a net loss of $828,871 for the fiscal year ended October 31, 1998. The net
loss for fiscal 1999 includes preoperating expenses relating to the opening of
the new Bang & Olufsen store in the Union Square area in lower Manhattan of
approximately $115,000.

The net loss for fiscal 1998 included non-cash stock compensation expense of
$297,500 and various costs associated with the surrender of a real estate lease
of $113,782. Additionally, fiscal 1998 includes an expense of $123,660
representing three years of consulting fees paid to the Underwriter at the
closing of the Company's successful public offering. These fees, which were to
be amortized over three years, were fully charged to expense in fiscal 1998, as
a result of the early termination of the Financial Advisory and Consulting
Agreement between the Company and its underwriter.
Revenues

Net sales for the fiscal year ended October 30, 1999, aggregated $21,387,000, an
increase of approximately $4,124,000 or 23.9% from the prior year. Comparable
store sales for the year ended October 30, 1999, increased approximately
$602,000 or 3.5% from the prior fiscal year.

Fiscal 1999 includes sales from four mature Harvey retail stores and two new
Harvey stores opened in November 1998. Fiscal 1999 also includes sales from the
Company's new Bang & Olufsen branded store opened in July 1999. Net sales in
1999 have also been positively affected by the Company's e-commerce efforts
particularly with product offerings on eBay and from increased demand for its
custom installation services.

Fiscal 1998 includes sales from three mature Harvey stores and one Harvey store
opened in Greenwich, Connecticut in January 1997. Also included in fiscal 1998
sales, is approximately one month of sales relating to the Mount Kisco store,
acquired in August 1998.

Custom installation services continue to expand and account for approximately
26% of net sales for fiscal 1999 as compared to 25% for fiscal 1998. The
increase in net sales for fiscal 1999 is attributed to the volume of goods and
services sold and to a lesser extent, changes in product lines or prices.

Comparable store sales for fiscal 1999 increased over fiscal 1998, primarily
from increased demand for new digital products such as DVD, HDTV, plasma
flat-screen televisions and an increase in our custom installation services.

The overall performance of the Company was negatively impacted by the decline in
sales during the third and fourth quarters. In particular during May (the first
month of the third quarter), overall sales declined by approximately 17% while
comparable store sales declined by approximately 30%. May 1999 was the first
month that Harvey experienced a decline in total sales since 1996.

Costs and Expenses

Total cost of sales for the fiscal year ended October 30, 1999, increased
approximately $2,436,000 or 22.9% from the prior fiscal year. This was primarily
the result of increased sales, offset by improved gross profit margins.

The gross profit margin for the fiscal year ended October 30, 1999 was 38.9% as
compared to 38.3% for the prior fiscal year. The gross profit margin improved,
despite additional promotional activities in 1999, as a result of increased
sales of new digital technologies, increased custom installation services and
from a strong product mix. Sales training efforts and merchandising emphasis on
the sale of higher margin inventory categories and accessories have also helped
to increase the gross profit margin.

Selling, general and administrative expenses ("SG&A expenses") increased 33.8%
or approximately $2,287,000 for the fiscal year ended October 30, 1999 as
compared to the prior year. Total SG&A expenses increased in fiscal 1999 as
compared to fiscal 1998, primarily from the two new Harvey stores opened in
November 1998, coupled with the preoperating expenses and the opening of the new
Bang & Olufsen store in July 1999.

Comparable SG&A expenses increased 13.7% or approximately $927,000 for the
fiscal year ended October 30, 1999 as compared to the prior year. Comparable
SG&A expenses increased from additional payroll and payroll related items,
occupancy costs, professional expenses, insurance costs, expenses relating to
Y2K modifications, depreciation expense and various store operating expenses. In
fiscal 1999, the Company has also incurred additional expenses relating to the
expansion of its custom installation business and its training efforts.

Interest expense decreased approximately $44,000 or 19.8% for the fiscal year
ended October 30, 1999 as compared to the prior fiscal year. The decrease was
primarily due to the paydown of outstanding borrowings under the revolving line
of credit facility through February 1999, from the net proceeds of the public
offering.

Fiscal Year Ended October 31, 1998 as Compared to
Fiscal Year Ended November 1, 1997

The fiscal year ended 1998 is a fifty-two week year as compared to fifty-three
week year for fiscal 1997.

Net Loss

The net loss for the fiscal year ended October 31, 1998 was reduced to $828,871
as compared to a net loss of $1,325,212 for the fiscal year ended November 1,
1997. As mentioned earlier, the net loss for fiscal 1998 included non-cash stock
compensation expense of $297,500 and various costs associated with the surrender
of a real estate lease of $113,782. Additionally, fiscal 1998 includes an
expense of $123,660 representing three years of financial advisory and
consulting fees pre-paid to the underwriter at the closing of the Company's
successful public offering. These fees, which were to be amortized over three
years, were fully charged to expense in fiscal 1998 as a result of the early
termination of the Financial Advisory and Consulting Agreement between the
Company and its underwriter. Such charges to operations during fiscal 1998
aggregated $534,942 or approximately $.19 per share. Excluding these charges,
the Company's loss was $293,929 for fiscal 1998, as compared to a loss of
$1,325,212 for fiscal 1997.

Revenues

Net sales for the fiscal year ended October 31, 1998 increased approximately
$1,864,000 or 12.1% over the fiscal year ended November 1, 1997. Comparable
store sales for fiscal 1998 increased approximately 15.8% as compared to fiscal
1997.

Fiscal 1998 includes sales from three mature stores and one new store opened in
Greenwich, Connecticut in January 1997. Also included in fiscal 1998 sales, is
approximately one month of sales relating to the newly acquired Mount Kisco
store, prior to its renovation in November 1998. Fiscal 1997 includes sales from
three mature stores and the Greenwich, Connecticut store for only ten months.
Fiscal 1997 also includes only three months of sales from one retail store which
was closed in February 1997.

The increase in the Company's net sales is attributed to increases in volume of
goods and services sold and to a lesser extent, changes in product lines. The
prices of its goods have remained relatively constant. The Company's sales
continue to benefit from the successful marketing campaign where emphasis is
placed on the quality of its manufacturers' products displayed in home vignette
settings, new technologies, service and custom installation of home theater and
multi-room audio/video systems. In fiscal 1998, this marketing campaign included
radio advertising for the latter part of the year and additional direct mail
activities during the year. Custom installation services also continue to expand
and account for approximately 26% of net sales for 1998, as compared to
approximately 20% for fiscal 1997.

As part of its successful marketing plan, the Company offers its customers who
qualify a Harvey credit card which is issued by an unrelated financial company.
The Company continuously offers consumers using the Harvey credit card 90 days
interest-free financing on any purchases. As a promotion, the Company, from time
to time, offers consumers using the Harvey credit card attractive financing
alternatives of 6 or 12 months interest-free financing on specific products. The
Company pays the finance company a fee in connection with all interest-free
financing which is a percentage of such sales. For fiscal 1998 and 1997, the
cost to the Company for all interest-free financing was approximately $44,000
and $34,000, respectively.

Cost and Expenses

Total cost of sales for the fiscal year ended October 31, 1998 increased
approximately $882,000 or 9.0% from the fiscal year ended November 1, 1997. This
was primarily the result of increased comparable store sales offset by the one
store closed in February 1997, and by the overall improvement of gross profit
margins.

Gross profit margin for the fiscal year ended October 31, 1998 was 38.3% as
compared to 36.6% for the fiscal year ended November 1, 1997.

The gross profit margin improved in fiscal 1998 as compared to fiscal 1997 as a
result of increased custom installation sales which have higher gross profit
margins. Additionally, an increase was realized from merchandising changes
started in fiscal 1997. The Company added higher margin products to its product
line from new manufacturers and eliminated lower margin products. The marketing
campaign for fiscal 1998 also placed less emphasis on price sensitive
advertisements as compared to fiscal 1997. Finally, the Company maximized its
prompt payment purchase discounts from its vendors, while further reducing its
inventory losses from shrinkage, which was already substantially below industry
average.

Selling, general and administrative expenses ("SG&A expense") increased less
than 1% or approximately $50,000 for the fiscal year ended October 31, 1998 as
compared to the fiscal year ended November 1, 1997.

The increase in SG&A expenses for fiscal 1998 as compared to fiscal 1997, was
primarily due to a general increase in payroll and payroll related items,
professional expenses, and various store operating expenses as a result of
increased sales. These increases were partially offset by reduced advertising
and occupancy costs. The decrease in occupancy was primarily the result of a
reduction in warehouse space beginning in fiscal 1998 and from the closing of a
retail store in February 1998.

Interest expense decreased approximately $102,000 or 31.2% for the fiscal
year ended October 31, 1998 as compared to the fiscal year ended November 1,
1997.

The decrease in interest expense for fiscal 1998 as compared to fiscal 1997 was
primarily due to the elimination of debtor-in-possession financing which was
outstanding through December 1996, and the reduction of interest paid to the
Company's lender, subsequent to the paydown of the credit facility in April 1998
using part of the net proceeds from the public offering.

Liquidity and Capital Resources

The Company's ratio of current assets to current liabilities was 1.19 or
approximately $925,000 at October 30, 1999, as compared to 1.91 or approximately
$2,355,000 at October 31, 1998. At October 30, 1999, the balance outstanding
under the Company's revolving line of credit facility ($1,477,603) was
classified as a current liability as the line of credit was temporarily paid
down in December 1999 from the increased sales of the Christmas selling season.
At October 31, 1998, no amounts were outstanding under the revolving line of
credit facility. The decrease in the current ratio is also due to cash used in
operations during fiscal 1999.

Net cash used in operating activities was approximately $669,000 for the
fiscal year ended October 30, 1999 as compared to cash used of approximately
$1,229,000 for the prior fiscal year. The improvement in cash used in operating
activities for fiscal 1999 was due primarily to an increase in accounts payable
and accrued expenses and other current liabilities, offset by an increase in
inventories. In fiscal 1998, accounts payable and accrued expenses and other
liabilities were reduced using the proceeds of the public offering.

Net cash used in investing activities was approximately $831,000 for fiscal 1999
as compared to approximately $504,000 used in fiscal 1998. Net cash used in
fiscal 1999 was due primarily to capital expenditures ($828,000) primary
relating to three new store openings. In fiscal 1998, the Company benefited from
the redemption of a $200,000 certificate of deposit.

Net cash provided from financing activities was approximately $1,302,000 for
fiscal 1999 as compared to approximately $1,944,000 for the prior fiscal year.
In March 1999, the Company began to borrow from its revolving line of credit
facility and borrowed approximately $1,478,000 for fiscal 1999. The revolving
line of credit facility increased primarily to fund new store openings,
increased accounts receivable, prepaid expenses and part of the Company's net
loss. The increase in cash from financing activities for fiscal 1998 was
primarily from the net proceeds from the Company's successful public offering,
offset by the temporary repayment of the Company's revolving line of credit
facility and a term loan.

In November 1997, the Company entered into a three-year revolving line of credit
facility with Paragon Capital LLC ("Paragon") whereby the Company may borrow up
to $3,300,000 based upon a lending formula (as defined) calculated on eligible
inventory. The Paragon facility provides an improved advance rate on the
Company's inventory, as compared to the Company's previous facility with
Congress Financial Corporation. The interest rate on borrowings up to $2,500,000
is 1% in excess of the rate of interest announced publicly by Norwest Bank,
Minnesota, National Association, from time to time as its "prime rate" (the
"Prime Rate") (8.25% at October 30, 1999). The rate charged on outstanding
balances over $2,500,000 is 1.75% above the Prime Rate. A commitment fee of
$49,500 was paid by the Company at closing (which is being amortized over three
years) and a facility fee ($24,750) of three-quarters of one percent (.75%) of
the maximum credit line will be charged in each fiscal year. Monthly maintenance
charges and a termination fee also exist under the line of credit. At January
10, 2000, there were no outstanding borrowings under the Paragon revolving line
of credit facility.

The maximum amount of borrowings available to the Company under this line of
credit is limited to formulas prescribed in the loan agreement. The Company's
maximum borrowing availability is equal to 73% of acceptable inventory, minus
the then unpaid principal balance of the loan, minus the then aggregate of any
available reserves as may have been established by Paragon, minus the then
outstanding stated amount of all letters of credit.

Pursuant to the credit facility, the Company cannot exceed certain advance rates
on eligible inventory and must maintain certain levels of net income or loss and
minimum gross profit margins. Additionally, the Company's capital expenditures
cannot exceed a predetermined amount.

Paragon obtained a senior security interest in substantially all of the
Company's assets. The revolving line of credit facility provides Paragon with
rights of acceleration upon the breach of certain financial covenants or the
occurrence of certain customary events of default including, among others, the
event of bankruptcy. The Company is also restricted from paying dividends on
common stock, retiring or repurchasing its common stock, and entering into
additional indebtedness (as defined).

<PAGE>

On December 2, 1999, the Company announced it had reached an agreement in
principle with CoolAudio.com, Inc. ("CoolAudio") to merge the two companies in a
stock for stock transaction pursuant to which CoolAudio would have merged with
and into the Company. As of the date hereof, the Company and CoolAudio have not
reached an agreement regarding the terms of the merger transaction. The Company
and CoolAudio continue to negotiate the terms of the proposed merger, but there
can be no assurance the Company will enter into definitive agreements with
CoolAudio or consummate the merger transaction.

In April 1998, the Company completed a public offering ("Offering") of its
common stock and common stock purchase warrants. The Offering was co-managed by
The Thornwater Company, L.P., which sold 1,200,000 shares of the Company's
common stock of which 1,025,000 shares were sold by the Company and 175,000
shares were sold by Harvey Acquisition Company, LLC, the Company's major
shareholder. 2,104,500 Warrants to acquire additional shares of the Company's
common stock were also sold by the Company. The net proceeds from the Offering,
approximately $4.1 million, were used for retail store expansion and general
working capital purposes.

Each Warrant is exercisable for one share of common stock at 110% ($5.50 per
share) of the Offering price, for a period of three years commencing March 31,
2000. The Warrants are also redeemable (at $.10 per Warrant), at the Company's
option, commencing March 31, 2000 if the closing bid price of the common stock
for 20 consecutive trading days exceeds 150% of the Offering price per share or
$7.50.

The Company's management believes that the Company's overhead structure has the
capacity to support additional stores without significant increases in cost and
personnel, and, consequently, that revenues and profit from new stores will have
a positive impact on the Company's operations.

As Bang & Olufsen focuses on developing Bang & Olufsen licensed branded stores
("Branded Stores") throughout the world, it has canceled its dealer agreement
with the Company and, with one exception, all other retailers effective May 31,
1999. Since this date, Bang & Olufsen products are available only in Branded
Stores.

On January 7, 1999, as part of its expansion plan in New York region, the
Company signed a lease and a related Prime Site Marketing Agreement to open a
new 1,500 square foot Bang & Olufsen Brand Store in the Union Square area in
lower Manhattan. The Company opened this new store in July 1999.

This Branded Store is the first of two stores the Company plans to open in
Manhattan. There is currently no location or lease agreement for the second Bang
& Olufsen store. The new store sells highly differentiated Bang & Olufsen
products, including uniquely designed audio systems, speakers, telephones,
headphones and accessories and other approved non-Bang & Olufsen products. The
store also offers professional custom installation of multi-room audio and home
theater systems. This new store is the Company's seventh, and is the third store
opened since its successful public offering, completed in April 1998.

<PAGE>

The Company received a commitment from Bang & Olufsen permitting, but not
requiring, the Company to open two additional Branded Stores in Manhattan and
Connecticut. Pursuant to this commitment, the Company must agree to pursue these
locations by May 2000. No assurance can be given about the number of Branded
Stores that the Company will open. Capital expenditures necessary for each 1,500
square foot store, including inventory, should be approximately $350,000.

The Company seeks to open an additional Harvey Electronics store in New Jersey
within the next eighteen months, if the appropriate location or existing
business can be obtained. The Company estimates that the total cost of opening a
new Harvey Electronics retail store is approximately $650,000. The estimated
cost of opening this store includes the cost of leasehold improvements,
including design and decoration, machinery and equipment, furniture and
fixtures, security deposits, opening inventory (net of the portion to be
borrowed from the Company's lender), legal expense, preopening expenses and
additional advertising and promotion in connection with the opening.

The Company intends to continue to redirect and substantially increase its
marketing funds which began in the first fiscal quarter of fiscal year 2000.
This reallocation of funds will broaden the Company's media presence with the
addition of cable and network television advertising.

Management believes that cash on hand, cash flow from operations and funds made
available under the credit facility with Paragon, will be sufficient to meet the
Company's anticipated working capital needs and expansion plan for at least the
next twelve-month period.

During the periods presented, the Company was not significantly impacted by the
effects of inflation. The Company did benefit from a strong Christmas demand in
November and December 1999.

Year 2000 Modifications

In fiscal 1999, the Company successfully implemented all Year 2000 modifications
to upgrade its operating systems. Currently, the Company's computer environment
is operating as designed, as all systems are Year 2000 compliant. The Company
does not anticipate any additional material capital expenditures or management
efforts in this regard for fiscal 2000.

Financial Statements

The information required by this item is incorporated by reference to the
Company's financial statements.

<PAGE>

Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.

None

Part III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.

The directors and executive officers of the Company are as follows:

Name Age (1) Position
- --------------------------------------------------------------------------------

Michael Recca 49 Chairman and Director
William F. Kenny, III 68 Director
Stewart L. Cohen (2) 45 Director
Fredric J. Gruder 53 Director
Franklin C. Karp 45 President and Director
Joseph J. Calabrese 40 Executive Vice President,
Chief Financial Officer,
Treasurer, Secretary and
Director
Michael A. Beck 40 Vice President of Operations
Roland W. Hiemer 38 Director of Inventory Control

(1) As of October 30, 1999.
(2) On January 10, 2000, Mr. Cohen resigned from the Company's Board of
Directors.

Michael E. Recca became the Chairman of the Board of Directors of the
Company in November 1996. Mr. Recca has been the president of Recca & Company,
Inc., a financial consulting firm based in New York City, since 1992. Mr. Recca
is also a member and one of the three managers of Harvey Acquisition Company,
LLC, which is a principal shareholder of the Company. Mr. Recca was an employee
of Taglich Brothers, D'Amadeo, Wagner & Co., Inc., a NASD registered
broker-dealer, through December 31, 1998.

William F. Kenny, III has been a director of the Company since 1975. For
the past eight years Mr. Kenny has been a consultant to Meenan Oil Co., Inc.
Prior to 1992, Mr. Kenny was the President and Chief Executive Officer of Meenan
Oil Co., Inc. Mr. Kenny has also served as a director of the Empire State
Petroleum Association, Petroleum Research Foundation and is President of the
East Coast Energy Council. Mr. Kenny was also the president of the Independent
Fuel Terminal Operators Association and the Metropolitan Energy Council.

<PAGE>

Stewart L. Cohen was elected a director of the Company in 1997. Mr. Cohen
is the Chief Executive Officer of Paragon Capital LLC, an asset-based lender
providing a revolving line of credit facility to the Company and other
retailers. Mr. Cohen is also a managing director of The Ozer Group LLC, an asset
and business restructuring firm which provides asset disposition, business
evaluation, advisory services, and asset appraisals for financial institutions
lending primarily to retail businesses. Mr. Cohen is also a director for Smith
and Hawkens, Inc. On January 10, 2000, Mr. Cohen resigned from the Company's
Board of Directors.

Fredric J. Gruder, a director, since September 1996, has since July 1999
been of counsel to Dorsey & Witney LLP. From September 1996 to July 1999, he was
a partner in the law firm of Gersten, Saage, Kaplowitz & Fredericks, LLP
("Gersten"), which represented Thornwater Company, L.P. ("Thornwater"),
Representative of the Company's underwriters in the Offering. From March 1996
through September 1996, Mr. Gruder was of counsel to Gersten, having been a sole
practitioner from May 1995 through March 1996. From March 1992 until March 1996,
Mr. Gruder served as vice president and general counsel to Sbarro, Inc., a
publicly traded corporation which owns, operates, and franchises Italian
restaurants. Prior to this time, Mr. Gruder practiced law in New York for over
twenty years, specializing in corporate securities and retail real estate.

Franklin C. Karp has been with the Company since 1990. Before being appointed as
the Company's President in April 1996, Mr. Karp served as Merchandise Manager
and later as vice president in charge of merchandising. Mr. Karp has been
employed in various sales, purchasing and management positions in the retail
consumer electronics business in the New York Metropolitan area for 27 years.

Joseph J. Calabrese, a certified public accountant, joined the Company as
Controller in 1989. Since 1991, Mr. Calabrese has served as Vice President,
Chief Financial Officer, Treasurer and Secretary of the Company. Mr. Calabrese
was elected Executive Vice President and a Director of the Company in 1996. Mr.
Calabrese began his career with Ernst & Young LLP in 1981 where for the
eight-year period prior to his joining the Company he performed audit services
with respect to the Company.

Michael A. Beck has been Vice President of Operations of the Company since April
1997. From June 1996 until such date, he was the Company's Director of
Operations and from October 1995 until April 1996 he served as director of
operations for Sound City, a consumer electronics retailer. Mr. Beck was a store
manager for the Company from August 1989 until October 1995. Mr. Beck holds a BA
in Psychology from Merrimack College.

<PAGE>

Roland W. Hiemer is an executive officer of the Company and Director of
Inventory Control. Mr. Hiemer has been with the Company for nine years. He
started with the Company as a salesman and advanced to Senior Sales Manager for
the Paramus store in 1991. He was further promoted to Inventory Control Manager
in 1991. In 1997, he was promoted to Director of Inventory Control. Mr. Hiemer
holds a BA in Business Administration from Hofstra University.

Committees of the Board of Directors

The Board of Directors has an Audit Committee and a Compensation and Stock
Option Committee.

Audit Committee. The function of the Audit Committee includes making
recommendations to the Board of Directors with respect to the engagement of the
Company's independent auditors and the review of the scope and effect of the
audit engagement. William F. Kenny, III and Frederic J. Gruder are the current
members of the Audit Committee.

Compensation and Stock Option Committee. The function of the Compensation
and Stock Option Committee is to make recommendations to the Board with respect
to the compensation of management employees and to administer plans and programs
relating to stock options, pension and other retirement plans, employee
benefits, incentives, and compensation. Frederic J. Gruder and William F. Kenny,
III are the current members of the Compensation and Stock Option Committee.

Item 10. Executive Compensation.

The following table sets forth the cash compensation paid by the Company, as
well as any other compensation paid to or earned by the Chairman of the Company,
the President of the Company and those executive officers compensated at or
greater than $100,000 for services rendered to the Company in all capacities
during the three most recent fiscal years.

Summary Compensation Table

Name of Individual Stock Long-Term
and Principal Position Year Salary Bonus Compensation Compensation
- ---------------------------- ---------- ---------------- ------------- ------------------- ------------------

<S> <C> <C> <C> <C> <C>
Michael Recca 1999 $ 95,000 $ - $ - $ -
Chairman (1) 1998 $ 55,000 (1) $ - $ - $ -
1997 $ - $ - $ $ -

Franklin C. Karp 1999 $ 126,000 $ 5,000 $ - $ -
President 1998 $ 125,000 $ 15,000 $ 10,313 (2) $ -
1997 $ 126,000 $ - $ - $ -

Joseph J. Calabrese 1999 $ 117,000 $ 3,750 $ - $ -
Executive Vice President 1998 $ 116,000 $ 10,000 $ 6,875 (2) $ -
Chief Financial Officer, 1997 $ 117,000 $ - $ - $ -
Treasurer and Secretary

<PAGE>

Michael A. Beck 1999 $ 101,000 $ 3,750 $ - $ -
Vice President of 1998 $ 92,000 $ 2,000 $ 5,156 (2) $ -
Operations 1997 $ 87,000 $ 500 $ - $ -

<FN>
(1)--Effective April 1, 1998, Mr. Recca has been receiving $7,917 per month,
representing an annual directors fee in the annual amount of $95,000, in
his capacity as the Chairman of the Board of Directors of the Company.

(2)--Represents stock compensation at fair market value from common stock
received from HAC, on October 12, 1998.
</FN>
</TABLE>

Severance Agreements

The Company has entered into substantially similar severance agreements
("Severance Agreement") with each of Franklin C. Karp, Joseph J. Calabrese,
Michael A. Beck, and Roland W. Hiemer.

Each Severance Agreement provides that in the event the Company is sold or
merged with another company, involved in a corporate reorganization, or if a
change of the current management takes place, and the party, for the foregoing
reasons, is terminated or asked to accept a position other than that of senior
officer requiring similar responsibilities to those that the party currently
performs, or if the current corporate office is moved to a new location which is
more than thirty miles from either Mineola, New York, or Lyndhurst, New Jersey,
depending on who the party is, as a result of a reorganization or change in
ownership or control, and the party declines the new position or relocation, the
Company or its successor in control will be obligated, and continue, to pay the
party at the same salary and car allowance, if any, the party had most recently
been earning, for a period of one year following termination of Mr. Karp, Mr.
Calabrese, and Mr. Beck and six months for Mr. Hiemer. In addition, the party
will be fully covered under the Company's benefit plans, including, without
limitation, the Company's medical, dental, life and disability insurance
programs, during the one-year period for Mr. Karp, Mr. Calabrese and Mr. Beck
and during the six month period for Mr. Hiemer (including family coverage for
medical and dental insurance).

In the event following any foregoing termination the party obtains employment at
a lesser compensation than the party's compensation by the Company, the Company
will pay the party the difference between the two salaries for the remainder of
the one-year or six month period, whichever is applicable, plus continued
coverage of the Company's benefit plans for the same period.

<PAGE>

Each Severance Agreement also provides that in the event the party is terminated
for any other reasons, except conduct that is materially injurious to the
Company or conviction of any crime involving moral turpitude, the Company will
be obligated and continue to pay the party at the same salary the party has most
recently been earning, for a period of six months following termination for Mr.
Karp, Mr. Calabrese and Mr. Beck and three months for Mr. Hiemer, plus full
coverage of the Company's benefits for the same period.

Employment Agreement

On April 3, 1998, the Company entered into a two-year employment agreement with
Franklin C. Karp, the Company's President. The employment agreement provides
that Mr. Karp continue as the Company's President with the same compensation and
benefits which Mr. Karp currently receives, subject to annual adjustment to be
determined and made by the Board of Directors of the Company.

Stock Option Plan

In April 1997, the Company adopted a stock option plan which currently covers
1,000,000 shares of the Common Stock. Options may be designated as either (i)
incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code") or (ii) non-qualified stock options. ISOs may be granted
under the Stock Option Plan to employees and officers of the Company.
Non-qualified options may be granted to consultants, directors (whether or not
they are employees), employees or officers of the Company (collectively
"Options"). In certain circumstances, the exercise of Options may have an
adverse effect on the market price of the Common Stock.

The Stock Option Plan is intended to encourage stock ownership by employees of
the Company, so that they may acquire or increase their proprietary interest in
the Company and to encourage such employees and directors to remain in the
employ of the Company and to put forth maximum efforts for the success of the
business. Options granted under the Stock Option Plan may be accompanied by
either stock appreciation rights ("SARS") or limited stock appreciation rights
(the "Limited SARS"), or both.

The Plan is administered by the Company's Compensation and Stock Option
Committee as the Board may establish or designate (the "Administrators"). The
Committee shall be comprised of not less than two members, and all of whom shall
be outside directors. The members of the Compensation and Stock Option Committee
are Fredric J. Gruder and William F. Kenny III, outside directors.

The Administrators, within the limitation of the Stock Option Plan, shall have
the authority to determine the types of options to be granted, whether an Option
shall be accompanied by SARS or Limited SARS, the purchase price of the shares
of Common Stock covered by each Option (the "Option Price"), the persons to
whom, and the time or times at which, Options shall be granted, the number of
shares to be covered by each Option and the terms and provisions of the option
agreements.

<PAGE>

The maximum aggregate number of shares of Common Stock as to which Options,
Rights and Limited Rights may be granted under the Stock Option Plan to any one
optionee during any fiscal year of the Company is 50,000.

With respect to the ISOs, in the event that the aggregate fair market value,
determined as of the date the ISO is granted, of the shares of Common Stock with
respect to which Options granted and all other option plans of the Company, if
any, become exercisable for the first time by any optionee during any calendar
year exceeds $100,000, Options granted in excess of such limit shall constitute
non-qualified stock options for all purposes. Where the optionee of an ISO is a
ten (10%) percent stockholder, the Option Price will not be less than 110% of
the fair market value of the Company's Common Stock, determined on the date of
grant, and the exercise period will not exceed five (5) years from the date of
grant of such ISO. Otherwise, the Option Price will not be less than one hundred
(100%) percent of the fair market value of the shares of the Common Stock on the
date of grant, and the exercise period will not exceed ten (10) years from the
date of grant. Options granted under the Plan shall not be transferable other
than by will or by the laws of descent and distribution, and Options may be
exercised, during the lifetime of the optionee, only by the optionee or by his
guardian or legal representative.

In fiscal 1999, the Company's Compensation and Stock Option Committee of the
Board of Directors ("Compensation Committee") approved two grants of incentive
stock options, aggregating 222,500, to the Company's officers, to purchase the
Company's common stock at an exercise price of $1.50 per share. The 1999
incentive stock options are exercisable immediately.

On December 5, 1997, the Company's Compensation and Stock Option Committee of
the Board of Directors approved a grant, as of the effective date of the
Offering, of 70,000 incentive stock options to many of the Company's employees
to purchase the Company's Common Stock originally exercisable at various
exercise prices between $5.00 and $6.00, over a three-year period from the
effective date. On October 28, 1998, the Company's Compensation and Stock Option
Committee of the Board of Directors amended and reduced the exercise price of
such incentive stock options to $3.00 for officers and middle management, and
$2.00 for other employees. These options remain exercisable over three years
(33-1/3% per year). Additionally, on the said date, the Compensation and Stock
Option Committee granted 75,000 new incentive stock options to purchase the
Company's Common Stock to employees and directors, with an exercise price of
$1.00. These options are also exercisable over three years (33-1/3% per year)
except for those options granted to Messrs. Cohen, Kenny and Gruder, whose
options are exercisable, as amended.

<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management.

The following table sets forth certain information with respect to the
beneficial ownership of shares of Common Stock as of October 30, 1999, based on
information obtained from the persons named below, by (i) each person known to
the Company to beneficially own more than 5% of the outstanding shares of Common
Stock, (ii) each executive officer and director of the Company, and (iii) all
officers and directors of the Company as a group:

Name and Address of Amount and Nature of Beneficial
Beneficial Owner Ownership (2) Percentage
- ----------------------------------------------------- --------------------------

Harvey Acquisition Company LLC 783,651 21.8%
949 Edgewood Avenue
Pelham Manor, NY 10803

Michael Recca 841,984 (1) 25.2%
949 Edgewood Avenue
Pelham Manor, NY 10803

Stewart L. Cohen 20,000 (2) *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

William F. Kenny, III 18,489 (2) *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

Fredric J. Gruder 12,500 (2) *
Gersten, Savage, Kaplowitz &
Fredericks, LLP
101 East 52nd Street
New York, NY 10022

Franklin C. Karp 85,833 (3) 2.6%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

Joseph J. Calabrese 69,035 (4) 2.1%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

Michael A. Beck 65,833 (4) 2.0%
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

<PAGE>

Name and Address of Amount and Nature of Beneficial
Beneficial Owner Ownership (2) Percentage
- --------------------------------------------------------------------------------

Roland W. Hiemer 21,667 (5) *
Harvey Electronics, Inc.
205 Chubb Avenue
Lyndhurst, NJ 07071

All Directors and Officers as group 1,135,341 (6) 31.8%
(8 Persons)

* Less than 1% of outstanding shares of Common Stock.

(1) Includes Shares owned by HAC, of which Mr. Recca is a member and one of
three managers, plus options to purchase up to 53,333 shares of the
Company's Common Stock which are exercisable at an exercise price of
between $1.00-$1.50 per share.

(2) Includes an option to purchase up to 10,000 shares of the Company's Common
Stock, which is exercisable at an exercise price of $1.00 per share.

(3) Includes options to purchase up to 70,833 shares of the Company's Common
Stock, which are exercisable at an exercise price of between $1.00-$3.00
per share.

(4) Includes options to purchase up to 58,333 shares of the Company's Common
Stock, which are exercisable at an exercise price of between $1.00-$3.00
per share.

(5) Includes options to purchase up to 19,167 shares of the Company's Common
Stock, which are exercisable at an exercise price of between $1.00-$3.00
per share.

(6) Includes options to purchase up to 289,999 share of common stock, which are
exercisable at an exercise price of between $1.00 - $3.00 per share.

Item 12. Certain Relationships and Related Transactions.

In 1995 and 1996, during the Company's bankruptcy proceeding, the Company
borrowed, in the aggregate, approximately $2,822,500 (the "Loan") from HAC. As
of the Effective date of the Company's Reorganization Plan, and pursuant to
certain provisions contained therein, HAC's claims in connection with the Loan
was satisfied by issuing HAC 2,000,000 shares of the Company's Common Stock.
Subsequently, Michael Recca was elected as a member and Chairman of the
Company's Board of Directors. Interest paid to HAC in fiscal 1998 was
approximately $66,000. In fiscal 1998, the Company recorded $40,000 in
management consulting fees to Recca & Co. Inc., of which Michael Recca is the
sole shareholder, of which $23,000 was payable at October 30, 1999 and October
31, 1998.

Effective April 1, 1998, Mr. Recca has been receiving $7,917 per month,
representing an annual director's fee in the annual amount of $95,000, in his
capacity as the Chairman of the Board of Directors of the Company.

<PAGE>

Reference is made to "Management's Discussion and Analysis or Plan of
Operation- Liquidity and Capital Resources" regarding the Company's revolving
line of credit facility with Paragon, which the Company entered into on November
5, 1997. Stewart L. Cohen, a former director of the Company, is the Chief
Executive Officer and a director of Paragon.

In February and March, 1997, Mr. E. H. Arnold ("Arnold"), a member of HAC
and a holder of Preferred Stock, loaned the Company the principal amount of
$350,000, with an interest rate of 12% per annum. On April 9, 1998, this loan
was repaid with interest ($48,000) and without prepayment penalty.

In November 1997, HAC transferred 85,000 shares of Common Stock to certain
employees and directors of the Company and Arnold. Such transfer is to be
treated for accounting purposes as if such shares were issued by the Company as
compensation to such persons. In fiscal 1998, the Company recorded $297,500 as
stock compensation expense (see Note 3 to the Financial Statements).

On April 7, 1998, HAC reimbursed the Company $70,000 of the estimated expenses
of $475,000 in the Offering in addition to the underwriting discounts and
commissions and non-accountable expense allowance related to the Shares sold by
it in the Offering. In the future the Company will present all proposed
transactions between the Company and its officers, directors or 5% shareholders,
and their affiliates to the Board of Directors for its consideration and
approval. Any such transaction, including forgiveness of loans, will require
approval by a majority of the disinterested directors and such transactions will
be on terms no less favorable than those available to disinterested third
parties.

In October 1998, the Company received a promissory note from a previous member
of its Underwriter, in lieu of an outstanding trade receivable for $73,321.
Payments, including interest at 9% per annum, aggregating $11,277, were made to
the Company in fiscal 1999. The balance of the original note was due on October
30, 1999. However, in November 1999, an amendment to the promissory note was
executed, deferring the payment of the remaining principal balance and interest
at 9% per annum as follows: one payment of $44,994 due January 25, 2000 with the
remaining balance of $24,141 due March 25, 2000. As a result, the amended "note
receivable from the previous member of Underwriter" ($68,430), has been
presented as a current asset at October 30, 1999.

Effective November 1, 1998, the Company signed a consulting agreement with a
previous member of its Underwriter. Pursuant to the terms of the two-year
agreement, the consultant received an annual fee of $75,000 for fiscal 1999. The
agreement can be terminated by the Company under certain defined events.

<PAGE>

Item 13. Exhibits and Reports on Form 8-K.

(a)--The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed under the Company's Form SB-2 under Commission File
#333--42121:

Exhibit Number Description

3.1.1--Restated Certificate of Incorporation of 1967

3.1.2--Certificate of Amendment of the Certificate of Incorporation of 1997

3.1.3--Certificate of Amendment of the Certificate of Incorporation of December
1996

3.1.4--Certificate of Amendment of Certificate of Incorporation of July 1988

3.1.5--Certificate of Amendment of Certificate of Incorporation of July 1971

3.1.6--Certificate of Amendment of Certificate of Incorporation of February 1971

3.1.7--Certificate of Amendment of Certificate of Incorporation of June 1969

3.1.8--Certificate of Amendment of Certificate of Incorporation of September
1968

4.1--Sections in Certificate of Incorporation and the Amended and Restated
By-Laws of Harvey Electronics, Inc., that define the rights of the holders of
shares of Common Stock, Preferred Stock and holders of Warrants(included in
Exhibit Nos. 3.1.2 and 3.1.3)

4.2--Form of Common Stock Certificate

4.3--Form of Redeemable Common Stock Purchase Warrant

4.4--Form of Representative's Warrant

4.5--Form of Warrant to Holders of Preferred Stock

10.1.1--Stock Option Plan of Harvey Electronics, Inc.

10.1.2--Form of Stock Option Agreement

10.2.1--Severance Agreement with Franklin C. Karp

10.2.2--Severance Agreement with Joseph J. Calabrese

10.2.3--Severance Agreement with Michael A. Beck

<PAGE>

10.2.4--Severance Agreement with Roland W. Hiemer

10.3--Employment Agreement with Franklin C. Karp

10.4.1--Dealer Agreement between the Company and Mitsubishi Electronics America,
Inc.

10.4.2--Dealer Agreement between the Company and Niles Audio Corporation, Inc.

10.5.1--Lease between the Company and Joseph P. Day Realty Corp. (2)

10.5.2--Lease between the Company and Goodrich Fairfield Associates, L.L.C. (2)

10.5.3--Lease between the Company and Sprout Development Co. (2)

10.5.4--Lease between the Company and Service Realty Company (2)

10.5.5--Lease between the Company and 205 Associates (2)

10.5.6--Sublease between the Company and Fabian Formals, Inc. and Affiliate
First Nighter of Canada (2)

10.6--Loan and Security Agreement, Master Note and Trademark Security Agreement
with Paragon Capital LLC

(ii) The following exhibits are hereby incorporated by reference from Exhibit A
filed as part of the registrant's Form 8-K dated November 3, 1997:

Exhibit Number Description

2.1.1--Restated Modified Amended Joint and Substantially Consolidated Plan of
Reorganization of Harvey Electronics, Inc.

2.1.2--Order dated November 13, 1996 Confirming Plan of Reorganization

(iii) The following exhibits are hereby incorporated by reference from Item 7
filed as part of the registrant's Form 8-K dated April 7, 1998:

Exhibit Number Description

4.4--Representative's Warrant Agreement

4.5--Warrant Agent Agreement

10.1--Underwriting Agreement

<PAGE>

10.2--Financial Advisory and Investment Banking Agreement between the Company
and The Thornwater Company, L.P.

(iv) The following exhibits are hereby incorporated by reference to the
corresponding exhibits filed with the Company's Form 8-K dated October 12, 1998:

10.01--Bang & Olufsen America, Inc. Termination Letter dated September 7, 1998

10.02--Bang & Olufsen America, Inc. New Agreement Letter dated October 8, 1998

10.03--Agreement with Thornwater regarding termination of agreements and lock-up
amendments dated October 31, 1998

(v) The following exhibits are hereto incorporated by reference to the Company's
Form 10KSB dated October 31, 1998:

105.7--Lease Agreement with Martin Goldbaum and Sally Goldbaum

105.8--Lease Agreement with bender Realty*

10.7--Surrender of Lease with 873 Broadway Associates

10.8--Contract of Sale with Martin Goldbaum, Sally Goldbaum, the Sound Mill,
Inc. and Loriel Custom Audio Video Corp.

10.9--License Agreement with ABC Home Furnishings, Inc.

(vi) The following exhibits are annexed hereto:

23.--Consent of Ernst & Young LLP.

27.1--Financial Data Schedule

(b) Reports on Form 8-K

The Company filed a report on Form 8-K dated December 2, 1999, announcing
it had reached an agreement in principle with CoolAudio to merge the two
companies in a stock for stock transaction pursuant to which CoolAudio would
have merged with and into the Company. As of the date hereof, the Company and
CoolAudio have not reached an agreement regarding the terms of a merger
transaction. The Company and CoolAudio continue to negotiate the terms of a
proposed merger; however there can be no assurance the parties will enter into
definitive agreements or consummate a merger transaction.

<PAGE>

Signatures

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Harvey Electronics, Inc.

By: /s/ Franklin C. Karp
--------------------
Franklin C. Karp, President

Dated: January 28, 2000

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dated indicated.

Signature Title Date
- --------------------------------------------------------------------------------

/s/ Franklin C. Karp President and Director January 28, 2000
- ----------------------------
Franklin C. Karp

/s/ Joseph J. Calabrese Executive Vice President, January 28, 2000
- ---------------------------- Chief Financial Officer,
Joseph J. Calabrese Treasurer, Secretary and
Director

/s/ Michael Recca Chairman and Director January 28, 2000
- ----------------------------
Michael Recca

/s/ William F. Kenny, III Director January 28, 2000
- ----------------------------
William F. Kenny, III

/s/ Fredric Gruder Director January 28, 2000
- ----------------------------
Fredric Gruder

Item 7. Financial Statements.

Harvey Electronics, Inc.

Index to Financial Statements

Report of Independent Auditors...............................................F-2

Balance Sheet--October 30, 1999..............................................F-3

Statements of Operations--Fiscal years ended
October 30, 1999 and October 31, 1998.....................................F-4

Statements of Shareholders' Equity--Fiscal years ended
October 30, 1999 and October 31, 1998.....................................F-5

Statements of Cash Flows--Fiscal years ended
October 30, 1999 and October 31, 1998.....................................F-6

Notes to Financial Statements................................................F-7

<PAGE>

F-5

Report of Independent Auditors

Shareholders and Board of Directors
Harvey Electronics, Inc.

We have audited the accompanying balance sheet of Harvey Electronics, Inc. as of
October 30, 1999 and the related statements of operations, shareholders' equity,
and cash flows for the fiscal years ended October 30, 1999 and October 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Harvey Electronics, Inc. at
October 30, 1999, and the results of its operations and its cash flows for the
fiscal years ended October 30, 1999 and October 31, 1998, in conformity with
accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Melville, NY
January 7, 2000

<PAGE>

Harvey Electronics, Inc.

Balance Sheet

October 30, 1999
Assets
Current assets:
Cash and cash equivalents $ 23,947
Accounts receivable, less allowance of $25,000 449,057
Note receivable--previous member of Underwriter 68,430
Inventories 4,920,614
Prepaid expenses and other current assets 351,962
-------------------
Total current assets 5,814,010
Property and equipment:
Leasehold improvements 1,498,585
Furniture, fixtures and equipment 1,145,228
-------------------
2,643,813
Less accumulated depreciation and amortization 717,272
-------------------
1,926,541
Equipment under capital leases, less accumulated
amortization of $349,000 141,012
Cost in excess of net assets acquired, less
accumulated amortization of $7,000 143,000
Reorganization value in excess of amounts
allocable to identifiable assets, less accumulated
amortization of $198,023 1,450,440
Note receivable--officer 15,000
Other assets, less accumulated amortization of $160,887 254,684
-------------------
Total assets $ 9,744,687
===================
Liabilities and shareholders' equity
Current liabilities:
Revolving line of credit facility $ 1,477,603
Trade accounts payable 1,943,225
Accrued expenses and other current liabilities 1,302,848
Income taxes 25,200
Cumulative Preferred Stock dividends payable 61,057
Current portion of capital lease obligations 78,880
-------------------
Total current liabilities 4,888,813
Long-term liabilities:
Cumulative Preferred Stock dividends payable 30,625
Capital lease obligations 21,504
Deferred rent 199,083
-------------------
251,212
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 875 shares (aggregate
liquidation preference--$875,000) 402,037
Common Stock, par value $.01 per share;
authorized 10,000,000 shares;
issued and outstanding 3,282,833 shares 32,828
Additional paid-in capital 7,481,667
Accumulated deficit (3,311,870)
-------------------
Total shareholders' equity 4,604,662
-------------------
Total liabilities and shareholders' equity $ 9,744,687
===================

See notes to financial statements.

<PAGE>

Harvey Electronics, Inc.

Statements of Operations

Fiscal Years Ended
October 30, 1999 October 31, 1998
_______________________________________

Net sales $21,386,507 $17,262,082

Interest and other income 72,524 70,364
_______________________________________
21,459,031 17,332,446
_______________________________________

Cost of sales 13,082,163 10,646,491
Selling, general and
administrative expenses 9,043,046 6,756,254
Stock compensation expense (Note 4) - 297,500
Financial advisory and consulting fee
to Underwriter (Note 3) - 123,660
Costs associated with lease transaction (Note 9) - 113,782
Interest expense 179,341 223,630
_______________________________________
22,304,550 18,161,317
_______________________________________
Net loss (845,519) (828,871)

Preferred Stock dividend requirement (74,376) (83,376)
Accretion of Preferred Stock - (6,000)
_______________________________________
Net loss applicable to Common Stock
$(919,895) $(918,247)
=======================================
Net loss per common share applicable to
common shareholders:
Basic and diluted net loss per common share $(.28) $(.32)
=======================================
Shares used in the calculation of net loss
per common share:
Basic and diluted weighted-average shares
outstanding during the year 3,282,833 2,844,751
=======================================

See notes to financial statements.

<PAGE>

Harvey Electronics, Inc.

Statements of Shareholders' Equity

Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at November 1, 1997 - $ - 2,257,833 $22,578
Net loss for the year - - - -
Transfer of Common Stock
from HAC to employees,
directors and a member of HAC - - - -
Accretion of Preferred Stock - - - -
Reclassify Preferred Stock to
shareholders' equity upon
removal of redemption feature 875 402,037 - -
Preferred Stock dividend - - - -
Deferred compensation earned - - - -
Record value of Common Stock Warrants
granted - - - -
Proceeds from public offering of
common stock - - 1,025,000 10,250
Proceeds from issuance of 2,104,500
common stock warrants in
public offering - - - -
Expenses of public offering of
common stock and warrants - - - -
-------------------------------------------------------------
Balance at October 31, 1998 875 402,037 3,282,833 32,828

Net loss for the year - - - -
Preferred Stock dividend - - - -
-------------------------------------------------------------
Balance at October 30, 1999 875 $ 402,037 3,282,833 $ 32,828
=============================================================

Additional Total
Paid-in Deferred Accumulated Shareholders'
Capital Compensation Deficit Equity
- -------------------------------------------------------------------------------------------------------------------------

Balance at November 1, 1997 $ 3,067,799 $ - $(1,473,728) $ 1,616,649
Net loss for the year - - (828,871) (828,871)
Transfer of Common Stock
from HAC to employees,
directors and a member of HAC 297,500 (297,500) - -
Accretion of Preferred Stock - (6,000) (6,000)
Reclassify Preferred Stock to
shareholders' equity upon
removal of redemption feature - - - 402,037
Preferred Stock dividend - - (83,376) (83,376)
Deferred compensation earned - 297,500 - 297,500
Record value of Common Stock Warrants
granted 30,000 - - 30,000
Proceeds from public offering of
common stock 5,114,750 - - 5,125,000
Proceeds from issuance of 2,104,500
common stock warrants in
public offering 210,450 - - 210,450
Expenses of public offering of
common stock and warrants (1,238,832) - - (1,238,832)
----------------------------------------------------------------------------------
Balance at October 31, 1998 7,481,667 - (2,391,975) 5,524,557

Net loss for the year - - (845,519) (845,519)
Preferred Stock dividend - - (74,376) (74,376)
----------------------------------------------------------------------------------
Balance at October 30, 1999 $ 7,481,667 $ - $(3,311,870) $ 4,604,662
==================================================================================

</TABLE>

See notes to financial statements.

<PAGE>

F-7
Harvey Electronics, Inc.

Statements of Cash Flows

Fiscal Years Ended
October 30, 1999 October 31, 1998
_____________________________________
Operating activities
Net loss $ (845,519) $ (828,871)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 478,284 412,401
Stock compensation expense - 297,500
Provision for losses on
accounts receivable - 5,000
Warranty reserve credit (14,713) (6,000)
Straight-line impact of rent escalations 15,161 47,511
Miscellaneous 6,347 6,508
Changes in operating assets and liabilities:
Accounts receivable (83,422) (98,199)
Note receivable--previous member
of Underwriter 4,891 (73,321)
Inventories (905,678) (451,158)
Prepaid expenses and other current assets (61,919) (168,614)
Trade accounts payable 366,099 (139,629)
Accrued expenses, other current liabilities
and income taxes 371,937 (231,707)
_____________________________________
Net cash used in operating activities (668,532) (1,228,579)
Investing activities
Restricted cash 25,000 -
Redemption of certificate of deposit - 200,000
Amount due under lease surrender agreement - (70,236)
Note receivable--officer (15,000) -
Acquisition of business - (200,000)
Purchases of property and equipment (828,276) (382,019)
Purchase of other assets (13,060) (52,065)
_____________________________________
Net cash used in investing activities (831,336) (504,320)
_____________________________________
Financing activities
Proceeds from public offering of
common stock and warrants - 5,335,450
Public offering costs - (1,112,167)
Net proceeds from new revolving
credit facility 1,477,603 2,262,306
Temporary repayment of new revolving
credit facility from proceeds of Offering - (2,262,306)
Costs of new line of credit facility - (82,177)
Net repayments of old revolving line of
credit facility - (1,777,851)
Repayment of term loan - (350,000)
Preferred Stock dividends paid (112,809) (36,882)
Principal payments on
capital lease obligations (62,423) (32,063)
_____________________________________
Net cash provided by financing activities 1,302,371 1,944,310
_____________________________________
(Decrease) increase in cash and
cash equivalents (197,497) 211,411
Cash and cash equivalents at
beginning of year 221,444 10,033
_____________________________________
Cash and cash equivalents at end of year $ 23,947 $ 221,444
=====================================
Supplement cash flow information
Interest paid $ 171,000 $ 288,000
=====================================
Taxes paid $ 17,000 $ 15,000
=====================================

See notes to financial statements.

<PAGE>

Harvey Electronics, Inc.

Notes to Financial Statements

October 30, 1999

1. Description of Business and Summary of Significant Accounting Policies

Description of Business

The Company is a specialty retailer of high quality audio/video consumer
electronics and home theater products in the Metropolitan New York area.
Revenues from retail sales are recognized at the time goods are delivered to the
customer or, for certain installation services, when such services are performed
and accepted by the customer. The Company's fiscal year ends the Saturday
closest to October 31. The fiscal years ended October 30, 1999 and October 31,
1998 each consists of 52 weeks.

Accounting Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the financial statements and accompanying notes. Actual
results could differ from those estimates.

Long-Lived Assets

In accordance with Financial Accounting Standards Board Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," when impairment
indicators are present, the Company reviews the carrying value of its assets in
determining the ultimate recoverability of their unamortized values using future
undiscounted cash flows expected to be generated by the assets. If such assets
are considered impaired, the impairment recognized is measured by the amount by
which the carrying amount of the asset exceeds the future discounted cash flows.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value, less cost to sell.

The Company evaluates the periods of amortization continually in determining
whether later events and circumstances warrant revised estimates of useful
lives. If estimates are changed, the unamortized cost will be allocated to the
increased or decreased number of remaining periods in the revised lives.
Operating losses subsequent to the Company's emergence from Chapter 11 indicate
that the reorganization value in excess of amounts allocable to identifiable
assets might be impaired; however, the Company's estimate of undiscounted cash
flows indicates that such carrying amounts are expected to be recovered.

<PAGE>

Harvey Electronics, Inc.

Notes to Financial Statements (continued)

1. Description of Business and Summary of Significant Accounting Policies
(continued)

Stock Based Compensation

SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value
method of accounting for the issuance of stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Pursuant to SFAS No. 123,
companies are encouraged, but are not required, to adopt the fair value method
of accounting for employee stock-based transactions. Companies are also
permitted to continue to account for such transactions under Accounting
Principles Board Opinion No. 25, as the Company has elected to do, but are
required to disclose in the financial statement footnotes, pro forma net income
and per share amounts as if the Company had applied the new method of accounting
for all grants made since 1996. SFAS No. 123 also requires increased disclosures
for stock-based compensation arrangements. The Company follows the disclosure
requirements of SFAS No. 123 (see Note 4).

Segment Disclosures

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS No. 131 also establishes standards
for related disclosure about products and services, geographic areas, and major
customers. The Company operates in one business segment and, therefore, the
adoption of SFAS No. 131 did not affect the Company's results of operations or
financial position, and did not require the disclosure of segment information.

Inventories

Inventories are stated at the lower of cost (average-cost method, which
approximates the first-in, first-out method) or market value.

<PAGE>

1. Description of Business and Summary of Significant Accounting Policies
(continued)

Depreciation and Amortization

Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of property and equipment, including equipment
acquired under capital leases, is calculated using the straight-line method over
the estimated useful lives of the related assets, ranging from three to ten
years. Amortization of leasehold improvements is calculated using the
straight-line method over the shorter of the lease term or estimated useful
lives of the improvements.

Income Taxes

The Company follows the liability method in accounting for income taxes as
described in SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes (see
Note 6).

Loss Per Share

Basic and diluted loss per share are calculated in accordance with SFAS No. 128,
"Earnings Per Share." The basic and diluted loss per common share for the fiscal
years ended October 30, 1999 and October 31, 1998 were computed based on the
weighted-average number of common shares outstanding. Common equivalent shares
assuming the conversion of Preferred Stock and exercise of outstanding options
and warrants were not considered since their inclusion would have been
antidilutive.

<PAGE>

1. Description of Business and Summary of Significant Accounting Policies
(continued)

Cash Equivalents

The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.

Fair Value of Financial Instruments

The recorded amounts of the Company's cash and cash equivalents, accounts and
notes receivable, accounts payable and accrued liabilities approximate their
fair values principally because of the short-term nature of these items.

Concentration of Credit Risk

The Company's operations consist of the retail sale, service and custom
installation of high quality audio, video and home theater equipment in the New
York Metropolitan area. The Company performs credit evaluations of its customers
financial condition and payment history but does not require collateral.
Generally, accounts receivable are due within 30 days and credit losses have
historically been immaterial.

Advertising Expense

In accordance with Statement of Position 93-7, "Reporting of Advertising Costs,"
the Company's advertising expense, net of cooperative advertising allowances, is
charged to operations when the advertising takes place. Advertising expense for
the fiscal years ended October 30, 1999 and October 31, 1998 was approximately
$227,000 and $233,000, respectively. Prepaid advertising for print
advertisements not run and broadcast advertisements not aired at October 30,
1999 and October 31, 1998 was approximately $167,000 and $75,000, respectively.

Reorganization Value and Fresh Start Reporting

The Company adopted Fresh Start Reporting in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code," when it
emerged from a Chapter 11 proceeding on December 26, 1996. At that time, Fresh
Start Reporting resulted in changes to the balance sheet, including valuation of
assets and liabilities at fair market value, elimination of the accumulated
deficit and valuation of equity based on the reorganization value of the ongoing
business.

<PAGE>

1. Description of Business and Summary of Significant Accounting Policies
(continued)

The reorganization value of the Company was determined based on the
consideration received from Harvey Acquisition Company LLC. (HAC) to obtain its
principal ownership in the Company. A carrying value of $318,000 was assigned to
the Preferred Stock (see Note 5). Subsequent to the Reorganization Date, the
Company issued an additional 51,565 shares of Common Stock to InterEquity
Capital Partners, L.P., a pre-reorganization subordinated secured debtholder, as
authorized by the Court, for an approved finders fee. The excess of the
reorganization value over the fair value of net assets and liabilities
($1,450,440), net of amortization at October 30, 1999) is reported as
"Reorganization value in excess of amounts allocable to identifiable assets" and
is being amortized over a 25 year-period. Amortization expense of $66,000 was
recorded for fiscal years 1999 and 1998.

2. Revolving Lines of Credit Facilities

In November 1997, the Company entered into a three-year revolving line of credit
facility with Paragon Capital L.L.C. ("Paragon") whereby the Company may borrow
up to $3,300,000 based upon a lending formula (as defined) calculated on
eligible inventory. Proceeds from Paragon were used to pay down the existing
credit facility with another lender, reduce trade payables and pay related costs
of the refinancing. The interest rate on borrowings up to $2,500,000 is 1% over
the prime rate (8.25% at October 30, 1999). The rate charged on outstanding
balances over $2,500,000 is 1.75% above the prime rate. A commitment fee of
$49,500 (being amortized over three years) was paid by the Company at closing
and a facility fee of three-quarters of one percent (.75%) of the maximum credit
line will be charged each year. Monthly maintenance charges and an early
termination fee also exist under the line of credit. The balance outstanding
under the revolving line of credit facility ($1,477,603) at October 30, 1999 is
presented as a current liability as the line of credit was temporarily paid down
in December 1999.

<PAGE>

2. Revolving Lines of Credit Facilities (continued)

Paragon has a senior security interest in all of the Company's assets. The line
of credit facility provides Paragon with rights of acceleration upon the
occurrence of certain customary events of default including, among others, the
event of bankruptcy. The Company is restricted from paying dividends on common
stock, retiring or repurchasing its common stock and entering into additional
indebtedness (as defined). Additionally, the line of credit facility containing
certain financial covenants, which the Company is in compliance with at October
30, 1999.

In connection with the line of credit facility, Paragon received a warrant to
purchase 125,000 shares of common stock, subject to adjustment, which is
currently exercisable at a price of $5.50 per share and expires April 3, 2001.
The Company is amortizing the value of the warrants over a three-year period,
based upon the estimated fair value of such warrant of approximately $24,000.

3. Sale of Common Stock and Warrants in Public Offering

In April 1998, the Company completed an issuance of its common stock and common
stock warrants in a public offering (the "Offering"). The Offering was
co-managed by The Thornwater Company, L.P. (the "Underwriter") which sold
1,200,000 shares of the Company's common stock, of which 1,025,000 shares were
sold by the Company and 175,000 shares were sold by HAC, and 2,104,500 of
Warrants ("Warrants") to acquire additional shares of the Company's common
stock. The net proceeds from the Offering, which approximated $4.1 million, were
used to temporarily repay amounts borrowed under the Paragon credit facility
($2,262,306) and to retire the principal ($350,000) and interest ($47,627) of a
term loan, with the balance of the proceeds used to open three new retail stores
and for general working capital purposes.

Each Warrant is exercisable for one share of common stock at 110% ($5.50 per
share) of the Offering price for a period of three-years commencing March 31,
2000, two years from the effective date of the Offering. The Warrants also are
redeemable (at $.10 per warrant) at the Company's option, beginning March 31,
2000 if the closing bid price of the common stock for 20 consecutive trading
days exceeds 150% of the Offering price per share or $7.50 per share.

<PAGE>

3. Sale of Common Stock and Warrants in Public Offering (continued)

At closing, the Company paid the Underwriter $123,660, representing the
prepayment of a three-year financial advisory and consulting agreement which was
to be amortized over the life of the agreement. As of October 31, 1998, this
financial advisory and consulting agreement was mutually terminated.
Additionally, the Underwriter agreed to eliminate the lock-up arrangement with
respect to shares owned by the Company's majority shareholder, HAC, and members
of management. As a result, the Company accelerated the amortization of the
prepaid three-year financial advisory and consulting fee paid to the Underwriter
and recorded a charge to operations of $123,660 for fiscal 1998.

In November 1997, HAC transferred 85,000 shares of common stock to certain
employees and directors of the Company and an individual who is a preferred
shareholder and a member of HAC. Such transfer was accounted for as if such
shares were issued by the Company as compensation to such persons. The Company
recorded deferred stock compensation expense equal to the fair market value of
the shares ($297,500) which was to be amortized over a two-year forfeiture
period; however, in October 1998, HAC removed the two-year forfeiture provision
and the Company accelerated the amortization of the deferred compensation
expense. As a result, $297,500 of stock compensation expense was charged to
operations in fiscal 1998.

4. Stock Based Compensation

Stock Option Plan

The Company's Board of Directors and shareholders approved the Harvey
Electronics, Inc. Stock Option Plan ("Stock Option Plan") in fiscal 1998. The
Stock Option Plan provides for the granting of up to 1,000,000 shares of
incentive and non-qualified common stock options and stock appreciation rights
to directors, officers and employees. All options are exercisable at times as
determined by the Board of Directors not to exceed ten years from the date of
grant.

In fiscal 1999, the Company's Compensation and Stock Option Committee of the
Board of Directors ("Compensation Committee") approved two grants of incentive
stock options aggregating 222,500 to the Company's officers to purchase the
Company's common stock at an exercise price of $1.50 per share. The 1999
incentive stock options are exercisable immediately.

<PAGE>

4. Stock Based Compensation (continued)

On December 5, 1997, the Compensation Committee approved a grant, as of the
effective date of the Offering, of 70,000 incentive stock options to certain
employees to purchase the Company's common stock originally exercisable at
various exercise prices between $5.00-$6.00, over a three-year vesting period
from the effective date. On October 28, 1998, the Company's Compensation
Committee reissued the 70,000 incentive stock options with an exercise price of
$3.00 for officers and middle management, and $2.00 for other employees. Such
options remain exercisable over a three-year vesting period (33-1/3% per year).
Simultaneously, the Compensation Committee granted 75,000 incentive stock
options to certain employees and directors, with an exercise price of $1.00
These options are also exercisable over a three-year vesting period (33-1/3% per
year); however, 15,000 options granted to directors were adjusted in fiscal 1999
to be immediate exercisable. The impact of such acceleration was insignificant.

In fiscal 1999 and 1998, the Company reserved 222,500 and 145,000 shares of
common stock, respectively, for issuance in connection with stock options. The
following table summarizes activity in stock options during fiscal 1999 and
1998:
<TABLE>
<CAPTION>

Weighted-
Shares Shares Under Option Average
-------------------------------
Available for Option Price Number of Exercise
Granting per Share Shares Price
--------------- --------------- --------------- ---------------

<S> <C>
Balance at November 1, 1997 - -
1998 stock option grant 145,000
Granted--December 5, 1998 (70,000) $2.00-$3.00 70,000 $2.86
Forfeited 3,200 $2.00 (3,200) $2.00
Granted--October 28, 1998 (75,000) $1.00 75,000 $1.00
--------------- ---------------
Balance at October 31, 1998 3,200 141,800 $1.89
1999 Stock option grants 222,500
Granted--February 12, 1999 (45,000) $1.50 45,000 $1.50
Granted--October 29, 1999 (177,500) $1.50 177,500 $1.50
Forfeited 1,400 $1.00-$2.00 (1,400) $1.36
=============== ===============
Balance at October 30, 1999 4,600 362,900 $1.65
=============== ===============
</TABLE>

At October 30, 1999, options for the purchase of 311,400 shares of common stock
are exercisable. The weighted-average fair value of options granted during the
fiscal years ended October 30, 1999 and October 31, 1998 was $1.24 and $1.61,
respectively.

<PAGE>

4. Stock Based Compensation (continued)

Exercise prices for options outstanding as of October 30, 1999, are as follows:

Number of Weighted Average
Options Options Remaining
Range of Outstanding at Exercisable Contractual Life
Exercise Price Year End at End of Year in Years
-------------------------------------------------------------------------------

$1.00 74,100 44,700 9
$1.50 222,500 222,500 10
$2.00 6,300 4,200 8
$3.00 60,000 40,000 8
=========================================================
362,900 311,400 9.4
=========================================================

The alternative fair value accounting provided for under SFAS No. 123, requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's Stock Options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.

Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not provide a reliable single measure of the
fair value of its stock options.

Pro forma information regarding net loss and net loss per share (basic and
diluted) is required by SFAS No. 123, which also requires that the information
be determined as if the Company had accounted for its stock options granted
under the fair value of that statement.

<PAGE>

4. Stock Based Compensation (continued)

The fair value of these options was estimated at the date of grant using the
Black-Sholes option pricing model with the following assumptions for fiscal
years 1999 and 1998: risk-free interest rate of 6.0% and 6.5%, respectively; no
dividend yield; volatility factor of the expected market price of the Company's
common stock of 1.507 and 1.489, respectively; and a weighted-average expected
life of the options of three years.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information for fiscal year 1999 and 1998 are as follows:

1999 1998
----------------------------

Pro forma net loss $(1,117,000) $(880,000)
Pro forma net loss attributable to common stock $(1,191,000) $(969,000)
Pro forma basic and diluted loss per share $ (.36) $ (.34)

5. 8.5% Cumulative Convertible Preferred Stock

The Company's Preferred Stock has no voting rights and is redeemable at the
option of the Company's Board of Directors, in whole or in part, at face value
plus any accrued dividends. The carrying value of the Preferred Stock is
$402,037 at October 30, 1999.

In the event of liquidation of the Company, the holders of the Preferred Stock
shall receive preferential rights and shall be entitled to receive a aggregate
liquidation preference of $875,000 plus any outstanding dividends, prior to any
distributions to common shareholders. The holders of the Preferred Stock shall
receive a semiannual 8.5% cumulative dividend ($85 per share annually), payable
on the last business day in June and December. The Company has elected to defer
the fiscal 1997 dividends, at a preference rate of $105 per share annually
($91,875) plus interest at 8.5% per annum over a three-year period. The December
1999 ($35,000) and 1998 ($38,000) installments relating to the 1997 dividends
and $39,000 relating to the 1998 dividends have been paid by the Company.

The Preferred Stock may be converted into shares of Common Stock until December
31, 2000, at the option of the holder, in whole or in part, as follows: (i) the
first 50% of the Preferred Stock can be converted at $6.00 per share, and (ii)
the balance is convertible at $7.50 per share. Beginning on January 1, 2001, the
Preferred Stock is convertible at the average closing price, as defined, of the
Company's Common Stock for the preceding 45-day period.

<PAGE>

5. 8.5% Cumulative Convertible Preferred Stock (continued)

The Preferred Stock originally contained a mandatory redemption feature. In
December 1997, the redemption feature was eliminated and the holders of the
Preferred Stock received 36,458 Warrants to purchase shares of common stock
(valued at approximately $6,000) with terms equivalent to the Warrants granted
during the Offering (see Note 3). The balance sheet at October 30, 1999 has been
presented to reflect the Preferred Stock as part of shareholders' equity as a
result of the eliminated redemption feature.

Cumulative Preferred Stock dividends payable of $91,682 are outstanding and
classified between current ($61,057), and long-term ($30,625) liabilities at
October 30, 1999. Dividends aggregating $74,376 were recorded as a reduction of
retained earnings at October 30, 1999.

6. Income Taxes

At October 30, 1999, the Company has available net operating loss carryforwards
of approximately $3,400,000 which expire in various years through fiscal 2019.
Of this amount, approximately $2,250,000 relates to pre-reorganization net
operating loss carryforwards. Under Section 382 of the IRS Code, it is estimated
that the pre-reorganization net operating loss carryforward and other
pre-reorganization tax attributes will be limited to approximately $150,000 per
year.

At October 30, 1999, October 31, 1998, and November 1, 1999 the Company had net
deferred tax assets of approximately $1,700,000 and $1,400,000, and
$1,207,000espectively, arising primarily from the future availability of the
above tax attributes. Such amounts have been offset in full by valuation
allowances.

Future benefits realized, if any, from pre-reorganization net operating loss
carryforwards would first reduce reorganization value in excess of amounts
allocable to identifiable assets until exhausted and thereafter be reported as a
direct addition to paid in capital.

7. Pension and Profit Sharing Plan

The Company maintains the Harvey Electronics, Inc. Savings and Investment
Plan (the "Plan") which includes profit sharing, defined contribution and 401(k)
provisions and is available to all eligible employees of the Company. There were
no contributions to the Plan for fiscal 1999 and 1998. 8. Commitments and
Contingencies

Commitments

The Company's financial statements reflect the accounting for equipment leases
as capital leases by recording the asset and the related liability for the lease
obligation. Capital lease additions of approximately $154,000 were recorded
during fiscal 1999. No such leases were recorded in fiscal 1998. Future minimum
rental commitments, by year and in the aggregate, for equipment under capital
and noncancelable operating leases with initial or remaining terms of one-year
or more consisted of the following at October 30, 1999.

Operating Capital
Leases Leases
--------------------------------------

Fiscal 2000 $1,705,000 $87,000
Fiscal 2001 1,475,000 12,000
Fiscal 2002 1,384,000 11,000
Fiscal 2003 1,295,000 1,000
Fiscal 2004 1,108,000 -
Thereafter 2,125,000 -
--------------------------------------

Total minimum lease payments $9,092,000 111,000
====================
Less amount representing interest 10,000
--------------------
Present value of net minimum lease payments 101,000
Less current portion 79,000
--------------------
$22,000
====================

Minimum rental commitments are offset by certain sublease agreements which earn
sublease income of approximately $93,000 for fiscal 2000 and approximately
$39,000 for fiscal 2001.

Total rental expense for operating leases was approximately $1,853,000 and
$1,376,000, for fiscal 1999 and 1998, respectively. Certain leases provide for
the payment of insurance, maintenance charges and taxes and contain renewal
options.

<PAGE>

8. Commitments and Contingencies (continued)

Contingencies

The Company is a party in certain legal actions which arose in the normal course
of business. The outcome of these legal actions, in the opinion of management,
will not have a material effect on the Company's financial position, results of
operations or liquidity.

Included in prepaid and other current assets at October 30, 1999 is a $25,000
certificate of deposit which is held as collateral under a $25,000 outstanding
letter of credit which expires on March 31, 2000.

9. Other Information

Accrued Expenses and Other Current Liabilities
October 30,
1999
------------------

Payroll and payroll related items $ 232,000
Accrued professional fees 147,000
Customer deposits 656,000
Sales taxes 145,000
Other 123,000
==================
$ 1,303,000
==================

Note Receivable

During October 1998, the Company received a promissory note from a previous
member of its Underwriter, in lieu of an outstanding trade receivable of
$73,321. Payments aggregating $11,277, including interest at 9% per annum, were
paid to the Company during fiscal 1999. The balance of the original note was due
on October 30,1999; however, in November 1999, an amendment to the promissory
note was executed, deferring the payment of the remaining principal balance and
interest so that a payment of $44,994 is due January 25, 2000, and payments of
the remaining balance of $24,141 is due March 25, 2000.

<PAGE>

9. Other Information (continued)

Other

Interest paid to HAC in fiscal 1998 was approximately $66,000. Management fees
of $40,000, relating to a Company affiliated with the Company's Chairman, was
charged to operations in fiscal 1998. Approximately $23,000 of management fees
and other miscellaneous amounts were payable to this Company at October 30,
1999.

A director's fee of $95,000 and $55,000 was paid to the Company's Chairman
during fiscal 1999 and 1998, respectively.

Effective November 1, 1998, the Company entered into a consulting agreement with
a previous member of its Underwriters. Pursuant to the terms of the two-year
agreement, the consultant received an annual fee of $75,000 during fiscal 1999.
The agreement can be terminated by the Company under certain defined events.

10. Costs Associated With Lease Transaction

During June 1998, the Company entered into a lease assumption agreement for
approximately 5,000 square feet of retail space in lower Manhattan, purchased
existing leasehold improvements for approximately $125,000 and paid a security
deposit of approximately $15,000. Such space was to be used to relocate the
Company's existing retail store within ABC Carpet and Home, also located in
lower Manhattan, as the landlord was initially unwilling to extend the company's
existing lease agreement.

In September 1998, the Company entered into an agreement to extend its existing
retail store lease located within ABC Carpet and Home. As a result, the Company
entered into a lease surrender agreement to terminate the lease assumption
agreement for the replacement retail space with a realty company.

<PAGE>

10. Costs Associated With Lease Transaction (continued)

In conjunction with the lease surrender agreement, the Company received payments
of $50,000 in December 1998 and $40,000 in December 1999 and is due a final
payment of $35,000 on December 22, 2000. In addition, the security deposit was
returned to the Company in January 1999. The present value ($70,236) of the
remaining payments are classified as $36,773 in "Prepaid expenses and other
current assets" and $33,462 in "Other Assets" at October 30, 1999. During fiscal
1998, the Company recorded all related lease payments, real estate commissions,
legal fees and the discount on the present value of the lease surrender
agreement payments, aggregating $113,782 to "Costs Associated with Lease
Transaction."

11. Retail Store Acquisition and Expansion

In July 1998, as a part of its expansion plan, the Company acquired certain
assets and the business of the Sound Mill, Inc. and its subsidiary, Loriel
Custom Audio/Video Corporation (the "Sound Mill"), a retailer and custom
installer of specialty high-end audio/video products for twenty-nine years with
one store located in Mt. Kisco, in Northern Westchester County, New York, for a
purchase price of $200,000 (as adjusted) in cash. The acquisition was accounted
for as a purchase. The purchase price was allocated to the assets acquired based
upon the fair values on the date of acquisition as follows: $50,000 for
leasehold improvements, equipment, vehicles and tools and $150,000 for cost in
excess of net assets acquired which is being amortized over a twenty-five year
period. The Company also signed a ten-year lease with a five-year renewal option
for the 3,100 square foot retail store operated by the Sound Mill. This property
is owned by the former principals of the Sound Mill. The store was renovated for
a November 1998 grand re-opening. The results of operations for this new store
was included in the Company's operations from the date of acquisition. Pro-forma
information as if the acquisition been made as of the beginning of fiscal 1998
has not been presented as such information is not material.

In August 1998, the Company signed a ten-year lease with a five-year renewal
option for its new 4,600 square foot retail showroom in Greenvale/Roslyn, on the
north shore of Long Island, New York. This new retail store opened in November,
1998 and was not included in the Company's results of operations during fiscal
1998.

<PAGE>

11. Retail Store Acquisition and Expansion (continued)

Bang & Olufsen products have been sold by the Company since 1980. Bang & Olufsen
now focuses on developing Bang & Olufsen licensed stores ("Branded Stores")
throughout the world, and accordingly, canceled its dealer agreement with the
Company effective May 31, 1999. Since this date, Bang & Olufsen products are
available only in Branded Stores. For the period prior to May 31, 1999, this
line represented approximately $628,000 or 3% of the Company's net sales for
fiscal 1999 and $1,176,000 or 6.3% of the Company's net sales for fiscal 1998.

On January 7, 1999, the Company signed a lease and a related Prime Site
Marketing Agreement to open a new 1,500 square foot Bang & Olufsen Branded Store
in the Union Square area of lower Manhattan. The Company opened this new store
in July 1999. All related preoperating expenses and results of operations from
the date this new store opened have been included in the Company's results of
operations for the year ended October 30, 1999. This is the Company's seventh
store and is the third opened since its successful public offering, completed in
April 1998.

The Company has the option to open two additional Bang & Olufsen Branded Stores
in Manhattan and Connecticut. The Company must agree to pursue these locations
by May 2000.

12. Subsequent Event

On December 2, 1999, the Company signed a letter of intent with
CoolAudio.com, Inc. ("CoolAudio") to merge the two companies through the
issuance of the Company's common stock. As of the date hereof, the Company and
CoolAudio have not reached an agreement regarding the terms of a merger
transaction. The Company and CoolAudio continue to negotiate the terms of a
proposed merger; however there can be no assurance the parties will enter into
definitive agreements or consummate a merger transaction.

Exhibit 23

Consent of Ernst & Young LLP

We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-84091) pertaining to the Harvey Electronics, Inc. Stock Option
Plan of our report dated January 7, 2000, with respect to the financial
statements of Harvey Electronics, Inc. included in the Annual Report (Form
10-KSB) for the year ended October 30, 1999.

/s/ Ernst & Young LLP
Melville, New York
January 28, 2000

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