CARVER CORP, 10KSB, 1998-04-15

CARVER CORP
10KSB, 1998-04-15
HOUSEHOLD AUDIO & VIDEO EQUIPMENT

Previous: PMC INTERNATIONAL INC, SC 13G, 1998-04-15

Next: GINTEL ASSET MANAGEMENT INC, SC 13G, 1998-04-15

<PAGE>

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
-----------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------------ ----------------

Commission file number 0-14482
--------

CARVER CORPORATION
------------------
(Name of small business issuer in its charter)
WASHINGTON 91-1043157
---------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

15300 WOODINVILLE-REDMOND ROAD, SUITE A, WOODINVILLE, WASHINGTON 98072
-----------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)

(425) 482-3400
--------------
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of class)

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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 not contained in this form, and no disclosure will
be contained, to the best of 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. [ ]

Issuer's revenues for its most recent fiscal year: $11,015,000.

The aggregate market value of the voting common stock held by non-
affiliates of the registrant based upon the closing price for the registrant's
Common Stock, as reported by the National Association of Securities Dealers'
Automated Quotation National Market System on April 9, 1998 was $1,747,190.

Number of shares of Common Stock of the Registrant outstanding as of
April 9, 1998: 4,673,476 shares.

Items 9 - 12 of Part III are incorporated by reference to the
Company's definitive proxy statement for its 1998 Annual Meeting of shareholders
which involves the election of directors and which will be filed with the
Commission within 120 days after the close of the fiscal year.

Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---

1
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>

PART I PAGE
- ------ ----
<S> <C>

Item 1. Description of Business......................................... 03

Item 2. Description of Property......................................... 15

Item 3. Legal Proceedings............................................... 15

Item 4. Submission of Matters to a Vote of
Security Holders................................................ 15

PART II
- -------

Item 5. Market for Common Equity and
Related Shareholder Matters..................................... 16

Item 6. Management's Discussion and Analysis
or Plan of Operation............................................ 17

Item 7. Financial Statements............................................ 22

Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.............................. 38

PART III
- --------

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act................ 38

Item 10. Executive Compensation........................................... 38

Item 11. Security Ownership of Certain Beneficial Owners
and Management................................................... 38

Item 12. Certain Relationships and Related Transactions................... 38

PART IV
- -------

Item 13. Exhibits and Reports on Form 8-K................................. 39
</TABLE>

2
<PAGE>

PART I

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

FORWARD-LOOKING STATEMENTS

Statements in this report covering future performance, developments,
expectations or events, including the discussion of the Company's strategy,
product development and introduction plans and various statements concerning the
Company's expectations for its growth and for the consumer electronics industry
and generation of additional working capital, constitute forward-looking
statements which are subject to a number of known or unknown risks,
uncertainties and other factors that might cause actual results to differ
materially from those expressed or implied by such statements. These risks and
uncertainties include the ability of the Company to obtain additional working
capital sufficient to meet its working capital requirements, production
difficulties or delays due to supply constraints, technical problems, payment
delays or other factors; technological changes; the effect of global, national
and regional economic conditions; reliability of offshore OEM suppliers; changes
in the Company's channels of distribution; changes in consumer preferences; the
impact of competitive products and pricing; changes in demand; increases in
component prices or other costs; inventory risks due to shifts in market demand,
product obsolescence or other factors and a number of other risks including
those risks and uncertainties described under the caption "Risk Factors" in this
report and those identified by the Company from time to time in other filings
with the Commission, press releases and other communications. All forward-
looking statements contained in this report reflect the Company's expectations
at the time of this report, and the Company disclaims any responsibility to
revise or update any such forward-looking statement except as may be required by
law.

DESCRIPTION OF BUSINESS

Carver Corporation ("Carver" or the "Company") designs, develops, manufactures
and markets high-fidelity audio/video components targeted to the mid-to high-end
home entertainment audio/video systems market. Carver products are positioned
in the middle and upper price range of most audio components. The Company
offers technically innovative audio/video products for the home entertainment
market that deliver affordable "audiophile" quality. It targets its
distribution channels toward knowledgeable consumers who insist on high quality
products which offer superior features and performance.

During 1997, the Company's strategy was to update its products, broaden its
market presence and return its operations to profitability. The Company focused
its product development activities on the design of a Dolby Digital signal
processor and tuner/preamplifier. It introduced two new home theater
loudspeaker systems and re-engineered its multi and two channel amplifiers to
meet CE certification standards. The Company also took several steps to
restructure its retail network. Due to a severe shortfall in working capital,
an industry wide decline in sales of consumer electronics, increased
competition, delays in availability of certain products and other factors, the
Company continued to experience declining sales and losses in 1997.

As the Company's sales have declined the Company has decided to develop a new
business strategy that will enable it to operate with lower overhead. This new
business model, which is still under development but which the Company began to
implement in the first quarter of 1998, includes the use of a new direct
marketing strategy, a reduction in the number of products offered by the Company
and the elimination of the Company's manufacturing operations. Under this model,
the Company will transition to purchasing all of its products from OEM
suppliers. As part of the direct marketing strategy, the Company will offer its
condensed product line directly to consumers in addition to sales through
dealers and distributors. The Company's products would be offered for sale to
consumers via the Internet at the Company's Web site currently under development
and through a toll-free telephone number. As part of this new marketing
strategy, the Company will eliminate certain components to reduce carrying and
marketing costs. See "Sales and Marketing" and "Management's Discussion and
Analysis or Plan of Operation - Development of New Business Strategy."

3
<PAGE>

The Company was incorporated in the State of Washington in 1978 and is located
at 15300 Woodinville-Redmond Road, Woodinville, Washington 98072. Its telephone
number is (425) 482-3400.

INDUSTRY OVERVIEW

Carver estimates, based on recent market industry surveys, that the U.S.
consumer (in-home use) high-fidelity audio market (electronics of all types
including portable and mobile audio) to be currently in excess of $3.6 billion
per year at the factory selling price.

Home audio/video systems vary widely in design, quality and price from
inexpensive systems having relatively low-quality sound reproduction to
expensive systems designed for the high-fidelity sound enthusiasts who demand
that their systems duplicate, as closely as possible, the sound of a live
performance. System prices range from under $100 to well over $100,000. Carver
considers itself positioned between the middle segment and the extreme high-end
companies. It estimates the total size of the market for separate audio
components to be around $2 billion annually. A Carver system, including
loudspeakers, ranges in price from approximately $2,800 to approximately
$10,600.

RECENT DEVELOPMENTS

PRIVATE PLACEMENT OF SECURITIES

On April 13, 1998, the Company expects to close an interim financing pursuant to
which it will sell 3,000,000 shares of its common stock, par value $0.01 (the
"Common Stock") to Renwick Special Situations Fund, L.P (the "Bridge
Financing"). The price of the Common Stock is $0.125 per share and the Company
will receive gross proceeds of $375,000 from the sale of Common Stock. Prior to
completion of this financing, the Company requested that the Nasdaq Stock Market
("Nasdaq") waive the shareholder approval requirement of Rule 4460(i)(1) of
Nasdaq's Marketplace Rules with respect to the Bridge Financing pursuant to Rule
4460(i)(2). On March 20, 1998, Nasdaq informed the Company that it had approved
the Company's request subject certain conditions, including; (i) approval by the
independent members of the Board of Directors of the Company's reliance on this
exception, (ii) the Company's notice to all shareholders, not less than ten days
before issuance of the Common Stock, of the Company's omission in seeking
shareholder approval of the financing, and (iii) issuance of a press release
concerning the circumstances surrounding the waiver request and the terms of the
transaction.

NONCOMPLIANCE WITH CERTAIN NASDAQ REQUIREMENTS

Nasdaq had previously advised the Company that it did not meet Nasdaq's new
minimum public float and bid price continued listing requirements, of $5,000,000
and $1.00 per share, respectively. The Company has until May 28, 1998 to
satisfy these requirements. The inability of the Company to comply with these
listing requirements likely will result in the delisting of the Company's common
stock from Nasdaq. Delisting of the Company's common stock would likely have
an adverse effect on the liquidity, trading price and ability to obtain
quotations on a timely basis for the common stock. If the Company's common
stock should cease to be listed on Nasdaq, it may continue to be quoted in the
OTC Bulletin Board.

4
<PAGE>

PERSONNEL

Stephen M. Williams, Thomas C. Graham and John F. Vynne resigned as directors of
the Company in January 1998. Mr. Williams resigned as President and Chief
Executive Officer in November 1997.

In March 1998, Benjamin Ben-Attar was appointed to fill one of the vacancies
resulting from such resignations as an independent director on the Board and
Audit Committee. Mr. Ben-Attar, who resides in New York, has worked for several
years in corporate finance as an associate with BNY Capital Markets, Inc., a
subsidiary of The Bank of New York. Mr. Ben-Attar has focused on middle market
mergers and acquisitions, private placements and leveraged finance. Mr. Ben-
Attar also has experience in the structuring of senior credit facilities.

Clifford J. Schorer, Jr. was appointed to fill one of the vacancies as an
independent director on the Board and the Company's Audit Committee on April 4,
1998. For the past twenty five years, Mr. Schorer, Jr. has been engaged in
creating and developing various entrepreneurial businesses. He is a Professor
in the Columbia University Executive Education Department and an Adjunct
Professor at the Columbia University Graduate School of Business. As a
consultant, Mr. Schorer, Jr. works with a diverse group of clients including
Lucent technologies, Con Edison, AT & T, Brooklyn Union Gas, Glaxo Welcome
Pharmaceutical, Spectrum Management, Isolyzer and others.

James J. Croft resigned as Vice President of Marketing and Product Development
in October 1997. The employment of Mark A. Nygren, Vice President of Operations,
was terminated in March 1998 as part of the Company's restructuring.

PRODUCTS

In 1997, three Carver products were named a Recommended Component by Stereophile
---------------------
Magazine, one of the industry's most influential and prestigious publications.
This rating is based predominately on performance, with consideration given to
products offering exceptional value for their suggested retail price. The
Carver products that earned Recommended Component ratings were the AV-705x, the
---------------------
HTR-880 Audio/Video receiver and the Lightstar Direct preamplifier.

In 1997, the Company's A-760x two channel power amplifier received a "Product of
the Year" award from AudioVideo International's Hi-Fi Grand Prix. AudioVideo
----------------
International is an influential trade publication in both domestic and
international markets. In addition, the CT-26v preamp/tuner received a "Special
Recognition" award in its respective category from AudioVideo International.

HOME AUDIO/VIDEO PRODUCTS

In recent years, Carver has concentrated its efforts on the growing market for
audio/video or home theater separates. The Company markets a home audio/video
component line of 14 products which includes 4 two channel power amplifiers, 3
multi-channel amplifiers, 2 preamplifier/tuners, 2 home theater loudspeaker
systems, 1 integrated amplifier, 1 receiver and 1 compact disk changer. The
Company's suggested retail price in the U.S. on its products ranged from $399-
$2400. The Company plans to reduce the number of products which it offers in
1998 to approximately 11. See "Sales and Marketing.

"An audio entertainment system typically includes a signal source such as a CD
player, cassette deck or radio tuner which outputs to a preamplifier that
controls the volume level, tone, and source switching. Specialized amplification
circuits in the preamplifier convert an input signal to a compatible format and
feed it to the amplifier which increases the signal strength to a level strong
enough to drive loudspeakers. An audio/video receiver accomplishes most of these
functions in one box, but the consumer is typically compromising performance to
achieve compactness. Although Carver offers a receiver it believes its strength
lies in its separate components which allow the consumer the flexibility to
customize power and features to suit their home acoustics and listening
preferences. Separate components also provide superior audio performance,
improved reliability and more upgrade options. The Company believes consumers
select separates primarily by power, accuracy or sonic superiority, features and
price.

5
<PAGE>

CARVER TECHNOLOGIES

Historically, the Company has identified certain fundamental limitations of the
stereophonic sound reproduction process and then developed innovative electronic
circuits or other technologies which address these limitations. In recent years,
the Company has developed technologies which it believes enhance the listener's
enjoyment of audio/video or home theater components and systems. The Company
holds fifteen patents with respect to certain of the technologies described
below and licenses an additional technology. See "Patents and Trademarks." The
Company's technologies include:

LIGHTSTAR/(R)/ POWER AMPLIFIER TECHNOLOGY. The Company believes its Lightstar
Technology represents the most advanced power amplifier technology on the market
today. This technology offers performance advantages over current amplifier
designs in terms of current capability, the capability to drive any loudspeaker
load independent from voltage fluctuations from the AC power line and effortless
sound quality. The Company holds patents on its Lightstar technology. The
patents expire beginning in 2014.

MAGNETIC FIELD POWER AMPLIFIER /(TM)/ TECHNOLOGY. Carver Magnetic Field
amplifiers are capable of delivering both high voltage and high current
simultaneously into modern speaker designs which can swing as low as two ohms in
certain frequency ranges. The patents relating to Magnetic Field Power Amplifier
technology are licensed by the Company from Robert W. and Diana R. Carver.

TRANSFER FUNCTION MODIFICATION TECHNOLOGY. The t-modification process allows the
Company to duplicate many of the sonic characteristics of very costly tube
amplifiers in solid state designs at a fraction of the cost.

CINEMA HOLOGRAPHY /(R)/ AND SONIC HOLOGRAPHY/(R)/. Using principles analogous
to those employed in producing visual holograms with intersecting laser beams,
the Company's Cinema and Sonic Holography technologies produce the illusion that
the musical program is being performed by instruments arrayed on a three-
dimensional stage. Cinema Holography also creates a much wider sound stage and
side images that are focused in specific positions. The Company holds two U.S.
patents relating to Sonic Holography which will expire beginning in 1999.

ASYMMETRICAL CHARGE-COUPLED FM DETECTION TECHNOLOGY. Carver's patented
Asymmetrical Charge-Coupled FM Detector (ACCD) circuit substantially reduces
interference caused by multipath distortion and noise present in weak stereo
radio broadcast signals. Thus, high quality stereo reproduction can be achieved
from FM signals which would produce unacceptably poor sound quality on other
equipment. The two patents for the Asymmetrical Charge-Coupled FM Detection
Technology will expire beginning in 2000.

PLANAR SPEAKER TECHNOLOGY. The Company's Flat Panel Speaker technology was
developed to address many of the problems encountered in conventional speaker
designs and ribbon array speakers. This dipole ribbon technology employs
innovative materials, panel geometry and driver positioning to achieve a sharply
focused, yet large three-dimensional sound effect. The Company's patent expires
in 2010.

POWER STEERING/(TM)/. Some of the most startling effects accompanying a motion
picture are those that allow a sound to move from left to right or, even more
impressively, from left front to right rear such as a jet flying across a room.
These effects are made to happen by "steering" the levels of a given sound to
the various channels to achieve the desired image position at any given point in
time. Most power amplifiers have a clipping level on each channel that doesn't
vary significantly because only one or all channels are being driven at the same
time. This means that while one channel is driven to full power the other
channels are idling. Much of the capability of the power supply is being wasted,
just sitting dormant, while the dominant channel is taking just one channel's
worth of power. The Company's Power Steering Technology allows the power
amplifier to deliver its full rated power into all channels driven
simultaneously, and, as the directional cues in the program cause the signal to
be "steered" to a specific channel, focus a greater portion of the power supply
to the channel demanding the greatest output. This ability to provide
significant power gains into the most demanding channel on a continuous basis or
to all five channels dynamically results in greater authority, clarity and
spaciousness that is not available in conventional power amplifiers.

6
<PAGE>

MAGNIFIED CURRENT AMPLIFICATION /(TM)/ TECHNOLOGY. Using principles learned
from its Lightstar Technology, the Company has developed a multi-state hybrid
power amplifier design which can deliver more than twice the current of
conventional amplifier designs using the same power transistors. The Company's
Magnified Current Amplification Technology utilizes the full current capability
of output power transistors which maximizes both the voltage and current
capability available for loudspeaker load.

INFINITE DECORRELATION /(TM)/. The Company's Infinite Decorrelation technology
was developed to maximize the surround space and directional cues from surround
sound channels for home theater applications. This technology eliminates the
lack of rear left or right separation for sounds that are placed behind the
listener in home theater applications and produces a much more realistic and
lifelike sound.

TOTAL DIRECT COUPLING /(TM)/. As transistor power amplifiers incorporated
designs which eliminated output transformers, they required the use of
stabilizing inductors which created colorations in the reproduction of the upper
harmonics of most instruments. The Company's Total Direct Coupling (TDC)
Technology allows the output circuits of power amplifiers to be directly
connected to a loudspeaker without the use of stabilizing inductor network and
the associated sonic disadvantages. TDC allows the Company's amplifiers to be
stable into a variety of speaker loads.

BIDAC /(TM)/. The Company's BiDAC Technology is utilized in the Company's
digital to analog converter which uses bitestream conversion for low-level
passages (ones that typically contain the mid and high frequencies) and
continuous calibration multibit for the high-level passages (that typically
contain the high level low frequencies).

PATENTS AND TRADEMARKS

The Company holds fifteen domestic patents issued between 1980 and 1997 on
several of its technologies which are incorporated into a number of its
products. See "Carver Technologies," Patents with respect to Sonic
Holography/(R)/, ACCD and Flat Panel Speaker Technology have been issued by
various countries.

Robert W. and Diana R. Carver personally own domestic and foreign patents on the
Magnetic Field Power Amplifier technology. The Company has a non-exclusive
license to use the technology, which requires the Company to pay Robert W. and
Diana R. Carver royalties on sales of products incorporating such technology.

While the Company believes that the patent rights owned and licensed by the
Company are important and cover and protect adequately the Company's proprietary
rights in the patented technologies, there can be no assurance that any current
or future patents will prove valid. Moreover, the Company believes that its
growth, competitive position and future success are more dependent upon
technical expertise and marketing skills than on the ownership of patent rights.

"Carver," "Cinema Holography," "Sonic Holography," and "Lightstar," are
registered trademarks of the Company. The trademark, "Power Steering" is pending
registration. The Company claims common law rights to the following trademarks:
"Digital Time Lens," "Magnetic Field Amplifier," "Soft EQ," "KLW Audio," the
"Amazing Loudspeaker," "Amazing Loudspeakers" and "TAL".

SALES AND MARKETING

Historically, the Company has marketed its audio/video products in the United
States primarily through retail outlets, ranging from audio/video specialty
stores to national retailers of brand-name consumer electronics, serviced by
independent manufacturers' representative companies and the Company's sales and
marketing staff. The Company's dealers typically stock a broad variety of
audio/video equipment and may also carry automobile audio systems, televisions,
video cassette recorders and other consumer-oriented electronic products. The
Company seeks dealers who emphasize high quality audio systems and who are
knowledgeable about the characteristics of audio/video products. The Company's
sales and marketing department emphasizes dealer education programs and

7
<PAGE>

product literature to enable individual sales people to understand and explain
to consumers the superior price/performance features offered by the Company's
products.

Currently, the Company is finalizing plans to add a new channel of distribution,
direct marketing, by which the Company plans to market and sell a reduced
product line directly to consumers, as well as to its dealers and distributors.
The Company's new distribution strategy contemplates that its products would be
offered for sale to consumers via the Internet on the Company's Web site
currently under development and through a toll-free telephone number. In
conjunction with this new model, the Company is adopting a unified pricing
policy to assure that, in spite of the multiple channels of distribution of its
products, each of its products will be offered to consumers at a consistent
price. The Company believes that this policy will promote stronger profit
margins. See "Risk Factors- Internet Sales."

The Company believes that purchasers of high quality audio equipment tend to
rely on audio specialty publications, the recommendations of their friends and
acquaintances who are audio enthusiasts and recommendations of and
demonstrations by knowledgeable sales people. Accordingly, the Company believes
that the favorable reviews of the Company's products that have been featured in
such publications as Stereo Review, Audio, Stereophile, Stereophile Guide to
Home Theater, Audio/Video Interiors, Audio Adventure, Home Theater, and The
$ensible Sound, in addition to the Company's general reputation for producing
superior products, are important keys of its sales and marketing program. Under
the Company's direct sales plan, the Company would continue to seek reviews of
its products which would be included on its Web site along with photographs and
descriptions of the corresponding products.

Domestic sales of consumer audio products accounted for approximately 51%, 83%,
and 87% of the Company's sales in 1995, 1996, and 1997, respectively. Total
Company sales of consumer audio products were 60%, 91%, and 94%, respectively,
for the same years.

Prior to mid-November 1995, the Company designed, manufactured, marketed and
sold a line of professional audio products. Worldwide sales of professional
audio products accounted for approximately 25% of the Company's sales in 1995
and approximately 3% in 1996. From mid-November 1995 through December 31, 1996,
the Company manufactured and sold certain professional sound products solely to
the purchaser of its professional products line pursuant to a Manufacturing
Agreement entered into by the Company at the time of the sale. The Company has
fulfilled its obligations under this Agreement.

OEM PRODUCT

The Company's Original Equipment Manufacturer ("OEM") production accounted for
approximately 8%, 1%, and 1% of sales in 1995, 1996 and 1997, respectively. Most
of the products which the Company sold as an OEM prior to 1996 were professional
audio products, and the underlying contracts for such OEM sales were included in
the sale of Carver's professional product line.

INTERNATIONAL SALES

The Company has a network of 45 distributors who provide retail sales coverage
in 46 countries. Foreign sales accounted for approximately 28%, 9%, and 5% of
the Company's sales in 1995, 1996 and 1997, respectively. While management
intended to allocate more resources to global marketing in 1997 in an effort to
increase international revenues, cash constraints in 1996 and 1997 prevented the
Company from allocating additional resources to the development of products for
its international markets and from marketing its existing products. In addition,
management believes that the downturn in the economies of many eastern Asian
countries, which have for the past several years constituted the greatest part
of the Company's international sales, has reduced its revenue from export sales
by approximately 45%. The Company introduced 12 new products for its
international markets in 1997. See "Risk Factors -Risks of International
Business."

8
<PAGE>

COMPETITION

The consumer electronics industry is intensely competitive. Many large and small
manufacturers offer audio systems which vary widely in price and quality and
which are distributed through a variety of distribution channels, including
audio specialty stores, discount stores, department stores and mail order firms.
Historically, the Company has chosen to concentrate its efforts on the segments
of the market served principally by audio specialty stores and a major national
consumer electronics retailer, Circuit City. See "Risk Factors- Concentration of
Accounts." In recognition of current market trends which show that consumers are
purchasing more electronics via telephone and the Internet, Carver is developing
a new distribution channel through which products could be purchased through
toll-free telephone numbers and on the Internet. See "Sales and Marketing.

"In the home audio market, the Company competes mainly with Adcom, Parasound,
Marantz and Harman Kardon. Most of the Company's competitors have substantially
greater financial and technical resources than the Company. The Company believes
that its competitive position in the consumer audio components market is
enhanced by unique Carver technologies and features that have given the Company
strong price/performance, as well as brand recognition advantages. See " Risk
Factors - Competition."

PRODUCT RETURNS

The Company's policy to not accept returns of unsold products from its dealers.
From time to time the Company has accepted returns of unsold products from its
dealers. Historically, the financial effect of such returns has been
insignificant.

BACKLOG

The Company's policy is to maintain sufficient finished goods inventory to fill
orders within three business days after they are received. However, during most
of 1995, the first seven months of 1996, and the last half of 1997, the Company
operated under intense working capital constraints, and its backlog rose due to
the Company's deferral of the purchase of sourced product. The Company's backlog
of orders may rise following major product introductions as dealers place orders
for the new products in excess of the number produced in initial production
runs, or when an offshore supplier fails to make on-time deliveries of product.
During the second half of 1996, two of the Company's overseas vendors were
unable to deliver three new models on time. See "Risk Factors Dependence on
Outside Manufacturers." Because of the Company's policy of filling an order
promptly after receipt, the Company does not view the level of backlog to be an
important index of future performance. The Company's backlog of orders at March
23, 1998 was approximately $539,000.

ENGINEERING, RESEARCH AND DEVELOPMENT

The Company's expenditures for engineering, research and development in 1995,
1996 and 1997 were $808,000, $711,000, and $1,152,000, respectively.

In 1997, the engineering group designed a two-channel amplifier, the A-220, for
manufacture by the Company and a modular digital processor design which was used
in a new "Dolby Digital/(R)/" surround sound processor which the Company first
shipped in February 1998. The Company also developed two new home theater
speaker systems that were first shipped in September and December, 1997.

Carver expects to release two new products during 1998. There can be no
assurance that product development or introduction plans will be accomplished on
schedule or that the new products will be well received by the market. See "Risk
Factors Dependence on Outside Manufacturers," "Economic Conditions" and
"Competition."

While the Company has recognized that its future is affected by its ability to
introduce products which incorporate technological innovation and advanced
features, it no longer has sufficient working capital to finance engineering,
research and development department at historical levels.. See "Risk Factors
Technological and Product

9
<PAGE>

Obsolescence," "Dependence on Outside Manufacturers," Risks of International
Business." The Company has reduced its engineering department to reflect its
working capital constraints. As a result of such reduction, the Company
currently employs seven full-time technical personnel in its engineering,
research and development department. The Company also employs temporary
technical personnel to augment its product development team as activity levels
require.

MANUFACTURING

During 1997, approximately 41% of the Company's sales were of products
manufactured by third parties to the Company's specifications. The Company
presently sources these products from four different suppliers located in the
Far East and the United States. Historically, the Company determined whether a
product would be manufactured by the Company or a third party principally on the
basis of two factors: 1) the location of the sources of parts and subassemblies,
and 2) the cost relative to expected volume of products to be manufactured.

Based upon the Company's new business plan and the reduced number of products
which the Company plans to offer, Carver has determined that it is more
economical to source its entire product line from selected and qualified
strategic vendor partners. These sourced products will be built to the
Company's specifications. To help insure availability of its products, the
Company intends to form relationships with vendors from whom the Company has
obtained products of consistently high quality delivered on a timely basis.
See "Risk Factors Dependence on Outside Manufacturers" and "Risks of
International Business."

During 1996 and the latter part of 1997, the availability of certain of the
Company's sourced products was interrupted by the Company's need to defer
purchases and delay payment due to working capital constraints. Availability of
sourced products has been and will continue to be dependent on the suppliers'
cooperation and responsiveness to the Company's needs. Should the Company be
required to supplement or replace a supplier, the Company believes that there
are a number of alternate sources, although the transition to a new supplier
would probably involve added costs and delays. The Company entered into a
relationship with a new supplier from whom the Company had expected to source at
least two of its new products scheduled for introduction in mid-1996.
Availability of these new products was delayed to the second quarter of 1997 due
to the inability of the supplier to manufacture and ship the products on
schedule. See "Risk Factors Dependence on Outside Manufacturers" and Risks of
International Business."

Consistent with its commitment to quality, the Company maintains strict testing
procedures. All products are tested at their respective manufacturing facilities
prior to shipment. The Company retests products manufactured by its suppliers on
a statistical sample basis at its Woodinville facility to monitor quality
control.

The Company offers a three-year limited warranty on amplifiers and loudspeakers;
a two-year limited warranty on preamplifiers, integrated amplifiers,
preamplifier/tuners, receivers and tuners; and a one-year limited warranty on
tape decks, compact disc players and changers.

HUMAN RESOURCES

On April 9, 1998, the Company had 60 full-time employees, of whom 25 were
engaged in production 9, in service and warranty repair, 7 in research,
development , and engineering, 8 in general and administrative functions and 11
in sales and marketing. As the Company continues to restructure its operations
to implement its direct sales and sourced product plans, it anticipates that
most of its production employees and several other employees will be laid off.
The Company plans to hire additional sales and direct marketing personnel. None
of the Company's employees is covered by a collective bargaining agreement.

10
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Corporation who are not directors are listed in
the following table. A description of their occupations for the past five years
also appears below.

NAME AGE POSITION

Debra L. Griffith 39 Vice President of Finance and
Administration

John P. World 51 Executive Vice President and General
Manager

Ms. Griffith joined the Company in July 1996 as its Vice President of Finance.
She became Vice President of Finance and Administration in January 1997. From
1983 to July 1996, Ms Griffith was employed by Teltone Corporation, a
telecommunications manufacturer, most recently as its Vice President of Finance
and Administration. Ms. Griffith has been a Certified Public Accountant since
1980, and she received her Bachelor of Arts in Business Administration with
honors in 1980 from the University of Washington.

Mr. World joined the Company in February 1987. Mr. World is currently
responsible for the overall operations of the Company. Since joining the
Company in 1987, Mr. World has at various times been responsible for the
administration, international sales and operations departments. Mr. World was
disbarred from the practice of law in October 1997 by the Washington Supreme
Court as a result of conduct of Mr. World in the representation of clients in
1991. Mr. World received his Juris Doctor in 1975 from the University of Puget
Sound and his Bachelor of Arts degree in Political Science in 1972 from the
University of Washington.

RISK FACTORS

In addition to the other information contained or incorporated by reference
herein, the following factors should be considered carefully in evaluating the
Company and its business. Prospective investors should not dismiss the risk
factors set forth below as "boilerplate" or "customary" disclosure. A careful
review and understanding of each of the risk factors set forth below, as well as
the other information contained in this report, is essential for an investor
seeking to make an informed investment decision with respect to the Company. The
Company's ability to halt the deterioration of its results of operations and
financial condition and successfully implement its operating strategy is subject
to a number of material risks and uncertainties. The contingencies and other
risks discussed below could affect the Company in ways not presently anticipated
by its management and thereby impair its ability to maintain or improve its
performance.

DEPENDENCE ON OUTSIDE MANUFACTURERS

In 1997, the Company depended upon outside manufacturers for the production of
several products which represented approximately 41% of its sales. As the
Company transitions to outside manufacturers for its products during the second
and third quarters of 1998 pursuant to implementation of its new business
strategy, it expects sales of products manufactured by suppliers to account for
over 70% of its revenue in 1998. In 1996, the Company was unable to fill orders
for key products due to production delays experienced by offshore suppliers of
these products which had a material adverse effect on sales in 1996. Any delay
in obtaining products in the future would likely have a similar impact. In
addition, the lack of availability of any product due to production delays or
any other reason could have an adverse impact on the Company's relationship with
its dealers and customers. Furthermore, products procured from offshore
suppliers require significant advance payment for tooling and nonrecurring
engineering expenses. Due to the significance of this investment, it is
impractical for the Company to maintain multiple suppliers for a single product.
As a result, any delay in obtaining products may result in lost

11
<PAGE>

revenues to the Company until such time as a transition to an alternate supplier
can be completed. The Company believes that there are a number of possible
alternate suppliers that after a several month period could manufacture the
Company's sourced product should it be necessary to replace an existing
supplier. However, production delays in 1996 demonstrate that any transition to
a new supplier can involve delays that may result in decreased sales and added
expense.

NEED FOR ADDITIONAL FINANCING

Due to declining sales and continuing losses from operations, the Company has
for several months experienced a severe shortfall in operating capital that has
forced the Company to seek extended payment terms from most of its suppliers,
delay payments to many of its suppliers and other vendors, delay or cancel
purchases, substantially reduce marketing and sales efforts and take other
steps to conserve operating capital. These steps have had a negative impact on
sales. At April 9, 1998, payments to vendors aggregating approximately $1.3
Million were past due. At April 9, 1998, the Company's immediate sources of
working capital consisted of cash of approximately $20,000 and available
borrowings under a line of credit of approximately $20,000. This facility
expires on July 31, 1998, and the lender has notified the Company that it will
not renew this line due, in part, to its small size. The Company's current
sources of operating capital are not sufficient to fund operations or implement
the Company's anticipated new business strategy. Accordingly, its is necessary
for the Company to obtain additional operating capital as soon as possible. The
report of the Company's independent auditors with respect to the Company's 1997
Consolidated Financial Statements states that the Company's recurring operating
losses, accumulated deficit and need for additional financing raise substantial
doubt about the Company's ability to continue as a going concern. The
Consolidated Financial Statements included in this report have been prepared
assuming the Company would continue as a going concern and do not include any
adjustments to reflect the possible future effects on the recoverability of
assets and liabilities that may result from this uncertainty.

During the last three fiscal years, the Company has incurred aggregate net
losses of approximately $9,592,000 or $2.56 per share. There can be no
assurance that the Company will generate profits in future periods. The
Company's future operating results will be dependent upon a number of factors,
particularly those associated with the change-over of its product lines, the
implementation of its new business strategy, increased sales and margins, the
control of overhead costs, the ability of the Company to successfully identify
and respond to emerging trends in the consumer electronics industry, the level
of competition and general economic conditions. See "Sales and Marketing" and
"Management's Discussion and Analysis or Plan of Operation."

Accordingly, the Company must obtain additional sources of working capital to
finance continuing losses and invest in its new business strategy.

The Company is currently in the process of implementing a new business plan
which includes new methods of distribution. As the Company implements these
methods, revenues from existing channels of distribution may be adversely
affected. As part of its new business plan, the Company intends to source all
of its products from OEM vendors. Delays in production or delivery of these
sourced products may result in lower than anticipated revenues or result in
higher than anticipated expense. Any unanticipated increase in expense or
decrease in revenue will increase the amount of financing required by the
Company. Failure to obtain sufficient working capital to satisfy the Company's
working capital requirements would force the Company to further curtail or
restructure operations, sell assets, continue to seek extended payment terms
from its creditors or seek protection under the federal bankruptcy laws.

12
<PAGE>

RISKS OF INTERNATIONAL BUSINESS

As a result of the Company's decision to source substantially all of its
products from offshore suppliers, the Company's business will be increasingly
subject to the risks generally associated with doing business internationally,
such as fluctuations in exchange rates, foreign governmental regulation and
changes in economic conditions. These factors, among others, could influence
both the Company's ability to realize an acceptable profit margin on its
products and its ability to procure products or components from sources outside
of the U.S. In addition, the Company's business will be increasingly subject to
the risks associated with the imposition of legislation and regulations relating
to imported goods, including quotas, duties or taxes and other charges,
restrictions or retaliatory actions on imports to the U.S. and other countries
in which the Company's products are manufactured or sold. The Company cannot
predict whether the foregoing legislation and regulation will be imposed by the
U.S. or other countries, nor can it predict what effect such imposition would
have on its business or results of operations. There can be no assurance that
the imposition of new trade regulations would not have a negative affect on the
Company's profit margins and its ability to return to profitability.

RECENT AND CONTINUED OPERATING LOSSES

During the last three completed fiscal years, the Company has incurred aggregate
net losses of approximately $9,592,000 or $2.56 per share. There can be no
assurance that it will generate profits in future periods. The Company's future
operating results will be dependent upon a number of factors, particularly those
associated with the implementation of its new business strategies, the change-
over of its product lines, the performance of its suppliers, the success of new
channels of distribution, increased sales and margins, the control of overhead
costs, the ability of the Company to successfully identify and respond to
emerging trends in the consumer electronics industry, the level of competition
and general economic conditions. See "Sales and Marketing" and "Management's
Discussion and Analysis of Financial Conditions and Results of Operations."

CONTROL BY PRINCIPAL SHAREHOLDERS AND ANTI-TAKEOVER CONSIDERATIONS

At April 10, 1998, Renwick Capital Management and its affiliates (the "Renwick
Group") beneficially owned 1,411,764 shares of Preferred Stock, 979,097 shares
of Common Stock and Warrants to acquire 300,000 shares of the Company's Common
Stock. See "Recent Developments - Renwick Financing." Currently, two of the
Company's four directors are affiliated with the Renwick Group. Although the
Renwick Group will not have the ability to control matters requiring shareholder
approval, they may have the ability to influence the affairs and management of
the Company and the elections of directors. In addition, the Renwick Group and
the Company have entered into an agreement which together with its voting power,
gives the Renwick Group the ability to (i) elect, or defeat the election of, any
of the Company's directors, (ii) amend or prevent amendment of the Company's
charter documents, or (iii) effect or prevent a merger, sale of assets or other
corporate transaction and the Company's shareholders. This may have the effect
of delaying, deferring or preventing a change in control of the Company, and
could limit the price that certain investors might be willing to pay in the
future for the Common Stock.

CONTINUED INCLUSION ON THE NASDAQ STOCK MARKET

The Company announced its failure to meet Nasdaq's new $5,000,000 minimum public
float and $1.00 minimum bid continued listing requirements. Nasdaq has granted
the Company until May 28, 1998 to satisfy these requirements. The inability of
the Company to comply with these listing requirements likely will result in the
delisting of the Company's common stock from Nasdaq. Delisting of the Company's
common stock would likely have an adverse effect on the liquidity, trading price
and ability to obtain quotations on a timely basis for the common stock the
Company's common stock should cease to be listed on Nasdaq, it may continue to
be quoted in the OTC Bulletin Board.

13
<PAGE>

CONCENTRATION OF ACCOUNTS; DEPENDENCE UPON RELATIONSHIP WITH CIRCUIT CITY

Late in 1995, the Company entered into a distribution arrangement with Circuit
City, one of the largest retailers of consumer electronics in the U.S. Sales to
Circuit City were 40% of the Company's revenue in 1997. As of March 27, 1998,
Circuit City accounted for 35% of the Company's receivables. Since sales to
Circuit City declined during 1997 (except for stocking orders of new Cinema
Loudspeaker systems), the Company expects 1998 sales to this customer to
decline. Dependence on a single customer for a significant percentage of sales
involves a number of risks, including the risk that the Company's inventory of
finished goods could increase sharply if Circuit City orders smaller quantities
than those anticipated by the Company, or discontinues doing business with the
Company. The agreement between the Company and Circuit City may be terminated
by either party for any reason upon 30 days advance written notice without
penalty. In the event of an unexpected termination of this agreement, the
Company many not be able to change its operations quickly enough to respond to a
significantly lower level of sales. Also, due to the significant buying power
of Circuit City, sales to Circuit City yield a smaller margin than that realized
by the Company on sales to most other customers.

ECONOMIC CONDITIONS

The success of the Company's operations depends, to a significant extent, upon
factors relating to discretionary consumer spending. These factors include
economic conditions such as unemployment levels, business conditions, interest
rates and taxation. The Company's business is also sensitive to consumer
spending patterns and consumer preferences. There can be no assurances that
consumer spending and consumer preferences will not be adversely affected by
general social trends and economic conditions, thereby impacting the Company's
revenues, sales and product types. If the demand for consumer electronics, in
particular mid- to high-end audio entertainment systems, were to decline, the
Company's business, financial condition and operating results could be adversely
affected.

COMPETITION

The consumer electronics industry is highly competitive. The Company's products
compete directly against other mid- to high-end audio entertainment systems and
indirectly against other functionally similar products which vary widely in
price and quality and which are distributed through a variety of distribution
channels, including audio specialty stores, discount stores, department stores
and mail order firms. The Company competes against a number of companies, many
of which have substantially greater resources than the Company. Such
competition could have a material adverse effect on the Company's business,
financial condition and operating results. The Company believes that success in
the consumer electronics industry depends, in part, on providing consumers with
unique technologies and features, and on brand name recognition.

TECHNOLOGICAL AND PRODUCT OBSOLESCENCE

The consumer electronics industry has been characterized in recent years by
significant technological changes, frequent new product introductions and
declining end-user prices. Current competitors or new market entrants could
introduce new or enhanced products with features and/or prices which render the
Company's products obsolete or less marketable. The ability of the Company to
compete successfully will depend in large measure on its ability to adapt to
technological changes and advances in the industry. There can be no assurance
that the Company will be able to keep pace with the technological or other
competitive demands of the marketplace.

INTERNET SALES

As a result of the Company's lack of operating history with the online commerce
market and the emerging nature of such market, the Company is unable to
accurately forecast future Web site revenues. Online commerce is a new, rapidly
evolving and intensely competitive distribution channel. Furthermore, the
barriers to entry are minimal and the Company's current competitors can launch
new sites at a relatively low cost. The Company expects to experience
fluctuations in sales generated by the Web site due to a variety of factors,
many of which are outside the

14
<PAGE>

Company's control. Factors that may adversely affect the Company's operating
results include (i) the Company's ability to retain existing customers, attract
new customers and maintain customer satisfaction; (ii) the Company's ability to
manage inventory and fulfill orders on a timely basis, (iii) the announcement of
new sites by the Company's competitors, (iv) the level of traffic on the
Company's web site, and (v) technical difficulties, system downtime or Internet
brownouts. There can be no assurance that the Company will be able to overcome
the difficulties posed by one or more of the foregoing factors and compete
successfully against current and future competitors, and competitive pressures
faced by the Company may have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.

SYSTEM DEVELOPMENT RISKS

A key element of the Company's new business strategy is to generate a
significant volume of sales on a newly developed Web site. Accordingly, the
satisfactory performance, reliability and availability of the Company's Web
site, transaction-processing systems and network infrastructure are critical to
the Company's ability to attract and retain new customers. Since revenues
depend upon the number of customers who visit and shop on its Web site, any
system interruptions that result in the unavailability of the Web site or
reduced order fulfillment performance would reduce the amount of product sold in
this particular channel of distribution and its attractiveness to the Company's
end-users in the long term. Any substantial increase in the volume of traffic
on the Web site may require the Company to expand and upgrade its systems and
infrastructure. There can be no assurance that the Company will be able to
accurately project the rate of use of its Web site, the timing of increases in
such use, if any, or its ability to timely respond to such increases.

ITEM 2. DESCRIPTION OF PROPERTY

The Company leases its approximately 50,000 square foot headquarters and
manufacturing facilities located in Woodinville, Washington, a suburb of
Seattle. The Company believes that its facilities are adequate but too large for
its current operations. As the Company transitions from manufacturing several of
its products to purchasing products from OEM vendors, the size of the Company's
facility needs will be further reduced.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders during the fourth quarter of
the Company's fiscal year.

15
<PAGE>

PART II

ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The common stock of Carver Corporation has traded over the counter on the Nasdaq
National Market under the symbol CAVR since its initial public offering on May
9, 1985. The following table sets forth high and low sales prices by quarter as
reported by the Nasdaq National Market in 1997 and 1996:

FISCAL YEAR 1997 FISCAL YEAR 1996
---------------- ----------------
QUARTER HIGH LOW HIGH LOW
- ------- ---- --- ---- ---

FIRST $3 5/16 $1 7/8 $2 1/2 $1 1/4

SECOND 2 1/8 1 2/32 3 3/8 2 1/8

THIRD 2 1/2 1 1/4 3 1/2 2 1/8

FOURTH 2 1/8 3/8 3 1/2 2

HOLDERS

The approximate number of shareholders of record if the Company's Common Stock
as of April 9, 1998 was 490.

DIVIDENDS

It has been the Company policy to retain all earnings to fund operations.

RECENT SALES OF UNREGISTERED SECURITIES

None.

16
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION

FORWARD-LOOKING STATEMENTS

Statements in this report covering future performance, developments,
expectations or events, including the discussion of the Company's strategy,
product development and introduction plans and various statements concerning the
Company's expectations for its growth and for the consumer electronics industry
and generation of additional working capital, constitute forward-looking
statements that are subject to a number of known or unknown risks, uncertainties
and other factors that might cause actual results to differ materially from
those expressed or implied by such statements. These risks and uncertainties
include the ability of the Company to obtain additional working capital
sufficient to meet its working capital requirements, production difficulties or
delays due to supply constraints, technical problems, payment delays or other
factors; technological changes; the effect of global, national and regional
economic conditions; fluctuations in foreign currency exchange rates;
reliability of offshore OEM suppliers; changes in the Company's channels of
distribution; changes in consumer preferences; the impact of competitive
products and pricing; changes in demand; increases in component prices or other
costs; inventory risks due to shifts in market demand, product obsolescence or
other factors; and a number of other risks including those risks and
uncertainties described under the caption "Risk Factors" in Part I of this
report and those identified by the Company from time to time in other filings
with the Commission, press releases and other communications. All forward
looking statements contained in this report reflect the Company's expectations
at the time of this report, and the Company disclaims any responsibility to
revise or update any such forward-looking statement except as may be required by
law.

That portion of the Company's business involving products manufactured by its
offshore suppliers may be influenced by factors affecting imports, such as
fluctuations in foreign currency exchange rates as well as the United States and
vendor country policies relating to tariffs, trade restrictions and taxation.
See "Effects of Inflation and Changes in Foreign Currency Exchange Rates."

DEVELOPMENT OF NEW BUSINESS STRATEGY

As the Company's sales have declined and the Company has experienced a severe
shortage in working capital, the Company has determined the need to develop a
new business strategy which will enable it to operate with lower overhead. This
new business model, which is still under development but which the Company began
to implement in the first quarter of 1998, includes the use of a new direct
marketing strategy, a reduction in the number of products offered by the Company
and the elimination of the Company's manufacturing operations. Under this
model, the Company will transition to purchasing all of its products from OEM
suppliers. Also, under the direct marketing strategy, the Company will offer
its condensed product line directly to consumers in addition to sales through
dealers and distributors. The Company's products would be offered for sale to
consumers via the Internet at a Company Web site currently under development and
through a toll-free number.

Based upon the Company's new business plan and the condensed product line the
Company plans to offer, Carver has determined that it is advantageous to source
its entire product line offshore from selected and qualified strategic vendor
partners. These sourced products will be built to the Company's specifications.
To help insure availability of its products, the Company intends to form
relationships with vendors from whom the Company has obtained high quality
products delivered on a timely basis. See "Description of Business Risk Factors
Dependence on Outside Manufacturers" and "Risks of International Business." As
the Company continues to restructure its operations to implement its direct
sales and sourced product plans, it anticipates that most of its production
employees and several other employees will be laid off. The Company plans to
hire additional direct marketing personnel.

1997 COMPARED WITH 1996

Net sales for 1997 were $11,015,000, a decrease of 24% from net sales of
$14,519,000 for 1996. This decrease is attributable in part to a 10% decrease
in sales of separate audio components throughout the industry. In addition,
sales of electronics to Circuit City were lower in 1997 than 1996 due, in part,
to the size of initial stocking orders in 1996.

17
<PAGE>

These declines were partially offset by sales of a new line of home theater
loudspeakers beginning in the third quarter of 1997. Sales were also impacted by
a severe short fall in working capital which restricted the Company's marketing
and sales efforts and its ability to supply product.

Domestic sales of the Company's consumer products decreased to $9,528,000, a 21%
decrease compared to sales of $11,989,000 in 1996. Of the domestic sales,
approximately $4,407,000 or 46% were sales made by the Company to Circuit City
compared to $5,953,000 or 50% in 1996.

Consumer sales outside of the United States decreased approximately 34% from
$1,279,000 to $844,000 in 1997. The Company believes that this decrease was due
primarily to soft demand in Asian markets attributable to recessionary
conditions.

Approximately 41% of the Company's sales in 1997 were attributable to products
that the Company sources offshore compared to 54% for the prior year.

The Company's gross margin decreased from 20% in 1996 to 13% in 1997 due to
downward pricing pressure on pro logic electronics as well as costs associated
with excess capacity in the Company's factory.

Operating expense decreased in 1997 in comparison to the prior year by 7%, as a
result of ongoing cost reduction efforts. These reductions were partially offset
by increased research and development investment on new consumer products, as
well as, the development of a line of loudspeakers for home theater application.

The Company experienced a gain on the sale of professional products line, due to
the collection of the holdback amount plus interest on the purchase price from
Phoenix Gold International Inc., of $202,000, an amount which had been
previously written down.

Average borrowings were down in 1997 from the same period of 1996 because of the
infusion of capital from the sale of the headquarters facility and lower
permitted borrowings due to borrowing base limitations. See "--Liquidity and
Capital Resources." Accordingly, interest expense decreased approximately
$48,000 when compared to 1996.

Net losses for 1997 were $3,232,000 (29% of net sales) or $0.84 per common
share. This compares to net losses of $3,203,000 (22% of net sales) or $0.86 per
share in 1996.

As the Company's sales have declined and the Company has experienced a severe
shortage in working capital, the Company has determined the need to develop a
new business strategy which will enable it to operate with lower overhead. This
new business model, which is still under development but which the Company began
to implement in the first quarter of 1998, includes the use of a new direct
marketing strategy, a reduction in the number of products offered by the Company
and the elimination of the Company's manufacturing operations. Under this
model, the Company will transition to purchasing all of its products from OEM
suppliers. Also, the Company will offer its condensed product line directly to
consumers in addition to sales through dealers and distributors.

The Company has approximately $19,911,000 of net operating losses that may be
utilized to reduce taxable income in future years. These loss carryforwards
will expire between the years 2004 and 2012. Management is of the opinion that
it is not appropriate to record a benefit for net operating loss carryforwards
at this time. If operating results improve, management will reassess its
position in this matter.

1996 COMPARED WITH 1995

Net sales for 1996 were $14,519,000, a decrease of 21% from net sales of
$18,428,000 for 1995. This decrease is attributable largely to the November
1995 sale of the Company's professional product line and certain related OEM
accounts to Phoenix Gold International, Inc. In 1995 net sales included sales
of professional products of $4,225,000 and OEM sales of $1,499,000 that in
total represented 31% of 1995 net sales. Contracts that represented 95% of the
Company's 1995 OEM sales were included in the assets sold with the professional
products line.

18
<PAGE>

Domestic sales of the Company's consumer products increased to $11,989,000 or
21% compared to sales of $9,399,000 in 1995. Of the domestic sales,
approximately $5,953,000 or 50% were sales made by the Company to Circuit City.

Consumer sales outside of the U.S. decreased approximately 52% from $2,655,000
to $1,279,000 in 1996. The Company believes this is attributable in large part
to limited availability of product to sell to its international distributors.
Approximately 54% of the Company's sales in 1996 were attributable to products
that the Company sources offshore compared to 47% for the same period of the
prior year.

The Company's sales of consumer products, although higher in 1996 than in the
prior year, were negatively affected by a severe shortfall in working capital.
In addition, two of the Company's offshore vendors failed to deliver two new
products on the scheduled delivery dates. These products often generate
additional sales of other products manufactured by the Company (e.g., amplifiers
and loudspeakers). The Company believes these factors had a significant
negative impact on the Company's sales during 1996.

The Company's gross margin increased from 18% in 1995 to 20% in 1996. Sales
during 1996 included $432,000 of sales of professional products to the purchaser
of the Company's professional product line pursuant to an agreement entered into
at the time of the sale of the line. These sales were at the Company's cost
and, therefore, yielded no margin. In addition, approximately $5,953,000 in
sales to Circuit City in 1996 were at a lower margin than the Company realizes
on its sales to other domestic customers. Despite these factors, the Company
experienced improvements in gross margin as it increased its domestic
production.

Operating expense decreased in 1996 in comparison to the prior year by 5%,
primarily due to the elimination of expenses attributable to the Company's
professional products line. This reduction affected selling and research and
development. These reductions were partially offset by increased research and
development investment on new consumer products, use of consultants as well as
increased field sales support and media advertising. Research and development
expenses were increased due to the development of loudspeakers for home theater
application and to pursue the safety and electrical approvals necessary to sell
the Company's products in the European Common Market countries. The Company
experienced a loss on the sale of professional products line due primarily to
the write-down of the remaining holdback amount on the purchase price from
Phoenix Gold International Inc., of $200,000, as well as $225,000 in inventories
and $156,000 in trade accounts receivable.

Average borrowings were down in 1996 from the same period of 1995 because of the
infusion of capital associated with the Renwick private placement and therefore
interest expense decreased approximately $133,000 when compared to 1995.

Net losses for 1996 were $3,203,000 (22% of net sales) or $0.86 per common
share. This compares to net losses of $3,157,000 (17% of net sales) or $0.86 per
share in 1995.

SEASONALITY

The market for high-fidelity audio/video equipment is somewhat seasonal, with
moderately higher sales generally occurring in the last five months of the year.
Demand for audio products also exhibits some cyclicality, reflecting the general
state of the economy and consumer expectations. The Company's sales in the
first six months of 1997 were $4,543,000 compared to $6,472,000 in the last six
months of the year. The introduction of new products may affect this seasonality
and year-to-year comparisons.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital on December 31, 1997 was $3,140,000, which
included cash and short-term investments aggregating approximately $233,000.
This compares with working capital of $4,573,000 and cash and short-term
investments of $70,000 at December 31, 1996. At April 10, 1998, the Company's
immediate capital resources consisted of approximately $20,000 in cash and
$25,000 available under the credit facility described below.

19
<PAGE>

The Company's inventory increased $582,000 from December 31, 1996 to December
31, 1997, due in part to the build up of quantities of amplifiers manufactured
in the U.S.. The sales of these units were delayed largely due to the lack of
availability of the associated preamp/tuner. In addition, inventories increased
due to the introduction of the new line of Cinema loudspeakers. Accounts
receivable increased $249,000 from the end of 1996 due to higher fourth quarter
net sales in 1997.

The Company has an agreement with a financial institution that provides for
working capital advances up to $6,000,000, subject to borrowing base limitations
tied to 70% of eligible accounts receivable and 50% of eligible inventory. A
maximum of $1,000,000 of this line may be used to secure letters of credit (the
"Credit Facility"). Advances are collateralized by substantially all of the
assets of the Company and bear interest at the prime lending rate plus 2%. The
outstanding balance on the line of credit was $2,094,000 and $1,110,000 at
December 31, 1997 and 1996, respectively, and approximately $20,000 was
available to be borrowed at April 10, 1998. Maximum and average amounts
outstanding during the year ended December 31, 1997 were $2,094,000 and
$1,007,000, respectively. The weighted average interest rate at December 31,
1997 was 10.5% and the weighted average interest rate during the year, computed
monthly, was 10.44%. The Credit Facility expires on July 31, 1998. The lender
has notified the Company that it will not renew the Credit Facility. There can
be no assurance that the Company can obtain a replacement line of credit when
needed on terms that the Company finds acceptable. However, the Company
believes that a new line of credit may be secured, if it can obtain agreements
from its creditors to payment plans and if financing is secured in the near
future.

Nasdaq had previously advised the Company that it did not meet Nasdaq's new
minimum public float and bid price continued listing requirements, $5,000,000
and $1.00 per share, respectively. The Company has until May 28, 1998 to satisfy
these requirements. The inability of the Company to comply with these listing
requirements likely will result in the delisting of the Company's common stock
from Nasdaq. Delisting of the Company's common stock would likely have an
adverse effect on the liquidity, trading price and ability to obtain quotations
on a timely basis for the common stock. See "Description of Business Recent
Developments Noncompliance with Certain Nasdaq Requirements."

On April 16, 1997, the Company sold its headquarters and manufacturing facility
in Lynnwood, Washington for $3,100,000 resulting in a gain of $859,000. Net
proceeds of $2,808,000 from the sale were used to pay down the bank line of
credit and to provide working capital. The Company moved to a smaller, leased
facility in Woodinville, Washington in July 1997.

In 1997, the Company purchased $513,000 of capital equipment, of which $204,000
was associated with a new computer system that was implemented in July of 1997.
Leasehold improvements of $124,000 were incurred in conjunction with the move to
a new leased facility. The remaining expenditures were associated with
equipment for engineering and manufacturing. In 1998, the Company expects a
decrease in purchases of capital equipment.

The Company believes that its current sources of operating capital are not
adequate to fund the Company's operations through the end of 1998. The Company
has identified potential financing sources. Even if the Company is successful
in raising additional financing, unforeseen costs and expenses or lower than
anticipated revenues could accelerate or increase the financing requirements.
There can be no assurance that the Company will be able to secure a line of
credit to replace the Credit Facility currently in place, or that the Company's
efforts to secure financing will be successful. The Company's independent
accountants have qualified their opinion with respect to their audit of the
Company's 1997 consolidated financial statements as the result of doubts
concerning the Company's ability to continue as a going concern in the absence
of additional financing. Failure to obtain sufficient

20
<PAGE>

additional capital to satisfy the Company's working capital requirements would
force the Company to further curtail or restructure operations, sell assets,
continue to seek extended payment terms from its creditors or seek protection
under the federal bankruptcy laws. See "Description of Business Risk Factors
Need for Additional Financing."

EFFECTS OF INFLATION AND CHANGES IN FOREIGN CURRENCY EXCHANGE RATES

Due to the competitive conditions in the market for consumer electronics,
historically the Company has been limited in its ability to increase prices for
its products in amounts sufficient to offset increased production and operating
costs. The Company intends to continue to monitor costs and its market and
adjust prices as appropriate. All sales of the Company's products are in U.S.
dollars.

The Company purchases its products manufactured offshore at an agreed per unit
price payable in U.S. Dollars. Accordingly, fluctuations in foreign currency
rates had no material impact on the Company's gross margin.

21
<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report 23

Consolidated Balance Sheet as of
December 31, 1997 and 1996 24

Consolidated Statement of Operations, Years
Ended December 31, 1997, 1996 and 1995 25

Consolidated Statement of Shareholders' Equity,
Years Ended December 31, 1997, 1996 and 1995 26

Consolidated Statement of Cash Flows, Years
Ended December 31, 1997, 1996 and 1995 27

Notes to Consolidated Financial Statements 28
</TABLE>

22
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
Carver Corporation

We have audited the accompanying consolidated balance sheets of Carver
Corporation and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three year period ended December 31, 1997. 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 generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Carver Corporation
and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and cash flows for each of the years in the three year period ended
December 31, 1997 in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered significant recurring losses from
operations and has a net accumulated deficit that raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

/s/ Moss Adams LLP

Seattle, Washington
February 6, 1998
(except for Note 2, as to
which the date is March 20, 1998).

23
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET

ASSETS
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 228,000 $ 65,000
Marketable securities 5,000 5,000
Accounts receivable, trade, net 1,876,000 1,627,000
Inventories 4,758,000 4,176,000
Note receivable and other assets 104,000
Prepaid expenses 221,000 662,000
---------------- ---------------
Total current assets 7,088,000 6,639,000
---------------- ---------------
PROPERTY AND EQUIPMENT
Land 440,000
Buildings and improvements 124,000 2,452,000
Equipment 1,765,000 2,299,000
---------------- ---------------
1,889,000 5,191,000
Less accumulated depreciation (1,084,000) (2,747,000)
---------------- ---------------
805,000 2,444,000
---------------- ---------------
OTHER ASSETS 106,000 141,000
---------------- ---------------
Total assets $ 7,999,000 $ 9,224,000
================ ===============
CURRENT LIABILITIES
Note payable $ 2,094,000 $ 1,110,000
Accounts payable 1,134,000 410,000
Accrued liabilities
Commissions 77,000 127,000
Payroll and related taxes 350,000 264,000
Warranty 135,000 113,000
Other 158,000 42,000
Total current liabilities 3,948,000 2,066,000

COMMITMENTS (Note 6)

SHAREHOLDERS' EQUITY
Preferred shares, par value $.01 per share, 2,000,000
shares authorized, 1,411,764 shares issued
and outstanding 14,000 14,000
Common shares, par value $.01 per share, 20,000,000
shares authorized, 3,971,821 shares issued
and outstanding 40,000 37,000
Additional paid-in capital 19,371,000 19,006,000
Accumulated deficit (15,374,000) (11,899,000)
---------------- ---------------
Total shareholders' equity 4,051,000 7,158,000
---------------- ---------------

Total liabilities and shareholders' equity $ 7,999,000 $ 9,224,000
================ ===============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

24
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS

Years ended December 31,
1997 1996 1995
----------------- ---------------- ---------------
<S> <C> <C> <C>
Net sales $ 11,015,000 $ 14,519,000 $ 18,428,000
Cost of sales 9,556,000 11,604,000 15,038,000
----------------- ---------------- ---------------
Gross margin 1,459,000 2,915,000 3,390,000
----------------- ---------------- ---------------

Operating expenses

Selling 2,152,000 2,629,000 3,441,000
General and administrative 2,423,000 2,079,000 1,887,000
Engineering, research and development 1,152,000 711,000 808,000
Restructuring charges - 1,319,000
Loss (gain) on sale of professional products line (202,000) 526,000 (1,208,000)
----------------- ---------------- ---------------
Total operating expenses 5,525,000 5,945,000 6,247,000
----------------- ---------------- ---------------
Loss from operations (4,066,000) (3,030,000) (2,857,000)
----------------- ---------------- ---------------

Other income (expense)
Interest expense (154,000) (202,000) (335,000)
Interest income 6,000 50,000 86,000
Gain (loss) on disposal of property and equipment - 8,000 (3,000)
Gain on sale of headquarters facility 859,000
Miscellaneous 123,000 (29,000) (48,000)
----------------- ---------------- ---------------
Total other income (expense) 834,000 (173,000) (300,000)
----------------- ---------------- ---------------

Net loss $ (3,232,000) $ (3,203,000) $ (3,157,000)
================= ================ ===============

Loss per share* $ (0.84) ($0.86) ($0.86)
================= ================ ===============

</TABLE>
*Earnings per share are calculated on the basis of 3,680,000 shares in 1995,
3,706,000 shares in 1996 and 3,842,000 in 1997.

The accompanying notes are an integral part of these consolidated financial
statements

25
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Common Shares Preferred Shares Additional
----------------------- ---------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
-------- -------- -------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 3,678,674 $37,000 $15,931,000 $ (5,431,000) $10,537,000
Issuance of shares 7,656 9,000 9,000
Net loss (3,157,000) (3,157,000)
--------- ------- --------- ------ ----------- ------------ -----------
Balance, December 31, 1995 3,686,330 $37,000 $15,940,000 $ (8,588,000) $ 7,389,000
Issuance of shares 14,655 1,411,764 14,000 2,856,000 2,870,000
Dividend on preferred shares 37,835 108,000 (108,000)
Issuance of warrants 102,000 102,000
Net loss (3,203,000) (3,203,000)
--------- ------- --------- ------ ----------- ------------ -----------
Balance, December 31, 1996 3,738,820 37,000 1,411,764 14,000 19,006,000 (11,899,000) 7,158,000
Issuance of shares 50,014 1,000 77,000 78,000
Dividend on preferred shares 182,987 2,000 241,000 (243,000) -
Issuance of warrants-net 47,000 47,000
Net loss (3,232,000) (3,232,000)
--------- ------- --------- ------ ----------- ------------ -----------
Balance, December 31, 1997 3,971,821 40,000 1,411,764 14,000 19,371,000 (15,374,000) 4,051,000
========= ======= ========= ====== =========== ============ ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements

26
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
--------------- ----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,232,000) $ (3,203,000) $ (3,157,000)
Adjustments to reconcile net loss
to cash flows (used by) from operating activities
Common shares and warrants issued for services 97,000 64,000 --
Depreciation and amortization 793,000 474,000 300,000
Loss (Gain) on sale of professional products line (202,000) 526,000 (1,208,000)
Gain on sale of headquarters facility (859,000) -- --
Restructuring Costs -- 1,319,000
(Gain) Loss on disposal of property and equipment (8,000) 3,000
Changes in assets and liabilities
Accounts receivable, trade, net (249,000) 521,000 1,526,000
Inventories (582,000) (444,000) 2,555,000
Prepaid expenses (100,000) (512,000) (31,000)
Other assets (14,000) (3,000) 126,000
Accounts payable and accrued liabilities 898,000 (417,000) (1,159,000)
--------------- ----------------- ------------------
(3,450,000) (3,002,000) 274,000
--------------- ----------------- ------------------

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from repayment of note receivable 104,000 992,000 10,000
Proceeds from sale of professional products line 202,000 71,000 1,632,000
Acquisition of property and equipment (513,000) (384,000) (44,000)
Net proceeds from sale of headquarters facility 2,808,000 --
Proceeds from disposal of property and equipment 21,000 2,000
--------------- ----------------- ------------------
2,601,000 700,000 1,600,000
--------------- ----------------- ------------------

CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common shares 28,000 10,000 9,000
Issuance of preferred shares 2,898,000 --
Increase (Decrease) in note payable, -net 984,000 (106,000) (1,851,000)
Repayment of long-term debt (696,000) (20,000)
--------------- ----------------- ------------------
1,012,000 2,106,000 (1,862,000)
--------------- ----------------- ------------------

INCREASE (DECREASE) IN CASH 163,000 (196,000) 12,000

CASH
Beginning of year 65,000 261,000 249,000
--------------- ----------------- ------------------
End of year $ 228,000 $ $65,000 $ 261,000
=============== ================= ==================
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements

<PAGE>

CARVER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Carver Corporation and its wholly-owned subsidiary, Carver
International, Ltd., a Foreign Sales Corporation (FSC). Significant
intercompany transactions are eliminated in consolidation.

OPERATIONS - The Company is engaged primarily in the development,
manufacture and distribution of audio/video entertainment systems. Sales are
approximately 92% in the United States and 8% in various foreign nations.

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

REVENUE RECOGNITION - Revenue is recognized when products are shipped. The
Company warrants its products for a period of one to three years following the
date of sale. Estimated warranty costs are recorded in the period of the sale.

INVENTORIES - Inventories consist of electronic components and audio/video
equipment and are stated at the lower of cost (determined on a first-in, first-
out basis) or market. Inventories consist of the following:
<TABLE>
<CAPTION>

December 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>

Raw materials and service spare parts $ 249,000 $ 484,000
Work-in-progress 1,641,000 1,154,000
Finished products 2,868,000 2,538,000
---------- ----------
$4,758,000 $4,176,000
---------- ----------

</TABLE>

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation for financial reporting purposes is provided using straight-line
methods. Estimated useful lives range from three to thirty years.

LONG-LIVED ASSETS - The Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("FAS 121") during 1996. FAS 121 requires
that long-lived assets and certain identifiable intangibles to be held and used
or disposed of by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. During 1997 the Company determined that no impairment loss need
be recognized for applicable assets of continuing operations.

INTANGIBLES - Patents are amortized over the useful lives which range from
seven to seventeen years.

PREPAID TOOLING - Advance payments for tooling associated with new product
development are amortized over the estimated life of the product which ranges
from one to two years.

28
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK BASED COMPENSATION - Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"). The new standard measures compensation cost
using a fair value method, which computes compensation cost as the difference
between the options' fair value and the option price on the grant date.
However, SFAS No. 123 allows companies to continue to measure compensation cost
using the intrinsic value method, which computes compensation cost as the
difference between a company's stock price and the option price at the grant
date. The Company has elected to continue to use the intrinsic value method.

RESEARCH AND DEVELOPMENT - Costs associated with product research and
development are charged to operations when incurred and are included in
operating expenses.

ADVERTISING - The Company expenses the costs of advertising as incurred.
Advertising expense in 1997, 1996 and 1995 was $300,000, $452,000, and $777,000,
respectively.

EARNING PER SHARE - Earnings per share are based on earnings for the
period, divided by the weighted average number of shares and common share
equivalents outstanding during each year. The earnings per share calculations
exclude common share equivalents as the effect would be anti-dilutive. The
weighted average number of common shares for purposes of computing earnings per
share amounted to 3,842,000, 3,706,000, and 3,680,000 shares for the years ended
December 31, 1997, 1996 and 1995, respectively.

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - The Company paid no
income tax in 1996 or 1997. The Company paid $154,000, $202,000, and $335,000
for interest in 1997, 1996, and 1995, respectively.

Non-cash financing activites during 1997 included the issuance of warrants
which have been rescinded but were valued at $90,000 and which were reduced by
warrants issued in 1996 and cancelled in 1997 that were valued at $43,000. In
1996, warrants were issued that were valued at $102,000. Warrants issued in
1996 included $60,000 closing fee relating to obtaining capital. Additionally,
the Company issued a dividend on the Preferred Stock paid in common shares
valued at $243,000 and $108,000 and common stock compensation valued at $48,000
and $64,000 in 1997 and 1996 respectively.

FUTURE ACCOUNTING CHANGES - SFAS Nos. 130, Reporting Comprehensive Income
and 131, Disclosures about Segments of an Enterprise and Related Information
will be effective for the Company in 1998. The Company does not expect these
statements to be material to their financial position or results of operations.

NOTE 2 - MANAGEMENT'S PLAN, FINANCING AND LIQUIDITY

As shown in the accompanying financial statements, during the last three
completed fiscal years, the Company has incurred aggregate net losses of
approximately $9,592,000 or $2.56 per share.

Due to declining sales and continuing losses from operations, the Company
has experienced a severe shortfall in operating capital that has forced the
Company to seek extended payment terms from most of its suppliers, delay
payments to many of its suppliers and other vendors, delay or cancel purchases,
substantially reduce marketing and sales efforts and take other steps to
conserve operating capital. These steps have had a negative impact on sales.
The Company's current sources of operating capital are not sufficient to fund
operations through 1998 or implement the Company's anticipated new business
strategy. Accordingly, it is necessary for the Company to obtain additional
operating capital as soon as possible.

29
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)

NOTE 2 - MANAGEMENT'S PLAN, FINANCING AND LIQUIDITY (CONTINUED)

The Company has identified potential financing sources and is pursuing
them. Even if the Company is successful in raising additional financing,
unforeseen costs and expenses or lower than anticipated revenues could
accelerate or increase the financing requirements. There can be no assurance
that the Company will be able to secure a line of credit to replace the Credit
Facility currently in place which expires July 31, 1998, or that the Company's
efforts to secure financing will be successful. Failure to obtain sufficient
additional capital to satisfy the Company's working capital requirements would
force the Company to further curtail or restructure operations, sell assets,
continue to seek extended payment terms from its creditors or seek protection
under the federal bankruptcy laws.

The Company is developing a new business strategy which will enable it to
operate with lower overhead. This new business plan, which is still under
development but which the Company began to implement in the first quarter of
1998, includes the use of a new direct marketing strategy, a reduction in the
number of products offered by the Company and the elimination of the Company's
manufacturing operations. Under this plan, the Company will transition to
purchasing all of its products from OEM suppliers. Also, under the direct
marketing strategy, the Company will offer its condensed product line directly
to consumers in addition to sales through dealers and distributors. The
Company's products would be offered for sale to consumers via the Internet at a
Company Web site currently under development and through a toll-free number. As
a result of the Company's lack of operating history with the online commerce
market and the emerging nature of such market, the Company is unable to
accurately forecast future Web site revenues.

Based upon the Company's new business plan and the condensed product line
the Company plans to offer, Carver has determined that it is advantageous to
source its entire product line offshore from selected and qualified strategic
vendor partners. As the Company continues to restructure its operations to
implement its direct sales and sourced product plans, it anticipates that most
of its production employees and several other employees will be laid off. The
Company plans to hire additional direct marketing personnel.

PRIVATE PLACEMENT OF SECURITIES - On April 13, 1998, the Company expects
to close an interim financing pursuant to which it will sell 3,000,000 shares of
its common stock, par value $0.01 (the "Common Stock") to Renwick Special
Situations Fund, L.P (the "Bridge Financing"). The price of the Common Stock is
$0.125 per share and the Company will receive gross proceeds of $375,000 from
the sale of Common Stock. Prior to completion of this financing, the Company
requested that the Nasdaq Stock Market ("Nasdaq") waive the shareholder approval
requirement of Rule 4460(i)(1) of Nasdaq's Marketplace Rules with respect to the
Bridge Financing pursuant to Rule 4460(i)(2). On March 20, 1998, Nasdaq
informed the Company that it had approved the Company's request subject certain
conditions, including; (i) approval by the independent members of the Board of
Directors of the Company's reliance on this exception, (ii) the Company's notice
to all shareholders, not less than ten days before issuance of the Common Stock,
of the Company's omission in seeking shareholder approval of the financing, and
(iii) issuance of a press release concerning the circumstances surrounding the
waiver request and the terms of the transaction.

30
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)

NOTE 2 - MANAGEMENT'S PLAN, FINANCING AND LIQUIDITY (CONTINUED)

NONCOMPLIANCE WITH CERTAIN NASDAQ REQUIREMENTS - Nasdaq had previously
advised the Company that it did not meet Nasdaq's new minimum public float and
bid price continued listing requirements, of $5,000,000 and $1.00 per share,
respectively. The Company has until May 28, 1998 to satisfy these requirements.
The inability of the Company to comply with these listing requirements likely
will result in the delisting of the Company's common stock from Nasdaq.
Delisting of the Company's common stock would likely have an adverse effect on
the liquidity, trading price and ability to obtain quotations on a timely basis
for the common stock. If the Company's common stock should cease to be listed
on Nasdaq, it may continue to be quoted in the OTC Bulletin Board.

CONVERTIBLE PREFERRED STOCK - Late in the second quarter and during the
third quarter of 1996, the Company sold 1,411,764 shares of Series A Cumulative
Convertible Preferred Stock ("Preferred Shares") and issued five-year warrants
("Warrants") to acquire up to 300,000 shares of the Company's Common Shares
pursuant to a Stock Purchase Agreement (the "Agreement") with Renwick Capital
Management, Inc. and certain Renwick affiliates ("Renwick"). The Shares of
Preferred Stock and Warrants are convertible into or exercisable for 1,711,764
shares of Common Stock, or approximately 46% of the current shares outstanding.

The price of the Preferred Shares was $2.125 per share and each Preferred
Share is convertible at any time at the option of the holder into one Common
Share, subject to certain potential antidultion adjustments. The Preferred
Shares are entitled to an 8% compounding annual dividend payable quarterly. In
the first and second year, such dividends have been paid with Common Shares.

The holders of the Preferred Shares are entitled to one vote for each share
of Common Shares into which the Preferred Shares are convertible. In addition,
the holders of the Preferred Shares are entitled to elect two representatives to
the Company's Board of Directors and preference in liquidity. The preferred
shareholders may be deemed to have acquired control of the Company, and
accordingly, certain actions by the Company require the approval of at least a
majority of the preferred shareholders.

The exercise price of the Warrants is $1.50 per share of Common Shares, if
exercised from the date of the initial closing through a date two years from the
date of the initial closing, $1.75 for the next year, $2.00 for the next year
and $2.125 for the final year, all subject to certain potential antidilution
adjustments.

SHORT-TERM BORROWINGS - The Company has an agreement with a financial
institution which provides for working capital advances up to $6,000,000. A
maximum of $1,000,000 of this line may be used to secure letters of credit.
Funds available under this agreement are restricted, however, to 70% of eligible
accounts receivable and 50% of inventories. Advances are collateralized by
substantially all assets of the Company and bear interest at the prime lending
rate plus 2%. The outstanding balance on the line of credit was $2,094,000 and
$1,110,000 at December 31, 1997 and 1996, respectively. In addition, the
Company has an $150,000 letter of credit outstanding at December 31, 1997. The
agreement expires on July 31, 1998, and the lender has notified the Company that
it will not renew the agreement.

Maximum and average amounts outstanding during the year ended December 31,
1997 were $2,044,000 and $1,007,000, respectively. The weighted average
interest rate at December 31, 1997 was 10.5% and the weighted average interest
rate during the year, computed monthly, was 10.44%.

31
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)

NOTE 3 - ACCOUNTS RECEIVABLE

Accounts receivable are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Trade Receivables $2,142,000 $1,890,000
Allowance for doubtful accounts (244,000) (245,000)
Allowance for discounts (22,000) (18,000)
---------- ----------
$1,876,000 $1,627,000
---------- ----------
</TABLE>

NOTE 4 - MAJOR CUSTOMER & EXPORT SALES BY REGION

Operating revenue from a single customer was $4,399,000 and $5,953,000 in 1997
and 1996 respectively. Foreign revenues are denominated in U.S. dollars. Net
export sales by geographic area are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Western Europe $121,000 $ 136,000 $1,608,000
Canada 313,000 233,000 577,000
Asia 306,000 772,000 1,771,000
Other 157,000 148,000 1,236,000
-------- ---------- ----------
$897,000 $1,289,000 $5,192,000
-------- ---------- ----------
</TABLE>
NOTE 5 - INCOME TAX

A reconciliation of the income tax benefit to the amounts computed by
applying the federal statutory income tax rate to income before income tax is as
follows:
<TABLE>
<CAPTION>

1997 1996 1996
-------------------------- ------------------------ ----------------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
----------- --------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income tax benefit $(1,099,000) (34.0)% $(1,089,000) (34.0)% $(1,073,000) (34.0)%
at federal statutory rate
FSC income % - - - - %
Other (227,000) (6.7)% 1,000 - % (99,000) (3.1)%
Change in valuation allowance 1,326,000 40.7 % 1,088,000 34.0 % 1,172,000 37.1 %
----------- --------- ----------- -------- ------------ -------
$ - - $ - - $ - -
=========== ======== =========== ======== ============ =======
</TABLE>

32
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)

NOTE 5 - INCOME TAX (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below:

<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
Deferred tax assets $ 6,770,000 $ 5,677,000
Net operating loss 223,000 205,000
Other

Deferred tax liabilities
Accelerated depreciation (186,000) (400,000)
Other (1,000)
----------- -----------
Total computed deferred taxes 6,807,000 5,481,000
Less valuation allowance (6,807,000) (5,481,000)
----------- -----------
Net deferred taxes $ -- $ --
----------- -----------
</TABLE>

For tax reporting purposes, the Company has approximately $19,911,000 of
net operating losses which may be utilized to offset future taxable income.
These loss carryforwards expire between the years 2005 and 2011. under FAS 109,
the Company is required to recognize the future benefit of its net operating
loss carryforwards. The Company has recorded a valuation allowance of 100% of
the computed deferred tax assets.

NOTE 6 - COMMITMENTS

The Company leases its office space under an operating lease agreement expiring
in January 2000. The Company also leases various office equipment under
operating lease agreements. Total rental expense under these leases amounted to
$165,360 for the period ended December 31, 1997.

<TABLE>
<CAPTION>
Commitments

Minimum payments under this lease due in future years are as follows:

Year Ending December 31,
- -----------------------------
<S> <C> <C>
1998 $ 299,400
1999 $ 299,400
2000 $ 149,700
------------
$ 748,500
============
</TABLE>

PURCHASE COMMITMENTS - As of December 31, 1997, the Company has committed
to the purchase of approximately $1,732,000 of inventory expected to be received
in 1998 from various vendors. Of this amount, the portion denominated in foreign
currencies was immaterial.

33
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)

NOTE 7 - EMPLOYEE BENEFIT & STOCK INCENTIVE PLANS

WARRANTS - At December 31, 1997, warrants to purchase 420,000 common shares
are outstanding at $1.50 per share. These warrants are fully exercisable.

STOCK BONUS PLAN - In 1995, the Company adopted a stock bonus plan for
employees, directors and consultants. The plan allows the Board of Directors to
grant shares of authorized, unissued common shares. In 1997 and 1996, 5,750 and
9,510 shares were granted, respectively.

STOCK PURCHASE PLAN - The Company has a stock purchase plan for the benefit
of its employees. Employees who choose to participate enroll semi-annually and
may make voluntary contributions to a fund. On June 30 and December 31 of each
year, the participant may apply contributed funds toward the purchase of shares
of Company stock at 85% of the prevailing market price or 85% of the market
price on the date of enrollment in the plan. The Company has reserved 100,000
shares for issuance under this plan.

The shares issued under this plan and the proceeds received for the three most
recent fiscal years are as follows:
<TABLE>
<CAPTION>

Shares Proceeds
------ --------
<S> <C> <C>

1997 2,208 $3,533
1996 2,554 4,463
1995 2,663 3,500

</TABLE>

PROFIT SHARING PLAN - The Company has a 401 (k) profit sharing plan for the
benefit of all full-time employees. Participants may make voluntary
contributions while the Company, at its discretion, may make a matching
contribution at a rate of $.50 for every $1 of participant contribution up to
$1,000 per participant. The Company made no contributions to the Plan in 1997,
1996 or 1995.

STOCK OPTIONS - The Company's 1995 Stock Option Plan provides for grants to
key employees, directors and consultants. There are 660,000 shares authorized
for grants of options under the Plan. The Company also has a 1985 Stock Option
Plan for employees and a 1985 Stock Option Plan for directors. Under all plans,
the Board of Directors determines the option price at the date of grant. Options
granted under the plan generally vest between three and four and one half years
after grant and expire between five and ten years from the date of grant. At
December 31, 1997, 164,948 shares were vested and 285,946 were available for
future grants under the plans.

The Company granted options of 50,000 shares on August 6, 1993 and 50,000
shares on August 26, 1994 to key employees as a condition of employment. These
options were canceled in 1998 and replaced with new options of 27,429 shares
each. The option price is the fair market value of the underlying common stock
on the date of grant. These options were fully vested on the date of grant and
have terms of ten years and lapse at the earlier of three years from the date of
termination of employment or one year from the date of death or disability,
whichever comes first.

34
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)

NOTE 7 - EMPLOYEE BENEFIT & STOCK INCENTIVE PLANS (CONTINUED)

The following summary sets forth the activity under the plans in 1997, 1996 and
1995.

<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Option Activity Shares Price Shares Price Shares Price
- --------------- ------------- ------------ ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 773,106 2.42 488,864 $2.58 521,614 2.63
Granted 559,105 1.47 435,000 2.36 209,500 2.50
Exercised (17,056) 1.45 (2,500) 2.25 -
Cancelled (760,606) 2.42
Forfeited (199,601) 1.52 (148,258) 2.76 (242,250) 2.61
-------- --------
Outstanding at year end 354,948 1.75 773,106 2.42 488,864 2.58
========== ======== ========
Options exercisable
at year end 164,948 $1.44 394,985 $2.48 300,114 $2.64
Weighted average
fair value of options
granted during the year $0.97 $1.47 $1.71 $2.36
</TABLE>

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------
Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg.
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Contractual Life Price at 12/31/97 Price
- -------------------------- ------------- ---------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
$ 1.44 - $ 1.44 249,948 9.37 1.44 164,947 1.44
2.00 - 2.50 75,000 9.37 2.30 -
2.50 - 2.50 15,000 9.37 2.50 - 2.50
- ------------------------------------------------------------------------------------------------------------------
$ 1.44 - $ 2.63 354,948 9.37 $1.75 164,947 $1.44
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

35
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)

NOTE 7 - EMPLOYEE BENEFIT & STOCK INCENTIVE PLANS (CONTINUED)

SFAS No. 123 requires proforma disclosure of net income as if the fair
value method were used. If compensation cost for the Company's 1997 and 1996
grants under stock-based compensation plans were determined under the fail value
method, the Company's net loss, net loss applicable to common share owners and
net loss per common share for 1997 and 1996 would approximate the proforma
amounts below. The fair value of the options granted during 1997 is estimated
at $.83 on the date of grant using Black-Scholes option-pricing model with the
following assumptions: no dividend yield, volatility of 80%, risk-free interest
rate of 6.7%, forfeitures recognized as incurred and an expected life ranging
from 5 to 8 years.
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
As Reported Proforma As Reported Proforma
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(3,232) $(3,561) $(3,203) $(3,473)
- --------------------------------------------------------------------------------------
Net loss applicable
to common share owners $(3,232) $(3,561) $(3,203) $(3,473)
- --------------------------------------------------------------------------------------
Net loss per common share $ (0.84) $ (0.93) $ (0.86) $ (0.94)
- --------------------------------------------------------------------------------------
</TABLE>

The effects of applying SFAS 123 in this proforma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.

NOTE 8 - RELATED PARTY TRANSACTIONS

Patents and Royalties - Robert W. and Diana R. Carver, shareholders of
Carver Corporation, hold three patents on the Magnetic Field Amplifer technology
which has been used in certain Carver products. Pursuant to terms of the license
agreement, Carver Corporation pays royalties to Robert W. and Diana R. Carver
for each amplifer sold which incorporates the licensed technology. Such
royalties amounted to $2,300 in 1997, $9,000 in 1996, and $45,000 in 1995.

NOTE 9 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(All amounts in thousands except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Revenues 2,101 2,442 2,511 3,961
Operating Loss (1,145) (1,260) (965) (696)
Loss before income taxes (1,081) (195) (999) (957)
Net Loss (1,081) (195) (999) (957)
Net loss per share (0.29) (0.05) (0.26) (0.24)

Year Ended December 31, 1996
Revenues $ 4,348 3,045 4,336 2,790
Operating Loss (376) (809) (68) (1,777)
Loss before income taxes (385) (971) (89) (1,758)
Net Loss (385) (971) (89) (1,758)
Net loss per share (0.10) (0.26) (0.02) (0.48)

</TABLE>

36
<PAGE>

CARVER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(CONTINUED)

NOTE 10 - FINANCIAL INSTRUMENTS

CONCENTRATION OF CREDIT RISK - Financial instruments that subject the
Company to concentrations of credit risk are cash and accounts receivable. The
Company places its cash with major financial institutions. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company has not experienced a history of significant credit-
related losses. At December 31, 1997, accounts receivable from one customer was
$1,115,000.

FAIR VALUES - The following methods and assumptions were used to estimate
the value of each class of financial instruments for which it is practical to
estimate that value:

The carrying value for the note payable approximates the fair value due to
the current classification of the notes. The carrying value of accounts
receivable, accounts payable and accrued expenses approximates fair value due to
the short-term nature of these items.

NOTE 11 - RESTRUCTURING CHARGES

In the fourth quarter of 1995, the Company recorded a restructuring charge
of $1,319,000 for costs associated with downsizing of operations associated with
the sale of its line of professional products, consolidating facilities, and the
disposal, either through sale or abandonment, of certain product lines. The
charges include severance costs and write-off of intangible assets and
inventories and accrued costs relating to personnel reduction that was completed
in 1996.

NOTE 12 - SALE OF PROFESSIONAL PRODUCTS LINE

On November 20, 1995, the Company sold assets relating to its professional
products line for a gain of $1,208,000. The purchase price, net of certain
selling expenses, was $1,982,000, in which $350,000 was held back and paid to
the Company since the closing date and $209,000 was paid directly to Robert W.
and Diana R. Carver in settlement of a royalty dispute.

37
<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

DIRECTORS

Incorporated by reference to the Proposal 1 - Election of Directors, "Nominees,"
section of the Company's Proxy Statement with respect to its 1998 Annual Meeting
of Shareholders to be filed by April 30, 1998.

EXECUTIVE OFFICERS

For information concerning the Company's executive officers, reference is made
to the information set forth under the caption "Executive Officers of the
Registrant" located in Item 1 of this Form 10-KSB.

SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Incorporated by reference to the Compliance with Section 16 (a) of the Exchange
Act section of the Company's Proxy Statement with respect to its 1998 Annual
Meeting of Shareholders to be filed by April 30, 1998.

ITEM 10. EXECUTIVE COMPENSATION

Incorporated by reference to the Directors' Compensation and Executive
Compensation sections of the Company's Proxy Statement with respect to its 1998
Annual Meeting of Shareholders to be filed by April 30, 1998.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

Incorporated by reference to the Securities and Principal Holders, Proposal 1 -
Elections of Directors, "Nominees," and Executive Compensation, sections of the
Company's Proxy Statement with respect to its 1998 Annual Meeting of
Shareholders to be filed by April 30, 1998.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference to the Certain Transactions section of the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Shareholders to be
filed by April 30, 1998.

38
<PAGE>

PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K

(a) REPORTS ON FORM 8-K. None.

(b) EXHIBITS AND INDEX OF EXHIBITS.

39
<PAGE>

EXHIBIT INDEX
- -------------

Exhibit
- -------
Number See Attachment "Exhibits"
- -------
<S> <C>
2.1 Asset Purchase and Sale Agreement dated as of December 23, 1992 among
Carver Corporation, U.S. Sound, Inc., John Lemon and USS Corporation.
(Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K
dated December 23, 1992).

2.2 Asset Purchase Agreement dated November 19, 1993 between Carver
Corporation and Bose Corporation. (Incorporated by reference to
Exhibit 2.2 to the Registrant's Form 10-K for the year ended December
31, 1993.).

2.3 Series A Preferred Stock Purchase Agreement, dated as of June 12,
1996, by and among the Company and each of those persons and entities
whose names are set forth on Exhibit A thereto (the "Investors").
(Incorporated by reference Exhibit 2.3 to the Company's Form 8-K dated
June 12, 1996.).

3.1 The Company's Restated Articles of Incorporation filed July 29, 1988.
(Incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-
K for the year ended December 31, 1989).

3.2 The Company's Eighth Amended and Restated Bylaws dated June 5, 1996.
(Incorporated by reference to Exhibit 3.2 to the Registrant's Form 10-
K for the year ended December 31, 1996).

4.1 Warrant Agreement, dated as of June 12, 1996, by and among the Company
and Renwick Capital Management, Inc. (Incorporated by reference
Exhibit 4.1 to the Company's Form 8-K dated June 12, 1996.).

4.2 Registration Rights Agreement, dated as of June 12, 1996, by and among
the Company and the Investors. (Incorporated by reference Exhibit 4.2
to the Company's Form 8-K dated June 12, 1996.).

4.3 Certificate of Designation, as filed with the Secretary of State of
the State of Washington on June 12, 1996. (Incorporated by reference
Exhibit 4.3 to the Company's Form 8-K dated June 12, 1996.).

4.4 Form of Series A Cumulative Convertible Preferred Stock Certificate.
(Incorporated by reference Exhibit 4.4 to the Company's Form 8-K dated
June 12, 1996.).

4.5 Form of Warrant Certificate evidencing the right to acquire shares of
the Company's Common Stock. (Incorporated by reference Exhibit 4.1 to
the Company's Form 8-K dated June 12, 1996.).

10.1 License Agreement dated as of June 1, 1980 between the Company and
Carver Technology Development, Inc. (Incorporated by reference to
Exhibit 10.6 to the Registrant's Registration Statement on Form S-1,
No. 2-96896).

10.2 The Company's Amended 1985 Incentive Stock Option Plan. (Incorporated
by reference to Exhibit 10.3 to the Registrant's Form 10-K for the
year ended December 31, 1992).

10.3 The Company's Amended 1985 Non-Qualified Stock Option Plan.
(Incorporated by reference to Exhibit 10.2 to the Registrant's
Registration Statement on Form S-8, No. 33-31344).

10.4 Form of the Amended Stock Option Agreement used in connection with the
Company's Amended 1985 Incentive Stock Option Plan. (Incorporated by
reference to Exhibit 10.5 to the Registrant's Form 10-K for the year
ended December 31, 1992).
</TABLE>

40
<PAGE>

<TABLE>
<C> <S>
10.5 The Company's Amended 1988 Employee Stock Purchase Plan. (Incorporated
by reference to Exhibit 10.6 to the Registrant's Form 10-K for the
year ended December 31, 1992).

10.6 Employment Agreement dated February 28, 1992, between Thomas C. Graham
and the Company. (Incorporated by reference to Exhibit 10.8 to the
Registrant's Form 10-K for the year ended December 31, 1992).

10.7 Severance Agreement dated as of September 22, 1993 between Thomas C.
Graham and the Company. (Incorporated by reference to Exhibit 10.9 to
the Registrant's Form 10-K for the year ended December 31, 1989).

10.8 Stock Option Agreement dated August 6, 1993 between Robert A. Fulton
and the Company. (Incorporated by reference to Exhibit 10.10 to the
Registrant's Form 10-K for the year ended December 31, 1993.).

10.9 Form of Authorized Dealer Agreement. (Incorporated by reference to
Exhibit 10.10 to the Registrant's Form 10-K for the ended December 31,
1989).

10.10 Amended Carver Corporation Stock Appreciation Rights Plan.
(Incorporated by reference to Exhibit 10.11 to the Registrant's Form
10-K for the year ended December 31, 1992).

10.11 Letter Agreement for Accounts Receivable Financing between the Company
and Congress Financial Corporation (Western) dated October 24, 1990,
and related Security Agreements dated December 20, 1990. (Incorporated
by reference to Exhibit 10.23 to the Company's Form 10-K for the year
ended December 31, 1990).

10.12 Ninth Amendment to the Accounts Financing Agreement between Carver
Corporation and Congress Financial Corporation (Western) dated March
31, 1994. (Incorporated by reference to Exhibit 10.15 to the
Registrant's Form 10-K for the year ended December 31, 1994.)

10.13 Stock Option Agreement dated March 10, 1994 between Robert A. Fulton
and the Company. (Incorporated by reference to Exhibit 10.21 to the
Company's Form 10-K for the year ended December 31, 1994.)

10.14 Employment Agreement dated August 26, 1994 between Stephen M. Williams
and the Company. (Incorporated by reference to Exhibit 10.22 to the
Company's Form 10-K for the year ended December 31, 1994.).

10.15 Stock Option Agreement dated August 26, 1994 between Stephen M.
Williams and the Company. (Incorporated by reference to Exhibit 10.23
to the Company's Form 10-K for the year ended December 31, 1994.).

10.16 Stock Option Agreement dated August 26, 1994 between Stephen M.
Williams and the Company. (Incorporated by reference to Exhibit 10.24
to the Company's Form 10-K for the year ended December 31, 1994.).

10.17 Settlement Agreement dated December 8, 1994 between Robert W. and
Diana R. Carver and the Company. (Incorporated by reference to Exhibit
10.25 to the Company's Form 10-K for the year ended December 31,
1994.).

10.18 The Company's 1995 Stock Option Plan. (Incorporated by reference to
Exhibit 10.26 to the Company's Form 10-Q for the quarter ended June
30, 1995.).

10.19 The Company's 1995 Stock Bonus Plan. (Incorporated by reference to
Exhibit 10.27 to the
</TABLE>

41
<PAGE>

Company's Form 10-Q for the quarter ended June 30, 1995.).

10.20 Asset Purchase Agreement dated November 20, 1995 between Phoenix Gold
International, Inc. and the Company. (Incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K dated December 5, 1995.).

10.21 Amendment No.1 to Asset Purchase Agreement dated November 20, 1995
between Phoenix Gold International, Inc. and the Company. (Incorporated
by reference to Exhibit 2.2 to the Company's Form 8-K dated December 5,
1995).

10.22 License Agreement dated November 20, 1995 between Phoenix Gold
International, Inc. and the Company. (Incorporated by reference to
Exhibit 2.3. to the Company's Form 8-K dated December 5, 1995.).

10.23 Tenth Amendment to the Accounts Financing Agreement dated November 20,
1995 between Congress Financial Corporation (Western) and the Company.
(Incorporated by reference to Exhibit 10.31 to the Company's Form 10K for
year ended December 31, 1995.).

10.24 Eleventh Amendment to the Accounts Financing Agreement dated January
15, 1996 between Congress Financial Corporation (Western) and the
Company. (Incorporated by reference to Exhibit 10.32 to the Company's
Form 10K for year ended December 31, 1995.).

10.25 Twelfth Amendment to the Accounts Financing Agreement dated February 26,
1996 between Congress Financial Corporation (Western) and the Company.
(Incorporated by reference to Exhibit 10.33 to the Company's Form 10K for
year ended December 31, 1995.).

10.26 Employment Agreement dated January 2, 1996 between Stephen M. Williams
and the Company. (Incorporated by reference to Exhibit 10.34 to the
Company's Form 10K for year ended December 31, 1995.).

10.27 The Stephen M. Williams 1996 Bonus Plan dated January 3, 1996 between
Stephen M. Williams and the Company. (Incorporated by reference to
Exhibit 10.35 to the Company's Form 10K for year ended December 31,
1995.).

10.28 Stock Option Agreement dated March 11, 1995 between Stephen M. Williams
and the Company. (Incorporated by reference to Exhibit 10.36 to the
Company's Form 10K for year ended December 31, 1995.).

10.29 Stock Option Agreement dated March 24, 1995 between Stephen M. Williams
and the Company. (Incorporated by reference to Exhibit 10.37 to the
Company's Form 10K for year ended December 31, 1995.).

10.30 Stock Option Agreement dated January 15, 1996 between Stephen M. Williams
and the Company. (Incorporated by reference to Exhibit 10.38 to the
Company's Form 10K for year ended December 31, 1995.).

10.31 Thirteenth Amendment to the Accounts Financing Agreement dated March 28,
1996 between Congress Financial Corporation (Northwest) and the Company.
(Incorporated by reference to Exhibit 10.39 to the Company's Form 10Q for
the quarter ended March 31, 1996.).

10.32 Fourteenth Amendment to the Accounts Financing Agreement dated April 29,
1996 between Congress Financial Corporation (Western) and the Company.
(Incorporated by reference to Exhibit 10.40 to the Company's Form 10Q for
the quarter ended March 31, 1996.).

<PAGE>

<TABLE>

<S> <C>
10.33 Fifteenth Amendment to the Accounts Financing Agreement dated May 24,
1996 between Congress Financial Corporation (Northwest) and the
Company. (Incorporated by reference to Exhibit 10.41 to the Company's
Form 10Q for the quarter ended June 30, 1996.).

10.34 Agreement for Financial Public Relations Services dated August 22,
1996 between Corporate Relations Group and the Company. (Incorporated
by reference to Exhibit 10.42 to the Company's Form 10Q for the
quarter ended September 30, 1996.).

10.35 Sixteenth Amendment to the Accounts Financing Agreement dated November
11, 1996 between Congress Financial Corporation (Northwest) and the
Company. (Incorporated by reference to Exhibit 10.43 to the Company's
Form 10Q for the quarter ended September 30, 1996.).

10.36 Seventeenth Amendment to the Accounts Financing Agreement dated
January 17, 1997 between Congress Financial Corporation (Northwest)
and the Company. (Incorporated by reference to Exhibit 10.36 to the
Company's Form 10-K for the year ended December 31, 1996).

10.37 First Amendment to Trust Deed, Assignment of Rents, Security Agreement
and Fixture Filing dated January 7, 1997 between Congress Financial
Corporation (Northwest) and the Company. (Incorporated by reference to
Exhibit 10.37 to the Company's Form 10-K for the year ended December
31, 1996).

10.38 Warrant Agreement dated September 30, 1996 between Martin Rutstein and
the Company. (Incorporated by reference to Exhibit 10.38 to the
Company's Form 10-K for the year ended December 31, 1996).

10.39 Registration Rights Agreement dated September 30, 1996 between Martin
Rustein and the Company. (Incorporated by reference to Exhibit 10.39
to the Company's Form 10-K for the year ended December 31, 1996).

10.40 Stock Option Agreement dated September 20, 1996 between Stephen M.
Williams and the Company. (Incorporated by reference to Exhibit 10.40
to the Company's Form 10-K for the year ended December 31, 1996).

10.41 Stock Option Agreement dated September 20, 1996 between Stephen M.
Williams and the Company. (Incorporated by reference to Exhibit 10.41
to the Company's Form 10-K for the year ended December 31, 1996).

10.42 Stock Option Agreement dated September 20, 1996 between John P. World
and the Company. (Incorporated by reference to Exhibit 10.42 to the
Company's Form 10-K for the year ended December 31, 1996).

10.43 Stock Option Agreement dated September 20, 1996 between John P. World
and the Company. (Incorporated by reference to Exhibit 10.43 to the
Company's Form 10-K for the year ended December 31, 1996).

10.44 Stock Option Agreement dated January 15, 1996 between John P. World
and the Company. (Incorporated by reference to Exhibit 10.44 to the
Company's Form 10-K for the year ended December 31, 1996).

10.45 Stock Option Agreement dated March 11, 1995 between John P. World and
the Company. (Incorporated by reference to Exhibit 10.45 to the
Company's Form 10-K for the year ended December 31, 1996).

10.46 Nonqualified Stock Option Agreement dated February 23, 1993 between
John P. World and the Company. (Incorporated by reference to Exhibit
10.46 to the Company's Form 10-K for the year ended December 31,
1996).
</TABLE>
43
<PAGE>

<TABLE>

<C> <S>
10.47 Nonqualified Stock Option Agreement dated March 2, 1992 between John P.
World and the Company. (Incorporated by reference to Exhibit 10.47 to
the Company's Form 10-K for the year ended December 31, 1996).

10.48 First Amendment to the Trust Deed, Assignment of Rents, Security
Agreement and Fixture Filing dated January 7, 1997 between Congress
Financial Corporation (Northwest) and the Company. (Incorporated by
reference to Exhibit 10.37 to the Company's Form 10-K for the year ended
December 31, 1996).

10.49 Warrant Agreement dated September 30, 1996 between Martin Rutstein and
the Company. (Incorporated by reference to Exhibit 10.38 to the
Company's Form 10-K for the year ended December 31, 1996).

21* Subsidiaries of the Registrant.

23.1* Consent of Moss Adams.

27* Financial Data Schedule.
</TABLE>

- -----------------
*Filed herewith

44
<PAGE>

SIGNATURES

The Registrant. In accordance with Section 13 or 15(d) of the Exchange
--------------
Act, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Woodinville, State of
Washington, on the 10/th/ day of April, 1998.

CARVER CORPORATION

By: /s/ John P. World
-------------------------------------
John P. World, Executive Vice President
and General Manager

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints John P.
World his attorney-in-fact, with the power of substitution for him, in any and
all capacities, to sign any amendments to this report on Form 10-KSB, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact and their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JOHN P. WORLD Executive Vice President and General April 10, 1998
- ----------------- Manager (Principal Executive Officer)
John P. World

/s/ RAJ A. BHATIA Director April 10, 1998
- -----------------
Raj A. Bhatia

/s/ JAMES R. McCULLOUGH Director April 10, 1998
- -----------------------
James R. McCullough

/s/ BENJAMIN BEN-ATTAR Director April 10, 1998
- ----------------------
Benjamin Ben-Attar

/s/ CLIFFORD J. SCHORER, JR. Director April 10, 1998
- ----------------------------
Clifford J. Schorer, Jr.

/s/ DEBRA L. GRIFFITH Vice President of Finance and April 10, 1998
- --------------------- Administration and Chief Financial Officer
Debra L. Griffith (Principal Financial and Principal
Accounting Officer)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT INDEX PAGE IN
THIS
ITEM DESCRIPTION REPORT
<S> <C> <C>
2.1 Asset Purchase and Sale Agreement dated as of December 23, 1992 among
Carver Corporation, U.S. Sound, Inc., John Lemon and USS Corporation.
(Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K
dated December 23, 1992).

3.1 The Company's Restated Articles of Incorporation filed July 29, 1985.
(Incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-
K for the year ended December 31, 1989).

3.2 The Company's Eighth Amended and Restated Bylaws (Incorporated by
reference to Exhibit 3.2 to the Registrant's Form 10-K for the year
ended December 31, 1996).

4.1 Warrant Agreement, dated as of June 12, 1996, by and among the Company
and Renwick Capital Management, Inc. (Incorporated by reference
Exhibit 4.1 to the Company's Form 8-K dated June 12, 1996).

4.2 Registration Rights Agreement, dated as of June 12, 1996, by and among
the Company and the Investors. (Incorporated by reference Exhibit 4.2
to the Company's Form 8-K dated June 12, 1996).

4.4 Form of Series A Cumulative Convertible Preferred Stock Certificate.
(Incorporated by reference Exhibit 4.4 to the Company's Form 8-K dated
June 12, 1996).

4.5 Form of Warrant Certificate evidencing the right to acquire shares of
the Company's Common Stock. (Incorporated by reference Exhibit 4.1 to
the Company's Form 8-K dated June 12, 1996).

10.2 The Company's Amended 1985 Incentive Stock Option Plan. (Incorporated
by reference to Exhibit 10.3 to the Registrant's Form 10-K for the
year ended December 31, 1992).
</TABLE>

46
<PAGE>

<TABLE>
<CAPTION>
PAGE IN
THIS
REPORT
<S> <C> <C>
10.3 The Company's Amended 1985 Non-Qualified Stock Option Plan.
(Incorporated by reference to Exhibit 10.2 to the Registrant's
Registration Statement on Form S-8, No. 33-31344).

10.5 The Company's Amended 1988 Employee Stock Purchase Plan. (Incorporated
by reference to Exhibit 10.6 to the Registrant's Form 10-K for the
year ended December 31, 1992).

10.9 Form of Authorized Dealer Agreement. (Incorporated by reference to
Exhibit 10.11 to the Company's Form 10-K for the year ended December
31, 1989).

10.10 Amended Carver Corporation Stock Appreciation Rights Plan.
(Incorporated by reference to Exhibit 10.11 to the Registrant's Form
10-K for the year ended December 31, 1992).

10.12 Ninth Amendment to the Accounts Financing Agreement between Carver
Corporation and Congress Financial Corporation (Western) dated March
31, 1994. (Incorporated by reference to Exhibit 10.15 to the
Company's Form 10-K for the year ended December 31, 1994.)

47
<PAGE>

<TABLE>
<CAPTION>
PAGE IN
THIS
REPORT
<S> <C> <C>
10.14 Employment Agreement dated August 26, 1994 between Stephen M. Williams
and the Company. (Incorporated by reference to Exhibit 10.22 to the
Company's Form 10-K for the year ended December 31, 1994.)

10.18 The Company's 1995 Stock Option Plan. (Incorporated by reference to
Exhibit 10.26 to the Company's Form 10-Q for the quarter ended June
30, 1995.)

10.19 The Company's 1995 Stock Bonus Plan. (Incorporated by reference to
Exhibit 10.27 to the Company's Form 10-Q for the quarter ended June
30, 1995.)

10.21 Amendment No. 1 to Asset Purchase Agreement dated November 20, 1995
between Phoenix Gold International, Inc. and the Company.
(Incorporated by reference to Exhibit 2.2 to the Company's Form 8-K
dated December 5, 1995.)

10.22 License Agreement dated November 20, 1995 between Phoenix Gold
International, Inc. and the Company. (Incorporated by reference to
Exhibit 2.3. to the Company's Form 8-K dated December 5, 1995.)

10.25 Twelfth Amendment to the Accounts Financing Agreement dated February
26, 1996 between Congress Financial Corporation (Western) and the
Company. (Incorporated by reference to Exhibit 10.33 to the Company's
Form 10K for year ended December 31, 1995.)
</TABLE>

48
<PAGE>

<TABLE>
<CAPTION>
PAGE IN
THIS
REPORT
<S> <C> <C>
10.26 Employment Agreement dated January 2, 1996 between Stephen M. Williams
and the Company. (Incorporated by reference to Exhibit 10.34 to the
Company's Form 10K for year ended December 31, 1995.).

10.28 Stock Option Agreement dated March 11, 1995 between Stephen M.
Williams and the Company. (Incorporated by reference to Exhibit 10.36
to the Company's Form 10K for year ended December 31, 1995.).

10.29 Stock Option Agreement dated March 24, 1995 between Stephen M.
Williams and the Company. (Incorporated by reference to Exhibit 10.37
to the Company's Form 10K for year ended December 31, 1995.).

10.30 Stock Option Agreement dated January 15, 1996 between Stephen M.
Williams and the Company. (Incorporated by reference to Exhibit 10.38
to the Company's Form 10K for year ended December 31, 1995.).

10.31 Thirteenth Amendment to the Accounts Financing Agreement dated March
28, 1996 between Congress Financial Corporation (Northwest) and the
Company. (Incorporated by reference to Exhibit 10.39 to the Company's
Form 10Q for the quarter ended March 31, 1996.).

10.32 Fourteenth Amendment to the Accounts Financing Agreement dated April
29, 1996 between Congress Financial Corporation (Western) and the
Company. (Incorporated by reference to Exhibit 10.40 to the Company's
Form 10Q for the quarter ended March 31, 1996.).

10.33 Fifteenth Amendment to the Accounts Financing Agreement dated May 24,
1996 between Congress Financial Corporation (Northwest) and the
Company. (Incorporated by reference to Exhibit 10.41 to the Company's
Form 10Q for the quarter ended June 30, 1996.).

49
<PAGE>

<TABLE>
<CAPTION>
PAGE IN
THIS
REPORT
<S> <C> <C>
10.37 First Amendment to Trust Deed, Assignment of Rents, Security Agreement
and Fixture Filing dated January 7, 1997 between Congress Financial
Corporation (Northwest) and the Company. (Incorporated by reference to
Exhibit 10.37 to the Company's Form 10-K for the year ended December
31, 1996).

10.38 Warrant Agreement dated September 30, 1996 between Martin Rutstein and
the Company. (Incorporated by reference to Exhibit 10.38 to the
Company's Form 10-K for the year ended December 31, 1996).

10.40 Stock Option Agreement dated September 20, 1996 between Stephen M.
Williams and the Company. (Incorporated by reference to Exhibit 10.34
to the Company's Form 10-K for the year ended December 31, 1996).

10.45 Stock Option Agreement dated March 11, 1995 between John P. World and
the Company. (Incorporated by reference to Exhibit 10.45 to the
Company's Form 10-K for the year ended December 31, 1996).

10.47 Nonqualified Stock Option Agreement dated March 2, 1992 between John
P. World and the Company. (Incorporated by reference to Exhibit 10.47
to the Company's Form 10-K for the year ended December 31, 1996).

10.49 Warrant Agreement dated September 30, 1996 between Martin Rutstein and
the Company. (Incorporated by reference to Exhibit 10.38 to the
Company's Form 10-K for the year ended December 31, 1996).
</TABLE>

50
<PAGE>

<TABLE>
<CAPTION>
PAGE IN
THIS
REPORT
<S> <C> <C>
21* Subsidiaries of the Registrant. 52

23.1* Consent of Moss Adams. 53

27* Financial Data Schedule. 54
</TABLE>

- -----------------
*Filed herewith

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF CARVER CORPORATION

Name Jurisdiction of Incorporation
------------ -----------------------------

Carver International Ltd. Guam

GREAT AMERICAN SOUND COMPANY State of Washington

<PAGE>

EXHIBIT 23.1

CONSENT OF MOSS ADAMS LLP, INDEPENDENT AUDITORS

To the Board of Directors and Shareholders
Carver Corporation

We consent to the incorporation by reference into the Registration
Statements on Form S-8 (Registration No. 33-65006, 33-70902, 33-50076, 33-31344,
33-23167 and 33-04273) of our reports on the financial statements dated February
6, 1998, except for Note 2, as to which the date is March 20, 1998, which appear
in the December 31, 1997 annual report on Form 10-KSB of Carver Corporation, and
to the reference to our firm under the heading "Experts" in the Prospectus.

/s/ MOSS ADAMS LLP

Seattle, Washington
February 6, 1998
(except for Note 2, as to
which the date is March 20, 1998).

<PAGE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 228,000
<SECURITIES> 5,000
<RECEIVABLES> 1,876,000
<ALLOWANCES> 50,000
<INVENTORY> 4,758,000
<CURRENT-ASSETS> 7,088,000
<PP&E> 1,889,000
<DEPRECIATION> (1,084,000)
<TOTAL-ASSETS> 7,999,000
<CURRENT-LIABILITIES> 3,948,000
<BONDS> 0
0
14,000
<COMMON> 40,000
<OTHER-SE> 3,997,000
<TOTAL-LIABILITY-AND-EQUITY> 7,999,000
<SALES> 11,015,000
<TOTAL-REVENUES> 11,015,000
<CGS> 9,556,000
<TOTAL-COSTS> 9,556,000
<OTHER-EXPENSES> 4,537,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154,000
<INCOME-PRETAX> (3,232,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,232,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,232,000)
<EPS-PRIMARY> (0.84)
<EPS-DILUTED> (0.84)

</TABLE>