10-Q 1 harvey10q42807.txt HARVEY10Q 4 28 07 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 28, 2007 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number 1-4626 Harvey Electronics, Inc. ------------------------ (Exact name of small business registrant as specified in its charter) New York 13-1534671 -------- ---------- (State of other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 205 Chubb Avenue, Lyndhurst, New Jersey, 07071 ----------------------------------------------- (Address of principal executive offices and zip code) 201-842-0078 ------------ (Registrant's telephone number) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act). Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No As of June 12, 2007, 998,667 shares of the registrant's common stock, par value $.01 per share, were outstanding. 1 Harvey Electronics, Inc. FORM 10-Q INDEX PART I. Financial Information Item 1. Financial Statements: Page No. Statements of Operations (Unaudited) - Twenty six and Thirteen Weeks Ended April 28, 2007 and April 29, 2006.............3 Balance Sheets - April 28, 2007 (Unaudited) and October 28, 2006...4 Statement of Shareholders' Equity (Unaudited) - Twenty six Weeks Ended April 28, 2007.........................................5 Statements of Cash Flows (Unaudited) - Twenty six Weeks Ended April 28, 2007 and April 29, 2006............................6 Notes to Financial Statements (Unaudited)..........................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............................18 Item 3. Quantitative and Qualitative Disclosures About Market Risk........27 Item 4. Disclosure Controls and Procedures................................27 PART II. Other Information Item 1. Legal Matters.....................................................28 Item 1A. Risk Factors......................................................29 Item 6. Exhibits..........................................................29 Signatures...................................................................30 Exhibit Number 31.1 Exhibit Number 31.2 Exhibit Number 32.1 Exhibit Number 32.2 2 Harvey Electronics, Inc. Statements Of Operations (Unaudited)

See accompanying notes to financial statements. 3 Harvey Electronics, Inc. Balance Sheets

(1) Derived from the audited balance sheet at October 28, 2006. See accompanying notes to financial statements. 4 Harvey Electronics, Inc. Statement of Shareholders' Equity (Unaudited)

See accompanying notes to financial statements. 5 Harvey Electronics, Inc Statements of Cash Flows (Unaudited)

6 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) 1. Basis of Presentation and Description of Business Basis of Presentation The accompanying unaudited interim financial statements of Harvey Electronics, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Management, all adjustments (consisting of normal recurring accruals and valuation allowances) considered necessary for a fair presentation have been included. Operating results for the twenty-six and thirteen week periods ended April 28, 2007 are not necessarily indicative of the results that may be expected for the fifty-two weeks ending October 27, 2007. Net sales and operating results for the Company's first quarter of its fiscal year are positively affected by the holiday shopping season. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended October 28, 2006. The preparation of the unaudited interim financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures at the date of the interim financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on certain assumptions, which they believe are reasonable in the circumstances, and does not believe that any change in those assumptions would have a significant effect on the financial position or results of operations. Actual results could differ from those estimates and assumptions. The Company's fiscal year ends the Saturday closest to October 31, and can consist of either a 52- or 53-week year. Fiscal 2007 and 2006 are both 52-week years. The twenty-six and thirteen-week periods, discussed in this Form 10Q may be referred to as six and three month periods, respectively. Description of Business The Company is a specialty retailer and custom installer of high quality audio/video consumer electronics and home theater products in the Metropolitan New York area. Operations of the Company consist solely of this single segment. Net sales include the sale of goods to customers and custom installation revenue. Retail sales are recorded at the time of the sale to the customer. Custom installation revenue, which is comprised of both the sale of products and the labor in connection with the installation of the products, are recorded in accordance with the provisions of Emerging Issues Task Force ("EITF") 00-21, "Revenue Arrangements with Multiple Deliverables". The revenue related to the sale of the products is recognized when the product is delivered to the customers. The revenue related to the labor in connection with the installation of the products, is recorded when the service has been substantially completed. 7 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) If the custom installation project requires a pre-wire phase, this phase will be considered a separate and distinct stage of work. The customer agrees to take title to the wire and any in-wall speakers when delivered to the site as they have fair value. The customer agrees that these amounts paid in advance for wire or in-wall speakers delivered to the site are non-refundable and as a result, these amounts are recognized as revenue when delivered. Labor on the pre-wire phase is recognized as revenue when the pre-wire installation is substantially completed. Revenues relating to these elements are recorded based on their fair values in the market. In addition, the Company sells extended warranty contracts for a third party provider. The profit on extended warranty sales is considered commission at the time of sale. The net amount earned on these sales is recorded in net sales, in accordance with EITF 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent." Major components of selling general and administrative expenses include payroll related expenses, advertising expense, occupancy costs, professional fees, truck expenses, warehouse costs, distribution costs, insurance expense, depreciation expense and credit card fees. Cost of goods sold includes inventory shrink, purchase discounts from its vendors and freight costs. The Company's computation of cost of goods sold and gross profit may not be comparable to other reporting electronics retailers as other entities may include the costs relating to warehousing and distribution networks. 2. Private Placement On April 17, 2006, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement"), modified by an amendment dated September 8, 2006, with several institutional and other accredited investors (the "Investors") led by Trinity Investment Partners LLC ("Trinity"). On November 10, 2006, the Company completed this transaction. Pursuant to the Purchase Agreement, the Company received $4,000,000 from the sale (the "Private Placement") of 8% Series B Convertible Preferred Stock (the "Series B Preferred Stock"). The proceeds from the Private Placement will be used by the Company primarily for general corporate and working capital purposes, to fund increased advertising expenditures, to replace the Company's website and to refurbish existing stores. The Purchase Agreement and the related transactions were approved by the Company's shareholders, at the annual meeting of shareholders on October 27, 2006. The Series B Preferred Stock is convertible at any time into 1,428,571 shares of the Company's common stock at $2.80 per share. The Investors also received Series A seven-year warrants to purchase an aggregate of 428,573 shares of the Company's common stock, exercisable at $5.60 per share. The dividend on the Series B Preferred Stock can be paid in cash or common stock at the option of the Company and must be approved by the Company's lender. The rights, preferences and privileges of the holders of the new Series B Stock are set forth in the Company Amended and Restated Certificate of Incorporation. 8 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) There was no beneficial conversion feature identified relating to the issuance of the Series B Preferred Stock and warrants. In connection with the Private Placement, the Company also entered into a Consulting Agreement, as amended, with Trinity. Trinity received reimbursement of $350,000 in expenses at the closing, received a Series B seven-year warrant to purchase 500,000 shares of the Company's common stock exercisable at $2.80 per share, and a Series C seven-year warrant to purchase 875,000 shares of the Company's common stock exercisable between $3.20 and $6.80 per share in ten equal tranches, with the exercise price increasing by $0.10 in each tranche. Transaction expenses in connection with the Private Placement approximate $1,158,000, including the $350,000 reimbursed to Trinity. A Registration Rights Agreement was executed by the Company and the Investors. Pursuant to this agreement, the Company registered with the Securities and Exchange Commission ("SEC") the 289,600 shares of common stock that are issuable upon exercise of the Series A Warrant and upon conversion of the Series B Preferred Stock. In accordance with the separate Registration Rights Agreement between the Company, Trinity, and D. Andrew Stackpole, the Company has agreed to register with the SEC the shares of common stock that are issuable upon exercise of the Series B and Series C Warrants and shares issued or issuable pursuant to the warrants relating to the Employment Agreement ("Employment Agreement") with D. Andrew Stackpole, provided that such shares will not be registered until at least six months following the effective date of the Registration Rights Agreement for the benefit of the Investors. The Registration Statement relating to the 289,600 shares became effective by the SEC on May 8, 2007. There were no embedded derivatives relating to the Registration Rights Agreement. vFinance Investments, Inc. ("vFinance") acted as placement agent for the Private Placement. At the closing of the transaction, vFinance and its affiliate Harborview Capital Management, an institutional investor in the Private Placement, received 350 shares of Series B Preferred Stock and a Series A seven-year warrant to purchase 125,000 shares of the Company's common stock exercisable at $5.60 per share in lieu of a cash fee. In addition, vFinance received the sum of $50,000 in cash which was donated to a charity of its choice and also received reimbursement of its legal fees aggregating $50,000. At the closing of the transaction, D. Andrew Stackpole, the founder of Trinity, became the Company's new Chairman pursuant to the terms of an Employment Agreement between the Company and Mr. Stackpole. The Employment Agreement was a condition for closing of the Purchase Agreement, and provides for the payment to Mr. Stackpole of salary and bonus of $350,000 at the end of the twelve month period following the closing of the transaction, which will be paid in warrants to purchase the Company's common stock. In the first half of fiscal 2007, the Company recorded stock based compensation expense relating to its Chairman aggregating $166,000 for warrants to be issued to purchase the Company's common stock for services rendered. The Company expects to issue 202,471 warrants to its Chairman for these services. Trinity will receive no additional compensation for services of its employees or advisors made available to the Company, relating to the Private Placement. 9 As a result of the closing of the Private Placement, the Company's current Board of Directors was replaced by a new slate of nine Directors, six of which were appointed by Trinity. This new slate of Directors, as well as the restated bylaws to provide for a staggered board of directors and limitations on the removal of such directors were approved by the Company's shareholders at the annual meeting. The Company's current management team has remained in their current positions following the transaction except the Chairman and President /Chief Executive Officer. Following the resignation of the President/Chief Executive Officer in October 2006, the Company appointed a new interim Chief Executive Officer. In connection with this transaction only, the Company's management team waived certain change of control provisions contained in their severance agreements and, for doing so, are receiving special retention bonuses of $10,000 per quarter for the next ten consecutive quarters, which began in May 2006. The Company's certificate of incorporation was also amended and restated, as approved by the shareholders, to add the new class of Series B Preferred Stock and to increase the Company's authorized number of shares of common stock to accommodate the Private Placement. Furthermore, as a result of the closing of the Private Placement, the Company's utilization of its net operating loss carryforwards has been limited as a change of control has taken place pursuant to Internal Revenue Code Section 382. 3. Proposed Acquisition On May 7, 2007, the Company entered into a stock purchase agreement (the "Stock Purchase Agreement") with Myer-Emco, Inc., a privately held retailer and custom installer of higher-end audio and video products ("Myer-Emco"), and stockholders of Myer-Emco owning 86% of the equity interest in Myer-Emco (the "MEI Sellers") for the acquisition (the "Acquisition") by the Company of all of the issued and outstanding shares of capital stock of Myer-Emco (the "Shares"). Myer-Emco operates 10 retail stores located in the Washington, D.C., Virginia and Maryland metro area. The purchase price for the Shares under the Stock Purchase Agreement consists of $10,000,000 cash, of which $1,000,000 will be escrowed until May 31, 2008 in order to secure the Company's potential claims against the MEI Sellers for any breach of their representations, warranties and covenants under the Stock Purchase Agreement, and pay-off amounts under Myer-Emco's existing revolving credit line and other consideration of approximately $1.2 million for transaction payments and related matters (the "Purchase Price"). After the closing, a MEI Seller, has agreed not to compete with the Company for a period of 5 years from the date of the closing in any state in which the Company or Myer-Emco has operations and a period of 3 years in any other state east of the Mississippi River (the "Covered States"). However, the 3 year period will be extended to 5 years if the Company or Myer-Emco commences operations in any of the Covered States prior to the expiration of the 3 year non-competition period. 10 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) The consummation of the transactions contemplated by Acquisition are subject to certain other closing conditions customary to transactions of this kind, and includes a condition that the current President of Myer-Emco, enter into an employment agreement with the Company and a condition requiring the owners of the remaining 14% of the equity interests not owned by the MEI Sellers (the "Remaining Equity Balance") to join as sellers under the Stock Purchase Agreement and deliver the Remaining Equity Balance to the Company such that the Company will acquire 100% of the equity interests of Myer-Emco at closing. As the Acquisition was not consummated on or before the target date of June 7, 2007, the Company and the MEI Sellers agreed to extend the closing date for an additional 45 days to July 23, 2007. As a result, on June 8, 2007, the Company paid Myer-Emco and the MEI Sellers' $300,000 for legal expenses relating to the acquisition. If the closing occurs on or before July 23, 2007, the $300,000 will be applied as a credit towards the purchase price, under the Stock Purchase Agreement. Myer-Emco and the MEI Sellers are subject to an agreement of exclusivity from the date of signing the Stock Purchase Agreement to the date of closing. 4. Refinancing of the Revolving Line of Credit Facility On June 18, 2007, the Company received a commitment letter with New Stream Commercial Finance, LLC ("New Stream") related to a one year $7.5 million senior secured revolving credit facility (the "New Credit Facility"). The Company expects to terminate and prepay its existing credit facility with Webster Business Credit Corporation ("Webster") with the proceeds available under the New Credit Facility. Under the New Credit Facility, the Company can borrow up to $7.5 million based upon lending formulas calculated on eligible inventory, credit card and accounts receivables, less certain reserves, as defined. This New Credit Facility is expected to provide a significant increase in availability and liquidity to the Company and will expire twelve months from the closing which is expected to take place in June 2007. The interest rate on the New Credit Facility will be LIBOR, as defined, plus 3% with a minimum interest rate of 8.5%. Under the New Credit Facility, the Company will pay a maintenance fee of $2,500 per month and a monthly unused line fee, as defined. In connection with the New Credit Facility, the Company will grant New Stream a senior secured interest in all of the Company's assets. The New Credit Facility will provide New Stream with rights of acceleration upon the occurrence of certain customary events of default. The Company will be restricted from paying dividends on its Common and Preferred Stock and entering into additional indebtedness, as defined. Commitment and closing fees relating to this New Credit Facility will approximate $300,000 and upon termination, there will be an exit fee of approximately $375,000. Covenants are anticipated to be normal and customary for a revolving credit facility. The Company's current $7.5 million credit facility is with Webster. Under the current credit facility, the Company can borrow up to $7.5 million based upon lending formulas calculated on eligible credit card receivables and inventory, less certain reserves, as defined. 11 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) The interest rate on all borrowings under the credit facility is either 0.25% over Webster Bank's prime rate (8.50% at April 28, 2007) or LIBOR plus 2.75%, at the Company's option. Under the credit facility, the Company pays Webster a maintenance fee of $1,000 per month and a monthly unused line fee, as defined in the credit facility. In connection with the credit facility, the Company granted Webster a senior security interest in all of the Company's assets. The credit facility provides Webster with rights of acceleration upon the occurrence of certain customary events of default. The Company is restricted from paying dividends on its Common or Preferred Stock, retiring or repurchasing its Common Stock and entering into additional indebtedness (as defined). On November 9, 2006, the Company entered into the Sixth Amendment and Consent Agreement with Webster which (i) consented to the Private Placement and change in control, (ii) modified certain Availability Reserves and the Fixed Charge Ratio, as defined and, (iii) and modified the Financial Covenants including the Capital Expenditures and Excess Availability/Cash requirements, as defined. The Company was in compliance with all financial covenants at April 28, 2007. As the New Credit Facility will replace Webster's credit facility and will expire in June 2008 and does not include both a subjective acceleration clause and a lock box arrangement, in accordance with EITF 95-22, The Company classified the balance outstanding, at April 28, 2007 ($3,541,000) under the credit facility as a long-term liability. 5. Net Advertising Expense In accordance with EITF 02-16, "Accounting by a Customer for Certain Consideration Received from a Vendor" ("EITF 02-16") which addresses how and when to reflect consideration received from suppliers in the financial statements, the Company's advertising expense, net of cooperative advertising allowances, is charged to operations when the advertising takes place. Net advertising expense is included in selling, general and administrative expenses in the Company's Statements of Operations. Manufacturer rebates received by the Company are recorded based on the quarterly estimated progress in earning such rebates. The Company's estimates, to record these rebates, are based on historical information and current programs with such vendors. In the fourth quarter of fiscal 2006, the Company initiated a change in its advertising campaign which was modified to reflect current market conditions, customer needs and service demands. The new marketing strategy was designed to better promote the Harvey brand and its installation and home integration offerings. Accordingly, certain promotional allowances received by vendors that were previously recorded as a reduction of advertising expense are now recorded as a reduction of inventory costs and cost of goods sold, relating to the first half of fiscal 2007 if the expenditure no longer represents identifiable costs incurred by the Company to promote its products. 12 As a result, $708,000 of promotional allowances were reflected as a reduction of cost of goods sold in the first half of fiscal 2007 for promotional allowances related to the first quarter ($358,000) and second quarter ($350,000). The reduction of inventory at April 28, 2007 and October 28, 2006 was $150,000 and $100,000, respectively. The following represents the gross amounts of advertising expenditures, cooperative advertising reimbursements and net advertising expense for the periods reported:

6. Loss Per Share Basic and diluted loss per share are calculated in accordance with Statement of Financial Accounting ("SFAS") No. 128, "Earnings Per Share". Basic loss per share excludes the dilutive effects of options, warrants and convertible preferred stock. Diluted loss per share includes only the dilutive effects of common stock equivalents such as stock options, warrants and convertible preferred stock. The following table sets forth the computation of basic and diluted loss per share for the periods presented pursuant to SFAS No. 128.

13 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) Convertible preferred stock, options and warrants were not included in the diluted earnings per share calculation for all periods presented, as they were anti-dilutive. 7. Income Taxes (Benefit) In connection with the Company's emergence from its reorganization proceeding under Chapter 11 of the United States Bankruptcy Code on December 26, 1996, the Company adopted Fresh Start Accounting in accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Fresh Start Accounting requires that the Company report an income tax equivalent provision when there is book income and a pre-reorganization net operating loss carryforward. This requirement applies despite the fact that the Company's pre-reorganization net operating loss carryforward will be utilized to reduce the related income tax payable. The current and any future year benefit arising from utilization of the pre-reorganization carryforward is not reflected as a reduction of the tax equivalent provision in determining net income, but instead is recorded first as a reduction of reorganization value in excess of amounts allocable to identifiable assets until exhausted and thereafter as a direct addition to paid-in-capital. For the six months ended April 28, 2007, no income tax provision was necessary due to the net loss. For the second quarter of fiscal 2006, the Company reported an income tax benefit of $25,000 (32.7% effective tax benefit). In the six months ended April 28, 2007, the Company provided no income tax benefit against current operating losses because of uncertainty regarding their future realization. 8. Goodwill and Other Intangible Assets Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. Other intangible assets are amortized over their estimated useful lives. The Company follows the provisions of SFAS No. 142, and accordingly, both goodwill and the Company's other intangible asset, reorganization value in excess of amounts allocable to identifiable assets, were not amortized and are subject to an annual impairment test. In the second quarter of fiscal 2007, the Company performed the necessary goodwill impairment analysis. After completion, this valuation found no impairment of the Company's goodwill and other intangible asset, reorganization value in excess of amounts allocable to identifiable assets. Goodwill and this other intangible asset are tested annually to identify if impairment has occurred. 9. Share Based Compensation The Company's Board of Directors and shareholders approved by the Harvey Electronics, Inc. Stock Option Plan ("Stock Option Plan") in fiscal 1998. The Stock Option Plan provides for the granting of up to 250,000 shares of incentive and non-qualified Common Stock options and stock appreciation rights to directors, officers and employees. At April 28, 2007 the Company had incentive stock options outstanding aggregating 208,650 options. All outstanding options are vested. These options were granted by the Company's Compensation and Stock 14 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) Option Committee and are exercisable at between three and ten years from the date of grant. No stock options had been granted from fiscal 2002 to January 27, 2007. In the second quarter of fiscal 2007, the Company granted 62,500 incentive stock options to its Interim Chief Executive Officer at an exercise price of $4.00 per share. A summary of stock option transactions is as follows for the six months ended April 28, 2007:

In fiscal 2005, the Company adopted the provisions of FAS No. 123(R), "Share-Based Payment" ("FAS 123(R)"). Under FAS123(R), share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period. The Company adopted the provisions of FAS123(R) using a modified prospective application. Under this method, compensation cost is recognized for all share-based payments granted, modified or settled after the date of adoption, as well as for any unvested awards that were granted prior to the date of adoption. Prior periods are not revised for comparative purposes. In prior years, the Company previously adopted only the pro forma disclosure provisions of SFAS 123. The fair value of each future option award will be estimated on the date of grant using a Black-Scholes option valuation model. Expected volatility will be based on the historical volatility of the price of the Company's stock. The risk-free interest rate will be based on U.S. Treasury issues with a term equal to the expected life of the option. The Company will use historical data to estimate expected dividend yield, expected life and forfeiture rates. The revised Statement required entities to disclose information about the nature of the share-based payment transactions and the effects of those transactions on the financial statements. The adoption of this pronouncement had no impact on the Company's financial position or results of operations prior to the second quarter of fiscal 2007 as no stock options were granted, and no previously issued stock options vested in fiscal 2005 or fiscal 2006. In the second quarter of fiscal 2007, the fair value of the 62,500 stock option granted, which fully vested on the date of grant, aggregated $30,000 and were charged to compensation expense with a corresponding credit to additional paid-in capital. 15 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) In the first quarter of fiscal 2007, the Company's new Board of Directors elected to maintain the original terms of 20,000 stock options relating to two exiting directors, which would have expired on February 10, 2007. This modification in terms resulted in compensation expense of $16,000 with a corresponding charge to additional paid in capital in the first quarter. 10. Recent Accounting Pronouncements In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. The interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently assessing the impact, if any, of FIN 48 which it will adopt at the beginning of Fiscal 2008. In June 2006, the FASB ratified Emerging Issues Task Force ("EITF") Issue No. 06-3, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross versus Net Presentation)", which allows companies to adopt a policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of this EITF would include taxes that are imposed on a revenue transaction between a seller and a customer. If such taxes are significant, the accounting policy should be disclosed as well as the amount of taxes included in the financial statements if presented on a gross basis. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The impact of EITF Issue No. 06-03 which was adopted in the second quarter of Fiscal 2007 had no impact as sales historically have been presented and will continue to be presented net of sales taxes. In September 2006, the SEC issued SAB No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 addresses quantifying the financial statement effects of misstatements; specifically, how the effects of prior year uncorrected misstatements must be considered in quantifying misstatements in the current year financial statements. In addition, SAB 108 provides guidance on the correction of misstatements, including the correction of prior period financial statements for immaterial misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company has reviewed the provisions of SAB 108, and it did not have any impact to the Company's financial position, results of operations or cash flows. 11. Reverse Stock Split The Company's shareholders, at the annual meeting, approved a reverse stock split of its common stock at an exchange ratio of 1 for 4. The reverse stock split was completed November 10, 2006. 16 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) 12. Other Effective September 22, 2006, the Company engaged a consultant under a month-to-month consulting services agreement. The consulting services agreement called for a weekly fee of $5,765 plus expenses. Total fees paid to the consultant in the first quarter of fiscal 2007 aggregated $36,000. Subsequent to the termination of the Company's President and Chief Executive Officer, the consultant was named Interim Chief Executive Officer ("Interim CEO") of the Company. On December 19, 2006, the Company entered into an employment agreement with the Interim CEO. The terms of the employment agreement continued through January 31, 2007, with one month extension periods for three months, at the Company's option which have been exercised to date. The Interim CEO received a salary of $21,500 a month plus expenses in accordance with the employment agreement. Pursuant to this agreement, the Company granted the Interim CEO non-qualified vested stock options of 37,500 on January 31, 2007. 12,500 additional non-qualified stock options were granted and vested on February 28, 2007. Additional non-qualified stock options were granted and vested on March 31, 2007 and April 30, 2007, respectively. The total options granted aggregated 75,000. The exercise price on all options for the purchase of each share of the Company's Common Stock is $4.00 per share and expire December 31, 2009. On June 5, 2007, the Company's Interim CEO completed his contract with the Company and was replaced by the Company's prior Chairman of the Board. The Company's new Interim Chief Executive Officer ("New Interim CEO") will also serve on an interim basis for six-months expiring November 30, 2007, with six, one-month extensions at the option of the Company. The New Interim CEO will receive a salary of $25,000 a month. $20,000 of such monthly amount will be payable in cash and the remainder will accrue. The total balance accrued and not paid will be paid in twelve-equal installments following the termination of the New Interim CEO's employment agreement. Pursuant to this employment agreement, the Company has agreed to grant the New Interim CEO a total of 100,000 free-standing non-qualified stock options for the purchase of the Company's Common Stock at an exercise price of $4.00 per share, which 50,000 of these options vest on November 30, 2007. 8,333 additional non-qualified options will vest monthly beginning December 31, 2007 and ending May 31, 2008 (aggregating the remaining 50,000 non-qualified stock options that will vest over the six-month period) provided the Company elects to extend the New Interim CEO's employment agreement. The options granted to the New Interim CEO will expire on December 31, 2010. 17 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following management's discussion and analysis and this Form 10-Q contain forward-looking statements, which involve risks and uncertainties. When used herein, the words "anticipate," "believe," "estimate," and "expect" and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company's actual results, performance or achievements could differ materially from the results expressed in or implied by these forward-looking statements. Historical results are not necessarily indicative of trends in operating results for any future period. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Results of Operations General The following discussion should be read in conjunction with the Company's audited financial statements for the fiscal years ended October 28, 2006 and October 29, 2005, included in the Company's Annual Report on Form 10K. Twenty-Six and Thirteen Weeks Ended April 28, 2007 as Compared to Twenty-Six and Thirteen Weeks Ended April 29, 2006. Net Loss. The Company's net loss for the twenty-six weeks ended April 28, 2007 was $1,641,000 as compared to a net loss of $6,000 for the same period last year. The Company reported a pre-tax loss of $601,000 for its second quarter ended April 28, 2007, as compared to a pre-tax loss of $76,000 for the same quarter last year. The net loss for the second quarter of fiscal 2007 was $601,000 as compared to a net loss of $51,000 for the same quarter last year. The Company's net loss for the six and three months ended April 28, 2007 was due primarily from reduced comparable store sales, as discussed below. Management believes that reduced advertising expenditures in the second quarter also negatively impacted net sales and store profitability. For the six and three month periods ended April 28, 2007, stock based compensation relating to the Company's Chairman, Interim CEO and certain directors aggregated $212,000 and $118,000, respectively. The Company believes the non-GAAP measurement of earnings before interest, taxes, depreciation and amortization ("EBITDA") is an important operational measure. Depreciation and amortization have historically been significant in relation to net income or net loss. The Company's depreciation and amortization expense, as is interest expense from its line of credit, primarily relates to the Company's retail stores and expansion of its retail stores. The Company's income tax equivalent provisions or deferred tax expense have also had a significant impact on earnings, but have primarily not required the use of the Company's cash, due to the reporting requirements of Fresh Start Accounting. 18 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) The Company's Management, Board of Directors and Webster review EBITDA monthly, quarterly and annually to gauge the Company's performance. EBITDA may also be used in simple valuation measures of the Company, by its shareholders and potential investors. Management understands that there are limitations associated with the use of this non-GAAP measure of EBITDA as compared to net loss. Specifically, a portion of interest expense does relate to the Company's operations and a portion of the income tax equivalent provision, if any, does relate to the payment of certain state taxes, although these amounts are not material. Additionally, the Company will not eliminate any other recurring or non-recurring expenses in its reconciliation of the Company's net loss to EBITDA. The following is a reconciliation of the Company's net loss to the non-GAAP measure of EBITDA:

The Company's net loss for the first half of fiscal 2007 and 2006 included net advertising expense of $969,000 and $160,000, respectively. The Company's net loss for the second quarter of fiscal 2007, and 2006 included net advertising expense of $166,000 and $-0-, respectively. The Company's advertising expenditures for the first half of fiscal 2007 decreased by 6.7% to approximately $1,064,000 as compared to $1,140,000 for the same period last year. Advertising expenditures for the second quarter of fiscal 2007 decreased by 53.2% to $192,000 as compared to $410,000 for the same quarter last year. Additionally, as the Company's overall sales declined for the first half of fiscal 2007, from the same period last year, the Company is expected to realize less cooperative advertising support from its vendors. In the fourth quarter of fiscal 2006, the Company initiated a change in its advertising campaign which was modified to reflect current market conditions, customer needs and service demands. The new marketing strategy was designed to better promote the Harvey brand and its installation and home integration offerings. Accordingly, certain promotional allowances received by vendors that were previously recorded as a reduction of advertising expense are now recorded as a reduction of inventory costs if the expenditure no longer represents identifiable costs incurred by the Company to promote its products. 19 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) As a result, $708,000 of promotional allowances were reflected as a reduction of cost of goods sold in the first half of fiscal 2007 for promotional allowances ($358,000 in the first quarter and $350,000 in the second quarter). The related reduction of inventory at April 28, 2007 and October 28, 2006 was $150,000 and $100,000, respectively. For the first half of fiscal 2007, no income tax provision was required due to the net loss. For the second quarter of fiscal 2006, the Company recorded an income tax benefit of $25,000 (32.7% effective tax benefit). Revenues. For the six months ended April 28, 2007, net sales aggregated $16,047,000, a decrease of $4.9 million or 23% from the same period last year. Comparable store sales for this period declined by the same amount. For the second quarter of fiscal 2007, net sales aggregated $7,639,000, a decrease of $1.9 million or 20% from the same quarter last year. Comparable store sales for this quarter declined by the same amount. During the first half and second quarter of fiscal 2007, the Company has experienced a decline in its audio and video sales and to a lesser extent, in its labor revenue. While the Company's custom installation business remained strong, retail store traffic and retail sales declined in the first half and second quarter of fiscal 2007. During the first half of fiscal 2007, and particularly during the holiday shopping season, the industry experienced frenzied price promotions by the mass merchants, coupled with price reductions from competing video vendors. As a result, the Company's overall flat panel sales in dollars decreased by 32.5% and unit sales declined by 24%. The Company experienced further price compression on flat panel televisions of 12% for the first half of fiscal 2007. The Company's overall video business ($6.1 million) declined 32.9% in the first half of fiscal 2007 as compared to the same period last year. Video sales represented 37.7% of gross sales for this period, compared to 42.8% for the same period last year. Video sales ($2.8 million), for the second quarter of fiscal 2007, declined 30% as compared to the same quarter last year and represented 35.7% of gross sales as compared to 40.6% of gross sales for the same quarter last year. The Company's higher margin audio sales ($8.1 million) have decreased 18% for the first half of fiscal 2007 as compared to the same period last year and represented 49.8% of gross sales, as compared to 46.3% of gross sales for the same period last year. Audio sales ($3.9 million) for the second quarter of fiscal 2007 have declined 13.5% from the same quarter last year and represented 50.4% of gross sales, as compared to 46.4% of gross sales for the same quarter last year. Audio sales were negatively impacted by reduced audio components, systems, radio and portables, furniture and were offset somewhat by increased audio accessories. The Company's high margin cable, wire and surge protector sales continued to be strong as a percentage of gross sales despite the overall reduction in sales. The Company's higher margin labor revenue ($2,023,000) decreased 11.8% in the first half of fiscal 2007, as compared to the same period last year, and 20 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) represented approximately 12.5% of gross sales as compared to 10.8% of gross sales for the same period last year. The Company expects to increase the promotion of its profitable service offerings and new technologies requiring the Company's services in fiscal 2007. This should improve labor revenues in fiscal 2007. For the second quarter of fiscal 2007, labor revenue ($1,064,000) declined 14.8% from the same quarter last year and represented 13.8% of gross sales as compared to 12.9% of gross sales for the same quarter last year. The Company believes it continues to benefit from the strong demand for its custom installation services. Additionally, despite increased competition and a decline in retail store traffic, customer demand continues for digital video products including larger plasma flat screen, LCD flat panel, high-definition televisions, integrated remote controls and related custom home installations. Custom installation projects continue to increase, as a percentage of gross sales and accounted for 74% of gross sales for the first half of fiscal 2007, as compared to approximately 63.8% of gross sales for the same period last year. Overall custom installation sales, including both equipment sales and labor income declined 11.5% and aggregated $12 million for the first half of fiscal 2007, as compared to $13.5 million for the same period last year. The Company's custom installation services yield higher gross profit margins and stronger net profitability, as compared to normal retail store sales. The Company believes it differentiates itself by offering sophisticated custom installation services, including programming capabilities that address complex technological integration issues giving its customers easy remote control operations for a variety of functions. Management believes installations of dedicated theater rooms, media servers, hard drive video and audio storage and distribution, video mounts, lighting systems in the home, as well as network cabling will continue to attract affluent customers to the Company. The home theater room will be the forefront of the smart home, for the desired integration of all electronics, lighting, security and networking within the home. These offerings should continue to benefit sales, enhance gross margins and improve overall store profitability. The Company believes it can expand its service niche in offering custom labor and other accessories for both Harvey customers and customers that have purchased products elsewhere, specifically on the internet or from mass merchants. Harvey offers a 48-hour response time to address the needs of a qualified customer at an additional labor cost. Additionally, the Company has an agreement with Cablevision offering and installing their high speed cable modems and digital cable boxes in conjunction with our installation services to Cablevision's iO digital cable customers. The Company is also working with Time Warner and Patriot Media and Communications in offering these services. Net sales for the newest Harvey retail store located in Bridgewater, New Jersey have been encouraging. The Company believes that this store, opened June 2005, will take some time to mature as its sales have significantly come from new home construction and custom installations which take time to cultivate and complete. The new Bridgewater store contributed net cash flow in fiscal 2006 and has achieved store profitability and positive cash flow in the first half of fiscal 2007. In the second quarter of fiscal 2007, the Company's Greenwich, Connecticut and Greenvale, Long Island stores had an increase in comparable store sales while 21 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) the remaining stores in the chain declined. Comparable store sales and net store profitability were negatively impacted by poor results from the Company's store within ABC Carpet and Home in Manhattan, Eatontown, New Jersey and in Midtown Manhattan. For the six months ended April 28, 2007, all of the Company's retail locations experienced declining comparable store sales and reduced store profitability, except the Company's Bang & Olufsen branded store in Manhattan, which experienced increased profitability. The Company's marketing efforts have been in a transition stage from the end of fiscal 2005, fiscal 2006 and for the first half of fiscal 2007. The Company has changed it advertising agency several times since fiscal 2005 and has not been satisfied with recent campaigns or its sales results. In June 2007, the Company re-engaged Harrison Leifer and DiMarco ("HLD"), the advertising agency that was very successful in cultivating the Company's brand and increasing its sales volume from 1998-2005. The Company's Management Team is very excited about working again with HLD to better promote the Company's brand, products and service offerings. Additionally, the Company recently conducted consumer focus groups, which should help develop an appropriate campaign. In the third and fourth quarters of fiscal 2007, the Company also expects to increase its marketing expenditures. The Company does expect to continue to utilize on-line mediums as results from these on-line efforts have been encouraging in the first half of fiscal 2007. Advertising efforts are expected to include radio, newspaper, direct mail, internet keyword searches and e-mail broadcasts, as well as the continued promotion of the Company's website, harveyonline.com, and potentially adding other marketing mediums. The Company expects to replace its website in fiscal 2007 which should enhance product and technology content to drive prospective customer leads to the Company. Furthermore, in fiscal 2007, the Company also will endeavor to put additional efforts and resources into its important customer relations management initiatives. Due to the early success of internet keyword searches, the Company will be more aggressive with this medium to prospective and existing customers in fiscal 2007. Costs and Expenses. Total cost of goods sold for the six months ended April 28, 2007 decreased 30.1% to $8,640,000 as compared to the same period last year. Total cost of goods sold for the second quarter of fiscal 2007 decreased 26.8% to $4,047,000, as compared to the same quarter last year. The decline in cost of goods sold was due primarily to the overall decrease in net sales, as noted above. In the fourth quarter of fiscal 2006, the Company initiated a change in its advertising campaign as discussed above. As a result, $708,000 of promotional allowances were reflected as a reduction of cost of goods sold in the first half of fiscal 2007 for promotional allowances. This adjustment in the Company's first half, decreased cost of goods sold and improved the gross margin. The gross profit margin for the first half of fiscal 2007 increased to 46.2% from 40.9% for the same period last year. The gross profit margin for the second quarter of fiscal 2007 increased to 47% from 42.1% for the same quarter last year. The increase in the gross profit margin was primarily due to the 22 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) promotional allowances discussed above ($708,000 for the first half and $350,000 for the second quarter). Excluding this adjustment, the gross margin for the six and three months ended April 28, 2007 was approximately 41.7% and 42.4%, respectively. Improved gross margins on audio components, labor revenue, cable, wire, surge protectors, furniture and audio and video accessories sales helped to offset the decline in video margins and improve the Company's overall gross profit margin for the first half of fiscal 2007. The Company's total cost of goods sold also includes freight costs, purchase discounts from its vendors and inventory shrink. The Company's gross profit margin may not be comparable to other reporting electronics retailers as other entities may include the costs relating to their warehousing and distribution networks. Warehouse and distribution network costs for the first half of fiscal 2007 and 2006 approximated $261,000 and $314,000, respectively. Warehouse and distribution costs for the second quarter of fiscal 2007 and 2006 approximated $117,000 and $152,000, respectively. These costs are included in SG&A expenses. Selling, general and administrative ("SG&A") expenses for the first half of fiscal 2007 increased by 5.3% to $8,867,000 as compared to the same period last year. SG&A for the second quarter of fiscal 2007 increased by 2.1% to $4,102,000 as compared to the same quarter last year. Net advertising expense for the first half of fiscal 2007, which is included in SG&A expenses in the Company's Statements of Operations increased to $969,000 from $160,000 for the same period last year. Net advertising expense for the second quarter of fiscal 2007 increased to $166,000 from $-0- for the same quarter last year. This increase was primarily related to certain promotional allowances received from vendors that were previously recorded as a reduction of advertising expense, now recorded as a reduction of cost of goods sold and inventory. Additionally, the increase was due to a decline in cooperative advertising support from the Company's vendors. SG&A expenses increased primarily from additional advertising expense, occupancy costs and depreciation expense, and was offset by reduced payroll and payroll related expenses, management bonuses and other selling expenses. Management will continue its cost reduction program for the remainder of fiscal 2007. More importantly, Management will continue its efforts to improve its purchasing and inventory efficiencies, implement positive merchandising changes, while cultivating its profitable service offerings. The Company plans to continue to hire and train custom installation personnel, as needed, and incur the necessary associated expenses relating to the expansion of its custom installation services. Management believes these services differentiate Harvey and are vital to the Company's business plan. Management also expects to intensify its sales training efforts in fiscal 2007 to ensure that its customers are given an exceptional and unsurpassed retail experience. Interest expense increased by approximately $72,000 or 42% for the first half of fiscal 2007 as compared to the same period last year. Interest expense for the second quarter of fiscal 2007 increased $38,000 or 40.5% as compared to the same 23 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) quarter last year. This was primarily due to increased borrowings and higher interest rates. Additionally, the credit facility was used to fund current operating losses, expenditures for computer equipment, software payments, development work relating to the replacement of its legacy computer system and professional fees relating to the proposed Myer-Emco acquisition. The new computer system was launched in November 2006. For the first half of fiscal 2007, no income tax provision was necessary due to net losses. Liquidity and Capital Resources At April 28, 2007 and October 28, 2006, the Company's ratio of current assets to current liabilities was 1.33 and 1.08, respectively. The current ratio at April 28, 2007 was positively impacted by the cash received from the Private Placement, the reduction in trade accounts payable and the increase in prepaid expenses and other current assets and was negatively impacted by the Company's net loss, the decline in accounts receivable and increase in accrued expenses and customer deposits. Net cash used by operating activities for the first half of fiscal 2007 was $775,000 as compared to cash provided by operating activities of $213,000 for the same period last year. For the first half of fiscal 2007, the Company reported a net loss of $1,641,000 as compared to a net loss of $6,000 for the same period last year. In the first half of fiscal 2007, the Company also reported a decrease in accounts receivable and inventory and a decrease in trade accounts payable and an increase in customer deposits and accrued expenses. This compared to cash provided from operations in the same period last year as inventory, trade accounts payable, customer deposits and accrued expenses were reduced. Net cash used in investing activities for the first half of fiscal 2007 was $796,000 as compared to $349,000 for the same period last year. Net cash used in investing activities included the purchase of equipment, software and additional development work aggregating $212,000 relating to the Company's replacement of its legacy computer system and $569,000 in other deferred assets relating to fees incurred from the proposed acquisition of Myer-Emco and $15,000 of other assets. For the same period last year, the Company incurred $147,000 relating to equipment purchases and the computer conversion and $211,000 in fees relating to the Private Placement. Net cash provided by financing activities for the first half of fiscal 2007 was $3,584,000 as compared to net cash provided of $139,000 for the same quarter last year. Financing activities included the receipt of $4.0 million from the Private Placement, offset by related fees. Financing activities also included net borrowings of $193,000 from the Company's credit facility as compared to net payments on the credit facility of $331,000 for the same period last year. Principal payments on notes payable aggregated $29,000 for the first half of fiscal 2007 as compared to $32,000 for the same period last year. For the first half of fiscal 2006, the Company also made preferred stock dividend payments of $25,000. On June 18, 2007, the Company entered into a commitment letter with New Stream Commercial Finance, LLC ("New Stream") related to a one year $7.5 million senior 24 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) secured revolving credit facility (the "New Credit Facility"). The Company expects to terminate and prepay its existing credit facility with Webster Business Credit Corporation ("Webster") with the proceeds available under the New Credit Facility. Under the New Credit Facility, the Company can borrow up to $7.5 million based upon lending formulas calculated on eligible inventory, credit card and accounts receivables, less certain reserves, as defined. This New Credit Facility is expected to provide a significant increase in availability and liquidity to the Company and will expire twelve months from the closing. The interest rate on the New Credit Facility will be LIBOR, as defined, plus 3% with a minimum interest rate of 8.5%. Under the New Credit Facility, the Company will pay a maintenance fee of $2,500 per month and a monthly unused line fee, as defined. In connection with the New Credit Facility, the Company will grant New Stream a senior secured interest in all of the Company's assets. The New Credit Facility will provide New Stream with rights of acceleration upon the occurrence of certain customary events of default. The Company will be restricted from paying dividends on its Common and Preferred Stock and entering into additional indebtedness, as defined. Commitment and closing fees relating to this New Credit Facility will approximately $300,000 and upon termination, there will be an exit fee of $375,000. Covenants are anticipated to be normal and customary for a revolving credit facility. The Company's current $7.5 million credit facility is with Webster Bank. Under the credit facility, the Company can borrow up to $7.5 million based upon lending formulas calculated on eligible credit card receivables and inventory, less certain reserves, as defined. On November 9, 2006, the Company entered into the Sixth Amendment and Consent Agreement with Webster which (i) consented to the Private Placement and change in control, (ii) modified certain Availability Reserves and the Fixed Charge Ratio, as defined and, (iii) and modified the Financial Covenants including the Capital Expenditures and Excess Availability/Cash requirements, as defined. The Company was in compliance with all financial covenants at April 28, 2007. As the New Credit Facility will replace the Webster credit facility and expire in June 2008 and does not include both a subjective acceleration clause and a lock box arrangement, in accordance with EITF 95-22, The Company classified the balance outstanding, at April 28, 2007 ($3,541,000) under the credit facility as a long-term liability. At June 18, 2007, there was approximately $3,061,000 in outstanding borrowings under the Webster credit facility, with approximately $422,000 available to borrow under this credit facility. As fully described in Note 2 to the financial statements, the Company entered into a Securities Purchase Agreement with several institutional and other accredited investors. On November 10, 2006, the Company completed the Private Placement and the Company received $4,000,000 ($3,430,000 net of closing costs) from the sale of a new 8% Series B Convertible Preferred Stock. The proceeds will be used by the Company primarily for general corporate and working capital purposes, to fund its increased advertising efforts, to replace its website and to refurbish existing stores. These funds will also be used to help develop an 25 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) additional technology presence within our stores emphasizing and reinforcing the changing services and products that the Company offers. The Company replaced its existing computer system in November 2006. The project cost is estimated at $700,000 - $750,000. At April 28, 2007, the unpaid costs to complete the project are estimated at $150,000 - $170,000. These costs will be financed using the Company's credit facility in fiscal 2007. The Company intends to increase its advertising expenditure for the remainder of fiscal 2007, primarily with print, radio, direct mail, keyword searches and e-mail broadcasts. Advertising expenditures will be financed using funds available from the Private Placement and New Credit Facility. The Company's website gives its customers access to one of Harvey's upscale retail showrooms or offers its customers a private, in-home consultation through the convenience of the Internet. The Company is expected to replace its website in fiscal 2007 at an estimated cost of between $80,000 - $100,000 using funds available from the Private Placement. In July 2003, the Company received a notice and information request from the Pennsylvania Department of Environmental Protection ("PADEP"). See Part II, Legal Matters, for details on this matter. The Securities and Exchange Commission has extended the compliance dates for non-accelerated filers, pursuant to 404 of the Sarbanes-Oxley Act of 2002. The Company will further evaluate its implementation plan in fiscal 2007 to meet its compliance requirements for the fiscal year ending 2008. In connection with this significant effort, Management believes that normal and customary expenses related to implementation of the required current provisions of the Act may be in the range of $250,000 - $350,000 for fiscal 2008. As fully disclosed in Note 12 to the financial statements, the Company's shareholders, at the annual meeting, approved a reverse stock split of its common stock at an exchange ratio of 1 for 4. The reverse stock split was completed November 10, 2006 together with the Private Placement. Management believes that cash on hand, cash available from the successful Private Placement, cash flow from operations and funds made available under the New Credit Facility with New Stream, will be sufficient to meet the Company's anticipated working capital needs for at least the next twelve-month period. The Company has no off-balance sheet arrangements as of April 28, 2007. The Company's business is subject to seasonal variations. Historically, the Company has realized a slight increase in its total revenue and a majority of its net income for the year during the first fiscal quarter. Due to the importance of the holiday shopping season, any factors negatively impacting the holiday selling season could have an adverse effect on the Company's revenues 26 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) and its ability to generate a profit. The Company's quarterly results of operations may also fluctuate significantly due to a number of factors, including the timing of new store openings and acquisitions and unexpected changes in volume-related rebates or changes in cooperative advertising policies from manufacturers. In addition, operating results may be negatively affected by increases in merchandise costs, price changes in response to competitive factors and unfavorable local, regional or national economic developments that result in reduced consumer spending. Management does not believe that inflation has had a material adverse effect on our results of operations. However, we cannot predict accurately the effect of inflation on future operating results. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's primary market risk exposure with regard to financial instruments are the changes in interest rates. The New Credit Facility between the Company and New Stream will bear interest at LIBOR plus 3%, with a minimum interest rate of 8.5%. Historically, the Company has not used derivative financial instruments to manage exposure to interest rate changes. The Company estimates that a hypothetical 10% adverse change in interest rates would not materially affect the consolidated operating results of the Company. Item 4. Disclosure Controls and Procedures Under the supervision and with the participation of the Company's Management, including the Interim Chief Executive Officer and the Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, the Company's Interim Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective, as of the end of the period covered by this Report (April 28, 2007), in ensuring that material information relating to the Company required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, including ensuring that such material information is accumulated and communicated to the Company's Management, including the Company's Interim Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As noted above, the Securities and Exchange Commission has extended the compliance dates for non-accelerated filers, pursuant to 404 of the Sarbanes-Oxley Act of 2002. The Company will further evaluate its implementation plan in fiscal 2007 to meet its compliance requirements for fiscal 2008. There were no changes in the Company's internal control over financial reporting (as required by the Exchange Act) that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 27 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) PART II. OTHER INFORMATION: Items 2, 3, 4 and 5 were not applicable in the quarter ended April 28, 2007. Item 1. Legal Matters In July 2003, the Company received a notice and information request from the Pennsylvania Department of Environmental Protection ("PADEP"). The notice stated that PADEP considers the Company a potentially responsible party for contamination related to a septic drain field located at a former Chem Fab Corporation ("Chem Fab") in Doylestown, Pennsylvania. PADEP's notice stated that if Chem Fab was previously owned by Harvey Radio, Inc. ("Harvey Radio") and if the Company was a successor to Harvey Radio, then the Company could be, in part, responsible for any environmental investigation or clean up actions necessary at this site. Harvey Radio was the predecessor of The Harvey Group, Inc. ("Harvey Group"), which filed for relief under Chapter 11 of the United States Bankruptcy Code in August 1995. The Company is the surviving retail business of the Harvey Group, which emerged from bankruptcy in December 1996. Chem Fab was a wholly-owned subsidiary of Harvey Radio as of September 1967. The capital stock of Chem Fab (a then wholly-owned subsidiary of Harvey Group) was sold by the Company to the Boarhead Corporation in January 1978. The disposition of Chem Fab was prior in time to the Company's bankruptcy petition date of August 3, 1995. On August 29, 2003, the Company sent its response letter to PADEP. The Company's response stated that any action by PADEP to recover any money from the Company relating to any environmental investigation or cleanup related to Chem Fab is in violation of the injunctions imposed by virtue of the Company's 1995 Bankruptcy proceeding. The response letter to PADEP specifically referred to two cases, with respect to entities subject to a discharge in bankruptcy by the Southern District of New York and the Second Circuit Court of Appeals. These cases may support the Company's position enjoining any further action against the Company. The Company believes PADEP's claim, even absent the bankruptcy injunction, would be improper against the Company, as Harvey Group was a shareholder of Chem Fab and Chem Fab's capital stock was sold in 1978, as previously stated. The Company advised PADEP that any further action to pursue a claim against the Company would result in the Company bringing a motion to reopen its bankruptcy case, solely to address the PADEP claim and further, the Company would commence contempt proceedings against PADEP. To date, the Company has not received a response from PADEP. The Company has also retained special environmental counsel for advice with respect to PADEP's request for information and other matters with respect to the claim. Furthermore, the number of other parties that may be responsible, their ability to share in the cost of a clean up and whether the Company's existing or prior 28 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) insurance policies provide coverage for this matter is not known. At this time, it is impossible for the Company to determine the outcome or cost to the Company on this matter. Item 1A. Risk Factors There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended October 28, 2006. Item 6. Exhibits Exhibit Number.... Description -------------- ----------- Exhibit 31.1...... Certification - Interim Chief Executive Officer Exhibit 31.2...... Certification - Chief Financial Officer Exhibit 32.1...... Certification - Interim Chief Executive Officer Exhibit 32.2...... Certification - Chief Financial Officer 29 Harvey Electronics, Inc. Notes to Financial Statements April 28, 2007 (Unaudited) Signatures In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on June 18, 2007. Harvey Electronics, Inc. By:/s/Michael E. Recca ------------------------------------ Michael E. Recca Interim Chief Executive Officer By:/s/Joseph J. Calabrese ------------------------------------ Joseph J. Calabrese Executive Vice President, Chief Financial Officer, Treasurer & Secretary 30

HARVEY ELECTRONICS INC 10-Q