SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended September 30, 1995
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission File No. 1-13550
-------
HAUPPAUGE DIGITAL, INC.
----------------------------------------------
(Name of small business issuer in its charter)
DELAWARE 11-3227864
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
91 Cabot Court, Hauppauge, New York 11788
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 434-1600
--------------
Securities registered pursuant to Section 12 (b) of the Act:
a) $.01 par value Common Stock
b) Class A Redeemable Common Stock Purchase Warrants
Securities registered pursuant to Section 12 (g) of the Act:
a) $.01 par value Common Stock
b) Class A Redeemable Common Stock Purchase Warrants
Check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Exchange Act of 1934 during
the past twelve (12) months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past ninety (90) days.
YES X NO
--- ---
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B 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: [X]
<PAGE>
<PAGE>
State registrant's revenues for its most recent fiscal year:
$11,551,169
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of November 27, 1995 was
approximately $5,476,880. Non-affiliates include all shareholders
other than officers, directors and 5% shareholders of the Company.
Market value is based upon the price of the Common Stock as of the
close of business on November 27, 1995 which was $3.50 per share as
reported by NASDAQ.
As of November 27, 1995, the number of shares outstanding of the
Common Stock was 2,756,183 shares.
<PAGE>
<PAGE>
PART II
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
Change in Fiscal Year
The Company changed its fiscal year end from December 31 to
September 30, effective September 30, 1994. All comparisons
presented herein reflect this change in fiscal year.
Results of Operations
Year ended September 30, 1995 compared to the nine months ended
September 30, 1994
Net sales for the year ended September 30, 1995 were
$11,551,169, compared to $4,166,807 for the nine months ended
September 30, 1994, resulting in an increase of $7,384,362 or 177%.
The increase in net sales has been attributable to the Company's
ability to accelerate production of Win/TV boards and increase
marketing programs due to the infusion of capital derived from the
Company's October 1994 Private Placement Offering and January 1995
public offering (See Note 6 to the attached financial statements),
plus the elimination in 1994 of development problems, which created
strong product demand and significant sales increases.
Net sales of the Company's products are summarized as follows:
Nine months
Year ended September 30, Increase
1995 1994 (Decrease)%
-------- ------- -----------
System Boards $ 792,857 $1,208,573 (34)
Win/TV Boards 10,758,312 2,958,234 264
---------- --------- ---
Total Net Sales $11,551,169 $4,166,807 177
========== =========
Unit sales of Win/TV boards, the Company's newest product
line, increased to approximately 41,600 as compared to
approximately 8,800 for the prior nine month period, resulting in
an increase of 375%. Sales to domestic customers for the year ended
September 30 were 30% of net sales for the current year and 55% for
the nine months ended September 30, 1994. Sales to international
customers, which were primarily in U.S. Dollars, were 70% of net
sales for the current year and 45% for the nine months ended
September 30, 1994.
Gross profit increased $1,753,937 or 317% when compared to the
prior nine month period. The gross profit percentage increased to
20% from 13%. The negative impact of $300,000 charged to the
reserve for inventory obsolescence during the nine months ended
September 30, 1994 due to the declining sales of systems boards
plus the dynamics of the market mix of product sold were the major
contributors to the contraction of the 1994 gross profit
percentage.
<PAGE>
Though selling, general and administrative expenses for the
year ended September 30, 1995 increased $1,529,910 over the nine
month period ended September 30, 1994, they declined to 27% of net
sales in fiscal 1995 compared to 39% of net sales for the nine
months ended September 30, 1994. The increase in expenses was
primarily due to increased sales and marketing expenses,
strategically implemented to obtain worldwide penetration, of
$701,407, consisting primarily of increases for advertising and
trade shows of $487,448 and increased commissions of $156,531
resulting from higher sales; technical support costs and receiving
and shipping costs increased $55,322 and $66,062 respectively,
mainly due to the increased support and freight costs needed to
handle the 375% increase in unit board sales, plus higher
administrative costs mainly due to increased professional services
costs and stock exchange listing fees associated with becoming a
publicly traded company of $89,370, consulting fees of $57,000,
which includes $27,000 paid to the Underwriter. In addition,
$187,660, which represents the excess of the fair market value over
the price of the shares sold relating to a July 1995 sale of 99,740
shares owned by the principal shareholders and sold for $0.03 per
share to certain key employees, was charged to operations as
additional compensation. This compensation charged to operations
by reason of the stock sold by the principal shareholders had no
net effect upon shareholders equity as of September 30, 1995 and no
impact upon future operations of the Company.
Research and development expenses increased $55,714, or
approximately 26%. The increase was due to the infusion of new
capital generated by the IPO which enabled the Company expand its
research and development resources to further the implementation
of existing product lines and develop new product lines.
The Company had net other expense of $409,583 for the year
ended September, 30, 1995 as opposed to net other expense of $7,108
for the nine months ended September 30, 1994. The increase in
expense was primarily due to the cash expenses of the Private
Placement Offering, $30,674, and the underlying value of the units
issued, $449,978 (142,850 shares valued at the IPO price of $3.15)
which were charged to expense under the caption "Private Placement
Financing Costs" (See Note 6 to the attached financial statements),
offset somewhat by higher interest income.
In light of the above, the Company experienced a decrease in
the net loss from operations of $168,313 for the year ended
September 30, 1995. Due to the nonrecurring charge of $480,652 for
private placement financing costs incurred during 1995, the net
loss increased $205,530 when compared to the nine months ended
September 30, 1994.
Nine months ended September 30, 1994 compared to year ended
December 31, 1993
For the nine months ended September 30, 1994, the Company had
<PAGE>
net sales of $4,166,807 and a loss before taxes of $1,288,916
compared to net sales of $8,399,612 and a loss before taxes of
$287,661 for the year ended December 31, 1993. The decrease in
sales was related primarily to (a) a reduction in sales of PC
system boards and (b) product development delays in introducing a
new line of digital video products, consisting of Win/TV boards,
which the Company did not begin to ship until May of 1994. Net
sales to international customers aggregating 45% of total net sales
were comprised of sales to customers in the United Kingdom (21%),
Germany (5%), Switzerland (4%), Norway (3%) and all other
international countries (12%). International orders are typically
billed in U.S. dollars, at the same prices as domestic orders.
Therefore, profitability in the domestic market and in the
international market are roughly comparable.
From 1987 and until 1991, the Company concentrated its
business on the development and sale of system boards which are the
"heart" of a PC and which may be used to upgrade older PCs. From
the inception of the Company and until 1987, the Company focused
its business on the development and sale of hardware and software
for math acceleration products for the PC market used to accelerate
scientific and mathematical calculations. The Company stopped
actively marketing these products by 1988. Over the last three
years, the Company has changed the focus of its business by
developing and manufacturing products for the digital video market,
consisting of Win/TV boards. Sales of PC system boards constituted
29% of the Company's revenue for the nine months ended September
30, 1994, 51% of the Company's revenues in 1993, and 85% in 1992.
The Company believes that sales of PC system boards will represent
a smaller percentage of overall revenue in 1995 and beyond. On June
15, 1994 because of the continued sales declines and certain market
developments, including the rapid acceptance of a new generation of
processor chips which adversely affected the salability of products
based on earlier generations, the Company decided to de-emphasize
the marketing of its PC system boards product line in favor of the
newer Win/TV boards and, as a result, recorded a reserve for
inventory obsolescence in the amount of $300,000. Such amount has
been reflected separately in the statement of operations for the
nine months ended September 30, 1994. The Company will continue to
sell its PC system boards to certain customers at amounts in excess
of the recorded net cost of such products. Although the Company is
not emphasizing the sale of this product line, the Company
currently has not set a date as to when it will cease sales of the
PC system boards.
Cost of sales (including provision for obsolescence) for the
nine months ended September 30, 1994 was $3,613,331, or 87%, as
compared to $6,334,278, or 75%, for the year ended December 31,
1993. The increase (as a percentage) over the prior year was
primarily attributable to the 1994 provision for obsolescence as
discussed above, and a higher mix of the Company's newer models of
its Win/TV product line (initially produced at lower profit
margins).
<PAGE>
The Company introduced the Celebrity and HighQ digital video
boards in November of 1993 at the Fall Comdex show in Las Vegas (a
major United States PC show) and originally scheduled these items
for shipment in January of 1994. However, due to product
development delays, the Company was not able to ship the Celebrity
until May 1994 and did not ship the HighQ until July 1994. From
November 1993 until the first shipments in May 1994, many
distributors did not place orders for the Company's earlier models
awaiting the release of the newer models.
Liquidity and Capital Resources
The Company had a net cash position of $1,214,940, working
capital of $1,472,033 and shareholders' equity of $1,675,373 as of
September 30, 1995. On January 10, 1995, the Company completed a
public offering of stock. The net proceeds received from the
offering were $3,267,023. In addition the Company received net
proceeds of $477,304 from a Private Placement Offering consummated
during October 1994, pursuant to which unaffiliated third parties
loaned the Company $600,000 (See Note 6 of the attached financial
statements). For the year ended September 30, 1995, $1,614,407 was
used to fund operating activities, with $2,268,792 invested in
current assets offset by $1,261,747 of operations funded through
accounts payable and accrued expenses. The Company used $71,388 to
acquire capital assets. Funds of $395,000 and $600,000 were
disbursed from the proceeds of the public offering to extinguish
bank and private placement debt.
The Company believes that the proceeds from the public
offering and its internally generated cash flow will be sufficient
to satisfy the Company's anticipated operating needs for at least
the ensuing twelve months.
Item 7. FINANCIAL STATEMENTS.
See Consolidated Financial Statements annexed hereto.
<PAGE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Report of Independent Certified Public Accountants F-2
Report of Independent Public Accountants F-3
Consolidated Balance Sheets as of September 30,
1995 and 1994 F-4
Consolidated Statements of Operations for the
year ended September 30, 1995 and the nine
months ended September 30, 1994 F-5
Consolidated Statements of Shareholders' Equity
(Deficit) for the year ended September 30, 1995
and the nine months ended September 30, 1994 F-6
Consolidated Statements of Cash Flows for the year
ended September 30, 1995 and the nine months
ended September 30, 1994 F-7
Notes to Consolidated Financial Statements F-8 - F-19
F-1
<PAGE>
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of
Hauppauge Digital, Inc. and Subsidiaries
Hauppauge, New York
We have audited the consolidated balance sheet of Hauppauge
Digital, Inc. and Subsidiaries as of September 30, 1995 and
the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended
September 30, 1995. 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 audit.
We conducted our audit 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 presentation of
the financial statements. We believe that our audit provides
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 Hauppauge Digital, Inc. and
Subsidiaries at September 30, 1995 and the results of its
operations and cash flows for the year ended September 30,
1995 in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Mitchel Field, New York
November 20, 1995, except for
Note 10 for which the date is
March 20, 1996
F-2
<PAGE>
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hauppauge Digital, Inc.:
We have audited the accompanying consolidated balance sheet of Hauppauge
Digital, Inc. (a Delaware corporation) and subsidiaries as of September 30,
1994, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the nine months ended September 30, 1994.
These financial statements are the responsibility of the Company's
managements. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hauppauge Digital, Inc. and
subsidiaries as of September 30, 1994, and the results of their operations
and their cash flows for the nine months ended September 30, 1994 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Melville, New York
December 2, 1994 (except with respect
to the matter described in Note 6(b),
as to which the date iS January 10, 1995)
F-3
<PAGE>
<PAGE>
HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
As of As of
September 30, 1995 September 30, 1994
------------------ ------------------
CURRENT ASSETS:
Cash and Cash Equivalents (Note 1) $1,214,940 $151,408
Accounts receivable, net of
allowance for doubtful of accounts
approximately $62,000 in 1995 and
$16,000 in 1994 1,146,865 554,642
Inventories (Note 2) 2,187,981 879,147
Prepaid expenses & other current assets 192,689 38,659
--------- -------
Total current assets 4,472,475 1,623,856
--------- ---------
Property, plant and equipment-
at cost 334,443 305,905
Less: Accumulated depreciation
and amortization 193,188 190,891
--------- ---------
141,255 115,014
--------- ---------
SECURITY DEPOSITS AND OTHER ASSETS 62,085 50,637
--------- ---------
$4,945,815 $1,789,507
========= =========
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short term borrowings-bank loan (Note 4) - $ 395,000
Accounts Payable 2,645,268 1,766,866
Accrued expenses 625,174 241,829
--------- ---------
Total current liabilities 3,270,442 2,403,695
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDERS EQUITY (DEFICIT) (NOTES 6 and 10)
Common stock $.01 par value; 10,000 shares
authorized, 2,756,183 and 1,280,000 issued
and outstanding as of September 30,
1995 and 1994 27,562 12,800
Additional paid-in capital 4,141,343 343,466
Accumulated deficit (2,493,532) (970,454)
--------- --------
1,675,373 (614,188)
--------- --------
$4,945,815 $1,789,507
========= =========
See accompanying notes to consolidated financial statements
F-4
<PAGE>
<PAGE>
HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year For the Year Nine
Ended Months Ended
September 30, 1995 September 30,1994
NET SALES (Note 7) $11,551,169 $4,166,807
COST OF SALES 9,079,245 3,313,331
PROVISION FOR INVENTORY
OBSOLESCENCE (Note 2) 164,511 300,000
---------- ---------
Total cost of sales 9,243,756 3,613,331
---------- ---------
Gross Profit 2,307,413 553,476
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
(Notes 8 and 10) 3,151,020 1,621,110
RESEARCH & DEVELOPMENT EXPENSES 269,888 214,174
--------- ---------
Loss from operations (1,113,495) (1,281,808)
OTHER INCOME (EXPENSE)
Interest income 50,026 4,940
Interest expense (20,233) (34,997)
Private placement financing
costs (Notes 6 and 10) (480,652) -
Miscellaneous income 41,276 22,949
-------- --------
Loss before tax provision (1,523,078) (1,288,916)
INCOME TAX PROVISION (Note 5) - 28,632
--------- ---------
Net Loss (Note 10) $(1,523,078) $(1,317,548)
========== =========
Net loss per share (Note 10) $ (0.64) $ (1.03)
========== =========
Weighted average shares
outstanding (Note 1) 2,382,928 1,280,000
========= =========
See accompanying notes to consolidated financial statements
F-5
<PAGE>
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED SEPTEMBER 30, 1995, AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Retained
Common Stock Additional Earnings
-----------------
Number of Paid in (Accumulated
Shares Amount Capital Deficit) Total
-------- ------- ------- --------- -----
BALANCE AT JANUARY 1,280,000 $12,800 $80,848 $347,094 $440,742
1, 1994
Net loss for the nine
months ended September
30, 1994 - - - (1,317,548) (1,317,548)
Issuance of shares to
the Company's legal
counsel by principal
shareholders (Note 6) - - 94,500 - 94,500
Conversion of shareholders'
loans to equity without
the issuance of common
shares (Note 6) - - 100,000 - 100,000
Rent expense funded by
principal
shareholders (Note 8) - - 68,118 - 68,118
------ ----- ------- -------- --------
BALANCE AT SEPTEMBER,
30, 1994 1,280,000 12,800 343,466 (970,454) (614,188)
Net loss for the year
ended September
30, 1995 - - - (1,523,078) (1,523,078)
Issuance of shares pursuant
to a private placement
offering
(Notes 6 and 10) 142,850 1,429 356,527 - 357,956
Issuance of shares pursuant
to the Company's initial
public offering
(Note 6) 1,333,333 13,333 3,253,690 - 3,267,023
Compensation related
to transfer of
shares (Note 10) - - 187,660 - 187,660
--------- ------ -------- ------ --------
BALANCE AT
SEPTEMBER 30, 1995 2,756,183 $27,562 $4,141,343 $(2,493,532) $1,675,373
========= ======= ========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
For the Year For the Year Nine
Ended Months Ended
September 30, 1995 September 30,1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,523,078) $(1,317,548)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 33,693 21,459
Provision for uncollectible receivables 49,200 15,925
Provision for system board obsolescence 164,511 300,000
Private placement financing costs 480,652 -
Compensation related to transfer of shares 187,660 -
Rent expense funded by principal
shareholders - 68,118
Legal expense incurred in connection with
the issuance of common shares to legal
counsel - 94,500
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable (641,420) 182,347
Inventories (1,473,342) (37,218)
Prepaid expenses and other
current assets (154,030) (11,704)
Accounts payable 878,402 281,934
Accrued expenses 383,345 44,752
---------- -------
(91,329) 960,113
---------- -------
Net cash used in operating activities (1,614,407) (357,435)
---------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property,
plant and equipment (57,749) (4,817)
Purchase of software rights (13,156) -
Security deposits (483) -
------- -------
Net cash used in investing
activities (71,388) (4,817)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private
placement offering 477,304 -
Net proceeds from initial
public offering 3,267,023 -
Principal payment on bank loan (395,000) -
Principal payment on private placement
bridge loan (600,000) -
--------- -------
Net cash provided by
financing activities 2,749,327 -
--------- -------
Net increase (decrease)
in cash and cash equivalents 1,063,532 (362,252)
CASH AND CASH EQUIVALENTS,
beginning of period 151,408 513,660
--------- -------
CASH AND CASH EQUIVALENTS, end of period $1,214,940 $ 151,408
========== =========
SUPPLEMENTAL DISCLOSURES:
Interest paid $46,206 $11,033
========== =========
Income taxes paid $19,322 $ 6,071
========== =========
See accompanying notes to consolidated financial statements
F-7
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Hauppauge
Digital, Inc. and its two wholly owned subsidiaries, Hauppauge Computer
Works, Inc. and HCW Distributing Corp., as well as Hauppauge Computer Works,
GMBH and Hauppauge Computer Works, Ltd., both wholly owned subsidiaries of
Hauppauge Computer Works, Inc. (collectively, the "Company"). All
intercompany accounts and transactions have been eliminated.
Change in Fiscal Year
Effective September 30, 1994, the Company changed its fiscal year end
from December 31 to September 30. The comparative financial information for
September 30, 1994, presented on the consolidated balance sheet, statements
of operations, shareholders' equity (deficit) and cash flows are for the nine
months ended September 30, 1994. Comparative condensed income statement data
for the year ended September 30, 1995 compared to the unaudited results for
the year ended September 30, 1994 is presented below:
Years Ended September 30,
1995 1994
(Unaudited)
Net Sales..................... $ 11,551,169 $ 6,458,498
Gross Profit.................. $ 2,307,413 $ 1,134,517
Net operating loss............ $ ( 925,835) $(1,309,241)
Loss before tax provision..... $ (1,427,440) $(1,305,531)
Net (Loss).................... $ (1,427,440) $(1,334,909)
Nature of Business
The Company is primarily engaged in the design, manufacture and selling
of Win/TV digital video computer boards. Win/TV boards convert moving video
images from cable TV, video cameras or a VCR to a digital format which is
displayed in a sizable window on a PC monitor. These video images can be
viewed simultaneously with normal PC operations such as word processing
programs and spreadsheet applications. The Win/TV board is marketed worldwide
through distributors, original equipment manufacturers and manufacturers'
representatives. Net sales to international and domestic customers were
approximately 70% and 30%, respectively, of total sales for the year ended
September 30, 1995, and 45% and 55%, respectively, of total sales for the
nine months ended September 30, 1994. Although the Company believes it
operates in one industry segment, it does not believe that it has a material
F-8
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of business-continued
concentration of credit risk either from an individual counterparty or a
group of counterparties, due to the large and diverse user group for its
products. Substantially all of the Company's assets are located in the United
States.
Net sales to international customers consist of:
Year ended Nine months ended
Sales to: September 30, 1995 September 30, 1994
- --------- ------------------ ------------------
United Kingdom 22% 21%
Germany 20% 5%
The Netherlands 5% -
Other countries 23% 19%
--- ---
70% 45%
=== ===
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity date
of three months or less to be cash equivalents.
Revenue Recognition
The Company records revenue when its products are shipped.
Warranty Policy
The Company warrants that its products are free from defects in material
and workmanship for a period of one year from the date of initial retail
purchase. The warranty does not cover any losses or damage that occur as a
result of improper installation, misuse or neglect and repair or modification
by anyone other than the Company or an authorized repair agent. The Company
accrues anticipated warranty costs based upon historical percentages of items
returned for repair within one year of the initial sale.
Inventories
Inventories are valued at the lower of cost (principally average cost)
or market. A reserve has been provided to reduce obsolete and/or excess
inventory to its net realizable value.
F-9
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Depreciation of machinery and equipment and amortization of leasehold
improvements is provided for using both accelerated and straight line methods
over the estimated useful lives of the related assets as follows:
Office Equipment and Machinery: 5 to 7 years
Leasehold improvements: Asset life or lease term,
whichever is shorter
Income Taxes
For the fiscal year ended September 30, 1994, the Company filed separate
corporate income tax returns for Hauppauge Digital, Inc., Hauppauge Computer
Works, Inc. and HCW Distributing Corp.. During 1995, Hauppauge Computer
Works, Inc. and HCW Distributing Corp. filed an election, which was approved
by the state and federal tax authorities, to change their tax reporting year
to September 30. Effective for the year ended September 30, 1995, the Company
will file a consolidated income tax return.
The Company follows the liability method of accounting for income taxes
as prescribed by Statement No. 109 of the Financial Accounting Standards
Board ("FAS 109"). Under FAS 109, deferred income taxes are recorded to
reflect the temporary differences in the tax bases of the assets or
liabilities and their reported amounts in the financial statements. The
Company has not recorded a deferred tax asset or liability for state and
local tax purposes due to the immaterial effect on the financial statements.
Foreign Currency Transactions
The Company sells products and services to foreign customers. Revenues
and expenses are recorded in U.S. dollars at the current exchange rate at the
time of the transaction. Gains and losses due to the changes in exchange rate
are recorded in the statement of operations.
Net Loss per Share
Net loss per share has been computed on the basis of weighted average
number of common shares outstanding for each period presented. Included in
the 1995 year end computation were 142,850 and 1,333,333 shares issued
through a private placement offering and an IPO (See Note 6).
F-10
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Loss per Share-continued
Weighted average shares outstanding for the year ended September 30,
1995 were 2,382,928. Weighted average shares for the nine months ended
September 30, 1994 were 1,280,000.
The effect of including warrants as common stock equivalents results in
a reduction of the loss per share. Therefore, the warrants are not included
as a component of the weighted average shares outstanding.
2. INVENTORIES
Inventories consist of the following:
September 30,
1995 1994
---- ----
Component Parts $ 738,846 $444,640
Work in Process 974,706 316,739
Finished Goods 474,429 117,768
------- -------
$2,187,981 $879,147
========= =======
During June of 1994, the Company's management observed that the System
Board product line sales volume had declined at a much faster pace than
expected, to a point where it appeared likely that the Company would have to
offer such items at significant discounts to the public, and therefore it
would not fully recover its original investment in such inventory. On June
15, 1994 because of the continued sales declines and certain market
developments, the Company decided to de-emphasize the marketing of its PC
system boards product line in favor of the newer Win/TV boards and, as a
result, recorded a reserve for inventory obsolescence in the amount of
$300,000. Such amount has been reflected separately in the statement of
operations for the year ended September 30, 1995 and the nine months ended
September 30, 1994. A reserve of approximately $165,000 was charged to
operations for 1995.
3. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment at cost less
accumulated depreciation:
1995 1994
---- ----
Office Equipment and Machinery $308,787 $280,972
Leasehold Improvements 25,656 24,933
------ ------
334,443 305,905
Less: Accumulated depreciation 193,188 190,891
------- -------
Total $141,255 $115,014
======= =======
F-11
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SHORT TERM BORROWINGS - BANK LOAN
The Company had a $500,000 line of credit from Shawmut Bank from August
15, 1991 to September 30, 1992. The terms of the credit line provided for
monthly interest payments on the outstanding balance at 1/2% above the bank's
prime interest rate and a 1/2% per annum fee on the unused portion of the
line. The line was secured by the Company's accounts receivable and the
personal guarantees of the principal shareholders, who are also the founders
and principal executive officers of the Company. The line matured on
September 30, 1992 and was not renewed. At September 30, 1994, the
outstanding balance was $395,000 and the line was considered a matured
facility by the bank. Although the Company had defaulted on certain financial
covenants, Shawmut agreed not to call the loan provided that the Company pay
Shawmut 1) $50,000 from the proceeds of the private placement described in
Note 6, and 2) pay the remaining principal plus any accumulated interest,
fees and costs in full by January 31, 1995 from the proceeds of the IPO.
The Company, from the proceeds of the private placement, made a payment
of $50,000 in October 1994. The Company also made a payment of $12,000 in
December 1994. On January 19, 1995, the Company paid $362,631 to Shawmut
from the proceeds of the IPO. Subsequent to the payment, Shawmut notified
the Company that additional legal fees and costs were due, and the payment
was first applied to these remaining amounts, resulting in unpaid principal
to Shawmut of approximately $28,900. On September 29, 1995, the Company paid
$17,500 to Shawmut in settlement of the disputed outstanding balance.
5. INCOME TAXES
The income tax provision consists of the following:
September 30,
1995 1994
---- ----
Federal income tax provision $ - $ -
Tax settlement-Federal - 17,000
State income tax provision 4,420 8,732
Tax settlement-State - 2,900
Tax benefit-overstated liability (4,420) -
------ -----
$ - $ 28,632
------ -------
During 1994, the Long Island Appeals office of the Internal Revenue
Service proposed a settlement in the amount of $17,000 plus interest, related
to income tax deficiencies in connection with the Company's tax filings for
its years ended December 31, 1988 to 1990. The Company, in recognition of
F-12
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes-continued
this proposal, recorded in 1994 an income tax provision of $19,900 and a
charge to interest expense of $13,100. In 1995 the Company accepted the
proposal and paid $17,000 in taxes and $13,207 in interest to the Internal
Revenue Service.
Components of deferred taxes are as follows:
September 30,
1995 1994
Deferred tax assets: ---- ----
Net operating loss carryforwards $574,945 $361,085
Inventory obsolescence reserve 157,930 102,000
Warranty reserve 20,400 -
Allowance for doubtful accounts 16,728 -
------- -------
Total deferred tax assets 770,003 463,085
Valuation allowance (770,003) (463,085)
-------- -------
Net deferred tax assets $ - $ -
-------- -------
The Company has recorded a full valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized. The change in
valuation allowance for the year ended September 30, 1995 and 1994 is as
follows:
1995 1994
Balance at the beginning of the year $463,085 $ 76,068
Increase in non utilization of net
operating loss carryforwards 213,860 285,017
Increase in reserve for inventory
obsolescence 55,930 102,000
Increase in warranty reserve 20,400 -
Increase in allowance for doubtful accounts 16,728 -
------ ------
Balance at the end of the year $770,003 $463,085
======= =======
As of September 30, 1995, the Company had net operating losses, (which
expire in the years through 2010), of $1,690,228 available to offset future
taxable income. Due to the change in control which resulted from the
Company's January 10, 1995 initial public offering of stock, (Note 6),
$1,344,228 of the net operating losses are subject to limitations per
Internal Revenue code section 382. The Company's carryforward utilization of
these restricted net operating losses is limited to $275,386 per year. Net
operating losses of $346,000, which occurred after January 10, 1995, are
unrestricted and can be utilized without limitation.
F-13
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes-continued
The difference between the actual income tax provision (benefit) and the
tax provision computed by applying the Federal statutory income tax rate to
the loss before income tax is attributable to the following:
September 30,
1995 1994
Income tax (benefit) at 34% $(485,330) $(438,231)
Loss producing no tax benefit 485,330 438,231
tate income taxes 4,420 8,732
IRS settlement - 19,900
Tax benefit-overstated liability (4,420) -
------- -------
Income tax provision $ - $ 28,632
======= =======
6. SHAREHOLDERS' EQUITY
a. Private Placement
Through a private placement offering consummated on October 12, 1994,
for gross proceeds of $600,000, the Company issued $600,000 in principal
amount of 5%, $25,000 promissory notes and such number of units comprised of
the Company's common stock and Class A redeemable common stock purchase
warrants as shall equal $18,750 divided by the IPO unit price of $3.15. The
resulting 142,850 units of common stock is determined by dividing $18,750 by
the offering price of $3.15 per unit and multiplying that result by 24
private placement units ($600,000 divided by $25,000 per unit), rounded to
exclude fractional shares. These units were issued in conjunction with the
IPO, effective January 10, 1995 (Note 6, Initial Public Offering-IPO). The
promissory notes were subject to mandatory prepayment from the proceeds of
any public or other private offering of the Company's debt or equity
securities. On January 17, 1995, the $600,000 plus accrued interest of $7,910
was repaid. All the units issued to the former noteholders have been
registered with the Securities and Exchange Commission concurrently with the
IPO.
A summary of the application of the net proceeds (approximately $477,000) is
listed below:
Payment of loan to Shawmut Bank $ 50,000
Partial expenses of IPO 122,000
Purchase of inventory, reduction
of trade payables and general
working capital purposes 305,000
-------
$477,000
=======
F-14
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a. Private Placement-continued
Based on certain factors such as: 1) the nature of the borrowing, 2) the
Company's financial position and 3) the economic environment, the 5% interest
rate on the promissory notes did not reflect the effective financing costs
when considering the value of the units of common stock and warrants issued.
Accordingly, $449,978 (the value of 142,850 units at the IPO price of $3.15)
has been charged to operations under the caption "Private Placement Financing
Costs" in the year ended September 30, 1995. Additionally, $122,696 of fees
and costs relating to the private placement were charged to operations within
the same caption in the year ended September 30, 1995.
b. Initial Public Offering (IPO)
Effective January 10, 1995 the Company completed an IPO of securities.
The Company sold 1,333,333 units at $3.15 per unit. Each unit consisted of
one share of $.01 par value common stock and one Class A redeemable stock
purchase warrant. Each Class A warrant entitles the holder to purchase one
share of common stock at an exercise price of $3.75 per share, subject to
adjustments for anti-dilution provisions in certain circumstances, for a
four-year period commencing one year after the January 10, 1995 effective
date and expiring January 9, 2000. The warrants are redeemable by the
Company, in whole or in part at a price of $.10 per warrant, commencing one
year after the effective date (or sooner with the consent of the
Underwriter), in accordance with a Warrant Agreement between the Company, its
Warrant Agent and the Underwriter. For the period of 180 days after the date
of the Prospectus (January 10, 1995), which period could have been terminated
sooner with the sole consent of the Underwriter, the warrants were neither
detachable, separately tradeable nor transferable from the common stock with
which they were issued. On April 20, 1995 the Underwriter consented to
accelerate the separation date. The Company's units were split into Common
Stock and Class A Warrants. The Common Stock and Class A Warrants began
trading separately on April 25, 1995.
As part of the offering, the Company sold to the Underwriter, for a
nominal fee of $10, the Underwriter's Unit Purchase Option, which entitles
the Underwriter to purchase 133,333 units at an exercise price of $4.41 (140%
of the offering price) for a period of four years, commencing one year after
the January 10, 1995 effective date. The units are identical to those offered
to the public.
F-15
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
b. Initial Public Offering (IPO)-continued
The Company and the Underwriter have entered into a two year Consulting
Agreement. The Consulting Agreement obligates the Company to pay the
Underwriter a fee of $72,000, of which $36,000 was paid upon the closing of
the offering, and $3,000 per month for the twelve month period subsequent to
the closing.
The net proceeds received by the Company after deducting Underwriter
discounts and commissions plus expenses of the IPO were $3,267,023.
c. Incentive Stock Option Plan
In August 1994, the Company adopted an Incentive Stock Option Plan
("ISO"), as defined in section 422(A) of the Internal Revenue Code, as
amended, reserving 200,000 shares of common stock for issuance under the ISO.
Pursuant to the ISO, options may be granted for up to ten years with exercise
prices during the first two years subsequent to the IPO being the greater of
the IPO offering price per unit ($3.15) or the fair market value of the
common stock at the date of the grant. After the initial two year period, the
option price shall be no less than the fair market value of the stock on the
date the options are granted. To date, no options have been granted under the
ISO.
d. Conversion of Shareholders Loans Payable to Shareholders' Equity
During 1994, the founders of the Company converted $100,000 of loans
payable to them into additional paid in capital, without the issuance of
additional stock.
e. Issuance of Common Stock to Company's Legal Counsel
In August 1994, the founders of the Company transferred 30,000 shares of
common stock to the Company's legal counsel, or their designees, for no cash
consideration. The Company valued the stock at the IPO offering price and
recorded legal expense and additional paid in capital of $94,500 for the nine
months ended September 30, 1994.
f. Change in Company Ownership
On August 2, 1994, prior to the IPO, Hauppauge Digital, Inc., a Delaware
Corporation, was incorporated with 10,000,000 authorized common shares, $.01
par value and became the parent of two wholly owned subsidiaries - Hauppauge
Computer Works, Inc. and HCW Distributing Corp.. The Company's executive
offices and operations remained at its Hauppauge, New York location. The two
existing
F-16
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
f. Change in Company Ownership-continued
shareholders at the time, who were also the founders of the Company,
exchanged all of the issued and outstanding shares of Hauppauge Computer
Works, Inc. and HCW Distributing Corp. for 1,280,000 shares of Hauppauge
Digital, Inc. common stock, which on August 2, 1994 represented all of the
outstanding shares of Hauppauge Digital, Inc..
7. SIGNIFICANT CUSTOMER INFORMATION
Significant customers for the year ended September 30, 1995 and the nine
months ended September 30, 1994 are as follows:
Percentage of Net Sales
September 30,
1995 1994
Reuters 17% 18%
Satellite Transmissions 1% 11%
ESCOM 8% -
8. RELATED PARTY TRANSACTIONS
The Company, on February 1, 1990, entered into a long term lease
agreement for a building containing office and warehouse space located in
Hauppauge, New York. The building is owned through a real state partnership
by the two founders of the Company, who currently hold the positions of Chief
Executive Officer and President. The indebtedness incurred by the owners to
purchase the building is guaranteed by the Company. As of September 30, 1995
and 1994, the outstanding mortgage balance was $1,260,543 and $1,330,375,
respectively. The lease expires on January 31, 2009 and provides for rent
increases of 5% per year. Annual lease payments are as follows:
Year ended September 30,
1996 $ 306,627
1997 321,958
1998 338,056
1999 354,959
2000 372,706
Thereafter 3,923,480
---------
$5,617,786
=========
F-17
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Related Party Transactions-continued
Rent expense totaled approximately $292,025 and $211,954 for the twelve
months and nine months ended September 30, 1995 and 1994, respectively.
During 1994, the Company received $68,118 in rent concessions. This amount
was charged to rent expense and as a contribution to additional paid in
capital. The Company pays the real estate taxes and is responsible for normal
building maintenance.
9. CONTINGENCIES
a. Litigation
In the normal course of business, the Company is a party to various
claims and/or litigation. Management and the Company's legal counsel believe
that the settlement of all such claims and or/litigation, considered in the
aggregate, will not have a material adverse effect on the Company's financial
position and results of operations.
b. Employment Contracts
On January 10, 1995, the effective date of the IPO, the Company's
president and chief executive officer entered into a three year employment
agreement with the Company. The agreements each provide for an annual salary
of $60,000 during the first year, $80,000 during the second year and $100,000
during the third year. The agreements also provide for a reasonable auto
allowance, term life insurance, medical insurance and certain other benefits
as is standard for employees of the Company. In addition, the president and
chief executive officer were granted an option to purchase 150,000 shares of
the Company's common stock. Such options are exercisable for ten years at
$3.15 per share, (which was the IPO price), only after the Company attains
certain specified pre tax income levels.
10. RESTATEMENT
On March 20, 1996, the Company reexamined the recording of two fiscal
1995 transactions in order to more appropriately reflect certain components
of its fiscal 1995 statement of operations.
a. With respect to the private placement described in Note 6(a), 75
percent of the proceeds were attributable to additional paid in capital in
conjunction with the stock issued. However, the Company charged all of the
costs and fees associated with this placement to other expenses and has
accordingly reclassed 75% of such expenses, or $92,022, to additional paid in
F-18
<PAGE>
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restatement-continued
capital. This reclassification has resulted in the reduction of previously
reported private placement costs from $572,674 to $480,652.
b. Additionally, in July 1995, the Company's founders and principal
shareholders sold 89,040 shares of their common stock to several key
employees for $0.03 per share. The shares sold were issued and outstanding
but were non registered and subject to restrictions regarding public sale.
The conclusion of the Company was, that even though the shares sold to the
employees did not increase shares outstanding, cause no additional dilution,
have restrictions that prohibit their current marketability and did not
impact the financial condition of the Company, the Company should have
charged to operations for fiscal 1995 additional compensation expense. After
giving consideration to the market price of $2.125 at the date of transfer
less the consideration paid, $186,539 was charged to compensation expense
for fiscal 1995, with a corresponding credit to additional paid in capital.
The principal shareholders also sold an additional 10,700 shares to other
key employees. These shares were similar in nature to the other 89,040
shares, with the exception of a ratable vesting provision based on future
employment over the next five years. The amortized portion charged to
compensation for fiscal 1995 was $1,121. The effects of these two
compensation adjustments resulted in fiscal 1995 selling, general and
administrative expenses and loss from operations increasing to $3,151,020 and
($1,113,495) from the previously reported results of $2,963,360 and
($925,835) respectively.
As a result of the adjustments, the Company's previously reported fiscal
1995 net loss of ($1,427,440) and ($0.60) per share have been restated to
($1,523,078) and $(0.64), respectively. The adjustments have no net effect on
the Company's shareholders equity as of September 30, 1995.
F-19
<PAGE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly endorsed.
HAUPPAUGE DIGITAL INC.
By: /s/ Gerald Tucciarone Date: March 29, 1996
-----------------
GERALD TUCCIARONE
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> SEP-30-1995 SEP-30-1994
<PERIOD-END> SEP-30-1995 SEP-30-1994
<CASH> 1,214,940 151,508
<SECURITIES> 0 0
<RECEIVABLES> 1,146,865 554,642
<ALLOWANCES> 62,000 16,000
<INVENTORY> 2,187,981 879,147
<CURRENT-ASSETS> 4,752,475 1,623,856
<PP&E> 334,443 305,905
<DEPRECIATION> 193,188 190,891
<TOTAL-ASSETS> 4,945,815 1,789,507
<CURRENT-LIABILITIES> 3,270,442 2,403,695
<BONDS> 0 0
<COMMON> 27,562 12,800
0 0
0 0
<OTHER-SE> 1,647,811 (626,988)
<TOTAL-LIABILITY-AND-EQUITY> 4,945,315 1,789,507
<SALES> 11,551,169 4,166,807
<TOTAL-REVENUES> 11,551,169 4,166,807
<CGS> 9,243,756 3,613,331
<TOTAL-COSTS> 3,420,908 1,835,284
<OTHER-EXPENSES> (409,583) (7,108)
<LOSS-PROVISION> 49,200 16,658
<INTEREST-EXPENSE> 20,233 34,997
<INCOME-PRETAX> (1,523,078) 1,288,916
<INCOME-TAX> 0 28,632
<INCOME-CONTINUING> (1,523,078) (1,312,548)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,523,078) (1,317,548)
<EPS-PRIMARY> (0.64) (1.03)
<EPS-DILUTED> (0.64) (1.03)
</TABLE>
