<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended September 30, 1996
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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
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HAUPPAUGE DIGITAL, INC.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 434-1600
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Securities registered pursuant to Section 12 (b) of the Act:
$.01 par value Common Stock
Securities registered pursuant to Section 12 (g) of the Act:
$.01 par value Common Stock
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]
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State registrant's revenues for its most recent fiscal year: $14,695,100
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 4, 1996 was approximately $15,035,000.
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 December 4, 1996 which was $4 5/8
per share as reported by NASDAQ.
As of December 4, 1996, the number of shares outstanding of the Common Stock
was 4,444,102 shares (exclusive of treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Part III which includes Item 9 (Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the Exchange Act), Item 10
(Executive Compensation), Item 11 (Security Ownership of Certain Beneficial
Owners and Management), and Item 12 (Certain Relationships and Related
Transactions) will be incorporated in the Company's Proxy Statement to be
filed within 120 days of September 30, 1996 and are incorporated herein by
reference.
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PART I
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Item 1. DESCRIPTION OF BUSINESS
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(a) Business Development.
Hauppauge Digital, Inc. (the "Company") was incorporated in the state of
Delaware on August 2, 1994 and has two wholly owned subsidiaries, Hauppauge
Computer Works, Inc., which was incorporated in the state of New York on
December 14, 1982, and HCW Distributing Corp., which was incorporated in the
state of New York on September 13, 1984. Hauppauge Computer Works, Inc. is
the owner of all the outstanding shares of Hauppauge Computer Works, GmbH, a
German corporation responsible for directing European marketing efforts, and
is the owner of all the outstanding shares of Hauppauge Computer Works, LTD,
a Virgin Islands corporation responsible for handling sales outside of the
United States. All references herein to the Company include the Company, its
two wholly owned subsidiaries and their subsidiaries. The Company's executive
offices are located at 91 Cabot Court, Hauppauge, New York 11788, its
telephone number at that address is (516) 434-1600 and its internet address
is http://www.hauppauge.com/hcw/index.htm.
From 1987 and until 1991, the Company concentrated its business on the
development and sale of system boards which are the "heart" of a personal
computer ("PC") and which may be used to upgrade older PCs. Since 1992, the
Company has changed the focus of its business and is presently engaged
primarily in the business of designing, manufacturing and selling digital
video products for the IBM and IBM compatible PC market, consisting of Win/TV
and WinCast boards. Win/TV boards are used to convert moving video images from
a video camera, video tape recorder or cable TV to a digital format which is
displayed in a resizable window on a PC video monitor. These video images may
be viewed simultaneously with normal PC operations such as word processing
and may also be used in conjunction with CD-ROM packages. WinCast boards add
the capability of receiving Intercast(TM) data transmissions.
The Company has entered the PC-based digital video market by
distributing the Win/TV boards to computer retailers and Original Equipment
Manufacturers ("OEMs"). Computer retailers typically stock Win/TV boards on
their shelves and sell them to end users for installation in their own PCs,
while OEMs typically purchase Win/TV boards and incorporate them in
multimedia PC packages, which are then ultimately sold to the end user. Since
the close of fiscal year 1995, the Company has added five new products to its
line of WIN/TV board products, bringing the total number of products
available for sale to ten.
Net sales of the Company's products for the Company's last two fiscal
years are summarized as follows:
Year Ended Year Ended
September 30, 1996 September 30, 1995
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PC System Sales $ 1,421,359 $ 792,857
Win/TV Boards 13,273,741 10,758,312
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Total Company Sales $ 14,695,100 $ 11,551,169
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(b) Business of Issuer.
Products
The Win/TV board was designed so that a PC user can watch television in
a resizable window on their PC video monitor during normal computer use. This
activity requires a board that plugs into a PC, and operating software to
control functions such as channel change, volume adjustment, freeze frame,
and channel scan. The application of the Win/TV board does not interfere with
the normal operation of the PC. All hardware functions required, such as
video digitizing, windowing, color space conversion and chroma keying, are
performed on the Win/TV board and do not affect the operation of the PC. The
Win/TV board includes audio functions so that sound can be heard while
watching TV or video. The audio can be connected to speakers or to a PCs
sound card.
All Win/TV board models come with software that runs under the popular
Microsoft(R) Windows(TM) operating system, including Windows(TM) 95, that
allows the TV picture to be resized from a tiny window size all the way to full
screen, all under the control of the mouse.
The Company presently has 10 models of the Win/TV board. It is the
Company's strategy to provide a wide range of Win/TV boards for the PC
market. With a Win/TV board installed in a PC, a user sees live video within
a window on the PC video monitor without interfering with the normal
operation of the computer. The user can resize this video image, making it
small so that it will take up less space on the video monitor, or the user
can enlarge the image to full screen if the user wants to see bigger image
detail. The video images can be viewed simultaneously with normal PC
operations such as word processing programs and spread sheet applications.
A stockbroker who is working on a PC and watching CNBC might keep the image
small on the PC video monitor while receiving stock quotations, and then with
one click, the user can enlarge the video image to full screen size.
The Win/TV-Celebrity ("Celebrity") board is primarily sold through
computer retailers and distributors. This model uses a proprietary Company
designed technology called "SmartLock". This feature has made the Celebrity
popular for use in PCs that are already installed in the office or home. The
SmartLock feature on the Celebrity allows the Win/TV board to be used in all
existing PCs. Previously, when digital video products were sold through the
computer retail market, there were installation problems which were due to
the way in which the digital video boards were connected to the PC. SmartLock
eliminates such problems and has been a key selling feature, intended to
reduce sales returns and the need for additional technical support.
The Win/TV-CinemaPro board ("CinemaPro") is a new product with similar
capabilities to the Celebrity but with a lower manufacturing cost. The
CinemaPro is expected to substantially replace the Celebrity for shipments in
1997.
The Win/TV-HighQ ("HighQ") board was designed for users who need higher
quality digitizing of video images for use in a PC. Uses include medical
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imaging, such as the creation of medical databases of images captured from
microscopes; industrial imaging, such as parts inspection; and desktop
publishing. The HighQ supports a scheme called "square pixel" digitizing,
where the horizontal and vertical aspects of the digitized image are kept to
exactly a 1:1 ratio, an important feature for medical and industrial
applications. The HighQ is the only model that does not include a cable ready
television tuner, but it does use the SmartLock feature.
The Win/TV Prism board ("Prism") is a low cost video board that combines
many of the features of the Company's higher-end boards. The Prism is cable
and TV antenna ready and comes equipped with an automatic 122 channel scan.
The Prism can be connected to sound cards, VCR's and video cameras. The
Prism does not use the SmartLock feature used in the Company's higher-end
boards and requires an active feature connector on an SVGA card.
The Win/Motion 60 board ("Win/Motion") digitizes full frame live video
from a video camera or VCR and stores it to the hard disk so that it can be
digitally edited on a PC. The Win/Motion uses Motion-JPEG compression
technology which increases performance and reduces the storage space required
for digital video clips. The compression technology allows the board to
capture 60 fields per second, resulting in more accurate frame-by-frame video
editing and more realistic video playback. The Win/Motion can also play back
full screen video clips from a hard disk, which can be recorded on tape or
displayed on a video monitor. The Win/Motion was designed for corporate
marketing communication departments, training video developers, trade show
demonstration creators, video hobbyists, CD-ROM title producers and creators
of corporate product literature on CD-ROM.
The following five products have been introduced since the close of the
1995 fiscal year.
The Win/TV-Spectrum board ("Spectrum") is a digital video overlay and TV
tuner board. The Spectrum can receive video from cable TV or an external
video source such as a video camera, digitizes and scales the live video
image, and pushes the digitized video image into the memory of a Cirrus Logic
based VGA subsystem. The Spectrum software can capture and save individual
video images to disk. The Spectrum also features channel surfing and image
capture, and a remote that controls TV functions.
The WinCast/TV board ("WinCast") is a single slot PC board which enables
the user to bring TV and Intercast(TM) Web pages to their PC, using Intel's
Intercast(TM) Viewer to display Intercast(TM) Web pages in a window alongside
the live TV window. The WinCast also has a 125 channel cable ready TV tuner with
automatic channel scan and a video digitizer. The video digitizer allows the
user to capture still and motion video images to a hard disk, creating high
impact presentations. In addition to the standard model, the WinCast/TV dbx
model offers high quality dbx-TV for awesome stereo sound.
The Win/TV pci board is a single slot PC board equipped with Pal-I
or Pal-B/G tuners and teletext capabilities for the English and European
market. The board has features similar to the WinCast/TV board. Since
European broadcasters do not transmit Intercast(TM) information, the
pci board does not need to have Intercast(TM) capabilities.
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The Video Magic board provides many high quality features for editing
videos on the user's PC. Video Magic can capture full motion video images at
up to 30 frames per second. Combined with the Media Studio Video editor,
the user can add titles, special effects, multiple video and audio overlays,
two and three dimensional effects plus fades and blends. The Video Magic
board can be used to create sales presentations, make video training tapes
and to add flare to home videos.
The Hauppauge Impact Video Conferencing Board (ImpactVCB) is a low cost
PC bus card for high performance access to the digitized video. Designed for
video conferencing and industrial applications requiring video, the ImpactVCB
features live video in a window, still image capture and an AVI capture
driver.
The Win/TV boards which are for sale to the computer retail market are
essentially the same as the ones which are for sale to the OEM market. The
differences are in the packaging and in the sophistication of the operating
software. The Company believes that the WinCast and CinemaPro are currently
the digital video board of choice for the computer retail market and the
WinCast and VCB boards are the choice of the OEM market. The Celebrity and
CinemaPro models accounted for approximately 57% of the Company's net sales for
its 1996 fiscal year.
For the international market, the Company has developed an option for
the Win/TV board called a teletext decoder. This device allows the reception
of digital text which is transmitted along with live television. Though
relatively unknown here in the United States, internationally, teletext is
standard on all European TV sets. The types of teletext data transmitted by
TV stations include weather information, travel schedules, stock market data
and home shopping services.
Until 1988, the Company actively marketed system boards which are the
"heart" of a PC and which could be used to upgrade older PCs. The Company
still designs and assembles custom made PCs. This line of business in not
emphasized and is not sold in the retail market. However, the Company does
specific designs to meet particular customer requirements. The Company
purchases all of the hardware and software, assembles the machine and
installs the software. These products are popular with companies that
require specific configurations not available through off-the-shelf
wholesalers or retailers.
Product Production
The Company designs the Win/TV boards and also writes the operating
software of the Win/TV boards to be used in conjunction with the popular
Microsoft(R) Windows(TM) operating system, the WindowsNT operating system and
the IBM OS/2 operating system. The Company subcontracts the manufacturing and
assembly of the Win/TV boards to independent third parties. The Company then
tests the completed product at its facility in Hauppauge, New York before
shipping to customers to ensure the quality of its products.
The Company is dependent upon AuraVision Corporation ("AuraVision") for
its supply of digital video processing chips, which are necessary for the
production of the Celebrity and CinemaPro models of the Win/TV digital video
board. The Company is not aware of an alternate source of supply for the
digital video processing chips manufactured by AuraVision. In the event that
the Company were unable to obtain its supply of digital video processing
chips from AuraVision, the Company might not be able to produce its Celebrity
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and CinemaPro model Win/TV boards and its business may be adversely affected. No
assurance can be given that the Company will continue to be able to retain
such source or obtain products from another source. The Company is also
dependent upon Philips, a division of North American Philips Company and
Brooktree Corporation,a division of Rockwell Semiconductors Systems, Inc.,
manufacturers of video digitizers, which are also necessary for the production
of various models of the Win/TV digital video board. If the foregoing suppliers
do not supply their products to the Company, the business of the Company might
be adversely affected because the Company would have to seek alternative
suppliers of video digitizers which may result in additional costs and delays
and therefore adversely affect the Company's production and profitability.
See Item 6 Management's Discussion and Analysis - Risks and Forward Looking
Statements.
Digital Video Market
The digital video market, as it pertains to the Win/TV board, involves
the use of a PC to turn a video image into a digital form which can be stored
on a PC's hard disk drive. Once a video image is on the PC's hard disk drive,
the image can be merged into a document using various word processing systems
such as WordPerfect(R) or Microsoft(R) Word(R). A sequence of video images
that are digitized are stored in a form called "AVI", which has digital audio
and video interleaved to create a digital movie. This digital movie can be
edited on the PC, adding special effects, audio overdubs and titles. These
digital movies are used in multimedia presentations and multimedia CD-ROMs.
The digital video sequences can also be transmitted to another location over
the highspeed communication lines, which allows for video conferencing.
Typical Win/TV board owners might include business persons who need to
keep in touch with news while working on a PC. Other owners might include
business users who want to merge video images into a document, watch
financial television news programs while working on personal computers, or
video conference with PC users in other locations.
End users may use the Win/TV board for the entertainment value of being
able to watch television on their PC and to capture video images for use with
"paintbrush" software. Other home uses might include the ability to edit
video tapes on a home PC and to have video conferencing in the home. Another
popular use of the Win/TV board may be for multimedia development. The Win/TV
board digitizes live video and allows this video to be stored on the PC hard
disk drive. The stored video can be used to create presentations that combine
the digitized video with text, create multimedia CD-ROM packages, and
digitally edit video tapes.
During July, 1996, a new broadcast technology called Intercast(TM) was
introduced during the 1996 Summer Olympics in Atlanta. Intercast(TM) Web
pages are broadcast in a portion of the TV signal called the Vertical Blanking
Interval. Intercast(TM) Web pages add a new dimension to TV shows by
allowing TV producers to add real time information to their broadcasts. These
pages are standard Internet Web pages, but are sent with TV signals over the
airways instead of being sent over the telephone lines. In addition to Web
pages specific to the show being broadcast, broadcasters can use the
Intercast(TM) medium to add other types of information to their TV
transmissions, such as real time stock market information along with their
Web pages. Intercast(TM) information broadcast by TV show producers is designed
to increase viewing pleasure by providing viewers with textual information
which coincides with broadcasted video images.
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Industrial uses of the Win/TV board might include, among other things,
medical applications (eye surgery, microscope imaging and hearing aid
fitting), image recognition applications (automobile license plate
identification, parts inspection), i.d. badges and driver's licenses. In
addition, the Win/TV board may be utilized by real estate brokerage firms to
merge digital pictures of real estate into faxes. The uses of digital video
represents recent technology that is becoming widely applied in PCs. The
Company believes that there is a trend toward replacing projects currently
done in text on PCs into projects that include full motion video or still
video pictures. For example, a real estate broker today might, on a desktop
PC, create a fax describing a property for sale. Equipped with the Win/TV
board, the broker could include a picture of the property in the fax. The
Win/TV board would be used to digitize a video image coming from a camcorder,
and this image could be included in the fax generated on the desktop PC.
Sales people who currently create written proposals may create proposals
that are played on portable computers that include digital videos to describe
processes or procedures, making their proposals more effective. The Win/TV
board can be used to both digitize the raw video from a camcorder and to play
back the digital video from the PC hard disk drive.
Distribution to the Retail Market
During fiscal 1996, net sales to the retail market through distributors
from the Company totaled approximately $9,633,000 or 66% of the Company's net
sales. This is in comparison to net sales of approximately $7,785,000 or 67%
for the year ended September 30, 1995. The Company has no exclusive
distributor and sells through a multitude of distributors, no one of which
accounted for more than 10% of the Company's net sales. These distributors
sell to a variety of retailers who sell personal computer products.
Original Equipment Manufacturers ("OEMs")
The OEM business is one where a PC manufacturer adds the Win/TV board
and its operating software to create a new model PC. Most of the activity by
the Company to date regarding OEMs has been to create new model multimedia
PCs and video conferencing products. Until recently, multimedia equipped PCs
had a sound card and a CD-ROM. The new products currently being designed by
OEMs include digital video and in particular TV video with the ability to
receive Intercast(TM) information broadcast by cable program providers.
The Company presently sells video boards under a Master Purchase
Agreement to a major news service provider. This news service provider has
developed a financial news service which utilizes Hauppauge's digital video
TV board. The Company's net sales to this customer for the year ended
September 30, 1996 and for the year ended September 30, 1995 totaled
approximately $1,615,000 (11% of total net sales) and approximately
$1,922,000 (17% of total net sales), respectively. This is the only customer
that accounts for more than ten (10%) percent of the Company's net sales.
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The Company's remaining OEM business totaled approximately $3,447,000
for fiscal 1996 compared to approximately $1,844,000 for the year ended
September 30, 1995. For fiscal 1996, approximately 34% of the Company's net
sales were for the OEM market as compared to 33% for the year ended September
30, 1995.
Marketing and Sales
The Company sells both domestically and internationally through sales
offices in New York, London and Germany. For the fiscal year ended September
30, 1996 and the year ended September 30, 1995, approximately 46% and 30% of
the Company's net sales were made within the United States, respectively,
while approximately 54% and 70% were outside the United States (predominately
in Germany and Great Britain), respectively. Hauppauge Computer Works, LTD
handles all sales outside of the United States.
The Company advertises its products in a number of U.S. and
international PC magazines. These magazines, plus a public relations program
aimed at editors of key personal computer magazines and an active web site on
the Internet, are the principal means of getting the product introduced to end
users. The sales rate in the computer retail market is very much determined by
the effectiveness of these programs, along with the technical capabilities of
the product itself. The Company also lists its products in catalogs of various
mail order companies and attends various worldwide trade shows.
The Company currently has 3 international sales persons and 4 sales
persons in the United States, located in New York and California. The Company
also has 2 manufacturer representatives retained by it on a non-exclusive
basis, who work with customers in certain geographic areas.
Competition
The Company's business is subject to significant competition.
Competition exists from larger companies that possess substantially greater
technical, financial, sales and marketing resources than that which the
Company has. The Company believes that competition from new entrants will
increase as the market for digital video in a PC expands. There can be no
assurances that the Company will not experience increased competition in the
future. Such increased competition may have a material adverse effect on the
Company's ability to successfully market its products. However, the Company
believes that through research and development and aggressive marketing it
can compete in this very competitive market, although there can be no
assurances of such.
Patents and Trademarks
Even though the Company independently develops its hardware and software
products, the Company's success will depend, in large part, on its ability to
innovate, obtain or license patents, protect trade secrets and operate
without infringing on the proprietary rights of others. The Company maintains
copyrights on its designs and software programs, but currently has no patent
on the Win/TV board and the Company believes that such technology cannot be
patented.
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On December 27, 1994, the Company's mark, "Win/TV", was registered with
the United States Patent and Trademark Office.
Governmental Regulations
The Company believes that existing or probable governmental regulations
have no material effect on the Company's business.
Research and Development
The technology underlying the Company's products and other products in
the computer industry, in general, is subject to rapid change, including the
potential introduction of new types of products and technologies, which may
have a material adverse impact upon the Company's business. The Company will
need to maintain an ongoing research and development program, and the
Company's success, of which there can be no assurances, will depend in part
on its ability to respond quickly to technological advances by developing and
introducing new products, successfully incorporating such advances in
existing products, and obtaining licenses, patents, or other proprietary
technologies to be used in connection with new or existing products. The
Company expended approximately $270,000 for research and development expenses
for the year ended September 30, 1995 and approximately $448,000 during
fiscal 1996. There can be no assurance that the Company's research and
development will be successful or that the Company will be able to foresee
and respond to such advances in technological developments and to
successfully develop other products. Additionally, there can be no assurances
that the development of technologies and products by competitors will not
render the Company's products or technologies non-competitive or obsolete.
See Item 6 Management's Discussion and Analysis - Risks and Forward Looking
Statements.
Compliance with Environmental Laws
The costs and effects of compliance with environmental laws (federal,
state and local) will have no material effect upon the business of the
Company.
Employees
As of September 30, 1996, the Company had 48 employees including its
executive officers, all of which are full-time. None of the Company's
employees are represented by a union, and management considers its
relationship with its employees to be excellent.
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Item 2. DESCRIPTION OF PROPERTY
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The Company occupies a 25,000 square foot facility at 91 Cabot Court,
Hauppauge, New York which it uses as its executive offices and for the
testing, storage, and shipping of its products. The Company considers the
premises to be suitable for all its needs. The building is owned by a
partnership consisting of Messrs. Aupperle and Plotkin and their wives and is
leased to the Company expiring January 31, 2006 with an option of the
Company to extend the lease for an additional three years. Rent is currently
at the annual rate of $306,627, and will increase to $321,958 per year on
February 1, 1997. The rent is payable in equal monthly installments and
increases at a rate of 5% per year on February 1 of each year thereafter
including during the option period. The premises are subject to two
mortgages which have been guaranteed by the Company upon which
the outstanding principal amount due as of September 30, 1996 was
$1,205,376. The Company pays the taxes and operating costs of
maintaining the premises.
In addition, the Company, through HCW, GmbH, maintains an office in
Germany, which consists of approximately 2,500 square feet. This facility
contains a sales office, a demonstration room and a storage facility for a
limited number of the Company's products. The Company pays a monthly rent of
approximately $2,000 per month for this facility pursuant to a rental
agreement which expires on December 31, 1996 and contains an option to renew
for two additional years.
Item 3. LEGAL PROCEEDINGS.
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The Company is presently party to no pending material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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Not Applicable.
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Executive Officers of Registrant
First Elected
Offices and an Officer of
Name Age(1) Positions Held the Company
- - ---- ------ --------------- --------------
Kenneth R. Aupperle 39 President, chief 1982
operations officer
and Director
Kenneth Plotkin 45 Chairman of the board of 1982
directors, chief executive
officer, vice-president,
secretary and Director
Gerald Tucciarone 41 Chief financial officer 1995
and treasurer
John Casey 40 Vice-president - technology 1987
_____________
(1) Age as of September 30, 1996.
All of the above Executive Officers have been elected to serve until the next
annual meeting of the Board of Directors presently scheduled for March, 1997
or until their respective successors are elected and qualified.
There are no family relationships between any Executive Officers. Kenneth R.
Aupperle is the husband of Laura Aupperle, a director. Kenneth Plotkin is
the husband of Dorothy Plotkin, a director.
Except for Gerald Tucciarone, each of the Executive Officers listed above has
served the Company in the above executive capacities on a full time basis for
the past five years.
Gerald Tucciarone, prior to his employment with the Company in January, 1995,
served as a vice-president of finance from 1985 to 1992 with Walker-
Telecommunications, Inc., a manufacturer of phones and voice mail equipment
and from 1992 to 1995, as assistant controller with Chadbourne and Parke, a
law firm. Mr. Tucciarone is a certified public accountant.
<PAGE>
PART II
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Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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(a) The principal market on which the common stock of the Company (the
"Common Stock") is traded is the over-the counter market. The Common Stock
is traded on NASDAQ on the Small-Cap Market and its symbol is HAUP and the
Boston Stock Exchange under the symbol HAU. Effective January 10, 1995, the
Company offered for sale 1,333,333 units (the "Units"), each of which
consisted of one class A common stock purchase warrant ("Class A Warrant"),
exercisable at $3.75 per share commencing January 10, 1996 and expiring on
January 9, 2000, and one share of Common Stock. The Common Stock became
separately tradeable from the Class A Warrants on April 25, 1995. At such
time, trading in the Units ceased. The following chart sets forth the high
and low bid prices as determined from NASDAQ for the Common Stock from April
25, 1995 until September 30, 1996. Quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
High Low
---- ---
Fiscal Year Ended
September 30, 1996
- - ------------------
First Quarter 3 3/4 1 3/4
Second Quarter 4 3/8 3
Third Quarter 7 3/4 3 1/8
Fourth Quarter 5 1/4 3 9/16
High Low
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Fiscal Year Ended
September 30, 1995(1)
- - ---------------------
Third Quarter (commencing
April 25, 1995) 3 1/2 2 1/8
Fourth Quarter 2 1/2 1 5/8
____________
(1) From January 10, 1995 to April 24, 1995 the high and low bid price of
the Units were as follows:
High Low
---- ---
Second Quarter (commencing
January 10, 1995) 4 1/16 3 5/8
Third Quarter (until
April 24, 1995) 4 1/8 3 3/4
<PAGE>
(b) The approximate number of holders of record of the Common Stock as of
December 4, 1996 was 78. The Company believes there are in excess of 564
beneficial holders of the Common Stock.
(1) No dividends have been paid during the past two years.
(2) The Company has no present intention of paying any cash dividends
in its foreseeable future and intends to use its net income, if any, in its
operations. The Company is prohibited by its loan agreements with MTB Bank
from declaring or paying any cash dividends.
<PAGE>
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
Years ended September 30, 1996 and 1995
---------------------------------------
Sales for the year ended September 30, 1996 were $14,695,100, compared to
$11,551,169 for the year ended September 30, 1995, resulting in an increase of
$3,143,931 or 27%. The increase in sales has been attributable to the Company's
increased investment in marketing and production capabilities due to the
capital derived from the Company's January 1995 public offering and the
proceeds derived from the July 1996 exercise of the Company's Class A Warrants.
The ability of the Company to procure additional inventory and expand production
sources enabled the Company to gain market share and meet the increased sales
demand.
Net sales of the Company's products are summarized as follows:
Years Ended September 30, Increase
1996 1995 (Decrease)%
---- ---- -----------
P.C. System Sales $ 1,421,359 $ 792,857 79
Win/TV Boards 13,273,741 10,758,312 23
----------- ---------- --
Total Company Sales $14,695,100 $11,551,169 27
=========== =========== ==
Unit sales of Win/TV boards, the Company's digital video TV board, increased to
approximately 62,000 as compared to approximately 41,600 for the prior year,
resulting in an increase of 48%. Sales to domestic customers for the year ended
September 30, 1996 were 46% of net sales as compared to 30% for the prior year.
Sales to international customers, which were primarily in U.S. Dollars, were
54% of net sales for the current year and 70% for fiscal 1995. The increase in
domestic sales as a percentage of sales reflects a commitment by the Company to
expand its domestic sales base by introducing new products, such as the
WinCast/TV board capable of receiving Intercast data broadcast by network and
cable TV content providers, and the strategic hiring of additional sales and
marketing personnel.
Gross profit increased to $3,680,640 from $2,307,413, an increase of
$1,373,227 or 60% over the fiscal year ended September 30, 1995. The gross
profit percentage increased to 25% from 20%. The increase in the margin
percentage was due to lower component costs resulting from the economies gained
by purchasing larger volumes of inventory plus fixed production costs absorbed
over a greater number of units, which lowered the labor costs per unit. In
addition, reserve for inventory obsolescence charged to operations decreased to
$38,000 for fiscal 1996 as compared to $164,511 for fiscal 1995.
Selling, general and administrative expenses declined to 21% of net
revenue from 27% of net revenue for the year ended September 30, 1995, resulting
in a decrease of $129,206 when compared to the prior year. The decrease in
expenses was primarily due to $187,660 charged to operations in fiscal 1995,
which represented the excess of fair market value over the selling price
pursuant to a sale of shares in July 1995 owned by the principal shareholders
<PAGE>
ofthe Company and sold to certain key employees (See note 6g of the accompanying
financial statements). Other decreases were lower professional services costs
of
$92,614 and lower Technical Support costs of $45,480, primarily due to lower
warranty repair costs. These decreases were offset partially by higher
commissions of $70,445 due to the 27% sales increase over fiscal 1995, increased
sales compensation of $57,902 due to the strategic hiring of additional sales
personnel, and increased administrative compensation of $59,036 due to
contractual increases in executive compensation and the full year effect of a
slightly higher staffing levels.
Research and development expenses increased $178,424 or approximately 66%.
The increase was due to the infusion of new capital from the Company's January
1995 public offering and the July 1996 conversion of the Company's Class A
Warrants, which enabled the Company to expand its engineering research and
development resources to enhance current products and further develop future
product lines.
The Company had net other income of $98,438 for the year ended September
30, 1996 as opposed to net other expense of $409,583 for the preceding fiscal
year. The increase in net other income was primarily due to non recurring
private placement financing costs of $480,652 charged to fiscal 1995 operations
plus higher fiscal 1996 net interest income due to higher levels of cash
invested.
As a result of all of the above, the Company recorded a net profit after
taxes for the year ended September 30, 1996 of $278,952 or $0.09 per share as
opposed to a net loss after taxes (which taxes for the prior year were nominal)
of ($1,523,078) or ($0.64) per share.
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Number 121, "Accounting for the Impairment
of long lived assets and for long lived assets to be disposed of" ("SFAS Number
121"). SFAS 121 is effective for fiscal years beginning after December 15, 1995.
SFAS 121 requires the long lived assets and certain identifiable intangibles to
be held and used by an entity to be reviewed for impairment whenever events or
changes in circumstance indicate that the carrying amount of an asset may not
be recoverable. The impact of adopting SFAS Number 121 is not expected to be
material.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard Number 123 "Accounting for Stock Based Compensation" ("SFAS
Number 123") in October 1995. Statement Number 123 encourages companies to
recognize expense for stock options and other stock based employee compensation
plans based on their fair value at the date of grant. As permitted by Statement
123, the Company plans to continue to apply its current accounting policy under
APB Opinion Number 25 "Accounting for Stock Issued to Employees" in 1997 and
future years, and will provide disclosure of the pro forma impact on net income
and earnings per share as if the fair value based method had been applied.
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
<PAGE>
marketing programs due to the infusion of capital derived from the Company's
October 1994 Private Placement Offering and January 1995 public offering (See
Notes 6c and 6d 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.
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.
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
<PAGE>
of $3.15) which were charged to expense under the caption "Private Placement
Financing Costs" (See Note 6c 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.
Over the prior two fiscal years, the Company has experienced certain
revenue trends. Since a major portion of the Company's products are sold through
distributors and retailers, the Company has historically recorded strong sales
results during the Company's first fiscal quarter (October to December), which
due to the holiday season, is a strong quarter for computer equipment sales. In
addition, the Company's international sales, mostly into the European market,
have been 54% and 70% of sales for fiscal 1996 and 1995. Due to this, the
Company's sales for its fourth fiscal quarter (July to September) are impacted
by the reduction of activity experienced with Europe during the July and August
summer holiday period.
To offset the above cycles, the Company is working to increase its
penetration of the domestic retail market to create counterbalancing domestic
sales. Since it is difficult to control the seasonality of retail sales,
the Company is also looking to create strategic OEM alliances to create a
consistent level of annual revenue to help offset the seasonality of the retail
segment of its business.
Liquidity and Capital Resources-As of September 30, 1996
- - --------------------------------------------------------
The Company had a net cash position of $6,559,175, working capital of
$7,969,496 and shareholders' equity of $8,174,917 as of September 30, 1996. For
year ended September 30, 1996, the Company's cash position increased by
$5,344,235. The detail of significant cash sources and (uses) were:
Net income adjusted for non cash items: $ 371,212
Investments in current assets (1,692,607)
Increase in current liabilities, net 485,241
Net proceeds from the exercise of Underwriter's
Unit Purchase Option 543,779
Net proceeds from the exercise of Class
A Warrants 5,676,813
In connection with the Company's January 10, 1995 Initial Public Offering
(IPO), the Company sold to Lew Lieberbaum & Co., Inc. (the Underwriter) 133,333
Underwriters Unit Purchase Options (Purchase Options), each exercisable at
$4.41. Each unit consisted of one share of the Company's Common Stock and one
Underwriter Warrant. The Underwriter's Warrant entitled the holder to purchase
one share of Common Stock at an exercise price of $3.75 and are identical to
the Class A Warrants offered in the IPO.
On May 7, 1996, in light of the market conditions that existed at the time,
the Company allowed the Underwriter to exercise 67,000 Purchase Options at $3.75
per Purchase Option, which they exercised on May 24, 1996. On June 7, 1996, the
remaining 66,333 Purchase Options were exercised by the Underwriter for $4.41.
The net proceeds of $543,779 will be used for working capital and general
corporate purposes (See note 6a).
<PAGE>
On June 3, 1996, the Company, in accordance with Article VI of a Warrant
Agreement dated January 10, 1995 between the Company and North American
Transfer, called for the redemption of all the outstanding warrants at a price
of $.10 per share. Each Warrant entitled the holder to purchase one share of
the Company's $.01 par value Common Stock at $3.75 per share. The expiration
date, originally July 5, 1996, was extended at the discretion of the Company
until July 17, 1996.
At the July 17, 1996 expiration date, 1,575,786 warrants, which included
133,333 Warrants obtained by the Underwriter in the exercise of their Purchase
Option, were exercised and 33,730 warrants were redeemed. The exercise and
redemption resulted in gross proceeds to the Company of $5,909,197. After
deducting expenses of the redemption, which include a 5% solicitation fee
payable to the Underwriter for a portion of the warrants, accounting, legal,
printing costs and the $.10 per share redemption price payable to the warrant
holders who did not exercise their Warrants, the net proceeds from the Warrant
redemption were $5,676,813. As a result of the Warrant redemption and exercise
of the Underwriters Unit Purchase Option, total shares issued and outstanding
as of September 30, 1996 were 4,465,302. The net proceeds will be used for
working capital and general corporate purposes (See note 6b).
On March 28, 1996, Hauppauge Computer Works, Inc, a wholly owned subsidiary
of Hauppauge Digital, Inc., entered into a Credit Agreement with the MTB Bank.
The Credit Agreement provides for, among other things, a two year asset based
line of credit, whereby the Company may borrow up to $1,100,000, which increases
to $1,600,000 upon receipt of the Company's audited September 30, 1996
consolidated financial statements (See note 5).
On November 8, 1996, the Company approved a stock repurchase program for
the repurchase of up to 300,000 shares of its own stock. The repurchased shares
will be used by the Company for certain employee benefit programs. As of
December 12, 1996, the Company had repurchased 21,200 shares at an average
purchase price of $3.72 per share.
The Company believes that the proceeds received from the exercise of the
Class A Warrants and the Underwriter's Unit Purchase Option, its internally
generated cash flow and its asset based line of credit, will be sufficient to
satisfy the Company's anticipated operating needs for at least the ensuing
twelve months.
Risk Factors
- - ------------
From time to time, information provided by the company, statements made by
its employees or information provided in its Securities and Exchange Commission
filings, including information contained in this Form 10-KSB, may contain
forward looking information. The Company's actual future results may differ
materially from those projections or statements made in such forward looking
information as a result of various risks and uncertainties, including but not
limited to rapid changes in technology, lack of funds for research and
development, competition, proprietary patents and rights of others, loss of
major customers, loss of sources of supply for its digital video processing
chips, non-availability of management, government regulation, and the inability
of the Company to profitably sell its products. The market price of the
Company's common stock may be volatile at times in response to fluctuation in
the Company's quarterly operating results, changes in analysts' earnings
estimates, market conditions in the computer hardware industry, as well as
general conditions and other factors external to the Company.
<PAGE>
Item 7. Financial Statements
--------------------
See Consolidated Financial Statements annexed hereto.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
(a) Effective August 10, 1995 The Company dismissed Arthur Andersen, LLP
("Andersen") as its independent public accountants. Andersen had served as the
Company's independent public accountants for the Company's fiscal year ended
December 31. 1993 and for the nine months ended September 30, 1994. During such
periods the reports prepared by Andersen did not contain any adverse opinions
or disclaimer of opinions nor were they qualified or modified at to
uncertainties, audit scope or accounting principles except that the report for
the nine months ended September 30, 1994 was prepared assuming the Company would
continue as a going concern and it expressed doubt about the Company's ability
to continue as a going concern. That report was prepared before the Company's
consummation of its public offering.
The decision to change accountants was recommended and approved by the
Company's board of directors. There were no disagreements with Andersen on any
matter of accounting principles
<PAGE>
or practices, financial statement disclosure or auditing scope procedures while
Andersen served as the Company's independent public accountants. The dismissal
of Andersen was because of fee considerations.
(b) Effective August 10, 1995, BDO Seidman, LLP ("Seidman") was named as the
Company's independent public accountants. Seidman was not previously consulted
by the Company with respect to any matter preceding the date of their
appointment.
<PAGE>
PART III
---------
Item 9 (Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act), Item 10 (Executive
Compensation), Item 11 (Security Ownership of Certain Beneficial Owners and
Management), and Item 12 (Certain Relationships and Related Transactions)
will be incorporated in the Company's Proxy Statement to be filed within 120
days of September 30, 1995 and are incorporated herein by reference.
<PAGE>
PART IV
-------
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits.
The following exhibits are incorporated by reference to the Company's
Registration Statement on Form SB-2 (No. 33-85426) as amended, effective
January 10, 1995.
(1.1) Form of Underwriting Agreement with Lew Lieberbaum & Co., Inc.
(3.1) Certificate of Incorporation, as amended to date
(3.2) By-laws
(4.1) Form of Common Stock Certificate
(4.5) 1994 Incentive Stock Option Plan
(10.1) Form of Employment Agreement with Kenneth R. Aupperle
(10.2) Form of Employment Agreement with Kenneth Plotkin
(10.3) Lease dated February 7, 1990 between Ladokk Realty Company and
Hauppauge Computer Works, Inc.
(10.8) Long Island Development Corporation ("LIDC") Mortgage Loan
Agreements
(10.9) The Company's Guaranty of LIDC Loan Agreements
(10.10) Shawmut Mortgage Loan Agreements
(10.11) The Company's Guaranty of the Shawmut Mortgage Loan Agreements
(10.12) Master Purchase Agreement between Reuters Ltd. and Hauppauge
Computer Works Inc.
(10.13) Credit Agreement between MTB Bank and Hauppauge Computer
Works, Inc. dated March 28, 1996
(22) Subsidiaries of the Company
The following exhibits are incorporated by reference to the Company's
Form 8-K dated August 10, 1995:
(16) Letter from Arthur Andersen, LLP dated August 11, 1995.
The following exhibits are annexed hereto:
(10.3.1) Modification made February 1, 1996 to Lease dated February 7,
1990 between Ladokk Realty Company and Hauppauge Computer
Works, Inc.
(b) Reports on Form 8-K
The following reports on Form 8-K have been filed since June 30,
1996:
a. Report dated July 31, 1996 under Item 5 Other Events with
respect to exercise by Lew Lieberbaum and Co., Inc. of its
Underwriters Options and the redemption and exercise of the
Company's Class A Warrants.
b. Report dated November 8, 1996 under Item 5 Other Events with
respect to the Company's program to repurchase up to 300,000
shares of its own Common Stock.
<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/ KENNETH PLOTKIN Date: 12/18/96
------------------------ -----------
KENNETH PLOTKIN
Chief Executive Officer, Vice-
President, and Secretary
By:/s/ GERALD TUCCIARONE Date: 12/18/96
------------------------- -----------
GERALD TUCCIARONE
Treasurer and Chief Financial Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and as of the date indicated.
By:/s/ KENNETH R. AUPPERLE Date: 12/18/96
-------------------------- -----------
KENNETH R. AUPPERLE
Director
By:/s/ KENNETH PLOTKIN Date: 12/18/96
-------------------------- -----------
KENNETH PLOTKIN
Director
By:/s/ DOROTHY PLOTKIN Date: 12/18/96
-------------------------- -----------
DOROTHY PLOTKIN
Director
By:/s/ LAURA AUPPERLE Date: 12/18/96
-------------------------- -----------
LAURA AUPPERLE
Director
By:/s/ LEONARD A. NEUHAUS Date: 12/18/96
-------------------------- -----------
LEONARD A. NEUHAUS
Director
By:/s/ BERNARD HERMAN Date: 12/18/96
-------------------------- -----------
BERNARD HERMAN
Director
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
--------
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of September 30,
1996 and 1995 F-3
Consolidated Statements of Operations for the
years ended September 30, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity
for the years ended September 30, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years
ended September 30, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7 - F-19
F-1
<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 sheets of Hauppauge
Digital, Inc. and Subsidiaries as of September 30, 1996 and
1995 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended.
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 audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall 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, 1996 and 1995 and the results
of its operations and cash flows for the years then ended
in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Mitchel Field, New York
December 12, 1996
F-2
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
-----------------------------
1996 1995
------------ -----------
CURRENT ASSETS:
Cash and Cash Equivalents
(Note 1) . . . . . . . . . . $ 6,559,175 $1,214,940
Accounts receivable, net
of allowance for doubtful
accounts of approximately
$75,000 in 1996 and
$62,000 in 1995. . . . . . . 1,835,882 1,146,865
Inventories (Notes 1 and 2). . 3,138,961 2,187,981
Prepaid expenses and other
current assets . . . . . . . 191,161 192,689
---------- ----------
Total Current Assets . . . 11,725,179 4,742,475
---------- ----------
Property, plant and equipment
at-cost(Notes 1 and 3) . . . 374,218 334,443
Less: Accumulated depreciation
and amortization . . . . . . 228,678 193,188
----------- -----------
145,540 141,255
----------- -----------
SECURITY DEPOSITS AND
OTHER ASSETS 59,881 62,085
----------- -----------
$11,930,600 $4,945,815
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . 2,818,832 2,645,268
Accrued expenses. . . . . . . 936,851 625,174
----------- ---------
Total Current Liabilities 3,755,683 3,270,442
---------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 9)
SHAREHOLDERS' EQUITY (Notes 6 and 10)
Common Stock $.01 par value;
10,000,000 shares authorized
4,465,302 and 2,756,183 issued
and outstanding as of September
30, 1996 and 1995 . . . . . 44,653 27,562
Additional paid-in
capital . . . . . . . . . . 10,344,844 4,141,343
Accumulated deficit . . . . (2,214,580) (2,493,532)
=========== ===========
8,174,917 1,675,373
----------- ----------
$11,930,600 $4,945,815
=========== ==========
See accompanying notes to consolidated financial statements
F-3
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30,
1996 1995
---------- -----------
NET SALES (Notes 1 and 7). . . $14,695,100 $11,551,169
COST OF SALES (Note 2) . . . . 11,014,460 9,243,756
----------- -----------
Gross Profit . . . . . . . 3,680,640 2,307,413
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES(Notes 6g and 8). . 3,021,814 3,151,020
RESEARCH & DEVELOPMENT
EXPENSES . . . . . . . . . 448,312 269,888
----------- -----------
Income, (loss) from
operations 210,514 (1,113,495)
OTHER INCOME (EXPENSE):
Interest income . . . . . . 81,633 50,026
Interest expense . . . . . - (20,233)
Private placement
financing costs
(Note 6c) . . . . . . . . - (480,652)
Miscellaneous income . . . 16,805 41,276
----------- -----------
Income, (loss) before
income tax provision . . 308,952 (1,523,078)
INCOME TAX PROVISION
(Notes 1 and 4) . . . . . . 30,000 -
----------- -----------
Net income (loss) . . . . . . 278,952 (1,523,078)
=========== ===========
Net income (loss) per share. . $0.09 $0.64
=========== ===========
Weighted average share
outstanding (Note 1) . . . $ 3,261,126 $ 2,382,928
=========== ===========
See accompanying notes to consolidated financial statements
F-4
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND 1995
<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 OCTOBER
1, 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 (Note
6c) 142,850 1,429 356,527 - 357,956
Issuance of shares
pursuant to the
Company's initial
public offering
(Note 6d) 1,333,333 13,333 3,253,690 - 3,267,023
Compensation related
to transfer of
shares (Note
6g) - - 187,660 - 187,660
-------- ------ --------- -------- --------
BALANCE AT
SEPTEMBER 30,
1995 $2,756,183 $27,562 $4,141,343 ($2,493,532) $1,675,373
========== ====== ========= =========== ==========
Net income for
the year ended
September 30,
1996 278,952 278,952
Issuance of
shares pursuant
to the exercise
of Underwriter's
Unit Purchase
Options (Note
6a) 133,333 1,333 542,446 - 543,779
Issuance of
shares pursuant
to the redemption
and exercise of
Class A Warrants
- net (Note
6b) 1,575,786 15,758 5,661,055 - 5,676,813
--------- ------ --------- ------ ---------
BALANCE AT
SEPTEMBER 30,
1996 4,465,302 $44,653 $10,344,844 $(2,214,580) $8,174,917
========= ======== ========== =========== ==========
See accompanying notes to consolidated financial statements
F-5
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30,
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income, (loss) $278,952 ($1,523,078)
------- ---------
Adjustments to reconcile net income,(loss) to
net cash (used in) provided by operating
activities:
Depreciation and amortization 38,119 33,693
Provision for uncollectible accounts
receivable 16,141 49,200
Provision for system board obsolescence 38,000 164,511
Private placement financing costs --- 480,652
Compensation related to transfer of shares --- 187,660
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable (705,155) (641,420)
Inventories (988,980) (1,473,342)
Prepaid expenses and other current assets 1,528 (154,030)
Accounts payable 173,564 878,402
Accrued expenses 311,677 383,345
------- --------
(1,115,106) (91,329)
---------- --------
Net cash used in operating activities (836,154) (1,614,407)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (39,775) (57,749)
Purchase of software rights -- (13,156)
Security deposits (428) (483)
-------- ------
Net cash used in investing activities (40,203) (71,388)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement offering --- 477,304
Net proceeds from Initial Public Offering --- 3,267,023
Net proceeds from exercise of Underwriters
Purchase Options 543,779 ---
Net proceeds from redemption and exercise of
Class A Warrants 5,676,813 ---
Principal payment on bank loan --- (395,000)
Principal payment on private placement
bridge loan --- (60,000)
-------- --------
Net cash provided by financing activities 6,220,592 2,749,327
-------- ---------
Net increase in cash and cash equivalents 5,344,235 1,063,532
CASH AND CASH EQUIVALENTS, beginning of period 1,214,940 151,408
-------- ---------
CASH AND CASH EQUIVALENTS, end of period $6,559,175 $1,214,940
======== =========
SUPPLEMENTAL DISCLOSURES:
Interest paid --- $46,206
========= =========
Income taxes paid $15,151 $19,322
======== ========
See accompanying notes to consolidated financial statements
F-6
<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.
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 retailers, distributors, original equipment manufacturers
and manufacturers' representatives. Net sales to international and
domestic customers were approximately 54% and 46%, respectively, of
total sales for the year ended September 30, 1996, and 70% and 30%,
respectively, for the year ended September 30, 1995. Substantially
all of the Company's assets are located in the United States.
Net sales to international customers consist of:
Year ended Year ended
Sales to: September 30, 1996 September 30, 1995
- - --------- ------------------ ------------------
United Kingdom 16% 22%
Germany 17% 20 %
The Netherlands 7% 5
Other countries 14% 23%
--- ---
54% 70%
=== ===
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions
that effect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities. Actual results could differ from
estimates.
F-7
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Concentrations of Credit Risk
Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally
of cash and accounts receivable. At times such cash in banks
are in excess of the FDIC insurance limit. Concentration
of credit risk with respect to accounts receivable exists
because the Company operates in one industry. Although the
Company operates in one industry segment, it does not believe
that it has a material 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.
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.
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:
F-8
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Office Equipment and Machinery: 5 to 7 years
Leasehold improvements: Asset life or lease term,
whichever is shorter
Income Taxes
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 with the fiscal year ended
September 30, 1995, the Company now files a consolidated federal
tax return for Hauppauge Digital, Inc., and its subsidiaries,
Hauppauge Computer Works, Inc. and HCW Distributing Corp..
The Company follows the liability method of accounting for
income taxes. 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.
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 Income, (Loss) per Share
Net income, (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. During fiscal 1996, 1,575,786 and 133,333
shares were issued through the exercise of the Company's Class A
Warrants and the exercise of the Underwriter's Purchase Unit
Options. (See Note 6-a,b,c and d).
In 1996, all of the Company's Class A Warrants were either
exercised or redeemed. In 1995, warrants were not included
in the weighted average shares calculation because they were
antidilutive.
F-9
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The carrying amounts of certain financial instruments,
including cash, accounts receivables and accounts payable,
approximate fair value as of September 30, 1996 because of the
relatively short term maturity of these instruments.
Prospective Accounting Changes
In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
Number 121, "Accounting for the Impairment of long lived
assets and for long lived assets to be disposed of" ("SFAS Number
121"). SFAS 121 is effective for fiscal years beginning after
December 15, 1995. SFAS 121 requires the long lived assets
and certain identifiable intangibles to be held and used by an
entity to be reviewed for impairment whenever events or
changes in circumstance indicate that the carrying amount of
an asset may not be recoverable. The impact of adopting
SFAS Number 121 is not expected to be material.
The Financial Accounting Standards Board issued
Statement of Financial Accounting Standard Number
123 "Accounting for Stock Based Compensation" ("SFAS
Number 123") in October 1995. Statement Number 123
encourages companies to recognize expense for stock
options and other stock based employee compensation plans
based on their fair value at the date of grant. As permitted by
Statement 123, the Company plans to continue to apply its
current accounting policy under APB Opinion Number
25 "Accounting for Stock Issued to Employees" in 1997 and
future years, and will provide disclosure of the pro forma
impact on net income and earnings per share as if the fair
value based method had been applied.
2. INVENTORIES
Inventories consist of the following:
September 30,
1996 1995
---- ----
Component Parts $ 849,324 $738,846
Work in Process 1,861,391 974,706
Finished Goods 428,246 474,429
------- -------
$3,138,961 $2,187,981
========== ==========
The Company continually reviews the inventory for potential
obsolescence. Reserves of approximately $38,000 and $165,000
for the years ended September 30, 1996 and 1995, respectively,
were included in the cost of sales.
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment:
1996 1995
---- ----
Office Equipment and Machinery $348,562 $308,787
Leasehold Improvements 25,656 25,656
------ ------
374,218 334,443
Less: Accumulated depreciation 228,678 193,188
------- -------
Total $145,540 $141,255
======== ========
4. INCOME TAXES
The income tax provision consists of the following:
Years ended September 30,
1996 1995
---- ----
State income tax provision $ 30,000 $ 4,420
Tax benefit-overstated liability - (4,420)
---------- ---------
$ 30,000 $ -
------------ ----------
Components of deferred taxes are as follows:
Years ended September 30,
1996 1995
---- ----
Deferred tax assets:
Net operating loss carryforwards $394,636 $574,945
Inventory obsolescence reserve 170,850 157,930
Warranty reserve 23,800 20,400
Allowance for doubtful accounts 22,216 16,728
Other reserves 12,886 -
------- -------
Total deferred tax assets 624,388 770,003
Valuation allowance (624,388) (770,003)
--------- -------
Net deferred tax assets $ - $ -
========== ========
Because the Company's principal product is relatively new, the relative
volatility of the industry the Company operates in and the limited track
record of profitability to date, the Company has continued to record a full
valuation allowance against the deferred tax assets as of September 30, 1996. The
change in valuation allowance is as follows:
F-11
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes-continued
Years ended September 30,
1996 1995
----- -----
Balance at the beginning of the year $770,003 $463,085
Increase in non utilization of net
operating loss carryforwards - 213,860
Utilization of net operating
loss carryforwards (180,309) -
Increase in reserve for inventory
obsolescence 12,920 55,930
Increase in warranty reserve 3,400 20,400
Increase in allowance for doubtful accounts 5,488 16,728
Increase in other reserves 12,886 -
------ ------
Balance at the end of the year $624,388 $770,003
======= ========
As of September 30, 1996, the Company had net operating losses, (which
expire in the years through 2010), of $1,160,664 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 6d), $951,337 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
$209,327 which occurred after January 10, 1995 are unrestricted. In 1996, the
Company utilized $275,386 of restricted net operating losses and $142,736 of
unrestricted net operating losses to offset 1996 taxable income.
The difference between the actual income tax provision (benefit) and the
tax provision computed by applying the Federal statutory income tax rate to
the income, (loss) before income tax is attributable to the following:
Years ended September 30,
1996 1995
---- ----
Income tax (benefit) at 34% $ 105,044 $ (485,330)
Deferred taxes 75,265 -
Utilization of net operating
loss carryforwards (180,309) -
Loss producing no tax benefit - 485,330
State income and franchise taxes 30,000 4,420
Tax benefit-overstated liability - (4,420
-------- --------
Income tax provision $ 30,000 $ -
======== ========
5. LINE OF CREDIT
On March 28, 1996, Hauppauge Computer Works, Inc, a wholly owned
subsidiary of Hauppauge Digital, Inc., entered into a Credit
F-12
<PAGE
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Line of Credit-continued
Agreement with the MTB Bank. The Credit Agreement provides for, among other
things, a two year asset based line of credit, whereby the Company may borrow
up to $1,100,000, which increases to $1,600,000 upon receipt of the Company's
audited September 30, 1996 consolidated financial statements. Advances shall
be made on a revolving basis based on 70% of eligible domestic and foreign
receivables not older than 90 days. The Agreement provides that foreign
receivables must be credit insured, except for one customer, which the MTB
Bank has verbally agreed to exclude from the credit insurance provision. Upon
satisfactory review of the Company's September 30, 1996 financial and accounts
receivable performance, the advance rate for eligible credit insured foreign
receivables will increase to 80%. An interest rate of 2 1/2 % above MTB's prime
commercial lending rate on a floating basis will be charged on all advances.
Borrowings against the credit line are secured by the assets of the Company.
In addition, the Company, HCW Distributing Corp., Hauppauge Computer Works GmbH,
Hauppauge Computer Works Ltd., and two of the Company's principal shareholders,
have guaranteed the obligations of Hauppauge Computer Works, Inc.. The
quarantees of the two principal shareholders are each limited to of 20% of
the borrowings outstanding with a cap of $150,000 each and a minimum of $50,000.
The loan requires the Company to maintain a consolidated net worth of $1,750,000
until September 30, 1996 and $2,000,000 thereafter. The Company is prohibited
from paying cash dividends during the term of the Credit Agreement. As of
September, 30, 1996, the Company has not utilized this loan facility.
6. SHAREHOLDERS' EQUITY
a. Exercise of Underwriter's Unit Purchase Option
In connection with the Company's January 10, 1995 Initial Public Offering
(IPO) (See note 6d), the Company sold to Lew Lieberbaum & Co., Inc. (the
Underwriter) 133,333 Underwriters Unit Purchase Options (Purchase Options),
each exercisable at $4.41. Each unit consisted of one share of the Company's
Common Stock and one Underwriter Warrant. The Underwriter's Warrant entitled
the holder to purchase one share of Common Stock at an exercise price of $3.75
and are identical to the Class A Warrants offered in the IPO.
On May 7, 1996, in light of the market conditions that existed at the time,
the Company allowed the Underwriter to exercise 67,000 Purchase Options at
$ 3.75 per share (the market price of the shares at the date of reduction in
exercise price was $3.38), which they exercised on May 24, 1996. On June 7,
1996, the remaining 66,333
F-13
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a. Exercise of Underwriter's Unit Purchase Option-continued
Purchase Options were exercised by the Underwriter for $4.41. The net proceeds
of $543,779 will be used for working capital and general corporate purposes.
b. Exercise and Redemption Class A Warrants
On June 3, 1996, the Company, in accordance with Article VI of a Warrant
Agreement dated January 10, 1995 between the Company and North American
Transfer, called for the redemption of all the outstanding warrants at a price
of $.10 per share. Each Warrant entitled the holder to purchase one share of
the Company's $.01 par value Common Stock at $3.75 per share. The expiration
date, originally July 5, 1996, was extended at the discretion of the Company
until July 17, 1996.
At the July 17, 1996 expiration date, 1,575,786 warrants, which included
133,333 Warrants obtained by the Underwriter in the exercise of their Purchase
Option, were exercised and 33,730 warrants were redeemed. The exercise and
redemption of the Warrants resulted in gross proceeds to the Company of
$5,909,197. After deducting expenses of the redemption, which included a 5%
solicitation fee payable to the Underwriter for a portion of the warrants,
accounting, legal, printing costs and the $0.10 per share redemption price
payable to warrant holders who did not exercise their Warrants, the net
proceeds from the Warrant redemption were $5,676,813.
As a result of the Warrant redemption and exercise of the Underwriter's
Unit Purchase Option, total shares issued and outstanding as of September 30,
1996 were 4,465,302. The net proceeds will be used for working capital and
general corporate purposes.
c. 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 6d, Initial Public Offering-IPO). The promissory notes were
subject to
F-14
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
c. Private Placement-continued
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
=======
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, $30,674
of fees and costs relating to the private placement financing costs were charged
to operations within the same caption in the year ended September 30, 1995.
d. 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 were 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,
F-15
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
d. Initial Public Offering (IPO)-continued
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 of July 17, 1996, all of the Class A Warrants have either been
exercised or redeemed (See Note 6b).
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. On May 24, 1996 and June 7, 1996, the Underwriter exercised all of
their Underwriter's Unit Purchase Options (See note 6a).
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.
e. 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 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. On May 7, 1996, options to acquire 77,000 shares
exercisable at $3.75 per share were granted under this plan.
f. 1996 Non-Qualified Stock Option Plan
On December 14, 1995, the Board of Directors authorized the adoption of
the 1996 Non-Qualified Stock Option Plan (the "1996 Non-Qualified Plan") which
was approved by the Company's stockholders on March 5, 1996.
F-16
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
f. 1996 Non-Qualified Stock Option Plan-continued
The Non-Qualified Plan authorizes the grant of 250,000 shares. The plan
terminates on March 5, 2006. This plan does not qualify for treatment as an
incentive stock option plan under the Internal Revenue Code. There are various
tax benefits which could accrue to the Company upon exercise of non qualified
stock options that may not be available to the Company upon exercise of
qualified incentive stock options. The purpose of the plan is to provide the
Company greater flexibility in rewarding key employees, consultants, and other
entities without burdening the Company's cash resources. As of September 30,
1996, no options have been granted under the 1996 Non-Qualified Plan.
g. Compensation Related to Transfer of Shares
During July 1995, the Company's founders and principal shareholders sold
99,740 shares of their common stock to several key employees for $0.03 per
share. The Company recorded compensation expense of $187,660 based on the
difference between the market price of the stock at the date of the sale and
the price paid.
7. SIGNIFICANT CUSTOMER INFORMATION
For the years ended September 30, 1996 and 1995, the Company had only one
customer who accounted for more than 10% of total consolidated sales. This
customer accounted for 11% and 17% of sales for fiscal 1996 and 1995. Accounts
receivable from this customer was $105,628 and $83,960 as of September 30,
1996 and 1995, respectively.
8. RELATED PARTY TRANSACTIONS
The Company, rents its principal office and warehouse space in Hauppauge,
New York from a real estate partnership owned by the two principal shareholders
of the Company. The lease term expires on January 31, 2006 and includes an
option to extend for three additional years. The lease provides for rent
increases of 5% per year.
The indebtedness incurred by the two principal shareholders to purchase the
building is also guaranteed by the Company and totaled $1,205,000 at September
30, 1996.
F-17
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Related party transactions-continued
Annual lease payments are as follows:
Year ended September 30,
------------------------
1997 321,958
1998 338,056
1999 354,959
2000 372,706
2001 391,342
Thereafter 1,771,069
----------
$3,550,090
==========
Rent expense totaled approximately $367,290 and $295,025 for the years
ended September 30, 1996 and 1995, respectively. 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.
F-18
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SUBSEQUENT EVENTS
On November 8, 1996, the Company approved a stock repurchase program for
the repurchase of up to 300,000 shares of its own Common Stock. The repurchased
shares will be used by the Company for certain employee benefit programs. As of
December 12, 1996, the Company had repurchased 21,200 shares at an average
purchase price of $3.72 per share.
F-19
</TABLE>
LADOKK REALTY COMPANY
91 Cabot Court
Hauppauge, New York 11788
February 1, 1996
Hauppauge Computer Works, Inc.
91 Cabot Court
Hauppauge, New York 11788
Re: Modification to Lease Dated February 7, 1990 ("Lease") by and between
Ladokk Realty Company ("Landlord") and Hauppauge Computer Works,
Inc. ("Tenant")
Gentlemen:
This letter will confirm that as of the date hereof, the terms of the
Lease are hereby modified as follows:
1. The Lease has been renegotiated to a term of ten years beginning
February 1, 1996 and ending January 31, 2006.
2. Tenant is given an option to extend the Lease for an additional
three years (the "Option Period"); provided Tenant is not in
default of the Lease at the time it exercises this option; and
provided written notice of the exercise of such option is given
by Tenant to Landlord no later than July 31, 2005.
3. During the Option Period the annual rental shall increase at the
rate of 5% per annum over the rent of the previous year,
including that for the first year of the Option Period for which
such increase shall be 5% over the year ended January 31, 2006.
All other terms of the Lease shall be applicable to the Option
Period.
Except as modified herein, all terms and conditions of the Lease shall
continue in full force and effect.
Very truly yours,
LADOKK REALTY COMPANY
By: /s/ KENNETH AUPPERLE
_____________________________
KENNETH AUPPERLE
CONSENTED TO:
Hauppauge Computer Works, Inc.
By: /s/
_________________________
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000930803
<NAME> HAUPPAUGE DIGITAL, INC.
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 6,559,175 1,214,940
<SECURITIES> 0 0
<RECEIVABLES> 1,835,882 1,146,865
<ALLOWANCES> 75,000 62,000
<INVENTORY> 3,138,961 2,187,981
<CURRENT-ASSETS> 11,725,179 4,742,475
<PP&E> 374,218 334,443
<DEPRECIATION> 228,678 193,188
<TOTAL-ASSETS> 11,930,600 4,945,815
<CURRENT-LIABILITIES> 3,755,683 3,270,442
<BONDS> 0 0
<COMMON> 44,653 27,562
0 0
0 0
<OTHER-SE> 8,130,264 1,647,811
<TOTAL-LIABILITY-AND-EQUITY> 11,930,600 4,945,815
<SALES> 14,695,100 11,551,169
<TOTAL-REVENUES> 14,695,100 11,551,169
<CGS> 11,014,460 9,243,756
<TOTAL-COSTS> 3,470,126 3,420,908
<OTHER-EXPENSES> 98,438 (409,583)
<LOSS-PROVISION> 16,141 49,200
<INTEREST-EXPENSE> 0 20,233
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<INCOME-TAX> 30,000 0
<INCOME-CONTINUING> 278,952 (1,523,078)
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<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 278,952 (1,523,078)
<EPS-PRIMARY> 0.09 (0.64)
<EPS-DILUTED> 0.09 (0.64)
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