As filed with the Securities and Exchange Commission on June 13, 1996
Registration No. 33-85426
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 4
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HAUPPAUGE DIGITAL, INC.
(Name of small business issuer in its charter)
Delaware 3577 11-3227864
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
91 Cabot Court
Hauppauge, New York 11788
(516) 434-1600
(Address and telephone number of principal executive offices and
principal place of business)
Mr. Kenneth R. Aupperle
President
Mr. Kenneth Plotkin
Chairman of the Board of Directors and
Chief Executive Officer
Hauppauge Digital, Inc.
91 Cabot Court
Hauppauge, New York 11788
(516) 434-1600
(Name, address and telephone of agent for service)
Copies to:
Herbert W. Solomon, Esq.
Seth I. Rubin, Esq.
Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
585 Stewart Avenue
Garden City, New York 11530
(516) 745-6000
(516) 745-6642 (FAX)
Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this registration statement.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
<PAGE>
HAUPPAUGE DIGITAL, INC.
Cross Reference Sheet Showing Location
in Prospectus of Information
Required by Items of SB-2
Item and Heading Location in Prospectus
1. Front of the Registration Statement and Outside Front Cover Page of
Outside Front Cover Page of Prospectus. Prospectus.
2. Inside Front and Outside Back Cover Inside Front and Outside Back Cover
Pages of Prospectus. Pages of Prospectus.
3. Summary Information and Risk Factors. Summary Prospectus; Risk Factors.
4. Use of Proceeds. Use of Proceeds.
5. Determination of Offering Price. Front Page of Prospectus; Risk
Factors; Plan of Distribution.
6. Dilution. Dilution.
7. Selling Security Holders. Not Applicable.
8. Plan of Distribution. Plan of Distribution; Right of
Rescission
9. Legal Proceedings. Business -- Litigation.
10.Directors, Executive Officers,
Promoters and Control Persons. Management.
11.Security Ownership of Certain Beneficial Principal Shareholders
Owners and Management.
12.Description of Securities. Description of Securities.
13.Interest of Named Experts and Counsel Experts; Legal Matters.
14.Disclosure of Commission Position on Description of Securities --
Indemnification for Securities Act Limited Liability of
Liabilities. Directors and Executive Officers
15.Organization Within Last Five Years. Not Applicable.
16.Description of Business. Business.
17.Management's Discussion and Analysis Management's Discussion and
or Plan of Operation. Analysis of Financial Condition and
and Results of Operations.
18.Description of Property. Business -- Facilities.
19.Certain Relationships and Related Certain Transactions.
Transactions.
20.Market for Common Equity and Outside Front Cover Page of
Related Stockholder Matters. Prospectus; Market Information
<PAGE>
21.Executive Compensation. Management-Executive Compensation
and Employment Agreements.
22.Financial Statements Financial Statements.
23.Changes in and Disagreements With Experts.
Accountants on Accounting and Financial
Disclosure
<PAGE>
HAUPPAUGE DIGITAL, INC.
1,476,183 Shares of Common Stock
$3.75 per Share
---------------------------------
133,333 Underwriter Units
Each Underwriter Unit consisting of one share of Common Stock
and one Class A Redeemable Common Stock Purchase Warrant
$4.41 per Unit
---------------------------------
133,333 Shares of Common Stock
$3.75 per Share
This Prospectus relates to an offering (the "Offering") by Hauppauge
Digital, Inc., a Delaware corporation (the "Company") of the following
securities: (a) 1,476,183 shares of Company's common stock, $.01 par value
(the "Common Stock") issuable upon the exercise of the Company's class A
redeemable common stock purchase warrants (the "Class A Warrants"); (b) 133,333
units (the "Underwriter Units") issuable upon the exercise of an option (the
"Underwriter Unit Purchase Option"), and each Underwriter Unit consists of one
share of Common Stock and one Class A Warrant (the Class A Warrant issuable
upon the exercise of the Underwriter Unit Purchase Option shall be referred
to as the "Underwriter Warrants"); and (c) 133,333 shares of Common Stock
issuable upon the exercise of the Underwriter Warrants. The Class A Warrants
were previously sold as part of units (the "Units") which were sold to the
public by the Company (the "Unit Offering") through Lew Lieberbaum & Co.,
Inc. (the "Underwriter'').
There are presently 1,476,183 outstanding Class A Warrants. Each Class
A Warrant entitles the holder to purchase one share of Common Stock commencing
January 10, 1996 until the close of business on January 9, 2000 at an
exercise price of $3.75 per share, subject to adjustment in certain
circumstances pursuant to the anti-dilution provisions therein. The Class A
Warrants are redeemable, in whole or in part, at a price of $.10 per
Class A Warrant commencing January 10, 1996; provided that (i) prior notice
of not less than 30 days is given to the Class A Warrantholders; and (ii) the
closing high bid price of the Company's Common Stock, for the 10
consecutive trading days ending on the third day prior to the date on which
the Company gives notice, has been at least $4.75 per share (to be adjusted for
any stock dividends and stock splits). See "Description of Securities-- Class A
Warrants".
ON JUNE 3, 1996, THE COMPANY CALLED FOR REDEMPTION ON JULY 5, 1996 (THE
"REDEMPTION DATE"), ALL OF ITS OUTSTANDING CLASS A WARRANTS IN ACCORDANCE WITH
ARTICLE VI OF THE WARRANT AGREEMENT DATED JANUARY 10, 1995. THE COMPANY HAS
EXTENDED THE REDEMPTION DATE UNTIL 5 p.m., LOCAL TIME, JULY 17, 1996.
The Underwriter's Unit Purchase Option was sold for $10 to the Underwriter
as part of its compensation in connection with its underwriting of the Unit
Offering. Each of the Underwriter Units, issuable upon exercise at $4.41 per
Underwriter Unit under the Underwriter Unit Purchase Option commencing January
10, 1996 until the close of business on January 9, 2000, consist of one share of
the Company's Common Stock and one Underwriter Warrant. Each Underwriter
Warrant entitles the holder thereof to purchase one share of Common
Stock at an exercise price of $3.75 per share, subject to adjustment in
certain circumstances. The Underwriter Warrants are identical to the Class A
Warrants offered in the Unit Offering. The Class A Warrants and the
Underwriter Warrants are sometimes referred to herein as the "Warrants". The
Underwriter's Warrants have been exercised by the Underwriter.
THE COMPANY'S POST-EFFECTIVE AMENDMENT NO. 3 TO THE REGISTRATION
STATEMENT, OF WHICH THIS PROSPECTUS IS A PART, WAS DECLARED EFFECTIVE ON MAY 3,
1996. THE FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
WERE INADVERTENTLY OMITTED FROM THE PROSPECTUS. THIS CURRENT PROSPECTUS BRINGS
THE COMPANY'S FINANCIAL STATEMENTS CURRENT THROUGH THE SIX MONTHS ENDED MARCH
31,1996. TO THE DATE OF THIS PROSPECTUS, THE UNDERWRITER'S UNIT PURCHASE OPTION
AND 245,883 CLASS A WARRANTS HAVE BEEN EXERCISED. BY VIRTUE OF THIS PROSPECTUS,
<PAGE>
THE COMPANY IS OFFERING SUCH PARTIES WHO HAVE EXERCISED THE UNDERWRITER'S UNIT
PURCHASE OPTION AND THE FOREGOING CLASS A WARRANTS THE OPPORTUNITY TO RESCIND
THE EXERCISE OF THEIR OPTION AND CLASS A WARRANTS AND RECEIVE A FULL REFUND OF
THEIR EXERCISE PRICE PAID TOGETHER WITH A RETURN OF THEIR SECURITIES EXERCISED.
TO EXERCISE THIS RIGHT OF RESCISSION NOTICE MUST BE RECEIVED BY NORTH AMERICAN
TRANSFER CO., 147 WEST MERRICK ROAD, FREEPORT, NEW YORK 11520, ATTN: MILDRED
ROSTOLDER, WITHIN SEVEN (7) CALENDAR DAYS OF THE DELIVERY OF THIS PROSPECTUS TO
THEM. A PARTY EXERCISING RESCISSION MUST RETURN THE COMMON STOCK ISSUED UPON
THE EXERCISE OF THE OPTION OR THE UNDERLYING UNIT PURCHASE OPTION UPON
EXERCISING THIS RIGHT OF RESCISSION. THE COMPANY WILL FORTHWITH RETURN THE
EXERCISE PRICE PAID TOGETHER WITH INTEREST AT THE RATE OF NINE (9%) PERCENT PER
ANNUM. CLASS A WARRANTS FOR WHICH RESCISSION IS REQUESTED WILL REMAIN SUBJECT
TO THE COMPANY'S RIGHT OF REDEMPTION AT $.10 PER WARRANT UNTIL JULY 17, 1996.
SEE "RIGHT OF RESCISSION".
The public offering prices of the Common Stock offered hereby are equal to
the exercise price of the Class A Warrants, the Underwriter's Unit Purchase
Option and the Underwriter Warrant. The exercise prices of such securities were
determined by negotiations between the Company and the Underwriter and are not
necessarily related to the Company's asset value, net worth or other established
criteria of value. The Company will receive no proceeds from the Common
Stock underlying the Underwriter Unit.
The Company's Common Stock and Class A Warrants are listed on the National
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ")
under the symbols "HAUP" and "HAUPW", respectively, and listed on the Boston
Stock Exchange under the symbols "HAU" and "HAUW", respectively. On June 12,
1996, the closing prices of the Common Stock and Class A Warrants as reported by
NASDAQ were $6.25 and $2.375, respectively. There is no public market for the
Underwriter's Unit Purchase Option.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===========================================================================
|Price | Underwriter | Proceeds to | Total Proceeds
| to | Discounts and| Company | to
|Public |Commissions (1)| Per Share (2)| Company (2)
- ----------------------------------------------------------------------------
Per Share of | | | |
Common Stock | | | |
underlying Class | | | |
A Warrants | $3.75 | $0.00 | $3.75 | $5,535,686.20
- ----------------------------------------------------------------------------
Per Underwriter | | | |
Unit, Consisting | | | |
of one share of | | | |
Common Stock and | | | |
One Underwriter | | | |
Warrant (3) | $4.41 | $0.00 | $4.08 | $543,778.53
- ---------------------------------------------------------------------------
Per Share of | | | |
Common Stock | | | |
Underlying | | | |
Underwriter's | | | |
Warrants | $3.75 | $0.00 | $3.75 | $499,998.75
- ---------------------------------------------------------------------------
Total Proceeds to | | | |
the Company | N/A | $0.00 | N/A | $6,579,463.48
============================================================================
(1) Does not include additional compensation which may be paid to the
Underwriter by the Company arising from the Company's agreement that it
pay to the Underwriter a solicitation fee of five (5%) percent of the
aggregate exercise price of the Class A Warrants exercised through the
efforts and with the assistance of the Underwriter. See "Plan of
Distribution".
(2) Does not include the payment of other expenses of the Offering (estimated
at $23,683), payable by the Company.
(3) The Company reduced the Underwriter's Unit exercise price on 67,000 Units
from $4.41 to $3.75 per Unit.
The date of this Prospectus is June 13, 1996.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information,including financial statements and notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety.
The Company
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, ("HCW, GmbH"), a German
corporation responsible for directing European marketing efforts,and is
the owner of all the outstanding shares of Hauppauge Computer Works, LTD
("LTD"), a Virgin Islands corporation responsible for handling sales outside of
the United States. All references herein to the Company include the Company
and its two wholly owned 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. Prior
thereto and since its inception in 1982, the Company focused its business on
the development and sale of hardware and software for math acceleration
products for the PC market which are used to accelerate scientific
and mathematical calculations. The Company stopped actively marketing these
products by 1988. 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 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.
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 PC's, while OEMs
typically purchase Win/TV boards and incorporate them in multimedia PC packages,
which are then ultimately sold to the end user.
The Offering
Securities Offered . . . (a) 1,476,183 shares of Common Stock underlying the
Class A Warrants exercisable at $3.75 per
share. See "Description of Securities".
(b) 133,333 Underwriter Units underlying the
Underwriter's Unit Purchase Option, each
Underwriter Unit consisting of one share of
Common Stock and one Underwriter Warrant
exercisable at $4.41 per Unit. See "Description
of Securities - Underwriter's Unit Purchase
Option".
(c) 133,333 shares of Common Stock underlying the
Underwriter Warrants exercisable at $3.75 per
share. See "Description of Securities".
<PAGE>
Common Stock Outstanding
Prior to the Offering (1)... 2,756,183 shares.
Common Stock Outstanding
After the Offering (1)...... 4,232,366 shares.
Warrants to be Issued
in the Offering . . . .1,476,183 Class A Warrants.
Exercise Terms . . . . Each Class A Warrant and Underwriter Warrant
entitles the holder thereof to purchase one share
of Common Stock for $3.75 (the "Exercise Price"),
from January 10, 1996 until January 9, 2000,
subject to adjustment in certain circumstances.
See "Description of Securities -- Warrants".
Expiration Date . . . January 9, 2000.
Redemption . . . . . Each Warrant is redeemable by the Company, in whole
or in part, at a price of $.10 per Warrant
commencing January 10, 1996, upon not less than 30
days prior written notice to the holders of such
Warrants, provided that the closing high bid price
of the Company's Common Stock is at least $4.75 per
share (subject to adjustment for stock dividends
and stock splits) for 10 consecutive trading days
ending on the third day prior to the date on which
the Company gives notice of redemption. See
"Description of Securities -- Warrants". The
Company has called for redemption all its
outstanding Class A Warrants and has extended the
Redemption Date until July 17, 1996.
Rescission . . . . . . . . See "Right of Rescission" with respect to
Underwriter's Unit Purchase Option and certain
Class A Warrants.
Use of Proceeds . . . . . .The Company intends to use the net proceeds of this
Offering, amounting to approximately $6,555,780 for
working capital and general corporate purposes.
See "Use of Proceeds".
Risk Factors . . . . . The securities offered hereby involve a high
degree of risk and immediate substantial dilution.
See "Risk Factors" and "Dilution''.
NASDAQ Symbols . . . . . .Common Stock: HAUP
Class A Warrants: HAUPW
Boston Stock Exchange Symbols. Common Stock: HAU
Class A Warrants: HAUW
(1) Does not include (a) 133,333 shares of Common Stock included in the
Underwriter Unit issuable upon exercise of the Underwriter's Unit
Purchase Option or 133,333 shares of Common Stock issuable upon
<PAGE>
exercise of the Underwriter Warrant which are part of the Underwriter Unit
or (b) any shares of Common Stock that may be issued as the result of
existing stock options. The Underwriter has exercised its Underwriter's
Unit Purchase Option at a reduced exercise price of $3.75 per Unit for
67,000 Units and $4.41 per Unit for 66,333 Units.
Summary Financial Information
The following is a summary of the Company's financial information
extracted from the Company's indicated fiscal year end Consolidated Financial
Statements, and is qualified in its entirety by the detailed financial
information appearing in the Consolidated Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Year Ended Nine Months Ended Six Months Ended
September 30, 1995 September 30, 1994 March 31
------------------ ------------------- -----------
(Unaudited)
1996 1995
Statement of Income ---- -----
(Loss) Data:
Net Sales $11,551,169 $4,166,807 $8,239,378 $5,120,026
Income (loss) before
income tax provision
(benefit) (1,523,078) (1,288,916) 304,054 (826,192)
Net income (loss) (1,523,078) (1,317,548) 284,054 (826,192)
Net income, (loss)
per share(1) ($0.64) ($1.03) $0.10 ($0.41)
Weighted average
shares outstanding 2,382,928 1,280,000 2,756,183 2,007,623
_______
(1) Net loss per share has been computed on the basis of weighted average
number of shares outstanding for each period presented. Included in the
1995 computation were 142,850 and 1,333,333 shares issued
through a private placement offering and the Unit Offering. The effect of
including Warrants as Common Stock equivalents would result in a reduction
of the loss per share. Therefore, they are not recognized as a component
of the weighed average shares outstanding.
Consolidated Balance Sheet Data:
As of September 30, 1995 As of March 31, 1996
(Unaudited)
Actual As Adjusted (1) Actual As Adjusted(2)
------ --------------- ------ -------------
Working
capital $1,472,033 $ 8,027,813 $1,751,020 $8,306,800
Total
assets 4,945,815 11,501,595 4,497,475 11,053,255
Current
liabilities 3,270,442 3,270,442 2,538,048 2,538,048
Shareholders'
equity 1,675,373 8,231,153 1,959,427 8,515,207
_______
(1) Gives effect to the issuance of 1,742,849 shares of $.01 par value Common
Stock upon the exercise of Class A Warrants and Underwriter Units.
(2) Gives effect to receipt of $6,555,780 of net proceeds without deduction for
the Underwriter's solicitation fee. See "Use of Proceeds" and "Plan of
Distribution".
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND SHOULD BE
PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN THE LOSS OF THEIR ENTIRE
INVESTMENT IN THE COMPANY. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS AS WELL AS ALL OF THE OTHER INFORMATION SET FORTH
ELSEWHERE IN THIS PROSPECTUS:
1. Historical Losses and Accumulated Deficit. Until the quarter ended
December 31, 1995, the Company had not generated an annual pre-tax profit since
its year ended December 31, 1989. In such year the Company had a profit before
taxes of $747,739 on net sales of $11,400,927. During the year ended September
30, 1995 and the nine months ended September 30, 1994, the Company had net sales
of $11,551,169 and $4,166,807, respectively. Losses before taxes for fiscal 1995
and the nine months ended September 30, 1994 were $1,523,078 and $1,288,916,
respectively. As of September 30, 1995, the Company had an accumulated
deficit of $2,493,532. The Company's working capital as of September 30, 1995
was $1,472,033 compared to a working capital deficiency of $779,839 as of
September 30, 1994. The Company had net sales of $8,239,378 for the six months
ended March 31, 1996 compared to $5,120,026 for the comparative six months one
year previous. Income before taxes was $304,054 for the six months ended March
31, 1996 compared to a loss before taxes of $826,192 for the comparative six
months one year previous. The Company had an accumulated deficit
of $2,209,478 as of March 31, 1996 compared to $1,796,646 as of March 31, 1995.
The Company's working capital as of March 31, 1996 was $1,751,020 compared to
$2,112,334 as of March 31, 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". The Company's ability to
continue its profitability will depend on several factors including; its ability
to expand marketing and sales efforts in the United States and Europe and thus
increase sales, enhancing its products through ongoing research and
development, improving its gross margins and controlling its expenses. No
assurance can be given that the Company will be able to continue to be
profitable following this Offering. There can be no assurances that the
Company's losses will not resume and continue or that the Company will be
profitable in the future.
2. Dependence Upon Proceeds from the Offering and Possible Need for
Additional Financing. The Company believes that it has sufficient capital to
fund its operations for at least 12 months from the date of this
Prospectus. On March 28, 1996, Hauppauge Computer Works, Inc., the Company's
wholly owned subsidiary, entered into a loan facility (the "Credit Agreement")
with MTB Bank ("MTB"). The Credit Agreement provides for, among other things,
a credit line to the Company of up to $1,100,000 increasing to up to $1,600,000
upon receipt by MTB of the Company's September 30, 1996 consolidated financial
statements. The credit line is secured by the assets of the Company and are
based upon eligible accounts receivable and the terms of the Credit
Agreement. As of May 31, 1996, the Company has not utilized this loan facility.
The Company, HCW Distributing Corp., HCW GmbH, LTD, Kenneth R. Aupperle and
Kenneth Plotkin have guaranteed the obligations of Hauppauge Computer Works,
Inc. The guarantee of Messrs. Aupperle and Plotkin are each limited to a
maximum of $150,000. The loan requires the Company to have a consolidated net
worth of at least $1,750,000 until September 30, 1996 and $2,000,000 thereafter,
and if the Company does not meet these and other covenants the Company may lose
the credit facility. The Company, HCW Distributing Corp., HCW GmbH and LTD have
each entered into a security agreement with MTB. If the Company's losses were to
resume and the Company does not receive any proceeds from this Offering, the
Company may be required to seek additional financing. There can be no
assurances that the Company will be able to obtain additional financing on
acceptable terms or at all. In the event that the Company is unable to obtain
such additional financing, development or commercialization of certain of its
present or planned products would be suspended, and the Company's ability
to grow or become profitable may be impaired. In such event, holders of
Warrants who choose to exercise such Warrants may lose their entire investment.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
3. Change in Focus of Company's Business. The Company has been in the
personal computer market since its inception in 1982. From 1987 until 1991,
the Company concentrated its business on the development and sale of system
boards which are the "heart" of a PC and which may be used to upgrade older
PCs. From the
<PAGE>
inception of the Company and until 1987, the Company focused its business on
the development and sale of hardware and software for math acceleration products
for the PC market used to accelerate scientific and mathematical calculations.
The Company stopped actively marketing these products by 1988. Over the last
four years, the Company has changed the focus of its business by developing and
manufacturing products for the digital video market, consisting of Win/TV
boards. Sales of PC system boards constituted 7% of the Company's
revenue for the year ended September 30, 1995, 29% for the nine months ended
September 30, 1994 and 51% of the Company's revenues in 1993. For the six months
ended March 31, 1996, PC system sales accounted for 10% of the Company's sales
compared to 11% for the previous year's first six months. The Company believes
that sales of PC system boards will represent a smaller percentage of overall
revenue in 1996 and beyond. The Company has not operated profitably during the
period of its shift in emphasis to products for the digital video
market and there can be no assurances that the Company will ever return to
profitability. See "Business".
4. Reliance on Products for Digital Video Market. Since 1991, when the
Company altered the focus of its business, the Company has concentrated its new
product development primarily on products for the digital video market
through its development of the Win/TV board. For the year ended September 30,
1995, the digital video products have accounted for 93% of the Company's
revenues. Sales of digital video products constituted 71% of the Company's
revenues for the nine months ended September 30, 1994, compared to 49% in 1993.
For the six months ended March 31, 1996, sales of digital video products
accounted for 90% of revenues compared to 89% of sales for the six months
ended March 31, 1995. It is anticipated that digital video products will
account for an increasing percentage of the Company's revenues in 1996.
Though the Company believes that the digital video market will have dramatic
growth in the upcoming years, there can be no assurances that there will
be substantial growth in this market, as the Company believes that the
technology for the digital video market is still in its early stages.
Furthermore, there can be no assurance that the Company's products will be
successful in this market. See "Business".
5. Rapid Changes in Technology and Lack of Funds for 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 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, prior to the Unit Offering, was
hindered by a lack of working capital which has allowed it to expend only
$269,888 and $214,174 for research and development expenses for fiscal 1995
and for the nine months ended September 30, 1994, respectively. The Company has
budgeted approximately $398,000 for research and development for fiscal 1996.
There can be no assurance that the Company's research and development will be
successful, that the Company will be able to foresee and respond to such
advances in technological developments, or that proceeds of this Offering to be
utilized for research and development will be sufficient for the Company's
purposes. 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 "Business--Product Production".
6. Highly Competitive Industry. 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 is expected to increase as the market for digital video in a PC and for
PC-based video teleconferencing expands. There can be no assurance 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. See "Business - Competition".
7. Proprietary Rights and Patents. 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
<PAGE>
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. There can be no assurance that challenges will not be
instituted against the validity or enforceability of any patents which may be
issued or licensed to the Company or, if instituted, that such challenges will
not be successful. The cost of litigation to uphold the validity of a patent
and prevent infringement can be substantial even if the Company were to prevail.
See "Business-Patents and Trademarks".
8. Dependence on Major Customers. For fiscal 1995 and the nine months
ended September 30, 1994, Reuters Ltd. ("Reuters") accounted for approximately
16.6% and 18.1%, respectively, of the Company's sales. The foregoing was the
only customer to account for more than 10% of the Company's sales during fiscal
1995. For the six months ended March 31, 1996, Vobis AG
accounted for 10.1% of the Company's sales, and
Reuters accounted for 9.9%. No other customer accounts for more than 10% of
sales during such six month period. The loss of Reuters or Vobis AG
could have a material adverse affect on the Company's business and
its financial condition. See "Business -Marketing and Sales".
9. Dependence on Foreign Sales. For the fiscal year ended September 30,
1995 and the nine months ended September 30, 1994, approximately 70% and 45% of
the Company's sales were made outside the United States (predominately in
Germany and Great Britain). For the six months ended March 31, 1996 and 1995,
approximately 62% and 66%, respectively, of the Company's sales were made
outside the United States. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". The Company's business and
prospects could thus be adversely affected by adverse political and economic
conditions in foreign countries and may also be subject to many of the risks of
foreign sales and operations, including tariff restrictions and currency
control regulation.
10. Low Operating Margins. Due to the competitiveness in the computer
industry and because of the Company's aggressive pricing strategy, the Company
has low gross margins. Consequently, its profitability is highly dependent
upon effective cost and management controls. See "Business-Product Production".
11. Dependence on Suppliers. The Company is dependent upon AuraVision
Corporation ("AuraVision") for its supply of digital video processing chips,
which are necessary for the production 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 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, to a lesser extent, upon Philips, a division of North
American Philips Company ("Philips") and Brooktree Corporation ("Brooktree"),
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 Company may also be adversely
affected because the Company would have to seek alternative suppliers of video
digitizers which may adversely affect the Company's production and
profitability. See "Business - Product Production".
12. International Market Susceptible to Currency Fluctuations. The
Company's international sales are invoiced primarily in U.S. dollars. A rising
value of the U.S. dollar makes the Company's products more expensive to
overseas buyers. The Company's sales could be materially impacted if the U.S.
dollar rose in value compared with the German mark and the British pound, the
two currencies of the countries which account for most of the international
sales.
13. Reliance on Current Management and Key Personnel. The Company's
success depends to a large extent upon the efforts and abilities of its key
executive officers, Kenneth R. Aupperle and Kenneth Plotkin, the President
and Chief Executive Officer, respectively, of the Company. See "Management -
Executive Compensation and Employment Agreements" for the terms of employment
agreements with Kenneth R. Aupperle
<PAGE>
and Kenneth Plotkin. Currently, the Company has key person life insurance in
the amount of $1,000,000 on each of the lives of Kenneth R. Aupperle and Kenneth
Plotkin. No assurance can be given the insurance can or will be maintained.
The loss of either of these individuals could have a material adverse effect on
the Company. The success of the Company's business will also depend upon its
ability to attract and retain qualified employees. There can be no assurances
that the Company will be successful in attracting or retaining such personnel.
See "Management".
14. Control by Management. As of the date of this Prospectus, the
Company's executive officers and directors own of record and beneficially
1,256,360 shares of Common Stock, an aggregate of 44.7% of the Company's
outstanding Common Stock and may be in a position to have significant influence
over the outcome of all matters submitted to stockholders for approval,
including the election of directors of the Company, as a result of their
control of such shares which will vote on all matters. See "Management" and
"Principal Shareholders." The foregoing does not reflect the issuance of
133,333 shares of Common Stock with respect to the exercise of the Underwriter's
Unit Purchase Option which will reduce the percentage controlled by management.
15. No Dividends and None Anticipated. The Company has not paid any
dividends on its Common Stock since its inception and does not contemplate or
anticipate paying any dividends on its Common Stock in the foreseeable future.
It is anticipated that earnings, if any, will be used to finance the development
and expansion of the Company's business. See "Dividend Policy" and "Description
of Securities".
16. Immediate and Substantial Dilution. As of March 31, 1996, the net
tangible book value of the Company was $1,959,427, or approximately $0.71 per
share of Common Stock, based on 2,756,183 shares outstanding on such date.
Purchasers of Warrants in the Offering will suffer immediate dilution of $1.89
per share of Common Stock, which is approximately 50%, based on investors
converting their Class A Warrants and Underwriter Units to Common Stock. See
"Dilution".
17. Alleged Market Manipulation by the Underwriter. The National
Association of Securities Dealers, Inc. ("NASD") recently alleged that the
Underwriter and others, including Leonard A. Neuhaus, a director of the Company,
in 1991, engaged in market manipulation, inaccurately maintained books and
records and failed to adequately supervise the activities of the Underwriter's
personnel in connection with the trading for the Underwriter's account of
warrants which were part of a public offering of units of convertible preferred
stock and warrants of a company for which the Underwriter had acted in 1991 as
managing underwriter. In order to expeditiously resolve this matter and without
admitting or denying these allegations, in January 1995, Mr.Neuhaus and others
voluntarily entered into a Letter of Acceptance, Waiver and Consent with the
NASD pursuant to which Mr. Neuhaus was censured and fined by the NASD, agreed
to pay with the Underwriter and others restitution to customers and was
suspended for associating with any NASD member for a three month period.
18. Potential Adverse Effect of Redemption of Warrants. The Company
currently has 1,476,183 Class A Warrants outstanding to purchase shares of
Common Stock plus an additional 133,333 Class A Warrants issued upon the
Underwriter's exercise of its Unit Purchase Options. The exercise of such
Warrants, or a substantial portion thereof, and the sale of the shares issued
upon exercise of such Warrants could adversely affect the market price of the
Common Stock. On June 3, 1996, the Company called for redemption on July 5,
1996, all of its outstanding Class A Warrants in accordance with Article VI of
the Warrant Agreement dated January 10, 1995. The Company has extended the
Redemption Date until July 17, 1996. Redemption of the Warrants may force the
holders to exercise the Warrants and pay the exercise price at a time when it
may be disadvantageous for the holders to do so, to sell the Warrants at the
then current market price when they might otherwise wish to hold the Warrants,
or to accept the redemption price, which is likely to be substantially less than
the market value of the Warrants at the time of redemption. The Warrants may
not be exercised unless a registration statement pursuant to the Securities Act
of 1933, as amended (the "Securities Act") covering the underlying shares of
Common Stock is current and such shares have been qualified for sale, or there
is an
<PAGE>
exemption from applicable qualification requirements, under the securities laws
of the state of residence of the holder of the Warrants. Although the Company
does not presently intend to do so, the Company reserves the right to call the
Warrants for redemption whether or not a current prospectus is in effect or
such underlying shares are not, or cannot be registered in the applicable
states. See "Description of Securities -- Warrants."
19. Shares Eligible for Future Sale. Of the shares of Common Stock of the
Company outstanding as of the date of this Prospectus, 1,280,000 shares are
restricted securities, as that term is defined in Rule 144 promulgated under
the Securities Act, and may only be sold pursuant to a registration under the
Securities Act,in compliance with Rule 144 under the Securities Act, or
pursuant to another exemption therefrom. In general,under Rule 144, subject
to the satisfaction of certain other conditions, a person, including an
affiliate of the Company, who has beneficially owned restricted shares of
Common Stock for at least two years is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1%
of the total number of outstanding shares of the same class, or if the Common
Stock is quoted on NASDAQ, the average weekly trading volume during the four
calendar weeks preceding the sale. A person who has not been an affiliate of
the Company for at least three months immediately preceding the sale and who
has beneficially owned the shares of Common Stock for at least three years is
entitled to sell such shares under Rule 144 without regard to any of the volume
limitations described above. Messrs. Aupperle and Plotkin and their wives,
holders of 1,150,260 shares of Common Stock, have agreed not to permit or
cause a private or public sale or public offering of their shares of
Common Stock until August 9, 1996 (eighteen (18) months from the effective date
of the Unit Offering) without obtaining the prior written approval of the
Underwriter. No assurance can be made as to the effect, if any, that sales
of shares of Common Stock or the availability of such shares for sale will have
on the market prices prevailing from time to time. Nevertheless, the possibility
that substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Company's ability to raise capital in the future through the sale of equity
securities. See "Shares Eligible for Future Sale."
20. Penny Stock Regulation. In the event that the Company is unable to
satisfy the maintenance requirements for the NASDAQ small capitalization market
or the Boston Stock Exchange, trading would be conducted on the "pink sheets"
or the NASD's Electronic Bulletin Board. In the absence of the Common Stock
being quoted on NASDAQ or the Boston Stock Exchange, or the Company's having
$2,000,000 in stockholders' equity, trading in the Common Stock would be
covered by Rule 15g-9 promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), for non-NASDAQ and non-exchange listed
securities. Under such rule, broker-dealers who recommend such securities to
persons other than established customers and accredited investors must make
a special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if the market price is at least $5.00 per share.
The Commission adopted regulations that generally define a penny stock to
be any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include an equity security
listed on NASDAQ, the Boston Stock Exchange, and an equity security issued by
an issuer that has (i) net tangible assets of at least $2,000,000, if such
issuer has been in continuous operation for three years, (ii) net tangible
assets of at least $5,000,000, if such issuer has been in continuous operation
for less than three years, or (iii) average revenue of at least $6,000,000 for
the preceding three years. Unless an exception is available, the regulations
require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith.
If the Company's securities were to become subject to the regulations
applicable to penny stocks, the market liquidity for the securities would be
severely affected by limiting the ability of broker-dealers to sell the
securities and the ability of holders of the Company's securities to sell their
securities in the secondary market. There is no assurance that trading in the
Company's securities will not be subject to these or other regulations
that would adversely affect the market for such securities.
<PAGE>
21. Current Prospectus and State Blue Sky Registration Required to
Exercise Warrants. Holders of Warrants will have the right to exercise
Warrants for the purchase of shares of Common Stock only if a current
prospectus relating to such shares is then in effect and only if the shares are
qualified for sale under the securities laws of the applicable state or
states. The Company has undertaken and intends to file and keep current the
Prospectus which will permit the purchase and sale of the Common Stock
underlying the Warrants, but there can be no assurance that the Company will
be able to do so. Although the Company intends to seek to qualify for sale
the shares of Common Stock underlying the Warrants in those states in which
the securities are to be offered, no assurance can be given that such
qualification will occur. The Warrants may be deprived of any value if a
prospectus covering the shares issuable upon the exercise thereof is not kept
current or if such underlying shares are not, or cannot be, registered in
the applicable states. See "Description of Securities -- Warrants."
22. Non-Registration in Certain Jurisdictions of Shares Underlying the
Warrants. Holders of Warrants may presently or in the future move to
jurisdictions in which the shares of Common Stock issuable upon exercise of
the Warrants are not registered or qualified during the period that the
Warrants are exercisable. In such event, the Company would be unable to
issue shares to those persons desiring to exercise their Warrants unless
and until the shares could be registered or qualified for sale in the
jurisdiction in which such purchasers reside, or an exemption to such
qualification exists in such jurisdiction. If the Company were unable to
register or qualify the shares in a particular state and no exemption to such
registration or qualification was available in such jurisdiction, the holder
of the Warrants might not be able to realize any economic benefit from the
Warrants. See "Description of Securities -- Warrants."
23. Relationship of Underwriter Trading. The Underwriter may act in a
brokerage capacity with respect to the purchase or sale of Common Stock or
Class A Warrants in the over-the-counter market where each will trade. The
Underwriter also has the right to act as the Company's exclusive agent in
connection with any future solicitation of warrantholders to exercise their
Class A Warrants. Unless granted an exemption by theCommission from Rule 10b-6
promulgated under the Exchange Act, the Underwriter and any soliciting broker-
dealers will be prohibited from engaging in any market-making activities or
solicited brokerage activities with regard to the Company's securities during
a period beginning nine business days prior to the commencement of
any such solicitation and ending on the later of the termination of such
solicitation activity or the termination (by waiver or otherwise) of any
right that the Underwriter and soliciting broker-dealers may have to receive a
fee for soliciting the exercise of the Class A Warrants. As a result, the
Underwriter and soliciting broker-dealers may be unable to continue to make a
market for the Company's securities during certain periods while the Class A
Warrants are exercisable. Such a limitation, while in effect, could impair
the liquidity and market price of the Company's securities. See "Plan of
Distribution".
24. Underwriter's Unit Purchase Option and Registration Rights. In
connection with the Unit Offering, the Company sold to the Underwriter, for
$10, the Underwriter's Unit Purchase Option which entitles the Underwriter
to purchase 133,333 Underwriter Units. The Underwriter has exercised its
Option, for 67,000 Units at $3.75 per Underwriter's Unit and 66,333 for $4.41,
all during the past thirty days. The exercise of the Underwriter's Unit
Purchase Option and the exercise of the Underwriter Warrants contained in the
Underwriter Unit may dilute the value of the shares of Common Stock to be
acquired by holders of the Class A Warrants, may adversely affect the
Company's ability to obtain equity capital, and, if the Common Stock issuable
upon the exercise of the Underwriter's Unit Purchase Option and the
Underwriter's Warrants are sold in the public market, such may affect the
market price of the Common Stock.
25. Broad Discretion in Application of Proceeds. The net proceeds of
this Offering will be $6,555,780, if all of the Warrants and Underwriters Units
are exercised, less any warrant solicitation fee. These net proceeds will be
utilized for working capital and general corporate purposes which include the
purchase of inventory, payment of accounts payable, salaries, financing
receivables and other operating expenses including the payment of salaries
to executive officers. Accordingly, the Company will have broad discretion as
to the application of such proceeds. See "Use of Proceeds".
<PAGE>
USE OF PROCEEDS
If all of the Warrants and Underwriters Units are exercised, of which
there can be no assurance, the Company will receive aggregate net proceeds of
approximately $6,555,780 after the deduction of approximately $23,683 for
expenses in connection with this Offering. This does not include additional
compensation which may be paid to the Underwriter by the Company arising from
the Company's agreement that it pay to the Underwriter a solicitation fee of
five (5%) percent(or a maximum of $301,784) of the aggregate exercise price of
the Class A Warrants exercised through the efforts and with the assistance of
the Underwriter. See "Plan of Distribution" and page 2 of the Cover Page. The
Company anticipates that the net proceeds of the Offering will be utilized as
follows:
Percentage
Amount of Net Proceeds
-------- ----------------
Working Capital and
General Corporate Purposes $6,555,780 100%
These net proceeds which will be utilized for working capital and general
corporate purposes include the purchase of inventory, payment of accounts
payable, salaries, financing receivables and other operating expenses
including the payment of salaries to executive officers. Accordingly, the
Company will have broad discretion as to the application of such proceeds.
The foregoing represents the Company's best estimates of the anticipated
use of the net proceeds of the Company based upon its present plans and certain
assumptions regarding general economic conditions and the Company's future
revenues and expenditures. Proceeds not immediately required for specified uses
will be invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term
interest-bearing investments. While the Company hopes that substantially all
of the Class A Warrants will be exercised, if the market price of the Company's
Common Stock exceeds $3.75 per share, to the extent that less than the proceeds
estimated above are received by the Company, the Company's Board will determine
how much of the funds received will be applied to each of the above uses. In
addition, if the Company's Board deems it reasonable and appropriate, the uses
may be changed.
DIVIDEND POLICY
The payment by the Company of dividends, if any, rests within the
discretion of its Board of Directors and, among other things, will depend upon
the Company's earnings, capital requirements and financial condition,
as well as other relevant factors. The Company has not declared any dividends
since inception, and has no present intention of paying any dividends on its
Common Stock in the foreseeable future, and intends to use earnings to
generate increased growth. Pursuant to the terms of the Credit Agreement with
MTB, the Company is prohibited from declaring or paying any cash dividends.
See "Managements Discussion and Analysis of Financial Conditions and Results
of Operations - Financial Condition".
<PAGE>
DILUTION
As of March 31, 1996, the net tangible book value of the Company was
$1,959,427, or approximately $0.71 per share of Common Stock. Net tangible
book value represents the Company's tangible assets less total
liabilities. Dilution per share represents the difference between the amount
paid per share upon conversion by the purchasers of the Class A Warrants and
Underwriter's Units, and the net tangible book value per share after
conversion of all the Class A Warrants and Underwriter's Units. After giving
effect to (i) the exercise of 1,609,516 Class A Warrants and (ii) exercise of
the 133,333 Underwriter's Units, and the receipt and application of the
estimated net proceeds therefrom (not including any warrant solicitation fee),
the Company's net tangible book value as of March 31, 1996 would have been
$8,515,207 or approximately $1.89 per share, which represents an immediate
increase in the net tangible book value of $1.18 per share to current
shareholders and an immediate dilution of $1.89 per share to the investors
converting their Class A Warrants and Underwriter Units to common stock.
The following table indicates the per share dilution to be incurred by the
investors who exercise their Warrants and Underwriter Units from the exercise
prices:
Weighted Average Exercise price (1)................................... $3.78
Net tangible book value before exercise of Warrants.... $0.71
Increase per share attributable to
investors exercising Warrants................... $1.18
Net tangible book value per share after exercise of Warrants........ $1.89
Dilution per share to investors exercising Warrants....................$1.89
______
(1) Weighted average exercise price in the result of 1,609,516 Class A
Warrants exercised at $3.75 per warrant plus 67,000 Underwriter's Units
exercised at $3.75 per unit and 66,333 exercised at $4.41 per unit.
The following table summarizes the number of shares of Common Stock
purchased from the Company through the date of this updated registration
statement, the amount of cash consideration paid and the average price
per share paid by existing shareholders and by the investors exercising
their Class A Warrants and Underwriter's Units:
Average
Shares Price
Purchased Consideration Paid Per Share
New investors exercising
warrants 1,609,516 $6,035,685 $3.75
Underwriter's Units 133,333 $543,779 4.08
Amount from exercising ----------- ---------- ----
security holders 1,742,849 $6,579,464 3.78
Existing shareholders 2,756,183 $4,212,000 1.53
Total 4,499,032 $10,791,464
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted to give effect to the exercise of Class A
Warrants and Underwriter's Units pursuant to this updated registration
statement. This table should be read in conjunction with the Company's
Financial Statements and the Notes thereto, included elsewhere in this
updated registration statement.
March 31, 1996
--------------
Actual As Adjusted (1)
------ -------------
Shareholders' Equity
Common Stock $.01 par value:
Authorized 10,000,000 shares
Issued and outstanding - 2,756,183
and 4,499,032 respectively (2) $ 27,562 $ 44,990
Additional paid in capital 4,141,343 10,679,695
Accumulated deficit (2,209,478) (2,209,478)
Total shareholders' equity $ 1,959,427 $ 8,515,207
_______
(1) Gives effect to the exercise of Class A Warrants and the conversion of the
Underwriter's Units to Common Stock and the receipt of net proceeds of
approximately $6,555,780 without any reduction for Underwriter's
solicitation fees. See "Use of Proceeds" and "Plan of Distribution".
(2) Does not include any shares of Common Stock that may be issued as the
result of existing stock options.
<PAGE>
MARKET INFORMATION
The principal market on which 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. Effective January 10, 1995, the Company offered for
sale 1,333,333 Units, each of which consisted of one 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 sales prices as determined from NASDAQ for the Common Stock from April 25,
1995 until June 12, 1996.
High Low
---- ----
Fiscal Year Ended
September 30, 1996
- ------------------
First Quarter 3 15/16 1 5/8
Second Quarter 4 3/8 3
Third Quarter (until 7 5/8 3 1/4
June 12, 1996)
Fiscal Year Ended
September 30, 1995
- ------------------
Third Quarter (commencing
April 25, 1995) 3 1/2 2 1/8
Fourth Quarter 2 1/2 1 5/8
The following chart sets forth the high and low sales prices as determined
from NASDAQ for the Units from January 10, 1995 until April 24, 1995:
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
The approximate number of holders of record of the Common Stock as of June
12, 1996 was 77. The Company believes there are in excess of 750 beneficial
holders of the Common Stock. On June 12, 1996, the closing price of the Common
Stock was $6.25.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
Six Months ended March 31, 1996 compared to six months ended March 31, 1995
Sales for the six months ended March 31, 1996 were $8,239,378, compared to
$5,120,026 for the comparable period in the prior fiscal year, resulting in an
increase of $3,119,352 or 61%. The increase in sales was primarily due to
the investment of the IPO proceeds during the prior fiscal year in increased
marketing and production capabilities. 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:
Six Months Ended March 31, Increase
1996 1995 (Decrease)%
---- ------ -----------
P.C. System Sales $ 845,588 $ 581,335 45
Win/TV Boards 7,393,790 4,538,691 63
---------- ---------- ---
Total Company Sales $8,239,378 $5,120,026 61
========== ==========
Unit sales of Win/TV boards, the Company's digital video TV board, increased to
approximately 33,200 as compared to approximately 16,400 for the prior year,
resulting in an increase of 102%. Sales to domestic customers for the six
month period were 38% of net sales for the current year and 34% for the prior
year. Sales to international customers, which were primarily in U.S. Dollars,
were 62% of net sales for the current year and 66% for the comparable period
of last year.
Gross profit increased to $1,974,623 from $1,129,097, an increase of
$845,526 or 75% over the prior comparable fiscal year period. The gross profit
percentage increased to 24% from 22%. 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.
Though selling, general and administrative expenses increased $176,584
over the prior year, they declined to 18% of revenue in the current year
compared to 26% of revenue for the six months ended March 31, 1995. The
increase in expenses was primarily due to increased sales and marketing
expenses of $207,316, mainly due to intensified marketing programs for
advertising and trade shows plus increased commissions because of
higher sales, increased general and administrative of $47,626, mainly for
increased compensation costs for new personnel and wage increases offset by
$42,726 in lower support and freight costs.
Research and development expenses increased $111,879 or approximately 125%.
The increase was due to the infusion of new capital from the Company's January
1995 IPO, which was used to expand the Company's engineering research and
development resources to enhance current products and further develop future
product lines.
<PAGE>
The Company had net other income of $23,875 for the March 31, 1996 six
month period as opposed to net other expense of $549,308 for the corresponding
six months of the preceding fiscal year. The increase in net other income was
primarily due to the non recurring private placement financing costs of
$572,674 charged to operations in the first fiscal quarter of 1995 plus higher
interest income.
As a result of all of the above, the Company recorded a net profit after
taxes for the six months ended March 31, 1996 of $284,054 or $0.10 per share as
opposed to a net loss after taxes (which taxes for the prior year were nominal)
of ($826,192) or ($0.41) per share.
Three Months ended March 31, 1996 compared to three months ended March 31, 1995
Net sales for the three months ended March 31, 1996 were $3,729,161,
compared to $2,966,220 for the comparable period in the prior fiscal year,
resulting in an increase of $762,941 or 26%. The increase in sales was
primarily due to the investment of the IPO proceeds during the prior fiscal
year in increased marketing and production capabilities. 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:
Three Months Ended March 31, Increase
1996 1995 (Decrease)%
---- ---- -----------
P.C. System Sales $ 443,012 $ 303,824 46
Win/TV Boards 3,286,149 2,662,396 23
---------- ---------- --
Total Company Sales $3,729,161 $2,966,220 26
========== ===========
Unit sales of Win/TV boards, the Company's digital video TV card, increased to
approximately 13,200 as compared to approximately 9,104 for the prior year,
resulting in an increase of 45%. Sales to domestic customers for the three
month period were 43% of net sales for the current year and 32% for the prior
year. Sales to international customers, which were primarily in U.S. Dollars,
were 57% of net sales for the current year and 68% for the comparable period of
last year.
Fiscal 1996 second quarter sales were approximately 17% lower than sales
for the first fiscal quarter. Sales for the fiscal first quarter were impacted
by the surge of consumer buying during the holiday season. The general slowdown
of consumer purchases after the holiday season, which causes distributors and
retailers to curtail purchases and sell off existing inventories, resulted in
the lower fiscal second quarter sales as compared to the fiscal first quarter.
Gross profit increased to $933,215 from $655,290, an increase of $277,925
or 42% over the prior comparable fiscal year period. The gross profit
percentage increased to 25% from 22%. 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.
Though selling, general and administrative expenses increased $46,083
over the prior year, they declined to 20% of revenue in the current quarter
compared to 24% of revenue for the three months ended March 31, 1995. The
increase in expenses was primarily due to increased sales and marketing
expenses of $94,469, mainly due to intensified marketing programs for
advertising and trade shows plus increased commissions because of higher
sales offset by $34,179 in lower support and freight costs.
Research and development expenses increased $59,780 or approximately 126%.
The increase was due
<PAGE>
to the infusion of new capital from the Company's January 1995 IPO, which was
used to expand the Company's engineering research and development resources to
enhance current products and further develop future product lines.
The Company had net other income of $11,719 for the March 31, 1996 three
month period compared to net other income of $33,289 for the corresponding
three months of the preceding fiscal year. The decrease in net other income
from the same quarter in the prior year was due to lower foreign currency gains
and lower interest earned on excess funds.
As a result of all of the above, the Company recorded a net profit after
taxes for the three months ended March 31, 1996 of $81,427 or $0.03 per share
as opposed to a net loss after taxes (which taxes for the prior year were
nominal) of ($59,065) or ($0.02) per share.
Year ended September 30, 1995 compared to the nine months ended September 30,
1994
Net sales for the year ended September 30, 1995 were $11,551,169, compared
to $4,166,807 for the nine months ended September 30, 1994, resulting in an
increase of $7,384,362 or 177%. The increase in net sales has been attributable
to the Company's ability to accelerate production of Win/TV boards and increase
marketing programs due to the infusion of capital derived from the Company's
October 1994 Private Placement Offering and January 1995 public offering (See
Note 6 to the attached financial statements), plus the elimination in 1994
of development problems, which created strong product demand and significant
sales increases.
Net sales of the Company's products are summarized as follows:
Nine months
Year ended September 30, Increase
1995 1994 (Decrease)%
----- ------ ------------
System Boards $ 792,857 $1,208,573 (34)
Win/TV Boards 10,758,312 2,958,234 264
---------- ----------- ----
Total Net Sales $11,551,169 $4,166,807 177
=========== ============ ===
Unit sales of Win/TV boards, the Company's newest product line, increased
to approximately 41,600 as compared to approximately 8,800 for the prior nine
month period, resulting in an increase of 375%. Sales to domestic customers for
the year ended September 30 were 30% of net sales for the current year and 55%
for the nine months ended September 30, 1994. Sales to international customers,
which were primarily in U.S. Dollars, were 70% of net sales for the current
year and 45% for the nine months ended September 30, 1994.
Gross profit increased $1,753,937 or 317% when compared to the prior nine
month period. The gross profit percentage increased to 20% from 13%. The
negative impact of $300,000 charged to the reserve for inventory obsolescence
during the nine months ended September 30, 1994 due to the declining sales of
systems boards plus the dynamics of the market mix of product sold were the
major contributors to the contraction of the 1994 gross profit percentage.
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,
<PAGE>
which represents the excess of the fair market value over the price of the
shares sold relating to a July 1995 sale of 99,740 shares owned by the
principal shareholders and sold for $0.03 per share to certain key employees,
was charged to operations as additional compensation. This compensation
charged to operations by reason of the stock sold by the principal shareholders
had no net effect upon shareholders equity as of September 30, 1995 and
no impact upon future operations of the Company.
Research and development expenses increased $55,714, or approximately 26%.
The increase was due to the infusion of new capital generated by the IPO which
enabled the Company expand its research and development resources to further
the implementation of existing product lines and develop new product lines.
The Company had net other expense of $409,583 for the year ended
September, 30, 1995 as opposed to net other expense of $7,108 for the nine
months ended September 30, 1994. The increase in expense was primarily due to
the cash expenses of the Private Placement Offering, $30,674, and the
underlying value of the units issued, $449,978 (142,850 shares valued at the
IPO price of $3.15) which were charged to expense under the caption "Private
Placement Financing Costs" (See Note 6 to the attached financial statements),
offset somewhat by higher interest income.
In light of the above, the Company experienced a decrease in the net loss
from operations of $168,313 for the year ended September 30, 1995. Due to the
nonrecurring charge of $480,652 for private placement financing costs incurred
during 1995, the net loss increased $205,530 when compared to the nine months
ended September 30, 1994.
Nine months ended September 30, 1994 compared to year ended December 31, 1993
For the nine months ended September 30, 1994, the Company had net sales of
$4,166,807 and a loss before taxes of $1,288,916 compared to net sales of
$8,399,612 and a loss before taxes of $287,661 for the year ended December 31,
1993. The decrease in sales was related primarily to (a) a reduction in sales
of PC system boards and (b) product development delays in introducing a new
line of digital video products, consisting of Win/TV boards, which the Company
did not begin to ship until May of 1994. Net sales to international customers
aggregating 45% of total net sales were comprised of sales to customers in the
United Kingdom (21%), Germany (5%), Switzerland (4%), Norway (3%) and all other
international countries (12%). International orders are typically billed in
U.S. dollars, at the same prices as domestic orders. Therefore, profitability
in the domestic market and in the international market are roughly comparable.
From 1987 and until 1991, the Company concentrated its business on the
development and sale of system boards which are the "heart" of a PC and which
may be used to upgrade older PCs. From the inception of the Company and until
1987, the Company focused its business on the development and sale of hardware
and software for math acceleration products for the PC market used to
accelerate scientific and mathematical calculations. The Company stopped
actively marketing these products by 1988. Over the last three years, the
Company has changed the focus of its business by developing and manufacturing
products for the digital video market, consisting of Win/TV boards. Sales of
PC system boards constituted 29% of the Company's revenue for the nine months
ended September 30, 1994, 51% of the Company's revenues in 1993, and 85% in
1992. The Company believes that sales of PC system boards will represent a
smaller percentage of overall revenue in 1995 and beyond. On June 15, 1994
because of the continued sales declines and certain market developments,
including the rapid acceptance of a new generation of processor chips which
adversely affected the salability of products based on earlier generations,
the Company decided to de-emphasize the marketing of its PC system boards
product line in favor of the newer Win/TV boards and, as a result, recorded a
reserve for inventory obsolescence in the amount of $300,000. Such amount has
been reflected separately in the statement of operations for the nine months
ended September 30, 1994. The Company will continue to sell its PC system
boards to certain customers at amounts in excess of the recorded net cost of
such products. Although the Company is not emphasizing the sale of this
product line, the Company currently has not set a date as to when it will
cease sales of the PC system boards.
<PAGE>
Cost of sales (including provision for obsolescence) for the nine months
ended September 30, 1994 was $3,613,331, or 87%, as compared to $6,334,278,
or 75%, for the year ended December 31, 1993. The increase (as a percentage)
over the prior year was primarily attributable to the 1994 provision for
obsolescence as discussed above, and a higher mix of the Company's newer models
of its Win/TV product line (initially produced at lower profit margins).
The Company introduced the Celebrity and HighQ digital video boards in
November of 1993 at the Fall Comdex show in Las Vegas (a major United States
PC show) and originally scheduled these items for shipment in January of 1994.
However, due to product development delays, the Company was not able to ship
the Celebrity until May 1994 and did not ship the HighQ until July 1994. From
November 1993 until the first shipments in May 1994, many distributors did
not place orders for the Company's earlier models awaiting the release of the
newer models.
Financial Condition
The Company had a net cash position of $1,214,940, working capital of
$1,472,033 and shareholders' equity of $1,675,373 as of September 30, 1995. On
January 10, 1995, the Company completed a public offering of stock. The net
proceeds received from the offering were $3,267,023. In addition the Company
received net proceeds of $477,304 from a Private Placement Offering consummated
during October 1994, pursuant to which unaffiliated third parties loaned the
Company $600,000 (See Note 6 of the attached financial statements). For
the year ended September 30, 1995, $1,614,407 was used to fund operating
activities, with $2,268,792 invested in current assets offset by $1,261,747
of operations funded through accounts payable and accrued expenses. The
Company used $71,388 to acquire capital assets. Funds of $395,000 and
$600,000 were disbursed from the proceeds of the public offering to extinguish
bank and private placement debt.
The Company had a net cash position of $566,002, working capital of
$1,751,019 and shareholders' equity of $1,959,427 as of March 31, 1996. For
the six months ended March 31, 1996, $625,224 was used to fund operating
activities. The major components of cash usage were $374,915 invested in
inventories and $732,393 used to reduce current vendor liabilities, offset
partially by a $181,759 reduction in customer accounts receivable and cash
derived from the six month profit of $284,054.
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. 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 Reuters, 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. The credit line is secured
by the assets of the Company. In addition, the Company, HCW Distributing Corp.,
Hauppauge Computer Works GmbH, Hauppauge Computer Works Ltd., Kenneth R.
Aupperle and Kenneth Plotkin, have guaranteed the obligations of Hauppauge
Computer Works, Inc.. The quarantees of Messrs. Aupperle and Plotkin 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. If the Company does not meet the requirements of these and other
existing covenants, the Company will be in default per the Credit Agreement.
The Company is prohibited from paying cash dividends during the term of the
Credit Agreement. As of May 31, 1996, the Company has not utilized this loan
facility.
The Company believes that its recently completed bank financing plus its
internally generated cash flow will be sufficient to satisfy the Company's
anticipated operating needs for a least the ensuing twelve months.
<PAGE>
BUSINESS
General
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. Prior thereto and
since its inception in 1982, the Company focused its business on the
development and sale of hardware and software for math acceleration products
for the PC market which are used to accelerate scientific and mathematical
calculations. The Company stopped actively marketing these products by 1988.
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 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.
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.
Net sales of the Company's products for the Company's last two fiscal
years and the first six months of fiscal 1996 are summarized as follows:
Six Months Ended Year Ended Nine Months Ended
March 31, 1996 September 30, 1995 September 30, 1994
--------------- ------------------ ------------------
System Boards $ 845,588 $ 792,857 $1,208,573
Win/TV Boards $ 7,393,790 $ 10,758,312 $2,958,234
Total Company ----------- ------------- -----------
Sales $ 8,239,378 $ 11,551,169 $4,166,807
============ ============= ==========
The Product
The Win/TV board was designed so that a PC user can watch television in a
resizable window on her 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 PC's sound card.
All Win/TV board models come with software that runs under the popular
Microsoft Windows operating system 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 six models of the Win/TV board, two of which
were introduced in fiscal 1995. 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
<PAGE>
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 suggested
retail price of the Celebrity is $449.
The Win/TV-Cinema board ("Cinema") does not use SmartLock, but instead
uses a less expensive but more limited technique to connect to a PC. This
version has been popular with OEM manufacturers of PCs, who are more
interested in low cost designs than universal compatibility. PC OEM's have a
limited set of hardware in their system, and therefore, universality is not
as important to them. The suggested retail price of the Cinema is $349.
The Win/TV-HighQ ("HighQ") board was designed for users who needed higher
quality digitizing of video images for use in a PC. Uses include medical
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 suggested retail price of the HighQ
is $499.
The Win/TV-02 board ("-02") was designed for the computer retail market
and was introduced in 1991 primarily to be sold in the upgrade market. Due to
system compatibility limitations in older generations of PCs, the -02 is being
phased out of production and is being replaced by the Celebrity and Cinema.
The Win/TV Prism board ("Prism"), which was introduced in fiscal 1995, 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 Company believes that the low cost and the features of this
product make it an attractive OEM product. The suggested retail price of the
Prism is $249.
The Win/Motion 60 board ("Win/Motion"), which was also introduced in
fiscal 1995, 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 suggested retail price of the Win/Motion is $595.
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 Celebrity is currently the digital
video board of choice for the computer retail market and the Cinema and Prism
boards are the choice of the OEM market. The Company also expects that due to
the lower cost of the Cinema and Prism boards they will be popular in the
retail market as well.
<PAGE>
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 Windows operating system, the WindowsNT operating system and the
IBM OS/2 operating system. The Company subcontracts the manufacturing of the
Win/TV boards to independent third parties. The Company then assembles and
final tests the boards at its facility in Hauppauge, New York.
The Company is dependent upon AuraVision for its supply of digital video
processing chips, which are necessary for the production 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 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, to a lesser extent, upon Philips and
Brooktree, 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 Company
may also be adversely affected because the Company would have to seek
alternative suppliers of video digitizers which may adversely affect the
Company's production and profitability.
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 or Microsoft Word . 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, allowing 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
<PAGE>
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.
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 are just starting to become 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 are creating 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 1995, sales to the retail market through distributors from
the Company totaled approximately $7,785,262 or 67% of the Company's net sales.
This is in comparison to net sales of approximately $3,137,415 or 75% for the
nine months ended September 30, 1994. For the six months ended March 31, 1996,
sales to the retail market through distribution were $6,151,880 or 75% of
sales. 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 other than Volbis AG which accounted for $839,822 or 10.1% of sales.
These distributors sell to a variety of retailers who sell personal
computer products. Such retailers include PC Connection and Micro Warehouse
in the United States and Dixons and Escom in Europe.
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. It
is expected that the new generation of multimedia PCS will be among the fastest
growing market segments of the PC market. Until recently, multimedia equipped
PCS had a sound card and a CD-ROM. The new generation of multimedia PCS
currently being designed by OEMs will include digital video and in particular
TV video.
The Company is presently incorporating or planning to incorporate its
Win/TV board for use in products of Reuters and ships to 20 Reuters locations
worldwide. Reuters has developed a financial news service called "Reuters TV"
which requires a Win/TV, or similar, board in each stockbroker's PC to receive
the service. The Company has a Master Purchase Agreement with Reuters relating
to the -02 and Celebrity boards. The Company's sales to Reuters for the year
ended September 30, 1995 and for the nine months ended September 30,1994 totaled
$1,921,813 and $756,079, respectively. Reuters was the only company that
accounted for more than ten (10%) percent of the Company's sales during fiscal
1995. For the six months ended March 31, 1996, sales to Reuters were
$817,164, or 9.9% of the Company's sales.
The Company's remaining OEM business totaled approximately $1,844,094 for
fiscal 1995 compared to approximately $273,313 for the nine months ended
September 30, 1994. Current OEM customers include C. Olivetti & Co. S.p.A.,
IBM PC Company (PS/1 Division) and ICL Personal Computer Systems, OY. For fiscal
<PAGE>
1995, approximately 33% of the Company's net sales were for the OEM market as
compared to 25% for the nine months ended September 30, 1994. The Company's
remaining (other than Reuters) OEM business totaled approximately
$1,273,334 for the six months ended March 31, 1996.
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, 1995 and the nine months ended September 30, 1994, approximately 30% and
55% of the Company's sales were made within the United States, respectively,
while approximately 70% and 45% were outside the United States (predominately
in Germany and Great Britain), respectively. Less than 1% of the Company's
sales are currently made in Asia. LTD handles all sales outside of the United
States. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
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, 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 markets its
products at trade shows and lists its products in catalogs of various mail order
companies.
The Company currently has four international sales persons, three in
Germany who also cover continental Europe, and one in London. The Company has
four sales persons in the United States, located in New York and Dallas. The
Company also has two manufacturer Underwriters 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.
Major Customers
For the fiscal year ended September 30, 1995 and the nine months ended
September 30, 1994, Reuters accounted for approximately 16.6% and 18.1%,
respectively, of the Company's sales. Reuters was the only customer to account
for more than 10% of the Company's sales during fiscal 1995. The loss of Reuters
would have a material adverse affect on the Company's business and its
financial condition. During fiscal 1995, approximately 8% of the Company's net
sales were to ESCOM Computers, a distributor to the retail market in Europe.
ESCOM did not account for any significant sales in fiscal 1994. For the six
months ended March 31, 1996, Vobis AG accounted for 10.1% of sales and
Reuters accounted for 9.9% of sales.
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
<PAGE>
technology cannot be patented.
On December 27, 1994, the Company's mark, "Win/TV" was duly 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 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 $214,174 for research and development expenses for the
nine months ended September 30, 1994. During fiscal 1995, the Company expended
$269,888 for research and development expenses. 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. For the six months ended March 31, 1996,
the Company expended $201,270 for research and development.
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 March 31, 1996, the Company had 46 employees including its executive
officers, of which 39 are full-time and 7 are part-time. None of the Company's
employees are represented by a union, and management considers its relationship
with its employees to be excellent.
Litigation
The Company is presently party to no pending material legal proceedings.
Facilities
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 assembly
and storage 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 under a lease
agreement dated February 7, 1990 for a term of 20 years commencing February 1,
1990. Rent is currently at the annual rate of $306,627 per year. The rent is
payable in equal monthly installments and increases at a rate of 5% per year
on February 1 of each year
<PAGE>
thereafter. The premises are subject to two mortgages which have been
guaranteed by the Company upon which the outstanding principal amount due as
of March 31, 1996 was $1,232,989.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.
<PAGE>
MANAGEMENT
Directors and Officers
The directors and executive officers of the Company are as follows:
Name Age Position
- ----- --- ----------
Kenneth R. Aupperle 38 President, Chief Operations Officer and a Director
Kenneth Plotkin 44 Chief Executive Officer, Vice-President of
Marketing, Secretary and a Director
Laura Aupperle 39 Director
Dorothy Plotkin 44 Director
Leonard A. Neuhaus 37 Director
Bernard Herman 69 Director
John Casey 40 Vice President of Technology
Gerald Tucciarone 40 Chief Financial Officer and Treasurer
The term of office of the directors does not expire until the Company's
next annual meeting and when their successors are chosen.
Kenneth R. Aupperle is a co-founder of the Company. He has been the
Company's president and chief operations officer since the Company's
incorporation. Mr. Aupperle hold a BS in Electrical Engineering and an
MS in Computer Science from Potytechnic University, along with additional
work toward a Ph.D. He has lectured on computer science at Polytechnic
University since 1979.
Kenneth Plotkin is a co-founder of the Company. He has been the Company's
chairman of the board of directors and chief executive officer since the
Company's incorporation. Mr. Plotkin is presently Secretary of the Company
and is vice-president in charge of marketing. He holds a BS and an MS in
Electrical Engineering from the State University of New York at Stony Brook.
Laura Aupperle has served as director of the Company since the Company's
incorporation. She worked for the Company on a full time basis in sales and
production from 1983 to 1990 and on a part time basis in production planning
since May, 1994. She is the wife of Kenneth R. Aupperle.
Dorothy Plotkin has served as director of the Company since the Company's
incorporation. She has worked for the Company on a full time basis since 1982
in various capacities and presently in sales and as a shipping manager. She
is the wife of Kenneth Plotkin.
Leonard A. Neuhaus has served as a director of the Company since January
10, 1995, the effective date of the Company's 1995 public offering, in
accordance with LLC's right to designate a nominee pursuant to the letter of
intent between the Company and LLC dated July 20, 1994. Mr. Neuhaus is a
co-founder, stockholder, chief operations officer and director of the
Underwriter. From June 1988 through March 1990, Mr. Neuhaus was chief
financial officer of Global Capital Group, Inc. / Global Capital Securities,
Inc. a registered broker-dealer. Mr. Neuhaus only devotes a limited portion of
his time to the affairs of the Company.
<PAGE>
The National Association of Securities Dealers, Inc. ("NASD") recently
alleged that the Underwriter and others, including Mr. Neuhaus, in 1991,
engaged in market manipulation, inaccurately maintained books and records
and failed to adequately supervise the activities of the Underwriter's
personnel in connection with the trading for the Underwriter's account of
warrants which were part of a public offering of units of convertible
preferred stock and warrants of a company for which the Underwriter had acted
in 1991 as managing underwriter. In order to expeditiously resolve this matter
and without admitting or denying these allegations, in January 1995, Mr.
Neuhaus and others voluntarily entered into a Letter of Acceptance, Waiver and
Consent with the NASD pursuant to which Mr. Neuhaus was censured and fined by
the NASD, agreed to pay with the Underwriter and others restitution to
customers and was suspended for associating with any NASD member for a three
month period.
Bernard Herman became a director of the Company in May, 1996. Until 1993,
he was chairman of Okidata Corporation, a manufacturer and distributor of
printers and computer peripheral products. Thereafter, he has served as a
consultant and arbitrator.
John Casey has served as vice president of technology of the Company since
1987. Mr. Casey holds a BS in Electrical Engineering from Polytechnic
University.
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.
Executive Compensation
The following table describes the components of the total compensation of
the CEO of the Company for the years ended September 30, 1995 and 1994. No
executive, other than the CEO, had a total annual salary and bonus for the
three years ended June 30, 1995 which exceeded $100,000.
Summary Compensation Table
Annual Compensation Long term compensation
------------------- ----------------------
Awards Payout
Other Securities All
Name and annual Restricted underlying LTIP other
principal Salary Bonus compen- stock options/ payout compen
position Year ($) ($) sation($) award(s)($) SARs (#) ($) sation($)
---- --- --- -------- ----------- -------- ----- -------
Kenneth 1995 56,083 - 1,600(1) - - - -
Plotkin,
CEO 1994 29,261 - 1,112(1) - - - -
_________
(1) Represents non-cash compensation in the form of the use of a car and
related expenses.
<PAGE>
Stock Options
The following table sets forth certain information with respect to options
granted in the year ended September 30, 1995 to the individual listed in the
Summary Compensation table.
Option/sar Grants in Last Fiscal Year
[Individual Grants]
Number of Percent of
securities total options /
underlying SARs granted Exercise
Options/SARs in fiscal or base Expiration
Name granted (#)(1) year (1) price ($/Sh) Date
- ----- ---------- ------------- ---------- ---------
Kenneth Plotkin, 150,000 50% 3.15 1/09/05
CEO
________
(1) On January 10, 1995, Kenneth Plotkin was granted an option to purchase
150,000 shares of Common Stock at $3.15 per share, subject to adjustment.
The option shall not be exercisable for a period of ten years except as
follows: For the first full fiscal year after the date of grant and for
each of the four years thereafter, should the Company attain an audited
annual pre-tax income of at least $1,000,000, options to purchase 30,000
shares of Common Stock shall then become immediately exercisable. If the
Company fails to attain the $1,000,000 plateau during the first year,
should the Company's combined pre-tax income for the first two full fiscal
years exceed $2,000,000, then options to purchase 60,000 shares of Common
Stock shall then become immediately exercisable. Kenneth R. Aupperle was
also granted a similar option.
The following table sets forth certain information with respect to the
unexercised options to purchase Common Stock granted to individuals named in
the Summary Compensation Table above. Such individual did not exercise any
stock options during the year ended September 30, 1995.
Aggregated Option/Sar Exercises in Last Fiscal Year
and Fy-End Option/Sar Values
Number
of securities Value
underlying unexercised in-
unexercised the-money options
Shares SARs at FY-end (#) SARs at FY-end($)
acquired on Value exercisable / exercisable /
Name exercise(#) realized($) unexersisable unexercisable(1)
- ----- ----------- ----------- ------------ ---------------
Kenneth Plotkin,
CEO -0- -0- -0- / 150,000 -0- / -0-
______________
(1) See footnote (1) above in Option/SAR Grants in Last fiscal Year.
Compensation of Directors
Directors of the Company are not compensated solely for being on the board
of directors.
<PAGE>
Employment Agreements
On January 10, 1995, Kenneth R. Aupperle and Kenneth Plotkin each entered
into a three year employment agreement with the Company to serve as president,
and chief operations officer, and chief executive officer, vice-president in
charge of marketing and secretary, respectively. The agreements 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. Each agreement provides for disability
benefits, a car allowance of $400 per month, reasonable reimbursements for
automobile expenses and also medical insurance as is standard for the employees
of the Company.
Incentive Stock Option Plan
On August 2, 1994, the Company adopted an Incentive Stock Option Plan
("ISO"), as defined in section 422 of the Internal Revenue Code, as amended.
200,000 shares of Common Stock have been reserved for issuance under the ISO.
Pursuant to the ISO, options may be granted for up to ten years with exercise
prices (A) during the first two years after January 10, 1995, of no less than
the greater of $3.15, or the fair market value of the Common Stock on the
date of grant, or (B) thereafter, of no less than fair market value of the
Common Stock on the date of grant. On May 7, 1996 options to acquire 77,000
shares at $3.75 per share, a price then in excess of the fair market value,
were granted under the Company's ISO, exercisable in installments for a term
of five (5) years from the date each installment becomes exercisable. Options
for 5,000 shares were granted to Gerald Tucciarone, and options for 10,000
shares were granted to John Casey, executive officers of the Company.
Non-Qualified Stock Option Plan
On December 14, 1995, the board of directors authorized the adoption of
the 1996 Non Qualified Option Plan (the "1996 Non-Qualified Plan") which was
approved by the Company's shareholders on March 5, 1996. The purpose of the
1996 Non-Qualified Plan is to encourage and reward key employees, consultants
and other individuals and entities ("Participants") by giving them an
opportunity to share in any future success of the Company without burdening the
Company's cash resources. The 1996 Non-Qualified Plan authorizes stock
options to Participants to acquire shares of the Company's Common Stock.
The 1996 Non-Qualified Plan authorizes the grant of 250,000 shares subject to
adjustment as provided therein. Options to acquire 30,000 shares of Common
Stock were granted under the 1996 Non-Qualified Plan on March 15, which
includes an option to acquire 15,000 shares each to Kenneth R. Aupperle and
Kenneth Plotkin exercisable at $3.00 per share (the fair market value on the
date of grant) until March 14, 2006. The options were granted in consideration
for Messrs. Aupperle and Plotkin's guarantee of the MTB loan. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financial Condition". The 1996 Non-Qualified Plan terminates ten (10) years
after stockholder approval.
PRINCIPAL STOCKHOLDERS
The following are known by the Company, as of the date hereof, to be the
beneficial owners of more than five percent of Common Stock:
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Owner of Common Stock
- ------------------ ------------------ -------------
Kenneth R. Aupperle (1)(3) 302,610 10.9%
91 Cabot Court
Hauppauge, NY 11788
Kenneth Plotkin(2)(3) 302,610 10.9%
91 Cabot Court
Hauppauge, NY 11788
<PAGE>
Laura Aupperle (1) 287,550 10.4%
91 Cabot Court
Hauppauge, NY 11788
Dorothy Plotkin (2) 287,550 10.4%
91 Cabot Court
Hauppauge, NY 11788
Jay Rasmussen 140,000 5.1%
2212 E. Little Cloud Circle
Sandy, Utah 84093
All Officers and Directors 1,256,360 44.7%
as a Group (7 Persons) (4)
________
(1) Kenneth R. Aupperle and Laura Aupperle are husband and wife. Ownership
set forth does not include shares of Common Stock owned by the spouse of
the other individual.
(2) Kenneth Plotkin and Dorothy Plotkin are husband and wife. Ownership set
forth does not include shares of Common Stock owned by the spouse of the
other individual. Ownership set forth also does not include 10,000
Class A Warrants held of record by Mr. Plotkin's father as custodian for
the Plotkin's son and daughter. The Plotkins disclaim beneficial ownership
of such Class A Warrants.
(3) Ownership does not include an option to purchase 150,000 shares of Common
Stock granted to each Kenneth R. Aupperle and Kenneth Plotkin on January
10, 1995. See "Executive Compensation -Option/SAR Grants in Last Fiscal
Year" for a description of the option. Includes an option to each Kenneth
R. Aupperle and Kenneth Plotkin to acquire 15,000 shares each at $3.00 per
share until March 14, 2006.
(4) Ownership includes 2,000 Class A Warrants and options for 10,000 shares
under the Company's ISO owned by John Casey, and 6,000 Class A Warrants
and options for 5,000 shares under the Company's ISO owned by Gerald
Tucciarone, as well as an option, exercisable at $3.15 per share, to
acquire 10,000 shares of Common Stock granted on November 6, 1995 to Mr.
Tucciarone. Furthermore, assumes no ownership by Mr. Neuhaus with respect
to the Underwriter's Unit Purchase Option for 133,333 Underwriter Units.
CERTAIN TRANSACTIONS
On August 2, 1994, Kenneth R. Aupperle, Laura Aupperle, Kenneth Plotkin
and Dorothy Plotkin exchanged all of their issued and outstanding shares of
the Company's two wholly owned subsidiaries for 1,280,000 shares of Common
Stock of the Company, representing all of the outstanding shares of the Company
at the time.
On July 6, 1995, Messrs. Aupperle and Plotkin and their wives transferred
an aggregate of 99,740 shares of Common Stock to certain key employees of the
Company, as incentive to them. No consideration was paid with respect to any
transfer of less than 1,000 shares of Common Stock to any such employee, and
$0.03 per share was paid to cover the costs of any transfer of more than 1,000
shares of Common Stock to any employee. John Casey and Gerald Tucciarone,
executive officers of the Company, were transferred 38,100 and 2,000 shares
of Common Stock, respectively. The shares sold were issued and outstanding but
were non registered and subject to restrictions regarding public sale. See
Note 10 to the Consolidated Financial Statements regarding the treatment of
this transfer with respect to the Consolidated Financial Statements of the
Company.
<PAGE>
The Company leases its facilities from a partnership consisting of Messrs.
Aupperle and Plotkin and their wives (the "Partnership") under a lease
agreement dated February 7, 1990 for a term of 20 years commencing February
1, 1990. For the nine months ended September 30, 1994, the Company obtained a
rent concession from the Partnership in the amount of $68,118. The Company did
not obtain a rent concession for fiscal 1995 and does not anticipate obtaining
rent concessions in the future. Rent is currently at the annual rate of
$282,604. The rent is payable in equal monthly installments and increases at
a rate of 5% per year. The premises are subject to two mortgages which have
guaranteed by the Company upon which the outstanding principal due as of March
31, 1996 was $1,232,989. The Company pays the taxes and operating costs of
maintaining the premises.
On March 28, 1996, Hauppauge Computer Works, Inc. entered into the Credit
Agreement with MTB. The Credit Agreement provides for, among other things, a
two year line of credit, whereby the Company may borrow up to $1,100,00, which
sum shall increase to $1,600,000 upon receipt by MTB of the Company September
30, 1996 consolidated financial statements, with interest payable monthly at
2 1/2% above MTB's prime commercial lending rate on a floating basis.Borrowings
under the Credit Agreement are limited to 70% of eligible domestic accounts
receivable not older than 90 days from billing date and 70% of eligible credit
insured foreign accounts receivable not older than 90 days. The Company, HCW
Distributing Corp., HCW GmbH, LTD, Kenneth R. Aupperle and Kenneth Plotkin
have guaranteed the obligations of Hauppauge Computer Works, Inc. The loans
are collateralized by a first priority security interest in all of the assets
of the Company which assets shall be subject to no other liens or security
interests, excluding fixed assets subject to other liens. The Credit Agreement
prohibits the payment of cash dividends by the Company.
During May, 1996, the Company reduced the exercise price on the
Underwriter's Unit Purchase Option for 67,000 Units for $4.41 per Unit to
$3.75 per Unit, which were then exercised by the Underwriter.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue up to 10,000,000 shares of Common Stock,
$0.01 par value per share. Holders of Common Stock are entitled to one vote per
share held of record on all matters on which shareholders may vote at all
meetings of shareholders. There is no cumulative voting with respect to the
election of directors, with the result that the holders of more than 50% of the
shares that voted for the election of directors can elect all of the directors.
See Risk Factor 14, "Control by Management" and "Principal Stockholders".
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor.
The Company has no intention to pay dividends in the foreseeable future and
is prohibited by its credit agreement with MT Bank from doing so. See Risk
Factor 15, "No Dividends and None Anticipated" and "Dividend Policy". In the
event of a liquidation, dissolution or winding up of the Company, the holders
of shares of Common Stock shall be entitled to receive pro rata all of the
remaining assets of the Company available for distribution to its shareholders
after payment of liabilities and after provision has been made for each class
of stock, if any, having preference over the Common Stock. Holders of shares of
Common Stock, as such, have no conversion, preemptive or other subscription
rights, and there are no redemption or sinking fund provisions applicable to
the Common Stock.
Warrants
The Class A Warrants have been issued pursuant to an agreement (the
"Warrant Agreement") between the Company, North American Transfer Co., as
warrant agent (the "Warrant Agent") and the Underwriter dated January 10, 1995.
The following discussion of certain terms and provisions of the Class A
Warrants are qualified in its entirety by reference to the detailed provisions
of the Warrant Agreement and the Class A Warrant certificates, the forms of
which have been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
Each Class A Warrant entitles its holder to purchase one share of Common
Stock at an exercise price of $3.75 per share commencing January 10, 1996.
The Class A Warrants expire on January 9, 2000. The
<PAGE>
exercise price of the Class A Warrants and the number of shares issuable upon
exercise of such Class A Warrants will be subject to adjustment to protect
against dilution in the event of stock dividends, stock splits, combinations,
subdivisions and reclassification. Class A Warrants may be exercised by
surrendering to the Warrant Agent the Class A Warrants together with the
payment of the exercise price in United States funds by cash or certified or
bank check. No fractional shares of Common Stock will be issued in connection
with the exercise of the Class A Warrants. Upon exercise, the Company will
pay the holder the value of any such fractional shares based upon the market
value of the Common Stock at such time.
The Class A Warrants may be redeemed, in whole or in part, by the Company
at any time at a redemption price of $.10 per Warrant commencing January 10,
1996; provided that (i) prior notice of not less than 30 days is given to the
Class A Warrantholders; and (ii) the closing high bid price of the Common Stock
for 10 consecutive trading days ending on the third day prior to the date of
the notice of redemption equals or exceeds $4.75 per share. Holders of Class
A Warrants shall have exercise rights until the close of business on the day
preceding the date fixed for redemption.
ON JUNE 3, 1996, THE COMPANY CALLED FOR REDEMPTION ON JULY 5, 1996 (THE
"REDEMPTION DATE"), ALL OF ITS OUTSTANDING CLASS A WARRANTS IN ACCORDANCE
WITH ARTICLE VI OF THE WARRANT AGREEMENT DATED JANUARY 10, 1995. THE
COMPANY HAS EXTENDED THE REDEMPTION DATE UNTIL 5 p.m. LOCAL TIME JULY 17,
1996.
In the event a holder of Warrants fails to exercise the Class A Warrants
prior to the expiration, the Class A Warrants will expire and the holder
thereof will have no further rights with respect to the Class A Warrants.
In order for a holder to exercise a Class A Warrant, and as required in
the Warrant Agreement, there must be a current registration statement on file
with the Commission pertaining to the shares of Common Stock underlying the
Class A Warrants, and such shares must be registered or qualified for sale
under the securities laws of the state in which such warrantholder resides or
such exercise must be exempt from registration in such state. The Company will
be required to file post-effective amendments to the Registration Statement of
which this Prospectus forms a part during the nine-month period from the date
hereof or when events require such amendments. In addition, the Company has
agreed with the Underwriter to use its best efforts to keep the Registration
Statement covering the shares underlying the Class A Warrants current and
effective. There can be no assurance however, that such Registration Statement
(or any other Registration Statement filed by the Company to cover shares of
Common Stock underlying the Class A Warrants) can be kept current. If a
Registration Statement covering such shares of Common Stock is not kept current
for any reason, or if the shares underlying the Class A Warrants are not
registered in the state in which a holder resides, the Class A Warrants will
not be exercisable and will be deprived of any value.
Underwriter's Unit Purchase Option
Upon the closing of the Unit Offering, the Company sold to the Underwriter
for $10, the Underwriter's Unit Purchase Option to purchase 133,333 Underwriter
Units. The Underwriter's Unit Purchase Option is exercisable at a price of
$4.41 per Underwriter Unit for a period of four years commencing January 10,
1996. The Underwriter Units contained in the Underwriter's Unit Purchase Option
are identical to the Units offered to the public in the Unit Offering. The
holders of Underwriter's Unit Purchase Options have certain registration
rights with respect to the Common Stock and Class A Warrants issuable upon
the exercise of the Underwriter's Unit Purchase Option. The Underwriter has
exercised its Underwriter's Purchase Option and the exercise price on 67,000
was reduced from $4.41 to $3.75 per Unit. See "Plan of Distribution".
Limited Liability of Directors and Executive Officers
The Certificate of Incorporation of the Company authorizes the Company to
indemnify to the fullest extent permitted by Delaware law any person whom it
may indemnify thereunder, which includes directors, officers, employees and
agents of the Company. Such indemnification (other than as ordered by a court)
<PAGE>
shall be made by the Company only upon a determination that indemnification is
proper in the circumstances because the individual met the applicable standard
of conduct. Advances for such indemnification may be made pending such
determination. In addition, the Certificate of Incorporation provides for the
elimination, to the extent permitted by Delaware law, of personal liability of
directors to the Company and its stockholders for monetary damages for breach
of fiduciary duty as directors.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company, will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy, as expressed in the Securities Act, and will by governed
by the final adjudication of such issue.
Transfer Agent, Warrant Agent and Registrar
The Transfer Agent, Warrant Agent and Registrar for the Common Stock and
the Class A Warrants is North American Transfer Co., 147 W. Merrick Road,
Freeport, New York 11520.
SHARES ELIGIBLE FOR FUTURE SALE
Of the shares of Common Stock of the Company outstanding as of the date of
this Prospectus, 1,280,000 shares are restricted securities, as that term is
defined in Rule 144 promulgated under the Securities Act, and may only be sold
pursuant to a registration under the Securities Act, in compliance with Rule
144 under the Securities Act, or pursuant to another exemption therefrom. In
general, under Rule 144, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted shares of Common Stock for at least two years
is entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of 1% of the total number of outstanding shares
of the same class, or if the Common Stock is quoted on NASDAQ, the average
weekly trading volume during the four calendar weeks preceding the sale. A
person who has not been an affiliate of the Company for at least three months
immediately preceding the sale and who has beneficially owned the shares of
Common Stock for at least three years is entitled to sell such shares under
Rule 144 without regard to any of the volume limitations described above.
Messrs. Aupperle and Plotkin and their wives, holders of 1,150,260 shares of
Common Stock, have agreed not to permit or cause a private or public sale or
public offering of their shares of Common Stock until August 9, 1996 (eighteen
(18) months from the effective date of the Unit Offering) without obtaining the
prior written approval of the Underwriter. No assurance can be made as to the
effect, if any, that sales of shares of Common Stock or the availability of
such shares for sale will have on the market prices prevailing from time to
time. Nevertheless, the possibility that substantial amounts of Common Stock
may be sold in the public market may adversely affect prevailing market
prices for the Common Stock and could impair the Company's ability to raise
capital in the future through the sale of equity securities.
PLAN OF DISTRIBUTION
This Offering is made by the Company in connection with the exercise of
outstanding Class A Warrants to purchase shares of the Company's Common Stock
which Class A Warrants were previously sold to the public as part of Units in
the Company's Unit Offering by the prospectus dated January 10, 1995. There
are currently issued and outstanding 1,476,183 Class A Warrants (plus an
additional 133,333 Underwriter Warrants that are part of the Underwriter's
Unit underlying the Underwriter's Unit Purchase Option which the Underwriter has
exercised), all of which may be exercised to purchase the Company's Common
Stock pursuant to this Offering.
<PAGE>
There is no minimum number of shares which must be purchased upon the exercise
of the Warrants except that one Warrant is required to purchase one share of
Common Stock and no fractional shares will be issued. There are no
arrangements to escrow any of the funds to be paid in connection with the
exercise of the Warrants. All payments made pursuant to the exercise of the
Warrants will be made to North American Transfer Co., 147 W.Merrick Road,
Freeport, New York 11520, Attention: Mildred Rostolder, and may be used by the
Company immediately upon receipt.
A registered holder may exercise his or her Warrants by surrendering the
certificate representing the Warrants together with a Warrant exercise form on
the Warrant certificate properly completed and signed with full payment of the
exercise price payable to the Company. Warrants may be exercised in whole or
in part. If Warrants are exercised in part, a new Warrant certificate will be
issued for the remaining number of shares. No fractional shares will be issued
upon the exercise of Warrants. Rather, they will be settled for cash. All
payments must be received by the Company prior to the expiration date or the
redemption date established by the Company and Warrants not exercised prior
to the expiration date shall expire.
A five percent solicitation fee will be paid to the Underwriter in
connection with the Class A Warrants exercised through the efforts and with
the assistance of the Underwriter if: (i) the market price of the Company's
Common Stock on the date the Class A Warrant is exercised is greater than the
then exercise price of the Warrants; (ii) the Class A Warrant is not held in
a discretionary account; (iii) disclosure of the compensation arrangements
was made both at the time the Class A Warrants were initially offered for sale
and at the time of exercise; (iv) the exercise of the Class A Warrants was a
solicited transaction; and (v) the exercise of the Class A Warrants was not
solicited by the Company. In addition, upon consent of the Underwriter, other
NASD members may solicit the exercise of the Class A Warrants without giving
up a portion of the 5% solicitation fee to the Underwriter. Further, the
Underwriter and any other NASD broker/dealer will receive a 5% solicitation
fee only when designated in writing by the warrantholder and the Underwriter
or any other NASD member provides bona fide services in connection with
solicitation.
The exercise price of $3.75 per share for each Class A Warrant was
arbitrarily determined by the Company in negotiation with the Underwriter in
the Company's Unit Offering and the price bears no relationship to the
Company's assets, earnings, book value or to any other established criteria of
value. Thus, the exercise prices of the Warrants should not be considered an
indication of the actual value of the Company. Therefore, holders of Warrants
are subject to an increased risk that the prices of the Company's securities
have been arrived at arbitrarily.
RIGHT OF RESCISSION
THE COMPANY'S POST-EFFECTIVE AMENDMENT NO. 3 TO THE REGISTRATION
STATEMENT, OF WHICH THIS PROSPECTUS IS A PART, WAS DECLARED EFFECTIVE ON
MAY 3, 1996. ALTHOUGH THE DECEMBER 31, 1995 STATEMENT OF INCOME AND
CONSOLIDATED BALANCE SHEET DATA WAS SUMMARIZED IN SUCH POST-EFFECTIVE
AMENDMENT, THE FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER
31, 1995 WERE INADVERTENTLY OMITTED FROM THE PROSPECTUS. THIS PROSPECTUS,
WHICH IS INCLUDED AS PART OF POST-EFFECTIVE AMENDMENT NO. 4, BRINGS THE
COMPANY'S FINANCIAL STATEMENTS CURRENT THROUGH THE SIX MONTHS ENDED
MARCH 31, 1996.
TO THE DATE OF THIS PROSPECTUS, THE UNDERWRITER'S UNIT PURCHASE
OPTION AND 245,883 CLASS A WARRANTS HAVE BEEN EXERCISED. BY VIRTUE OF THIS
PROSPECTUS, THE COMPANY IS OFFERING SUCH PARTIES WHO HAVE EXERCISED THE
UNDERWRITER'S UNIT PURCHASE OPTION AND THE FOREGOING CLASS A WARRANTS
THE OPPORTUNITY TO RESCIND THE EXERCISE OF THEIR OPTION AND CLASS A
WARRANTS AND RECEIVE A FULL REFUND OF THEIR EXERCISE PRICE PAID TOGETHER
<PAGE>
WITH A RETURN OF THEIR SECURITIES EXERCISED.
TO EXERCISE THIS RIGHT OF RESCISSION NOTICE MUST BE RECEIVED BY NORTH
AMERICAN TRANSFER CO., 147 WEST MERRICK ROAD, FREEPORT, NEW YORK 11520, ATTN:
MILDRED ROSTOLDER, WITHIN SEVEN (7) CALENDAR DAYS OF THE DELIVERY OF THIS
PROSPECTUS TO THEM WHICH IS BEING MADE BY OVERNIGHT DELIVERY. A PARTY
EXERCISING RESCISSION MUST RETURN THE COMMON STOCK ISSUED UPON THE
EXERCISE OF THE OPTION OR THE UNDERLYING UNIT PURCHASE OPTION UPON
EXERCISING THIS RIGHT OF RESCISSION. THE COMPANY WILL FORTHWITH RETURN
THE EXERCISE PRICE PAID TOGETHER WITH INTEREST AT THE RATE OF NINE (9%)
PERCENT PER ANNUM FROM THE DATE OF THE EXERCISE OF THE OPTION TO THE DATE
OF THE RETURN OF THE MONIES PAID TOGETHER WITH THE SECURITIES WITH RESPECT
TO WHICH RESCISSION HAS BEEN REQUESTED.
CLASS A WARRANTS FOR WHICH RESCISSION IS REQUESTED WILL REMAIN
SUBJECT TO THE COMPANY'S RIGHT OF REDEMPTION AT $.10 PER WARRANT UNTIL
5 p.m. LOCAL TIME JULY 17, 1996.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the securities
offered hereby will be passed upon for the Company by Hollenberg Levin
Solomon Ross Belsky & Daniels, LLP, 585 Stewart Avenue, Garden City,
New York 11530. Members of the firm of Hollenberg Levin Solomon Ross Belsky
& Daniels, LLP own 19,000 shares of Common Stock of the Company.
EXPERTS
The consolidated financial statements for fiscal 1995 included in this
Prospectus and elsewhere in the Registration Statement have been audited by
BDO Seidman, LLP independent certified public accountants to the extent and
for the periods indicated in their report with respect thereto and were
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements for the nine months ended September
1994 included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen, LLP ("Andersen") independent public
accountants to the extent and for the periods indicated in their report with
respect thereto and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
Effective August 10, 1995 the Company dismissed 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 as 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 Unit Offering. Reference is made to said report
which includes an explanatory paragraph regarding the Company's litigation
uncertainties.
The decision to change accountants was recommended and approved by the
Company's board ofdirectors. There were no disagreements with Andersen on any
matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedures while Andersen served as the Company's
independent public accountants. The dismissal of Andersen was because of fee
considerations.
<PAGE>
ADDITIONAL INFORMATION
With respect to the securities offered hereby, the Company has filed with
the Securities and Exchange Commission (the "Commission") a post-effective
amendment to its Registration Statement on Form SB-2 under the Securities Act.
For purposes hereof, the term "Registration Statement" means the original
Registration Statement and any and all amendments thereto. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto, to which reference hereby is made.Each statement made
in this Prospectus concerning a document filed as an exhibit to the
Registration Statement is qualified in its entirety by reference to such
exhibit for a complete statement of its provisions.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance with those requirements files reports and other
information with the Commission under the File No. 1-13550. Such reports,
proxy statements and other information can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 or at its Regional Offices located at 7 World
Trade Center, New York, New York 10007 and Room 1204, Everett McKinley Dirksen
Building, 219 South Dearborn Street, Chicago, Illinois 60604. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company distributes annual reports containing audited financial
statements to the Company's shareholders.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ANNUAL FINANCIAL STATEMENTS
---------------------------
Page(s)
Reports of Independent Public Accountants F-2, F-3
Consolidated Balance as of September 30, 1995
and September 30, 1994 F-4
Consolidated Statements of Operations for the
year ended September 30, 1995 and the nine
months ended September 30, 1995 F-5
Consolidated Statements of Shareholder's Equity
(Deficit) for the year ended September 30, 1995
and the nine months ended September 30, 1994 F-6
Consolidated Statements of Cash Flows for the year
ended September 30, 1995 and the nine months
ended September 30, 1994 F-7
Notes to Consolidated Financial Statements-
September 30, 1995 and 1994 F-8 - F-19
INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
-----------
Condensed Consolidated Balance Sheets-
March 31, 1996 and September 30, 1995 F-20
Condensed Consolidated Statements of Operations-
Six Months ended March 31, 1996 and 1995 F-21
Condensed Consolidated Statements of Operations-
Three Months ended March 31, 1996 and 1995 F-22
Condensed Consolidated Statements of Cash Flows-
Six Months ended March 31, 1996 and 1995 F-23
Notes to Condensed Consolidated Financial Statements F-24-F-26
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of
Hauppauge Digital, Inc. and Subsidiaries
Hauppauge, New York
We have audited the consolidated balance sheet of Hauppauge
Digital, Inc. and Subsidiaries as of September 30, 1995 and
the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended
September 30, 1995. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of
the financial statements. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Hauppauge Digital, Inc. and
Subsidiaries at September 30, 1995 and the results of its
operations and cash flows for the year ended September 30,
1995 in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Mitchel Field, New York
November 20, 1995, except for
Note 10 for which the date is
March 20, 1996
F-2
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hauppauge Digital, Inc.:
We have audited the accompanying consolidated balance sheet of Hauppauge
Digital, Inc. (a Delaware corporation) and subsidiaries as of September 30,
1994, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the nine months ended September 30, 1994.
These financial statements are the responsibility of the Company's managements.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hauppauge Digital, Inc. and
subsidiaries as of September 30, 1994, and the results of their operations
and their cash flows for the nine months ended September 30, 1994 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Melville, New York
December 2, 1994 (except with respect
to the matter described in Note 6(b),
as to which the date if January 10, 1995)
F-3
<PAGE>
HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
As of As of
September 30, 1995 September 30, 1994
---------------------- -----------------
CURRENT ASSETS:
Cash and Cash Equivalents (Note 1) $1,214,940 $151,408
Accounts receivable, net of
allowance for doubtful accounts of
approximately $62,000 in 1995 and
$16,000 in 1994 1,146,865 554,642
Inventories (Note 2) 2,187,981 879,147
Prepaid expenses & other current assets 192,689 38,659
--------- ---------
Total current assets 4,742,475 1,623,856
------------- -------------
Property, plant and equipment-
at cost (Note 3) 334,443 305,905
Less: Accumulated depreciation
and amortization 193,188 190,891
--------- ---------
141,255 115,014
--------- ---------
SECURITY DEPOSITS AND OTHER ASSETS 62,085 50,637
---------- ---------
$4,945,815 $1,789,507
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short term borrowings-bank loan (Note 4) - $ 395,000
Accounts Payable 2,645,268 1,766,866
Accrued expenses 625,174 241,829
--------- ---------
Total current liabilities 3,270,442 2,403,695
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDERS' EQUITY (DEFICIT) (NOTES 6 AND 10)
Common stock $.01 par value; 10,000,000 shares
authorized, 2,756,183 and 1,280,000 issued
and outstanding as of September 30,
1995 and 1994 27,562 12,800
Additional paid-in capital 4,141,343 343,466
Accumulated deficit (2,493,532) (970,454)
---------- ----------
1,675,373 (614,188)
---------- -----------
$4,945,815 $1,789,507
========== ==========
See accompanying notes to consolidated financial statements
F-4
<PAGE>
HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year For the Nine
Ended Months Ended
September 30, 1995 September 30,1994
------------------ -----------------
NET SALES (Note 7) $11,551,169 $4,166,807
COST OF SALES 9,079,245 3,313,331
PROVISION FOR INVENTORY
OBSOLESCENCE (Note 2) 164,511 300,000
----------- ---------
Total cost of sales 9,243,756 3,613,331
----------- ---------
Gross Profit 2,307,413 553,476
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
(Notes 8 and 10) 3,151,020 1,621,110
RESEARCH & DEVELOPMENT
EXPENSES 269,888 214,174
---------- ----------
Loss from operations (1,113,495) (1,281,808)
OTHER INCOME (EXPENSE)
Interest income 50,026 4,940
Interest expense (20,233) (34,997)
Private placement financing
costs (Notes 6 and 10) (480,652) -
Miscellaneous income 41,276 22,949
--------- ---------
Loss before tax provision (1,523,078) (1,288,916)
INCOME TAX PROVISION (Note 5) - 28,632
--------- ----------
Net Loss(Note 10) $(1,523,078) $(1,317,548)
=========== ===========
Net loss per share(Note 10) $ (.0.64) $ (1.03)
============ =============
Weighted average shares
outstanding (Note 1) 2,382,928 1,280,000
=========== ===========
See accompanying notes to consolidated financial statements
F-5
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED SEPTEMBER 30, 1995, AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Retained
Common Stock Additional Earnings
-----------------
Number of Paid in (Accumulated
Shares Amount Capital Deficit) Total
------ ------- ------- -------- ------
BALANCE AT JANUARY
1, 1994 1,280,000 12,800 80,848 347,094 440,742
Net loss for the
nine months ended
September 30, 1994 - - - (1,317,548)(1,317,548)
Issuance of shares
to the Company's
legal counsel
by principal
shareholders (Note 6) - - 94,500 - 94,500
Conversion of shareholders'
loans to equity without
the issuance of common
shares (Note 6) - - 100,000 - 100,000
Rent expense funded
by principal
shareholders (Note 8) - - 68,118 - 68,118
-------- ----- ------- ------- ------
BALANCE AT SEPTEMBER
30, 1994 1,280,000 12,800 343,466 (970,454) (614,188)
Net loss for the
year ended
September 30, 1995 - - - (1,523,078)(1,523,078)
Issuance of shares
pursuant to a private
placement offering
(Notes 6 and 10) 142,850 1,429 356,527 - 356,956
Issuance of shares
pursuant to the
Company's initial
public offering
(Note 6) 1,333,333 13,333 3,253,690 - 3,267,023
Compensation related to
transfer of shares (Note 10) - - 187,660 - 187,660
-------------- -------- ---------- -------- ---------
BALANCE AT
SEPTEMBER 30, 1995 $2,756,183 $27,562 $4,141,343 $(2,493,532) $1,675,373
=========== ========== ========= ======== ========
See accompanying notes to consolidated financial statements
F-6
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
For the Year For the Nine
Ended Months Ended
September 30, 1995 September 30,1994
------------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,523,078) $(1,317,548)
Adjustments to reconcile net loss to ------------ ------------
net cash used in operating activities:
Depreciation and amortization 33,693 21,459
Provision for uncollectible receivables 49,200 15,925
Provision for system board obsolescence 164,511 300,000
Private placement financing costs 480,652 -
Compensation related to transfer of shares 187,660 -
Rent expense funded by principal
shareholders - 68,118
Legal expense incurred in connection with
the issuance of common shares to legal
counsel - 94,500
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable (641,420) 182,347
Inventories (1,473,342) (37,218)
Prepaid expenses and other
current assets (154,030) (11,704)
Accounts payable 878,402 281,934
Accrued expenses 383,345 44,752
-------- -------
(91,329) 960,113
---------- --------
Net cash used in operating activities (1,614,407) (357,435)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property,
plant and equipment (57,749) (4,817)
Purchase of software rights (13,156) -
Security deposits (483) -
--------- -------
Net cash used in investing
activities (71,388) (4,817)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private
placement offering 477,304 -
Net proceeds from initial
public offering 3,267,023 -
Principal payment on bank loan (395,000) -
Principal payment on private placement
bridge loan (600,000) -
--------- ------
Net cash provided by
financing activities 2,749,327 -
--------- ------
Net increase (decrease)
in cash and cash equivalents 1,063,532 (362,252)
CASH AND CASH EQUIVALENTS,
beginning of period 151,408 513,660
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $1,214,940 $ 151,408
========== =========
SUPPLEMENTAL DISCLOSURES:
Interest paid $46,206 $11,033
========== ========
Income taxes paid $19,322 $ 6,071
========== ========
See accompanying notes to consolidated financial statements
F-7
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Hauppauge
Digital, Inc. and its two wholly owned subsidiaries, Hauppauge Computer
Works, Inc. and HCW Distributing Corp., as well as Hauppauge Computer Works,
GMBH and Hauppauge Computer Works, Ltd., both wholly owned subsidiaries of
Hauppauge Computer Works, Inc. (collectively, the "Company"). All
intercompany accounts and transactions have been eliminated.
Change in Fiscal Year
Effective September 30, 1994, the Company changed its fiscal year end
from December 31 to September 30. The comparative financial information for
September 30, 1994, presented on the consolidated balance sheet, statements
of operations, shareholders' equity (deficit) and cash flows are for the nine
months ended September 30, 1994. Comparative condensed income statement data
for the year ended September 30, 1995 compared to the unaudited results for
the year ended September 30, 1994 is presented below:
Years Ended September 30,
1995 1994
(Unaudited)
------------ -----------
Net Sales..................... $ 11,551,169 $ 6,458,498
============ ============
Gross Profit.................. $ 2,307,413 $ 1,134,517
============ ============
Net operating loss............ $ (1,113,495) $ (1,309,241)
============ =============
Loss before tax provision..... $ (1,523,078) $ (1,305,531)
============= ==============
Net (Loss).................... $ (1,523,078) $ (1,334,909)
============== =============
Nature of Business
The Company is primarily engaged in the design, manufacture and selling
of Win/TV digital video computer boards. Win/TV boards convert moving video
images from cable TV, video cameras or a VCR to a digital format which is
displayed in a sizable window on a PC monitor. These video images can be
viewed simultaneously with normal PC operations such as word processing
programs and spreadsheet applications. The Win/TV board is marketed worldwide
through distributors, original equipment manufacturers and manufacturers'
representatives. Net sales to international and domestic customers were
approximately 70% and 30%, respectively, of total sales for the year ended
September 30, 1995, and 45% and 55%, respectively, of total sales for the
nine months ended September 30, 1994. Although the Company believes it
operates in one industry segment, it does not believe that it has a material
F-8
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of business-continued
concentration of credit risk either from an individual counterparty or a
group of counterparties, due to the large and diverse user group for its
products. Substantially all of the Company's assets are located in the United
States.
Net sales to international customers consist of:
Year ended Nine months ended
Sales to: September 30, 1995 September 30, 1994
- -------- --------------------- -------------------
United Kingdom 22% 21%
Germany 20% 5%
The Netherlands 5% -
Other countries 23% 19%
--- ---
70% 45%
=== ===
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity date
of three months or less to be cash equivalents.
Revenue Recognition
The Company records revenue when its products are shipped.
Warranty Policy
The Company warrants that its products are free from defects in material
and workmanship for a period of one year from the date of initial retail
purchase. The warranty does not cover any losses or damage that occur as a
result of improper installation, misuse or neglect and repair or modification
by anyone other than the Company or an authorized repair agent. The Company
accrues anticipated warranty costs based upon historical percentages of items
returned for repair within one year of the initial sale.
Inventories
Inventories are valued at the lower of cost (principally average cost)
or market. A reserve has been provided to reduce obsolete and/or excess
inventory to its net realizable value.
F-9
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Depreciation of machinery and equipment and amortization of leasehold
improvements is provided for using both accelerated and straight line methods
over the estimated useful lives of the related assets as follows:
Office Equipment and Machinery: 5 to 7 years
Leasehold improvements: Asset life or lease term,
whichever is shorter
Income Taxes
For the fiscal year ended September 30, 1994, the Company filed separate
corporate income tax returns for Hauppauge Digital, Inc., Hauppauge Computer
Works, Inc. and HCW Distributing Corp.. During 1995, Hauppauge Computer
Works, Inc. and HCW Distributing Corp. filed an election, which was approved
by the state and federal tax authorities, to change their tax reporting year
to September 30. Effective for the year ended September 30, 1995, the Company
will file a consolidated income tax return.
The Company follows the liability method of accounting for income taxes
as prescribed by Statement No. 109 of the Financial Accounting Standards
Board ("FAS 109"). Under FAS 109, deferred income taxes are recorded to
reflect the temporary differences in the tax bases of the assets or
liabilities and their reported amounts in the financial statements. The
Company has not recorded a deferred tax asset or liability for state and
local tax purposes due to the immaterial effect on the financial statements.
Foreign Currency Transactions
The Company sells products and services to foreign customers. Revenues
and expenses are recorded in U.S. dollars at the current exchange rate at the
time of the transaction. Gains and losses due to the changes in exchange rate
are recorded in the statement of operations.
Net Loss per Share
Net loss per share has been computed on the basis of weighted average
number of common shares outstanding for each period presented. Included in
the 1995 year end computation were 142,850 and 1,333,333 shares issued
through a private placement offering and an IPO (See Note 6).
F-10
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Loss per Share-continued
Weighted average shares outstanding for the year ended September 30,
1995 were 2,382,928. Weighted average shares for the nine months ended
September 30, 1994 were 1,280,000.
The effect of including warrants as common stock equivalents results in
a reduction of the loss per share. Therefore, the warrants are not included
as a component of the weighted average shares outstanding.
2. INVENTORIES
Inventories consist of the following:
September 30,
1995 1994
---------- --------
Component Parts $ 738,846 $444,640
Work in Process 974,706 316,739
Finished Goods 474,429 117,768
--------- --------
$2,187,981 $879,147
========= ========
During June of 1994, the Company's management observed that the System
Board product line sales volume had declined at a much faster pace than
expected, to a point where it appeared likely that the Company would have to
offer such items at significant discounts to the public, and therefore it
would not fully recover its original investment in such inventory. On June
15, 1994 because of the continued sales declines and certain market
developments, the Company decided to de-emphasize the marketing of its PC
system boards product line in favor of the newer Win/TV boards and, as a
result, recorded a reserve for inventory obsolescence in the amount of
$300,000. Such amount has been reflected separately in the statement of
operations for the year ended September 30, 1995 and the nine months ended
September 30, 1994. A reserve of approximately $165,000 was charged to
operations for 1995.
3. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment at cost less
accumulated depreciation:
1995 1994
------- -------
Office Equipment and Machinery $308,787 $280,972
Leasehold Improvements 25,656 24,933
------- -------
334,443 305,905
Less: Accumulated depreciation 193,188 190,891
------- -------
Total $141,255 $115,014
======== ========
F-11
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SHORT TERM BORROWINGS - BANK LOAN
The Company had a $500,000 line of credit from Shawmut Bank from August
15, 1991 to September 30, 1992. The terms of the credit line provided for
monthly interest payments on the outstanding balance at 1/2% above the bank's
prime interest rate and a 1/2% per annum fee on the unused portion of the
line. The line was secured by the Company's accounts receivable and the
personal guarantees of the principal shareholders, who are also the founders
and principal executive officers of the Company. The line matured on
September 30, 1992 and was not renewed. At September 30, 1994, the
outstanding balance was $395,000 and the line was considered a matured
facility by the bank. Although the Company had defaulted on certain financial
covenants, Shawmut agreed not to call the loan provided that the Company pay
Shawmut 1) $50,000 from the proceeds of the private placement described in
Note 6, and 2) pay the remaining principal plus any accumulated interest,
fees and costs in full by January 31, 1995 from the proceeds of the IPO.
The Company, from the proceeds of the private placement, made a payment
of $50,000 in October 1994. The Company also made a payment of $12,000 in
December 1994. On January 19, 1995, the Company paid $362,631 to Shawmut
from the proceeds of the IPO. Subsequent to the payment, Shawmut notified
the Company that additional legal fees and costs were due, and the payment
was first applied to these remaining amounts, resulting in unpaid principal
to Shawmut of approximately $28,900. On September 29, 1995, the Company paid
$17,500 to Shawmut in settlement of the disputed outstanding balance.
5. INCOME TAXES
The income tax provision consists of the following:
September 30,
1995 1994
---- ----
Federal income tax provision $ - $ -
Tax settlement-Federal - 17,000
State income tax provision 4,420 8,732
Tax settlement-State - 2,900
Tax benefit-overstated liability (4,420) -
------ --------
$ - $ 28,632
------ --------
During 1994, the Long Island Appeals office of the Internal Revenue
Service proposed a settlement in the amount of $17,000 plus interest, related
to income tax deficiencies in connection with the Company's tax filings for
its years ended December 31, 1988 to 1990. The Company, in recognition of
this proposal, recorded in
F-12
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes-continued
1994 an income tax provision of $19,900 and a
charge to interest expense of $13,100. In 1995 the Company accepted the
proposal and paid $17,000 in taxes and $13,207 in interest to the Internal
Revenue Service.
Components of deferred taxes are as follows:
September 30,
1995 1994
Deferred tax assets: ---- ----
Net operating loss carryforwards $574,945 $361,085
Inventory obsolescence reserve 157,930 102,000
Warranty reserve 20,400 -
Allowance for doubtful accounts 16,728 -
------- -------
Total deferred tax assets 770,003 463,085
Valuation allowance (770,003) (463,085)
------- -------
Net deferred tax assets $ - $ -
------- -------
The Company has recorded a full valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized. The change in
valuation allowance for the year ended September 30, 1995 and 1994 is as
follows:
1995 1994
---- ----
Balance at the beginning of the year $463,085 $ 76,068
Increase in non utilization of net
operating loss carryforwards 213,860 285,017
Increase in reserve for inventory
obsolescence 55,930 102,000
Increase in warranty reserve 20,400 -
Increase in allowance for doubtful accounts 16,728 -
-------- --------
Balance at the end of the year $770,003 $463,085
======== ========
As of September 30, 1995, the Company had net operating losses, (which
expire in the years through 2010), of $1,690,228 available to offset future
taxable income. Due to the change in control which resulted from the
Company's January 10, 1995 initial public offering of stock, (Note 6),
$1,344,228 of the net operating losses are subject to limitations per
Internal Revenue code section 382. The Company's carryforward utilization of
these restricted net operating losses is limited to $275,386 per year. Net
operating losses of $346,000, which occurred after January 10, 1995, are
unrestricted and can be utilized without limitation.
F-13
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes-continued
The difference between the actual income tax provision (benefit) and the
tax provision computed by applying the Federal statutory income tax rate to
the loss before income tax is attributable to the following:
September 30,
1995 1994
---- ----
Income tax (benefit) at 34% $(485,330) $(438,231)
Loss producing no tax benefit 485,330 438,231
state income taxes 4,420 8,732
IRS settlement - 19,900
Tax benefit-overstated liability (4,420) -
-------- ----------
Income tax provision $ - $ 28,632
========= ========
6. SHAREHOLDERS' EQUITY
a. Private Placement
Through a private placement offering consummated on October 12, 1994,
for gross proceeds of $600,000, the Company issued $600,000 in principal
amount of 5%, $25,000 promissory notes and such number of units comprised of
the Company's common stock and Class A redeemable common stock purchase
warrants as shall equal $18,750 divided by the IPO unit price of $3.15. The
resulting 142,850 units of common stock is determined by dividing $18,750 by
the offering price of $3.15 per unit and multiplying that result by 24
private placement units ($600,000 divided by $25,000 per unit), rounded to
exclude fractional shares. These units were issued in conjunction with the
IPO, effective January 10, 1995 (Note 6, Initial Public Offering-IPO). The
promissory notes were subject to mandatory prepayment from the proceeds of
any public or other private offering of the Company's debt or equity
securities. On January 17, 1995, the $600,000 plus accrued interest of $7,910
was repaid. All the units issued to the former noteholders have been
registered with the Securities and Exchange Commission concurrently with the
IPO.
A summary of the application of the net proceeds (approximately $477,000) is
listed below:
Payment of loan to Shawmut Bank $ 50,000
Partial expenses of IPO 122,000
Purchase of inventory, reduction
of trade payables and general
working capital purposes 305,000
-------
$477,000
========
F-14
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a. Private Placement-continued
Based on certain factors such as: 1) the nature of the borrowing, 2) the
Company's financial position and 3) the economic environment, the 5% interest
rate on the promissory notes did not reflect the effective financing costs
when considering the value of the units of common stock and warrants issued.
Accordingly, $449,978 (the value of 142,850 units at the IPO price of $3.15)
has been charged to operations under the caption "Private Placement Financing
Costs" in the year ended September 30, 1995. Additionally, $122,696 of fees
and costs relating to the private placement were charged to operations within
the same caption in the year ended September 30, 1995.
b. Initial Public Offering (IPO)
Effective January 10, 1995 the Company completed an IPO of securities.
The Company sold 1,333,333 units at $3.15 per unit. Each unit consisted of
one share of $.01 par value common stock and one Class A redeemable stock
purchase warrant. Each Class A warrant entitles the holder to purchase one
share of common stock at an exercise price of $3.75 per share, subject to
adjustments for anti-dilution provisions in certain circumstances, for a
four-year period commencing one year after the January 10, 1995 effective
date and expiring January 9, 2000. The warrants are redeemable by the
Company, in whole or in part at a price of $.10 per warrant, commencing one
year after the effective date (or sooner with the consent of the
Underwriter), in accordance with a Warrant Agreement between the Company, its
Warrant Agent and the Underwriter. For the period of 180 days after the date
of the Prospectus (January 10, 1995), which period could have been terminated
sooner with the sole consent of the Underwriter, the warrants were neither
detachable, separately tradeable nor transferable from the common stock with
which they were issued. On April 20, 1995 the Underwriter consented to
accelerate the separation date. The Company's units were split into Common
Stock and Class A Warrants. The Common Stock and Class A Warrants began
trading separately on April 25, 1995.
As part of the offering, the Company sold to the Underwriter, for a
nominal fee of $10, the Underwriter's Unit Purchase Option, which entitles
the Underwriter to purchase 133,333 units at an exercise price of $4.41 (140%
of the offering price) for a period of four years, commencing one year after
the January 10, 1995 effective date. The units are identical to those offered
to the public.
F-15
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
b. Initial Public Offering (IPO)-continued
The Company and the Underwriter have entered into a two year Consulting
Agreement. The Consulting Agreement obligates the Company to pay the
Underwriter a fee of $72,000, of which $36,000 was paid upon the closing of
the offering, and $3,000 per month for the twelve month period subsequent to
the closing.
The net proceeds received by the Company after deducting Underwriter
discounts and commissions plus expenses of the IPO were $3,267,023.
c. Incentive Stock Option Plan
In August 1994, the Company adopted an Incentive Stock Option Plan
("ISO"), as defined in section 422(A) of the Internal Revenue Code, as
amended, reserving 200,000 shares of common stock for issuance under the ISO.
Pursuant to the ISO, options may be granted for up to ten years with exercise
prices during the first two years subsequent to the IPO being the greater of
the IPO offering price per unit ($3.15) or the fair market value of the
common stock at the date of the grant. After the initial two year period, the
option price shall be no less than the fair market value of the stock on the
date the options are granted. To date, no options have been granted under the
ISO.
d. Conversion of Shareholders Loans Payable to Shareholders' Equity
During 1994, the founders of the Company converted $100,000 of loans
payable to them into additional paid in capital, without the issuance of
additional stock.
e. Issuance of Common Stock to Company's Legal Counsel
In August 1994, the founders of the Company transferred 30,000 shares of
common stock to the Company's legal counsel, or their designees, for no cash
consideration. The Company valued the stock at the IPO offering price and
recorded legal expense and additional paid in capital of $94,500 for the nine
months ended September 30, 1994.
f. Change in Company Ownership
On August 2, 1994, prior to the IPO, Hauppauge Digital, Inc., a Delaware
Corporation, was incorporated with 10,000,000 authorized common shares, $.01
par value and became the parent of two wholly owned subsidiaries - Hauppauge
Computer Works, Inc. and HCW Distributing Corp.. The Company's executive
offices and operations remained at its Hauppauge, New York location. The two
F-16
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
f. Change in Company Ownership-continued
existing shareholders at the time, who were also the founders of the Company,
exchanged all of the issued and outstanding shares of Hauppauge Computer
Works, Inc. and HCW Distributing Corp. for 1,280,000 shares of Hauppauge
Digital, Inc. common stock, which on August 2, 1994 represented all of the
outstanding shares of Hauppauge Digital, Inc.
7. SIGNIFICANT CUSTOMER INFORMATION
Significant customers for the year ended September 30, 1995 and the nine
months ended September 30, 1994 are as follows:
Percentage of Net Sales
September 30,
1995 1994
---- ----
Reuters 17% 18%
Satellite Transmissions 1% 11%
ESCOM 8% -
8. RELATED PARTY TRANSACTIONS
The Company, on February 1, 1990, entered into a long term lease
agreement for a building containing office and warehouse space located in
Hauppauge, New York. The building is owned through a real state partnership
by the two founders of the Company, who currently hold the positions of Chief
Executive Officer and President. The indebtedness incurred by the owners to
purchase the building is guaranteed by the Company. As of September 30, 1995
and 1994, the outstanding mortgage balance was $1,260,543 and $1,330,375,
respectively. The lease expires on January 31, 2009 and provides for rent
increases of 5% per year. Annual lease payments are as follows:
Year ended September 30,
------------------------
1996 $ 306,627
1997 321,958
1998 338,056
1999 354,959
2000 372,706
Thereafter 3,923,480
---------
$5,617,786
==========
F-17
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Related Party Transactions-continued
Rent expense totaled approximately $292,025 and $211,954 for the twelve
months and nine months ended September 30, 1995 and 1994, respectively.
During 1994, the Company received $68,118 in rent concessions. This amount
was charged to rent expense and as a contribution to additional paid in
capital. The Company pays the real estate taxes and is responsible for normal
building maintenance.
9. CONTINGENCIES
a. Litigation
In the normal course of business, the Company is a party to various
claims and/or litigation. Management and the Company's legal counsel believe
that the settlement of all such claims and or/litigation, considered in the
aggregate, will not have a material adverse effect on the Company's financial
position and results of operations.
b. Employment Contracts
On January 10, 1995, the effective date of the IPO, the Company's
president and chief executive officer entered into a three year employment
agreement with the Company. The agreements each provide for an annual salary
of $60,000 during the first year, $80,000 during the second year and $100,000
during the third year. The agreements also provide for a reasonable auto
allowance, term life insurance, medical insurance and certain other benefits
as is standard for employees of the Company. In addition, the president and
chief executive officer were granted an option to purchase 150,000 shares of
the Company's common stock. Such options are exercisable for ten years at
$3.15 per share, (which was the IPO price), only after the Company attains
certain specified pre tax income levels.
10. RESTATEMENT
On March 20, 1996, the Company reexamined the recording of two fiscal
1995 transactions in order to more appropriately reflect certain components
of its fiscal 1995 statement of operations.
a. With respect to the private placement described in Note 6(a), 75
percent of the proceeds were attributable to additional paid in capital in
conjunction with the stock issued. However, the Company charged all of the
costs and fees associated with this placement to other expenses and has
accordingly reclassed 75% of such expenses, or $92,022, to additional paid
in capital. This
F-18
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restatement-continued
reclassification has resulted in the reduction of previously reported private
placement costs from $572,674 to $480,652.
b. Additionally, in July 1995, the Company's founders and principal
shareholders sold 89,040 shares of their common stock to several key employees
for $0.03 per share. The shares sold were issued and outstanding but were
non registered and subject to restrictions regarding public sale. The
conclusion of the Company was, that even though the shares sold to the
employees did not increase shares outstanding, cause no additional dilution,
have restrictions that prohibit their current marketability and did not
impact the financial condition of the Company, the Company should have
charged to operations for fiscal 1995 additional compensation expense.
After giving consideration to the market price of $2.125 at the date of
transfer less the consideration paid, $186,539 was charged to compensation
expense for fiscal 1995, with a corresponding credit to additional paid in
capital. The principal shareholders also sold an additional 10,700
shares to other key employees. These shares were similar in nature to the
other 89,040 shares, with the exception of a ratable vesting provision based
on future employment over the next five years. The amortized portion charged to
compensation for fiscal 1995 was $1,121. The effects of these two compensation
adjustments resulted in fiscal 1995 selling, general and administrative
expenses and loss from operations increasing to $3,151,020 and ($1,113,495)
from the previously reported results of $2,963,360 and ($925,835) respectively.
As a result of the adjustments, the Company's previously reported fiscal
1995 net loss of ($1,427,440) and ($0.60) per share have been adjusted to
($1,523,078) and ($0.64), respectively. The adjustments have no net effect on
the Company's shareholders equity as of September 30, 1995.
F-19
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
As of
March 31, 1996 As of
(Unaudited) September 30, 1995
--------------- -----------------
CURRENT ASSETS:
Cash and Cash Equivalents.......... $566,002 $1,214,940
Accounts receivable, net of
allowance for doubtful accounts . 955,106 1,146,865
Inventories (Note 2)............... 2,534,896 2,187,981
Prepaid expenses and other
current assets................... 233,064 192,689
----------- ----------
Total current assets..... 4,289,068 4,742,475
----------- -----------
Property, plant and equipment-
-at cost 358,157 334,443
Less: Accumulated depreciation
and amortization................. 210,300 193,188
------- -------
147,857 141,255
---------- ----------
SECURITY DEPOSITS AND OTHER ASSETS...... 60,550 62,085
---------- ---------
$4,497,475 $4,945,815
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................... 1,706,645 2,645,268
Accrued expenses................... 831,403 625,174
----------- ---------
Total current liabilities..... 2,538,048 3,270,442
----------- ---------
SHAREHOLDERS' EQUITY
Common stock $.01 par value;
10,000,000 shares authorized,
2,756,183 issued and outstanding
as of March 31, 1996 and
September 30, 1995................ 27,562 27,562
Additional paid-in capital ........ 4,141,343 4,141,343
Accumulated deficit................ (2,209,478) (2,493,532)
----------- ----------
1,959,427 1,675,373
------------ ----------
$4,497,475 $4,945,815
============ ==========
See notes to condensed consolidated financial statements
F-20
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS AND OPERATIONS
For the Six For the Six
Months Ended Months Ended
March 31, 1996 March 31, 1995
(Unaudited) (Unaudited)
--------------- --------------
NET SALES.................... $8,239,378 $5,120,026
COST OF SALES................ 6,264,755 3,990,929
--------------- --------------
Gross Profit............ 1,974,623 1,129,097
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.. 1,493,174 1,316,590
RESEARCH & DEVELOPMENT EXPENSES. 201,270 89,391
--------------- -------------
Income, (loss) from operations 280,179 (276,884)
OTHER INCOME (EXPENSE):
Interest Expense, net..... 15,858 (5,333)
Private Placement financing
costs (Note 4)....... - (572,674)
Miscellaneous Income...... 8,017 28,699
-------------- -------------
Income, (loss) before
income tax provision.. 304,054 (826,192)
INCOME TAX PROVISION (Note 5).. 20,000 -
-------------- -----------
Net income, (loss) $284,054 ($826,192)
============== ===============
Net income, (loss) per share.... $ 0.10 ($0.41)
============== ===============
Weighted average shares
outstanding (Note 3)....... 2,756,183 2,007,623
============= =========
See notes to condensed consolidated financial statements
F-21
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS AND OPERATIONS
For the Three For the Three
Months Ended Months Ended
March 31, 1996 March 31, 1995
(Unaudited) (Unaudited)
--------------- --------------
NET SALES.................... $3,729,161 $2,966,220
COST OF SALES................ 2,795,946 2,310,930
--------------- --------------
Gross Profit............ 933,215 655,290
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.. 746,114 700,031
RESEARCH & DEVELOPMENT EXPENSES. 107,393 47,613
--------------- ------------
Income, (loss) from operations 79,708 (92,354)
OTHER INCOME (EXPENSE):
Interest income,(expense)net. 6,042 8,260
Miscellaneous Income...... 5,677 25,029
-------------- --------------
Income, (loss) before
income tax provision.. 91,427 (59,065)
INCOME TAX PROVISION (Note 5).. 10,000 -
-------------- --------------
Net income, (loss) $ 81,427 ($ 59,065)
============== ===============
Net income, (loss) per share.... $ 0.03 ($0.02)
============== ===============
Weighted average shares
outstanding (Note 3)....... 2,756,183 2,622,850
============== ===============
See notes to condensed consolidated financial statements
F-22
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six For the Six
Months Ended Months Ended
March 31, 1996 March 31, 1995
(Unaudited) (Unaudited)
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income, (loss).............. $284,054 ($826,192)
-------- ----------
Adjustments to reconcile net income,
(loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization.... 18,646 15,003
Provision for uncollectible accounts
receivable....................... 10,000 21,000
Provision for system board obsolescence. 28,000 55,000
Private placement financing costs .. - 572,674
Rent expense funded by
principal shareholders......... - -
Increase (decrease) in cash resulting
from changes in operating assets
and liabilities:
Accounts receivable................. 181,759 (444,378)
Inventories......................... (374,915) (1,360,809)
Prepaid expenses and other
current assets................. (40,375) (134,760)
Accounts payable.................... (938,622) 848,855
Accrued expenses.................... 206,229 140,342
--------- ---------
(909,278) (287,073)
--------- ---------
Net cash used in operating
activities..................... (625,224) (1,113,265)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of machinery and equipment. (23,714) -
Purchase of software rights.......... - (13,156)
Security deposits................... - (483)
-------- -----
Net cash used in investing
activities................ (23,714) (13,639)
-------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from private placement
offering............................. - 477,304
Net proceeds from Initial Public Offering. - 3,267,023
Principal payment on bank loan............ - (395,000)
Principal payment on private placement
bridge loan......................... - (600,000)
---------- ---------
Net cash provided by financing
activities........................... 0 2,749,327
---------- ---------
Net increase (decrease) in cash and
cash equivalents...................... (648,938) 1,622,423
CASH AND CASH EQUIVALENTS,
beginning of period.................. 1,214,940 151,408
---------- --------
CASH AND CASH EQUIVALENTS,
end of period........................ $566,002 $1,773,831
========== ==========
SUPPLEMENTAL DISCLOSURES:
Interest paid........................... - $43,667
=========== ==========
Income taxes paid........................ $8,182 $19,163
=========== ============
See notes to condensed consolidated financial statements
F-23
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared in accordance with generally accepted
accounting principles for interim period reporting in conjunction with the
instructions to Form 10-QSB. Accordingly, these statements do not include
all of the information required by generally accepted accounting principles
for annual financial statements, and are subject to year-end adjustments. In
the opinion of management, all known adjustments (consisting of normal
recurring accruals and reserves) necessary to present fairly the quarterly
financial results for the period have been included. It is suggested that
these interim statements be read in conjunction with the financial statements
and related notes included in the Company's September 30, 1995 Form 10-KSB.
The operating results for the three months and six months ended March 31,
1996 are not necessarily indicative of the results to be expected for the
September 30, 1996 year end.
NOTE 2. INVENTORIES
Inventories have been valued at the lower of average cost or market. The
components of inventory at March 31, 1996 and September 30, 1995 consist of:
March 31, September 30,
1996 1995
---- ------
Component Parts $ 855,994 $ 738,846
Work in Progress 1,129,250 974,706
Finished Goods 549,652 474,429
---------- ----------
$2,534,896 $2,187,981
========== ==========
NOTE 3. NET INCOME (LOSS) PER SHARE
Net income and loss per share have been computed on the basis of weighted
average common shares outstanding for each period presented.
F-24
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net income (loss) per share - continued
Weighted average shares outstanding listed below were used in the per
share computation:
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
---- ---- ---- ----
2,756,183 2,622,850 2,756,183 2,007,623
During the quarter ended March 31, 1996, the Company's stock did not trade at
an average price that was in excess of the exercise price for the Company's
Class A warrants. Therefore, the warrants, which in certain circumstances are
considered as a component of weighted average shares outstanding, were not
included in the calculation of weighted average shares. The Company has
1,476,183 Class A Warrants outstanding, exercisable at $3.75 per share,
commencing January 10, 1996 and expiring on January 9, 2000.
NOTE 4. PRIVATE PLACEMENT FINANCING COSTS
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
promissory notes bearing interest at 5% per annum 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
Company's January 10, 1995 initial public offering (IPO). The promissory notes
were subject to mandatory repayments. On January 17, 1995, the $600,000 plus
accrued interest of $7,910 was repaid. All the units issued to the former
noteholders were registered with the Securities and Exchange Commission
concurrently with the IPO.
It was the opinion of management, based on certain factors such as: 1) the
nature of the borrowing, 2) the Company's financial position and 3) the economic
environment, that 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) was charged to operations under the caption "Private
Placement Financing Costs" in the quarter ended December 31, 1994. Additionally,
$122,696 of fees and costs relating to the private placement were charged to
operations within the same caption in the quarter ended December 31, 1994.
F-25
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. INCOME TAXES
Income taxes are based on annualized statutory rates for federal and state
income taxes. The provision for income taxes reflects the effect of restricted
and unrestricted net operating loss carryforwards adjusted for the applicable
federal and state alternative minimum tax provisions.
NOTE 6. LINE OF CREDIT
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. 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 Reuters, 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. The credit line is secured by the assets of the Company. In addition,
the Company, HCW Distributing Corp., Hauppauge Computer Works GmbH, Hauppauge
Computer Works Ltd., Kenneth R. Aupperle and Kenneth Plotkin, have guaranteed
the obligations of Hauppauge Computer Works, Inc.. The quarantees of Messrs.
Aupperle and Plotkin 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. If the Company does not meet the requirements
of these and other existing covenants, the Company will be in default per the
Credit Agreement. The Company is prohibited from paying cash dividends during
the term of the Credit Agreement. As of March 31, 1996, the Company has not
utilized this loan facility.
F-26
<PAGE>
No dealer, salesman or any other
person has been authorized to give
any information or to make any
representations other than those
contained in this Prospectus in
connection with the offer made by
this Prospectus and, if given or made,
such information or representations must
not be relied upon as having been 1,476,183 Shares of
authorized by the Company. Neither the Common Stock
delivery of this Prospectus nor any sale
made hereunder shall under any 1,333,333 Underwriter Units
circumstances create any implication that
there has been no change in the affairs 133,333 Shares of Common Stock
of the Company since the date hereof.
This Prospectus does not constitute an HAUPPAUGE DIGITAL, INC.
offer or solicitation by anyone in any
jurisdiction in which the person making
such offer or solicitation is not
qualified to do so or to anyone to whom
it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
Page
----
Prospectus Summary 3
Summary Financial
Information 5
Risk Factors 6
Use of Proceeds 12
Dividend Policy 12 ------------
Dilution 13
Capitalization 14 PROSPECTUS
Market Information 15
Management's Discussion and Analysis ------------
of Operation and Financial Condition 16
Business 21
Management 28
Principal Stockholders 31
Certain Transactions 32
Description of Securities 33
Shares Eligible for Future Sale 35
Plan of Distribution 35
Right of Rescission 36
Legal Matters 37
Experts 37
Additional Information 38
Consolidated Financial Statements F-1 June 13, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Certificate of Incorporation of the Company provides that no director
shall be liable to the Company or any of its stockholders for monetary damages
for breach of fiduciary duty as a director, except with respect to (i) a breach
of the director's duty of loyalty to the Company or its stockholders, (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) liability under Section 174 of the Delaware
General Corporation Law or (iv) a transaction from which the director derived
an improper personal benefit, it being the intention of the foregoing provision
to eliminate the liability of the Company's directors to the Company or its
stockholders to the fullest extent permitted by Section 102(b)(7) of the
Delaware General Corporation Law, as amended from time to time, each person
that such Sections grant the Company the power to indemnify.
Section 174 of the Delaware Corporation Law provides for certain liability
of directors for unlawful payment of dividends or unlawful stock purchases or
redemptions. Section 102(b)(7) of the Delaware Corporation Law provides that
liability of directors shall not be eliminated or limited for any breach of the
director's duty f loyalty, acts not in good faith, which involve intentional
conduct or a knowing violation of law, violation of Section 174 of the Delaware
Corporation Law, or transactions in which the director derives an improper
personal benefit. Section 145 of the Delaware Law provides that a corporation
may indemnify any person who was or is a party or threatened to be made a party
by reason of the fact that he is or was a director or officer of the
corporation against expenses incurred by him in connection with the defense of
certain actions that may be brought against them, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation. The foregoing statutory discussion is
limited by the terms of the statute and any amendments thereto.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company, will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it
is against public policy, as expressed in the Securities Act, and will by
governed by the final adjudication of such issue.
Item 25. Other Expenses of Issuance and Distribution
Estimates of fees and expenses incurred or to be incurred in connection
with the issuance and distribution of securities being registered:
Printing and Mailing Costs and Fees $5,000
Legal Fees and Costs 15,000
Accounting Fees and Costs 2,000
Miscellaneous Expenses 1,683
______
TOTAL $23,683
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
Except as set forth below, there were no securities sold by the Registrant
within the past three years without registering the securities under the
Securities Act:
On August August 2, 1994, Kenneth R. Aupperle, Laura Aupperle, Kenneth
Plotkin and Dorothy Plotkin exchanged all of their issued and outstanding
shares of the Company's two wholly owned subsidiaries for 1,280,000 shares of
Common Stock, representing all of the outstanding shares of the Company.
In October 1994, the Company sold $600,000 of units to 28 purchasers in a
private placement, each unit consisting of a 5% promissory note and such number
of Units as equal 75% of the principal amount of the promissory note, divided
by the price of the Unit in the Unit Offering ($3.15). Such offering was made
in compliance with Rule 506 of Regulation D of the Securities Act, in that the
offering was made to no more than 35 persons who were not "accredited" (as
defined in Rule 501 of Regulation D), any of such non-accredited persons
possessing sufficient knowledge and experience of similar investment, the
information required to be delivered pursuant to Rule 502 of Regulation D was
delivered; the offering was made without general solicitation or advertising;
and limitation were imposed upon the resale of securities purchased. In
January, 1995, the Common Stock included in the Units and the Common Stock
issuable upon the exercise of the Class A Warrants issued in connection with
the bridge loan was registered for resale on Form SB-2. The following were
the participants of such offering:
Herbert Cyrlin
Marshall N. Cyrlin
Albert Kula
Norman Laufer
William C. Albert Trust
Christopher J. Alf
Shepard Ellenberg
K & K Realty
Daniel F. Reinhart
Gregg Supinsky
M & D Construction, Inc.
Hillel Y. Marans
John & Steven Albicocco
Francine Manzo
Thomas A. Peacock
Arnold D. Flam, DDS, Harvey Glicker, DDS, P.C., Profit Sharing Trust FBO
Harvey Glicker
SEP IRA Jonathan S. Elias
Ronald P. Cohen
Jesse Farrow
Karl D. Evertz
E & M RP Trust
Donald E. Millard
Arthur M. Luxenberg
Perry Weitz
717 Associates
Don Kollmar
II-2
<PAGE>
James Lustig
Moshe Levy and Dan Levy JTWROS
The sale set forth above is claimed to be exempt from registration with
the Commission pursuant to Section 4(2) of the Securities Act of 1933, as
transactions by an issuer not involving any public offering.
Reference is also made to the transfer of 30,000 shares of Messrs.
Aupperle and Plotkin and their wives' Common Stock to members of the firm of
Hollenberg Levin Solomon Ross & Belsky, LLP, the Company's counsel, or their
designees, without payment of monies in August of 1994. The sales set forth
in this paragraph were exempt from registration with the Commission pursuant to
Section 4(1) of the Securities Act as transactions by an issuer not involving
a public offering.
Item 27. Exhibits
The following Exhibits were previously filed or incorporated by reference
with respect to this Registration Statement as indicated in Amendment No. 2 to
the Registration Statement:
Exhibit Description of Exhibit
(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
(4.2) Form of Class A Warrant Certificate
(4.3) Form of Warrant Agency Agreement between the Company, North
American Transfer Co. and Lew Lieberbaum & Co.,Inc., as amended
(4.4) Form of Underwriter's Unit Purchase Option
(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.
(22) Subsidiaries of the Company
The following Exhibit was previously filed or incorporated by reference
with respect to this Registration Statement as indicated in Post-Effective
Amendment No.2 to the Registration Statement:
(4.6) 1996 Non-Qualified Stock Option Plan
The following Exhibit was previously filed or incorporated by reference
with respect to this Registration Statement as indicated in Post-Effective
Amendment No.3 to the Registration Statement:
II-3
<PAGE>
(10.13) Credit Agreement with MTB Bank dated March 28, 1996
(24.3) Consent of Arthur Andersen, LLP
The following exhibits are annexed hereto:
(24.1) Consent of Hollenberg Levin Solomon Ross Belsky and Daniels, LLP
(24.2) Consent of BDO Seidman, LLP
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales of
securities are being made, a post-effective amendment to this Registration
Statement to: (i) include any prospectus required by Section 10(a)(3) of the
Securities Act; (ii) reflect in the Prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and (iii) include any additional or changed
material information on the plan of distribution.
(2) For the purpose of determining liability under the Securities
Act, treat each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the Offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, or otherwise, the Company
has been informed that in the opinion of the Commission such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer of controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and is therefore
unenforceable and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this Amendment
to the Registration Statement to be signed on its behalf by the undersigned,
in Hauppauge, New York on June 13, 1996.
HAUPPAUGE DIGITAL, INC.
By: /s/ KENNETH R. AUPPERLE
_____________________________
KENNETH R. AUPPERLE, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following personsin the
capacities and on the dates indicated.
/s/ KENNETH R. AUPPERLE
______________________________ Date: June 13, 1996
KENNETH R. AUPPERLE, President,
Chief Operations Officer and Director
/s/KENNETH PLOTKIN
_____________________________ Date: June 13, 1996
KENNETH PLOTKIN, Chief Executive
Officer, Secretary, Vice-President,
Chairman of the Board of Directors, and
Director
/s/ LAURA AUPPERLE
______________________________ Date: June 13, 1996
LAURA AUPPERLE, Director
/s/ DOROTHY PLOTKIN
______________________________ Date: June 13, 1996
DOROTHY PLOTKIN, Director
______________________________ Date:
LEONARD A. NEUHAUS, Director
/s/ GERALD TUCCIARONE
______________________________ Date: June 13, 1996
GERALD TUCCIARONE, Treasurer
and Chief Financial Officer
/s/
______________________________ Date:
BERNARD HERMAN, Director
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Description
- ----------- -------------------
24.1 Consent of Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
24.2 Consent of BDO Seidman, LLP
</TABLE>
EX. 24.1
CONSENT OF COUNSEL
We hereby consent to the use of our name wheresoever set forth in this
Registration Statement (SB-2).
/s/ Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
___________________________________________
Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
Garden City, New York
June 13, 1996
EX. 24.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form SB-2 of our report dated November 20, 1995
(except with respect to the matter discussed in Note 10, as to which the date
is March 20, 1996), relating to the consolidated financial statements of
Hauppauge Digital, Inc. and Subsidiaries as of September 30, 1995 and to the
reference to our firm under the heading "Experts" in such prospectus.
/s/ BDO SEIDMAN, LLP
_____________________________________
BDO SEIDMAN, LLP
Mitchel Field, New York
June 13, 1996
