<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended September 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission File No. 1-13550
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HAUPPAUGE DIGITAL, INC.
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(Name of small business issuer in its charter)
DELAWARE 11-3227864
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
91 Cabot Court, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 434-1600
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Securities registered pursuant to Section 12 (b) of the Act:
$.01 par value Common Stock
Securities registered pursuant to Section 12 (g) of the Act:
$.01 par value Common Stock
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act of 1934 during the past twelve
(12) months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to the filing requirements for
the past ninety (90) days.
YES X NO
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB: [X]
<PAGE>
State registrant's revenues for its most recent fiscal year: $25,613,252
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 9, 1997 was approximately $15,070,646.
Non-affiliates include all shareholders other than officers, directors and 5%
shareholders of the Company. Market value is based upon the price of the
Common Stock as of the close of business on December 9, 1997 which was $5.75
per share as reported by NASDAQ.
As of December 9, 1997 the number of shares outstanding of the Common Stock
was 4,409,102 shares (exclusive of treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Part III which includes Item 9 (Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the Exchange Act), Item 10
(Executive Compensation), Item 11 (Security Ownership of Certain Beneficial
Owners and Management), and Item 12 (Certain Relationships and Related
Transactions) will be incorporated in the Company's Proxy Statement to be
filed within 120 days of September 30, 1997 and are incorporated herein by
reference.
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PART I
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Item 1. DESCRIPTION OF BUSINESS
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(a) Business Development.
Hauppauge Digital, Inc. (the "Company") was incorporated in the state of
Delaware on August 2, 1994 and has two wholly owned subsidiaries, Hauppauge
Computer Works, Inc., which was incorporated in the state of New York on
December 14, 1982, and HCW Distributing Corp., which was incorporated in the
state of New York on September 13, 1984. Hauppauge Computer Works, Inc. is
the owner of all the outstanding shares of Hauppauge Computer Works, GmbH, a
German corporation responsible for directing European marketing efforts, and
is the owner of all the outstanding shares of Hauppauge Computer Works, LTD,
a Virgin Islands corporation responsible for handling sales outside of the
United States. All references herein to the Company include the Company, its
two wholly owned subsidiaries and their subsidiaries. The Company's executive
offices are located at 91 Cabot Court, Hauppauge, New York 11788, its
telephone number at that address is (516) 434-1600 and its internet address
is http://www.hauppauge.com.
Since 1992, the Company has been engaged primarily in the business of
designing, manufacturing and marketing of digital video, TV, video
conferencing and video capture boards for PCs. The WinTV 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. Specific features of the most popular models are highlighted in
the product section.
The Company markets its products, through distributors, computer
retailers and Original Equipment Manufacturers ("OEMs"). Distributors
typically stock and sell the products to retail stores and value added
resellers ("VARs"). Computer retailers typically stock the products on their
shelves and sell them to end users for installation in their own PCs, while
OEMs typically purchase TV and video conferencing boards ("VCBs") to
incorporate them into multimedia PCs, which are then ultimately sold to the
end user. The Company's product lines consist of digital, video TV boards,
digital TV boards capable of receiving Intercast(TM) data transmissions,
video editing boards and video capture/video conferencing boards.
Net sales of the Company's products for the Company's last two fiscal
years are summarized as follows:
Year Ended Year Ended
September 30, 1997 September 30, 1996
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System Sales $ 465,172 $ 1,421,359
TV and video conferencing 25,148,080 13,273,741
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Total Company Sales $ 25,613,252 $ 14,695,100
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(b) Business of Issuer.
Products
The WinTV board was designed so that a PC user can watch television in
a resizable window on their PC video monitor during normal computer use. This
activity requires a board that plugs into a PC, and operating software to
control functions such as channel change, volume adjustment, freeze frame,
and channel scan. All hardware functions required, such as video digitizing,
windowing, color space conversion and chroma keying, are performed on the
WinTV board and do not affect the operation of the PC. The WinTV boards
include 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 WinTV board models come with software that runs under the popular
Microsoft(R) Windows(TM) operating system, including Windows 95(TM) and
Windows NT 4.0, 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. Some
WinTV models will also run under Windows 98(TM), which Microsoft (R) has
slated for release during 1998.
It is the Company's strategy to provide a wide range of WinTV boards for
the PC market. With a WinTV 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 to see more image detail. The video
images can be viewed simultaneously with normal PC operations such as word
processing programs and spread sheet applications. A stockbroker who is
working on a PC and watching CNBC might keep the image small on the PC video
monitor while receiving stock quotations, and then with one click, the user
can enlarge the video image to full screen size.
Products made by the Company include the following:
The WinCast/TV board ("WinCast") is a single slot PCI board which
enables a user to bring TV and Intercast(TM) Web pages to their PC, using
Intel's Intercast(TM) Viewer to display Intercast(TM) Web pages in a window
alongside the live TV window. The WinCast has a 125 channel cable ready TV
tuner with automatic channel scan and a video digitizer. The video digitizer
allows the user to capture still and motion video images to a hard disk,
creating high impact presentations. In addition to the standard model, the
WinCast/TV-dbx model offers high quality dbx-TV for stereo decoding.
The WinCast/TV radio board has all the features of the WinCast/TV-dbx
model, in addition to an FM stereo radio tuner. This model is available
equipped with an NTSC tuner for the North America market, or a PAL-I or PAL-BG
tuner for the English and European markets.
The WinTV pci board is a single slot PCI board equipped with a Pal-I or
Pal-B/G tuner and teletext capabilities for the English or European markets.
The board has features similar to the WinCast/TV board.
<PAGE>
The Hauppauge Impact Video Conferencing Board (ImpactVCB) is a low cost
PCI bus card for high performance access to the digitized video. Designed
for video conferencing and industrial applications requiring video, the
ImpactVCB features live video in a window, still image capture and an AVI
capture driver.
The WinTV-CinemaPro board ("CinemaPro") was introduced in fiscal 1997.
Due to its lower manufacturing costs, the CinemaPro has essentially replaced
its predecessor, the WinTV Celebrity. The CinemaPro is a high end solution
for financial service customers as well as distribution and retail channels.
The CinemaPro is normally equipped with a cable ready tuner, and uses a
proprietary Company designed technology called "SmartLock". The SmartLock
feature allows the synchronizing the WinTV video to the VGA display,
eliminating connection problems between the VGA card and the WinTV board.
The WinTV-HighQ ("HighQ") board was designed for users who need 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 typically does not include a television tuner, but it
does use the SmartLock feature.
The WinMotion 60 board ("WinMotion") 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 WinMotion 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 WinMotion 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 WinMotion 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 VideoMagic and VideoWizard boards provide many high quality
features for editing videos on the user's PC. VideoMagic can capture full
motion video images at up to 30 frames per second. Combined with the Media
Studio Video editor, the user can add titles, special effects, multiple video
and audio overlays, two and three dimensional effects plus fades and blends.
The VideoMagic board can be used to create sales presentations, make video
training tapes and to add flare to home videos.
The WinTV boards which are for sale to the computer retail market are
essentially the same as the ones which are for sale to the OEM market. The
differences are in the packaging and in the sophistication of the operating
software. The Company believes that the WinCast and the CinemaPro models
are the choice of the retail market. The WinCast and VCB video conferencing
boards are the choice of the OEM market. The CinemaPro, WinCast, European
PCI and Video Conferencing boards accounted for approximately 87% of the
Company's net sales for its 1997 fiscal year.
<PAGE>
For the international market, the Company has developed a capability for
the WinTV board called a teletext decoder. This 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.
Teletext, Intercast(TM) and several newer services are all forms of data
broadcasting. The Company believes that due to the applications of its
products in PCs, data broadcasting is a key growth opportunity.
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 is 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 purchased by companies that
require specific configurations not available through off-the-shelf
wholesalers or retailers.
Product Production
The Company designs the WinTV boards and also writes the operating
software of the WinTV boards to be used in conjunction with the popular
Microsoft(R) Windows(TM) operating system, the WindowsNT operating system and
the IBM OS/2 operating system. The Company subcontracts the manufacturing and
assembly of the WinTV boards to independent third parties. The Company then
tests the completed product at its facility in Hauppauge, New York before
shipping to customers to ensure the quality of its products.
The Company purchases components such as tuners from reliable
manufacturers such as Philips and Temic, and video digitizers from Auravision
and Rockwell Semiconductor Systems, Inc. If the foregoing suppliers do not
supply their products to the Company, the business of the Company might be
adversely affected because the Company would have to find alternative
suppliers of tuners and video digitizers, which may result in additional
costs and delays and therefore adversely affect the Company's production and
profitability. See Item 6, "Management's Discussion and Analysis-Risk
Factors".
Manufacturing is performed by a selected group of contract
manufacturers. Product design specifications are provided to insure proper
assembly. Contract manufacturing is either done on a consignment basis, in
which the Company provides all the component parts and pays an assembly
charge for each board produced, or on a turnkey basis, in which all
components and labor are provided by the contract manufacturer, and the
manufacturing price the Company is charged includes parts and assembly costs.
The Company has six contract manufacturers qualified to assemble product, all
located in the United States. Four contract manufacturers are presently
being utilized to handle the majority of production. If demand were to
increase dramatically, the Company believes additional production could be
absorbed by the other contract manufacturers.
<PAGE>
Digital Video Market
The digital video market, as it pertains to the WinTV board, involves
the use of a PC to turn a video image into a digital form which can be stored
on a PC's hard disk drive. Once a video image is on the PC's hard disk drive,
the image can be merged into a document using various word processing systems
such as WordPerfect(R) or Microsoft(R) Word(R). A sequence of video images
that are digitized are stored in a form called "AVI", which has digital audio
and video interleaved to create a digital movie. This digital movie can be
edited on the PC, adding special effects, audio overdubs and titles. Such
digital movies are used in multimedia presentations and multimedia CD-ROMs.
The digital video sequences can also be transmitted to another location over
the highspeed communication lines, which allows for video conferencing.
Typical WinTV 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 WinTV board for the entertainment value of being
able to watch television on a 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 WinTV board may be for multimedia development. The WinTV
board digitizes live video and allows this video to be stored on the PC hard
disk drive. The stored video can be used to create presentations that combine
the digitized video with text, create multimedia CD-ROM packages, and
digitally edit video tapes.
During 1996, a new broadcast technology called Intercast(TM) was
introduced. Developed by Intel Corporation, Intercast(TM) Web pages are
broadcast in a portion of the TV signal called the Vertical Blanking
Interval. Intercast(TM) Web pages add a new dimension to TV shows by
allowing TV producers to add real time information to their broadcasts.
These pages are standard Internet Web pages, but are sent with TV signals
over the airways instead of being sent over the telephone lines. In addition
to Web pages specific to the show being broadcast, broadcasters can use the
Intercast(TM) medium to add other types of information to their TV
transmissions, such as real time stock market information along with their
Web pages. Intercast(TM) information broadcast by TV show producers is
designed to increase viewing pleasure by providing viewers with textual
information which coincides with broadcasted video images. The Company's
WinCast/TV and WinTV-pci boards allows you to display Intercast(TM) data on
a PC's VGA monitor.
Industrial uses of the WinTV 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 WinTV board may be utilized by real estate brokerage firms to
merge digital pictures of real estate into faxes. The uses of digital video
represents recent technology that is becoming widely applied in PCs. The
Company believes that there is a trend toward replacing projects currently
done in text on PCs into projects that include full motion video or still
video pictures. For example, a real estate broker today might, on a desktop
PC, create a fax describing a property for sale. Equipped with the WinTV
board, the broker could include a picture of the property in the fax. The
WinTV 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.
<PAGE>
Sales people who currently create written proposals may create proposals
that are shown on portable computers that include digital videos to describe
processes or procedures, making their proposals more effective. The WinTV
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.
Video Conferencing Market
During fiscal 1997, the Company on an OEM basis began selling a video
conferencing board (the Impact VCB). The product is mainly being sold to a
large computer peripheral company, who sells the product through nationwide
retail outlets. Video conferencing allows PC users to see and hear each
other through a video window on their computer monitor. Using the Company's
VCB, a modem, camera, and the applicable software, users can visually share
information with each other.
The Company believes that PC based video conferencing will be a growth
market as software products, such as White Pine's CUSEEME and Microsoft's
NetMeeting, gain in popularity.
Distribution to the Retail Market
During fiscal 1997, net sales to distributors and retailers of the
Company totaled approximately $19,006,000 or 74% of the Company's net sales.
This is in comparison to net sales of approximately $9,633,000 or 66% for the
year ended September 30, 1996. The Company has no exclusive distributor or
retailer and sells through a multitude of retailers and distributors, no one
of which accounted for more than 10% of the Company's net sales. The Company
either sells direct to retailers or utilizes distributors, who sell to a
variety of retailers and value added resellers.
Sales to Original Equipment Manufacturers
The OEM business is one where a PC manufacturer incorporates the
Company's WinCast TV board or ImpactVCB into a product sold under the OEM's
label. The Company's OEM business is expected to increase in the next few
years. This is due to opportunities created by the new FCC regulations
requiring television broadcasters to begin digital broadcasts by the end of
1998. These new regulations will attract consumer interest in devices, such
as the Company's WinTV boards, which are equipped to receive digital TV
broadcasts.
The Company presently sells video boards under a Master Purchase
Agreement to a major news service provider. This news service provider has
developed a financial news service which utilizes the Company's digital video
TV board. The Company's net sales to this customer for the year ended
September 30, 1997 and for the year ended September 30, 1996 totaled
approximately $3,143,000 (12% of total net sales) and approximately
$1,615,000 (11% of total net sales), respectively.
<PAGE>
The Company's remaining OEM business totaled approximately $3,463,000
for fiscal 1997 compared to approximately $3,447,000 for the year ended
September 30, 1996. During fiscal 1997, the Company began selling VCBs to a
large computer peripheral company. The Company's net sales to this customer
totaled approximately $2,880,271 (11% of total net sales). For fiscal 1997,
approximately 26% of the Company's net sales were for the OEM market as
compared to 34% for the year ended September 30, 1996.
Marketing and Sales
The Company sells both domestically and internationally through Company
sales offices in New York, California and Germany, plus an independent sales
representative's office in London. For the fiscal year ended September 30,
1997 and the year ended September 30, 1996, approximately 34% and 46% of the
Company's net sales were made within the United States, respectively, while
approximately 66% and 54% were outside the United States (predominately in
Germany, the United Kingdom, and the Netherlands), respectively. Hauppauge
Computer Works, LTD handles all sales outside of the United States.
The Company advertises its products in a number of U.S. and
international PC magazines. The Company also participates extensively in
their retailers' market promotion programs, such as store circulars and
promotions. These in store promotional programs, magazine advertisements,
plus a public relations program aimed at editors of key personal computer
magazines and an active web site on the Internet, are the principal means of
getting the product introduced to end users. The sales rate in the computer
retail market is very much determined by the effectiveness of these programs,
along with the technical capabilities of the product itself. The Company also
lists its products in catalogs of various mail order companies and attends
various worldwide trade shows.
The Company currently has 5 sales persons located in Europe and 5 sales
persons in the United States, located in New York and California. The Company
also has 2 manufacturer representatives retained by it on a non-exclusive
basis, who work with customers in certain geographic areas.
See "Management's Discussion and Analysis-Results of Operations-Years
Ended September 30, 1997 and 1996" with reference to a discussion on seasonality
of the Company's sales.
Foreign Currency Fluctuations
The Company's international sales are mainly in Europe. The Asian market
accounts for less than 2% of the Company's sales. Sales into the German and
English markets are denominated in German Marks and British Pound Sterling.
Due to the Company's concentration of sales in these two countries, changes
in currency values have an affect on the Company's operations. During the
Company's third and fourth fiscal quarters, the German Mark devalued
approximately 19% over the prior fiscal year's third and fourth quarters.
Approximately 30% of the Company's third and fourth fiscal quarter sales
were denominated in German Marks. The resulting devaluation of the German
Mark caused a decrease in gross margins of several percentage points.
<PAGE>
In order to manage these currency fluctuations, the Company put into
place a strategy of selling forward German Marks by entering into a series
of six month window contracts, based on estimated sales to Germany. As of
September 30, 1997, the Company had open window contracts worth over 5.6
million German Marks, convertible at prices ranging from 1.84 to 1.72 German
Marks to the dollar. Although it is difficult to predict the volatility of
the German Mark, the Company will continue its strategy of selling German
Marks forward, based on projected business, in an attempt to lock in
favorable currency prices. There can be no assurance that the Company will
be able to lock in foreign currencies at a favorable rate and a favorable
cost.
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 dynamics of competition in this market involve short
product life cycles, declining selling prices, evolving industry standards,
and frequent new product introductions. The Company competes in this
emerging market against companies such as ATI Technologies and STB systems,
among others. The Company believes that competition from new entrants will
increase as the market for digital video in a PC expands. There can be no
assurances that the Company will not experience increased competition in the
future. Such increased competition may have a material adverse effect on the
Company's ability to successfully market its products. However, the Company
believes that through research and development and aggressive marketing it
can compete in this very competitive market, although there can be no
assurances of such.
Patents and Trademarks
Even though the Company independently develops its hardware and software
products, the Company's success will depend, in large part, on its ability to
innovate, obtain or license patents, protect trade secrets and operate
without infringing on the proprietary rights of others. The Company maintains
copyrights on its designs and software programs, but currently has no patent
on the WinTV board and the Company believes that such technology cannot be
patented.
On December 27, 1994, the Company's mark, "WinTV", was registered with
the United States Patent and Trademark Office. The Company's Hauppauge name
logo is also registered.
Governmental Regulations
The Company believes that existing or probable governmental regulations
have no material effect on the Company's business.
Research and Development
The Company's development efforts are currently focused on more highly
integrated versions of its hardware products, further improve performance and
cost points, and on new versions of its software, to add features, improve
ease of use, and provide support for new operating systems. The Company is
also developing additional capabilities in the data broadcasting field.
<PAGE>
The technology underlying the Company's products and other products in
the computer industry, in general, is subject to rapid change, including the
potential introduction of new types of products and technologies, which may
have a material adverse impact upon the Company's business. The Company will
need to maintain an ongoing research and development program, and the
Company's success, of which there can be no assurances, will depend in part
on its ability to respond quickly to technological advances by developing and
introducing new products, successfully incorporating such advances in
existing products, and obtaining licenses, patents, or other proprietary
technologies to be used in connection with new or existing products. The
Company expended approximately $ 560,000 for research and development
expenses for the year ended September 30, 1997 and approximately $448,000
during fiscal 1996. There can be no assurance that the Company's research and
development will be successful or that the Company will be able to foresee
and respond to such advances in technological developments and to
successfully develop other products. Additionally, there can be no assurances
that the development of technologies and products by competitors will not
render the Company's products or technologies non-competitive or obsolete.
See Item 6, "Management's Discussion and Analysis - Risk Factors".
Compliance with Environmental Laws
The costs and effects of compliance with environmental laws (federal,
state and local) will have no material effect upon the business of the
Company.
Employees
As of September 30, 1997, the Company had 54 employees including its
executive officers, all of which are full-time. None of the Company's
employees are represented by a union, and management considers its
relationship with its employees to be excellent.
<PAGE>
Item 2. DESCRIPTION OF PROPERTY
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The Company occupies a 25,000 square foot facility at 91 Cabot Court,
Hauppauge, New York which it uses as its executive offices and for the
testing, storage, and shipping of its products. The Company considers the
premises to be suitable for all its needs. The building is owned by a
partnership consisting of Messrs. Aupperle and Plotkin and their wives and is
leased to the Company expiring January 31, 2006 with an option of the
Company to extend the lease for an additional three years. Rent is currently
at the annual rate of $321,958, and will increase to $338,058 per year on
February 1, 1998. The rent is payable in equal monthly installments and
increases at a rate of 5% per year on February 1 of each year thereafter
including during the option period. The premises are subject to two
mortgages which have been guaranteed by the Company upon which the
outstanding principal amount due as of September 30, 1997 was $1,147,989. The
Company pays the taxes and operating costs of maintaining the premises.
The Company also maintains an office in Fremont, California, which
consists of approximately 1,600 square feet. This office operates as the
Company's west coast sales office. The lease, which expires on May 18, 2000,
requires the Company to pay monthly rent of approximately $2,000 per month,
with the rent increasing by 3.8% on May 19, 1998 and May 19, 1999. The
Company is also responsible for a portion of common area maintenance charges
based on the space it occupies.
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, 1998 and contains an option to renew
for two additional years.
Item 3. LEGAL PROCEEDINGS.
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The Company is presently party to no pending material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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Not Applicable.
<PAGE>
Executive Officers of Registrant
First Elected
Offices and an Officer of
Name Age(1) Positions Held the Company
- - ---- ------ --------------- --------------
Kenneth R. Aupperle 40 President, chief 1982
operations officer
and Director
Kenneth Plotkin 46 Chairman of the board of 1982
directors, chief executive
officer, vice-president,
secretary and Director
Gerald Tucciarone 42 Chief financial officer 1995
and treasurer
John Casey 41 Vice-president - technology 1987
_____________
(1) Age as of September 30, 1997.
All of the above Executive Officers have been elected to serve until the next
annual meeting of the Board of Directors presently scheduled for March, 1998
or until their respective successors are elected and qualified.
There are no family relationships between any Executive Officers.
Except for Gerald Tucciarone, each of the Executive Officers listed above has
served the Company in the above executive capacities on a full time basis for
the past five years.
Gerald Tucciarone, prior to his employment with the Company in January, 1995,
served as a vice-president of finance from 1985 to 1992 with Walker-
Telecommunications, Inc., a manufacturer of phones and voice mail equipment
and from 1992 to 1995, as assistant controller with Chadbourne and Parke, a
law firm. Mr. Tucciarone is a certified public accountant.
<PAGE>
PART II
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Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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(a) The principal market on which the common stock of the Company (the
"Common Stock") is traded is the over-the counter market. The Common Stock
is traded on NASDAQ on the Small-Cap Market under the symbol HAUP and on the
Boston Stock Exchange under the symbol HAU. Quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
High Low
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Fiscal Year Ended
September 30, 1997
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First Quarter 4 5/8 3 1/4
Second Quarter 4 2 5/8
Third Quarter 3 7/16 2 5/8
Fourth Quarter 4 15/16 2 7/8
High Low
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Fiscal Year Ended
September 30, 1996
- - ------------------
First Quarter 3 3/4 1 3/4
Second Quarter 4 3/8 3
Third Quarter 7 3/4 3 1/8
Fourth Quarter 5 1/4 3 9/16
<PAGE>
(b) The approximate number of holders of record of the Common Stock as of
December 9, 1997 was 78. The Company believes there are in excess of 1,300
beneficial holders of the Common Stock.
(1) No dividends have been paid during the past two years.
(2) The Company has no present intention of paying any cash dividends
in its foreseeable future and intends to use its net income, if any, in its
operations. The Company is prohibited by its loan agreements with MTB Bank
from declaring or paying any cash dividends.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Years ended September 30, 1997 and 1996
- - ---------------------------------------
Sales for the year ended September 30, 1997 were $25,613,252, compared
to $14,695,100 for the year ended September 30, 1996, resulting in an
increase of $10,918,152 or 74%. The increase in sales can be attributed to
shipments of digital video products introduced worldwide during the latter
part of fiscal 1996, penetration of the new products at nationwide and
regional retailers, the commencement of shipments on an OEM basis of the
Company's VCB, plus continued strong sales to direct corporate customers.
Average unit sales prices as well as average unit production costs declined
from the prior year due to technological advances, OEM sales and higher unit
production volume.
Net sales of the Company's products are summarized as follows:
Years Ended September 30, Increase
1997 1996 (Decrease)%
---- ---- ----------
System Sales $ 465,172 $ 1,421,359 (67)
Video TV and video conferencing 25,148,080 13,273,741 89
---------- ---------- ----
Total Company Sales $25,613,252 $14,695,100 74
=========== =========== ====
Unit sales of digital video and VCBs increased to approximately 281,000 as
compared to approximately 62,000 for the prior fiscal year, resulting in an
increase of 353%. Sales to domestic customers for the year ended September
30, 1997 were 34% of net sales as compared to 46% for the prior fiscal year.
Sales to international customers, located primarily in England, Germany and
the Netherlands, were 66% of net sales for the current year and 54% for
fiscal 1996.
Gross profit increased to $5,651,217 from $3,680,640, an increase of
$1,970,577 or 54% over the fiscal year ended September 30, 1996. The gross
profit percentage was 22% compared to 25% for the prior fiscal year. The 19%
devaluation of the German Mark during fiscal 1997 coupled with the dynamics
of market competition which limited the amount of compensating price
increases, offset lower unit production costs due to the absorption of fixed
costs over a greater volume of units, resulting in lower margins for fiscal
1997. During the fourth fiscal quarter of 1997, the Company, in an effort to
manage the volatility of the German Mark, sold German Marks in a series of
window contracts. The amount of window contracts open as of September 30,
1997 was 5,650,000 German Marks ranging in prices from 1.84 to 1.73 German
Marks to the dollar. Based on the German Mark price of 1.76DM to a dollar at
September 30, 1997, the Company had net deferred losses of approximately
$100,000. The Company will continue this strategy of hedging projected future
Deutchmark revenues in an effort to control the impact of foreign currency
fluctuations.
Though selling, general and administrative expenses increased
$1,261,516 in fiscal 1997, they more importantly declined to 17% of net
revenue from 21% of net revenue for the year ended September 30, 1996. The
increase in expenses was primarily due to increased sales and marketing
expenses $672,356, mainly for: higher personnel costs due to an increased
outside sales staff; increased commissions resulting from the 74% sales
increase and higher marketing and promotional costs in support of increased
worldwide retail sales; higher technical support costs of $96,613 for
additional staff required to consistently maintain a high level of customer
<PAGE>
support in light of the increased volume resulting from the Company's 74%
growth; higher freight costs of $250,346 due to the higher volume freight
costs absorbed by the Company; and higher general and administrative costs of
$ 242,201, mainly due to contractual wage increases, personnel growth, rent
for the newly opened California office, professional fees paid for a
marketing study and higher D&O insurance premiums, reflecting higher
coverage in fiscal 1997.
Research and development expenses in fiscal 1997 increased $112,055 or
approximately 25%. The increase was due to the infusion of new capital from
the Company's July 1996 conversion of the Company's Class A Warrants, which
enabled the Company to expand its engineering research and development
resources to enhance current products and further develop future product
lines.
The Company had net other income of $234,291 for the year ended
September 30, 1997 as opposed to net other income of $98,438 for the
preceding fiscal year. The increase in net other income was primarily due to
interest income earned from higher levels of cash invested. Provision for
income taxes increased to $56,003 as compared to $30,000 in fiscal 1996. The
increase in taxes, due to the 237% increase in net income before taxes was
offset by the utilization of net operating loss carry forwards, the tax
benefit realized by disposing of obsolete inventory, the benefit derived from
use of the Company's Foreign Sales Corporation and the reduction of the
Company's deferred tax benefit valuation allowance (see note 4 of the
financial statements). The tax benefit realized by the disposal of obsolete
inventory and the benefit realized from the reduction of the deferred tax
benefit valuation allowance, were recognized in the fourth quarter.
As a result of all of the above, the Company recorded a net profit after
taxes for the year ended September 30, 1997 of $985,808 or $0.22 per share on
weighted average shares outstanding of 4,455,922, as opposed to net income
after taxes of $278,952 or $0.09 per share on weighted average shares
outstanding of 3,261,126.
Over the prior two fiscal years, the Company has experienced certain
revenue trends. Since the Company's products are primarily sold through
distributors and retailers, the Company has historically recorded stronger
sales results during the Company's first fiscal quarter (October to
December), which due to the holiday season, is a strong quarter for computer
equipment sales. In addition, the Company's international sales, mostly in
the European market, have been 66%, 54% of sales for fiscal 1997 and 1996.
Due to this, the Company's sales for its fourth fiscal quarter (July to
September) can be potentially impacted by the reduction of activity
experienced with Europe during the July and August summer holiday period.
To offset the above cycles, the Company is targeting as wide a range of
customer types in order to moderate the seasonality of retail sales.
The Company is currently evaluating the effect of year 2000 issues
relating to its computer system. At the present time the Company is not able
to evaluate the effect the year 2000 issue will have on its operations.
<PAGE>
Years ended September 30, 1996 and 1995
---------------------------------------
Sales for the year ended September 30, 1996 were $14,695,100, compared
to $11,551,169 for the year ended September 30, 1995, resulting in an
increase of $3,143,931 or 27%. The increase in sales has been attributable
to the Company's increased investment in marketing and production
capabilities due to the capital derived from the Company's January 1995
public offering and the proceeds derived from the July 1996 exercise of the
Company's Class A Warrants. The ability of the Company to procure additional
inventory and expand production sources enabled the Company to gain market
share and meet the increased sales demand.
Net sales of the Company's products are summarized as follows:
Years Ended September 30, Increase
1996 1995 (Decrease)%
---- ---- -----------
P.C. System Sales $ 1,421,359 $ 792,857 79
WinTV Boards 13,273,741 10,758,312 23
----------- ---------- --
Total Company Sales $14,695,100 $11,551,169 27
=========== =========== ==
Unit sales of WinTV boards, the Company's digital video TV board, increased
to approximately 62,000 as compared to approximately 41,600 for the prior
year, resulting in an increase of 48%. Sales to domestic customers for the
year ended September 30, 1996 were 46% of net sales as compared to 30% for
the prior year. Sales to international customers, which were primarily in
U.S. Dollars, were 54% of net sales for the current year and 70% for fiscal
1995. The increase in domestic sales as a percentage of sales reflects a
commitment by the Company to expand its domestic sales base by introducing
new products, such as the WinCast/TV board capable of receiving Intercast
(TM) data broadcast by network and cable TV content providers, and the
strategic hiring of additional sales and marketing personnel.
Gross profit increased to $3,680,640 from $2,307,413, an increase of
$1,373,227 or 60% over the fiscal year ended September 30, 1995. The gross
profit percentage increased to 25% from 20%. The increase in the margin
percentage was due to lower component costs resulting from the economies
gained by purchasing larger volumes of inventory plus fixed production costs
absorbed over a greater number of units, which lowered the labor costs per
unit. In addition, reserve for inventory obsolescence charged to operations
decreased to $38,000 for fiscal 1996 as compared to $164,511 for fiscal 1995.
Selling, general and administrative expenses declined to 21% of net
revenue from 27% of net revenue for the year ended September 30, 1995,
resulting in a decrease of $129,206 when compared to the prior year. The
decrease in expenses was primarily due to $187,660 charged to operations in
fiscal 1995, which represented the excess of fair market value over the
selling price pursuant to a sale of shares in July 1995 owned by the
principal shareholders of the Company and sold to certain key employees (See
note 6g of the accompanying financial statements). Other decreases were lower
professional services costs of $92,614 and lower Technical Support costs of
$45,480, primarily due to lower warranty repair costs. These decreases were
offset partially by higher commissions of $70,445 due to the 27% sales
increase over fiscal 1995, increased sales compensation of $57,902 due to the
strategic hiring of additional sales personnel, and increased administrative
compensation of $59,036 due to contractual increases in executive
compensation and the full year effect of a slightly higher staffing levels.
<PAGE>
Research and development expenses increased $178,424 or approximately
66%. The increase was due to the infusion of new capital from the Company's
January 1995 public offering and the July 1996 conversion of the Company's
Class A Warrants, which enabled the Company to expand its engineering
research and development resources to enhance current products and further
develop future product lines.
The Company had net other income of $98,438 for the year ended
September 30, 1996 as opposed to net other expense of $409,583 for the
preceding fiscal year. The increase in net other income was primarily due to
non recurring private placement financing costs of $480,652 charged to fiscal
1995 operations plus higher fiscal 1996 net interest income due to higher
levels of cash invested.
As a result of all of the above, the Company recorded a net profit after
taxes for the year ended September 30, 1996 of $278,952 or $0.09 per share as
opposed to a net loss after taxes (which taxes for the prior year were
nominal) of ($1,523,078) or ($0.64) per share.
Liquidity and Capital Resources-As of September 30, 1997
- - --------------------------------------------------------
The Company had a net cash position of $5,602,412, working capital of
$8,689,914 and shareholders' equity of $8,966,772 as of September 30, 1997.
For the year ended September 30, 1997, the Company's net investment in assets
required to support the Company's 74% revenue growth exceeded cash generated
as a result of profitable operations resulting in cash decreasing by
$956,763. Significant items of cash sources and (uses) are detailed as
follows:
Net income adjusted for non cash items $ 1,018,958
Investments in current assets (3,408,394)
Operations funded by current liabilities, net 1,748,848
Purchase of fixed assets (120,002)
Purchase of treasury stock (193,953)
Net cash of ($640,588) used in operating activities was primarily due
to cash required to finance accounts receivable and inventory as a result of
the growth in sales, offset partially by operations funded by vendor
financing and cash generated by the Company's net income. The Company also
used $193,953 to purchase treasury stock and $120,002 to procure fixed
assets.
During fiscal 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 increased during fiscal 1997 to $1,600,000. As of September
30, 1997, the Company had not utilized this loan facility. This line of credit
expires February, 1998. The Company is presently exploring a replacement for
this Credit Agreement at more favorable terms.
On November 8, 1996, the Company approved a stock repurchase program for
the repurchase of up to 300,000 shares of its own stock. At September 30,
1997, the Company had repurchased 59,200 shares for $193,953, at an average
price of $3.38. The repurchased shares will be used by the Company for
certain employee benefit programs.
The Company believes that its current cash position, internally
generated cash flow and its loan facility will be sufficient to satisfy the
Company's anticipated operating needs for at least the ensuing twelve months.
<PAGE>
Inflation
While inflation has not had a material effect on the Company's
operations in the past, there can be no assurance that the Company will be
able to continue to offset the effects of inflation on the costs of its
products or services through price increases to its customers without
experiencing a reduction in the demand for its products; or that inflation
will not have an overall effect on the computer equipment market that would
have a material effect on the Company.
Implementation of New Accounting Standards
a. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share" ("SFAS No. 128") SFAS No. 128 specifies the
computation, presentation and disclosure requirements for earnings per share.
SFAS No. 128 is effective for periods ending after December 15, 1997. The
adoption of the statement is not expected to have a material effect on the
consolidated financial statements.
b. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which established
standards for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with that same prominence as other financial
statements.
SFAS No. 130 is effective for financial statements for periods beginning
after December 15, 1997 and required comparative information for earlier
years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, the standard
will have on future financial disclosures. Results of operations and
financial position, however, will be unaffected by the implementation of this
standard.
c. Reporting Segments of an Enterprise
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"), which supersedes SFAS 14, "Financial Reporting for Segments
of a Business Enterprise." SFAS No. 131 establishes standards for the way
public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating
segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
<PAGE>
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier
years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, it may have
on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of this
standard.
Risk Factors
- - ------------
From time to time, information provided by the Company, statements made
by its employees or information provided in its Securities and Exchange
Commission filings, including information contained in this Form 10-KSB, may
contain forward looking information. The Company's actual future results may
differ materially from those projections or statements made in such forward
looking information as a result of various risks and uncertainties, including
but not limited to rapid changes in technology, lack of funds for research
and development, competition, proprietary patents and rights of others, loss
of major customers, loss of sources of supply for its digital video
processing chips, non-availability of management, government regulation,
currency fluctuations and the inability of the Company to profitably sell its
products. The market price of the Company's common stock may be volatile at
times in response to fluctuation in the Company's quarterly operating results,
changes in analysts' earnings estimates, market conditions in the computer
hardware industry, as well as general conditions and other factors external to
the Company.
Item 7. Financial Statements
--------------------
See Consolidated Financial Statements annexed hereto.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
Not Applicable
<PAGE>
PART III
---------
Item 9 (Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act), Item 10 (Executive
Compensation), Item 11 (Security Ownership of Certain Beneficial Owners and
Management), and Item 12 (Certain Relationships and Related Transactions)
will be incorporated in the Company's Proxy Statement to be filed within 120
days of September 30, 1997 and are incorporated herein by reference.
<PAGE>
PART IV
-------
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits.
The following exhibits are incorporated by reference to the Company's
Registration Statement on Form SB-2 (No. 33-85426) as amended, effective
January 10, 1995.
(1.1) Form of Underwriting Agreement with Lew Lieberbaum & Co., Inc.
(3.1) Certificate of Incorporation, as amended to date
(3.2) By-laws
(4.1) Form of Common Stock Certificate
(4.5) 1994 Incentive Stock Option Plan
(10.3) Lease dated February 7, 1990 between Laddok Realty Company and
Hauppauge Computer Works, Inc.
(10.8) Long Island Development Corporation ("LIDC") Mortgage Loan
Agreements
(10.9) The Company's Guaranty of LIDC Loan Agreements
(10.10) Shawmut Mortgage Loan Agreements
(10.11) The Company's Guaranty of the Shawmut Mortgage Loan Agreements
(10.12) Master Purchase Agreement between Reuters Ltd. and Hauppauge
Computer Works Inc.
(10.13) Credit Agreement between MTB Bank and Hauppauge Computer
Works, Inc. dated March 28, 1996
(22) Subsidiaries of the Company
The following exhibits are incorporated by reference to the Company's
Form 10-KSB for September 30, 1996:
(10.3.1) Modification made February 1, 1996 to Lease dated February 7,
1990 between Laddok Realty Company and Hauppauge Computer
Works, Inc.
The following exhibits are annexed hereto:
(3.2.1) Article X to the By-Laws.
(23) Consent of Independent Certified Public Accountants
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The following reports on Form 8-K have been filed since June 30,
1997:
None.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly endorsed.
HAUPPAUGE DIGITAL INC.
By: /s/ KENNETH PLOTKIN Date: 12/17/97
------------------------ -----------
KENNETH PLOTKIN
Chief Executive Officer, Vice-
President, and Secretary
By:/s/ GERALD TUCCIARONE Date: 12/17/97
------------------------- -----------
GERALD TUCCIARONE
Treasurer and Chief Financial Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and as of the date indicated.
By:/s/ KENNETH R. AUPPERLE Date: 12/17/97
-------------------------- -----------
KENNETH R. AUPPERLE
Director
By:/s/ KENNETH PLOTKIN Date: 12/17/97
-------------------------- -----------
KENNETH PLOTKIN
Director
By:/s/ LEONARD A. NEUHAUS Date: 12/17/97
-------------------------- -----------
LEONARD A. NEUHAUS
Director
By:/s/ BERNARD HERMAN Date: 12/17/97
-------------------------- -----------
BERNARD HERMAN
Director
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of September 30,
1997 and 1996 F-3
Consolidated Statements of Operations for the
years ended September 30, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity
for the years ended September 30, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years
ended September 30, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-17
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of
Hauppauge Digital, Inc. and Subsidiaries
Hauppauge, New York
We have audited the consolidated balance sheets of Hauppauge Digital, Inc.
and Subsidiaries as of September 30, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hauppauge
Digital, Inc. and Subsidiaries at September 30, 1997 and 1996 and the
results of its operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
- - ----------------------------
BDO Seidman, LLP
Mitchel Field, New York
December 12, 1997
F-2
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
-----------------------------
1997 1996
------------ -----------
CURRENT ASSETS:
Cash and Cash Equivalents
(Note 1) . . . . . . . . . . $5,602,412 $6,559,175
Accounts receivable, net
of allowance for doubtful
accounts of $100,000 and
$75,000 . . . .. . . . . . . 3,194,128 1,835,882
Inventories (Notes 1 and 2). . 4,844,366 3,138,961
Prepaid expenses and other
current assets (Note 4). . . 553,540 191,161
---------- ----------
Total Current Assets . . . 14,194,446 11,725,179
Property, plant and equipment
at-cost(Notes 1 and 3) . . . 494,220 374,218
Less: Accumulated depreciation
and amortization . . . . . . 276,832 228,678
----------- -----------
217,388 145,540
----------- -----------
Security Deposits and Other
Non-current assets 59,470 59,881
----------- -----------
$14,471,304 $11,930,600
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . 4,403,787 2,818,832
Accrued expenses. . . . . . . 1,100,745 936,851
----------- ---------
Total Current Liabilities 5,504,532 3,755,683
---------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 5,8 and 9)
SHAREHOLDERS' EQUITY (Notes 5 and 6)
Common Stock $.01 par value;
10,000,000 shares authorized
4,465,302 issued and outstanding
as of September 30, 1997 and
1996 . . . . . . . . . . . . 44,653 44,653
Additional paid-in
capital . . . . . . . . . . 10,344,844 10,344,844
Accumulated deficit . . . . (1,228,772) (2,214,580)
Treasury Stock, at cost,
59,200 shares . . . . . . . (193,953) -
=========== ===========
8,966,772 8,174,917
----------- ----------
$14,471,304 $11,930,600
=========== ==========
See accompanying notes to consolidated financial statements
F-3
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30,
1997 1996
---------- -----------
NET SALES (Notes 1 and 7). . . $25,613,252 $14,695,100
COST OF SALES (Note 2) . . . . 19,962,035 11,014,460
----------- -----------
Gross Profit . . . . . . . 5,651,217 3,680,640
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES(Note 8). . . . . . 4,283,330 3,021,814
RESEARCH & DEVELOPMENT
EXPENSES . . . . . . . . . 560,367 448,312
----------- ------------
Income from operations 807,520 210,514
OTHER INCOME (EXPENSE):
Interest income . . . . . . 243,235 81,633
Other, net . . . . . . . . (8,944) 16,805
----------- -----------
Income before
income tax provision . . 1,041,811 308,952
INCOME TAX PROVISION
(Notes 1 and 4) . . . . . . 56,003 30,000
----------- -----------
Net income . . . . . . . . . . $ 985,808 $ 278,952
=========== ===========
Net income per share. . . . . . $0.22 $0.09
=========== ===========
Weighted average shares
outstanding (Note 1) . . . $ 4,455,922 $ 3,261,126
=========== ===========
See accompanying notes to consolidated financial statements
F-4
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Common Stock
----------------- Additional
Number of Paid in
Shares Amount Capital
---------- ------ --------
BALANCE AT OCTOBER
1, 1995 2,756,183 $27,562 $4,141,343
Net income for the
year ended
September 30,
1996 - - -
Issuance of
shares pursuant
to the exercise
of Underwriter's
Unit Purchase
Options (Note
6a) 133,333 1,333 542,446
Issuance of
shares pursuant
to the redemption
and exercise of
Class A Warrants
- net (Note
6b) 1,575,786 15,758 5,661,055
--------- ------ ---------
BALANCE AT
SEPTEMBER 30,
1996 4,465,302 $44,653 $10,344,844
--------- -------- ----------
Net income for
the year ended
September 30,
1997 - - -
Purchase of
treasury stock
(Note 6c) - - -
--------- -------- ----------
BALANCE AT
SEPTEMBER 30,
1997 4,465,302 $44,653 $10,344,844
========= ======= ===========
<S> <C> <C> <C>
Retained
Earnings
(Accumulated Treasury
Deficit) Stock Total
---------- ------ --------
BALANCE AT OCTOBER
1, 1995 ($2,493,532) - $1,675,373
Net income for the
year ended
September 30,
1996 278,952 - 278,952
Issuance of
shares pursuant
to the exercise
of Underwriter's
Unit Purchase
Options (Note
6a) - - 543,779
Issuance of
shares pursuant
to the redemption
and exercise of
Class A Warrants
- net (Note
6b) - - 5,676,813
--------- ------ ---------
BALANCE AT
SEPTEMBER 30,
1996 ($2,214,580) - $8,174,917
--------- -------- ----------
Net income for
the year ended
September 30,
1997 985,808 - 985,808
Purchase of
treasury stock
(Note 6c) - (193,953) (193,953)
--------- -------- ----------
BALANCE AT
SEPTEMBER 30,
1997 ($1,228,772) $(193,953) $8,966,772
========= ======= ===========
See accompanying notes to consolidated financial statements
F-5
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 985,808 $ 278,952
------- ---------
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 50,783 38,119
Provision for uncollectible accounts
receivable 24,367 16,141
Provision for system board obsolescence 52,000 38,000
Deferred tax benefit (94,000) -
Changes in current assets and liabilities:
Accounts receivable (1,382,610) (705,155)
Inventories (1,757,405) (988,980)
Prepaid expenses and other current assets (268,379) 1,528
Accounts payable 1,584,954 173,564
Accrued expenses 163,894 311,677
------- --------
(1,626,396) (1,115,106)
---------- --------
Net cash used in operating activities (640,588) (836,154)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (120,002) (39,775)
Security deposits (2,220) (428)
-------- ------
Net cash used in investing activities (122,222) (40,203)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (193,953) -
Net proceeds from exercise of Underwriters
Purchase Options - 543,779
Net proceeds from redemption and exercise of
Class A Warrants - 5,676,813
--------- ---------
Net cash (used in)provided by
financing activities (193,953) 6,220,592
-------- ---------
Net (decrease)increase in cash and
cash equivalents (956,763) 5,344,235
CASH AND CASH EQUIVALENTS, beginning of period 6,559,175 1,214,940
-------- ---------
CASH AND CASH EQUIVALENTS, end of period $5,602,412 $6,559,175
======== =========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $66,895 $15,151
======== =======
See accompanying notes to consolidated financial statements
F-6
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Hauppauge
Digital, Inc. and its two wholly owned subsidiaries, Hauppauge Computer
Works, Inc. and HCW Distributing Corp., as well as Hauppauge Computer Works,
GMBH and Hauppauge Computer Works, Ltd., both wholly owned subsidiaries of
Hauppauge Computer Works, Inc. (collectively, the "Company"). All
intercompany accounts and transactions have been eliminated.
Nature of Business
The Company is primarily engaged in the design, manufacture and selling
of WinTV digital video computer boards and video conferencing boards. WinTV
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 WinTV
board is marketed worldwide through retailers, distributors, original
equipment manufacturers and manufacturers' representatives. Net sales to
international and domestic customers were approximately 66% and 34%,
respectively, of total sales for the year ended September 30, 1997, and 54%
and 46%, respectively, for the year ended September 30, 1996. Substantially
all of the Company's assets are located in the United States.
Net sales to international customers consist of:
Years ended September 30,
Sales to: 1997 1996
- - ---------- ---- ----
United Kingdom 20% 16%
Germany 28% 17%
The Netherlands 5% 7%
Other countries 13% 14%
--- ---
66% 54%
=== ===
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities. Actual results could
differ from estimates.
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.
F-7
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. At times such cash in banks are in excess of the FDIC insurance
limit. Concentration of credit risk with respect to accounts receivable
exists because the Company operates in one industry. Although the Company
operates in one industry segment, it does not believe that it has a material
concentration of credit risk either from an individual counterparty or a
group of counterparties, due to the large and diverse user group for its
products.
Revenue Recognition
The Company records revenue when its products are shipped.
Warranty Policy
The Company warrants that its products are free from defects in material
and workmanship for a period of one year from the date of initial retail
purchase. The warranty does not cover any losses or damage that occur as a
result of improper installation, misuse or neglect and repair or modification
by anyone other than the Company or an authorized repair agent. The Company
accrues anticipated warranty costs based upon historical percentages of items
returned for repair within one year of the initial sale.
Inventories
Inventories are valued at the lower of cost (principally average cost)
or market. A reserve has been provided to reduce obsolete and/or excess
inventory to its net realizable value.
Property, Plant and Equipment
Depreciation of machinery and equipment and amortization of leasehold
improvements is provided for using both accelerated and straight line methods
over the estimated useful lives of the related assets as follows:
Office Equipment and Machinery: 5 to 7 years
Leasehold improvements: Asset life or lease term, whichever is shorter
Income Taxes
The Company follows the liability method of accounting for income taxes.
Deferred income taxes are recorded to reflect the temporary differences in
the tax bases of the assets or liabilities and their reported amounts in the
financial statements.
F-8
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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. The effect of these
transactions has been immaterial.
Financial Instruments
The Company uses forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies. Gains and losses on these
positions are deferred and included in the Statement of Operations as part of
Other, net, when the transaction is completed.
Net Income per Share
Net income per share has been computed on the basis of weighted average
number of common shares outstanding for each period presented. Included in
the computation of weighted average shares for fiscal 1997 are 28,482 options
considered common stock equivalents pursuant to the treasury stock method.
During fiscal 1996, 1,575,786 and 133,333 shares were issued through the
exercise of the Company's Class A Warrants and the exercise of the
Underwriter's Purchase Unit Options. (See Note 6-a,b). In 1996, all of the
Company's Class A Warrants were either exercised or redeemed. During fiscal
1997, the Company repurchased 59,200 shares for treasury purposes (see Note
6c).
Fair Value of Financial Instruments
The carrying amounts of certain financial instruments, including cash,
accounts receivable and accounts payable, approximate fair value as of
September 30, 1997 because of the relatively short term maturity of these
instruments.
Stock Based Compensation
The Company accounts for its stock option awards under the intrinsic
value based method of accounting as prescribed by APB Opinion Number 25
"Accounting for Stock Issued to Employees." Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price
of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. The Company discloses the pro forma
impact on net income and earnings per share as if the fair value based method
had been applied as required by SFAS No. 123, "Accounting for Stock Based
Compensation" (see Note 6d).
Prospective Accounting Changes
a. Earnings Per Share
In February 1997, The Accounting Standards Board issued Statement of
Financial Accounting Standards Number 128, "Earnings Per Share" ("SFAS Number
128"). SFAS 128 is effective for fiscal years beginning after December 15,
1997. The goal of the Statement was to simplify and harmonize the United
States EPS reporting requirements with the international reporting community.
Among the changes will be primary and fully diluted EPS replaced by Basic and
Diluted EPS, elimination of reporting of common stock equivalent for Basic
EPS presentation, use of only the average market price when computing the
effect of stock options using the treasury stock method and elimination of
the 3% dilution threshold. The impact of adopting SFAS Number 128 is not
expected to be material.
F-9
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prospective Accounting Changes-continued
b. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which established
standards for reporting and display of comprehensive income, its components
and accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with that same prominence as other financial
statements.
SFAS No. 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier
years to be restated. The impact of implementing SFAS 130 is not expected to
be material.
c. Reporting for Segments of an Enterprise
In June 1997 the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"), which supersedes SFAS 14, "Financial Reporting for Segments
of a Business Enterprise". SFAS No. 131 establishes standards for the way
public companies report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating
segments as components of a company about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier
years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, it may have
on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of this
standard.
2. INVENTORIES
Inventories consist of the following:
September 30,
1997 1996
---- ----
Component Parts $ 1,545,790 $ 849,324
Work in Process 2,181,249 1,861,391
Finished Goods 1,117,327 428,246
--------- ---------
$4,844,366 $ 3,138,961
========== ==========
The Company continually reviews the inventory for potential
obsolescence. Reserves of approximately $52,000 and $38,000 for the years
ended September 30, 1997 and 1996, respectively, were included in the cost of
sales.
F-10
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
3. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment:
September 30,
1997 1996
---- ----
Office Equipment and Machinery $ 465,947 $348,562
Leasehold Improvements 28,273 25,656
------- -------
494,220 374,218
Less: Accumulated depreciation 276,832 228,678
------- -------
Total $217,388 $145,540
======== ========
4. INCOME TAXES
The income tax provision consists of the following:
Years ended September 30,
1997 1996
---- ----
Current tax expense
Federal income taxes $ 120,284 $ -
State income taxes 29,719 30,000
------- ------
$ 150,003 $ 30,000
------- -------
Deferred tax benefit (94,000) -
------- -------
Total Provision $ 56,003 $ 30,000
Components of deferred taxes are as follows:
Years ended September 30,
1997 1996
---- ----
Deferred tax assets:
Net operating loss carry forwards $ 229,823 $ 394,636
Inventory obsolescence reserve 40,812 170,850
Warranty reserve 24,650 23,800
Allowance for doubtful accounts 30,248 22,216
Deferred rent payments 37,250 37,250
Capitalized inventory costs 72,800 40,568
Sales returns reserve 53,618 -
Other reserves 24,597 12,886
------ ------
Total deferred tax assets 513,798 702,206
Valuation allowance (419,798) (702,206)
-------- -------
Net deferred tax assets (included
Prepaid expenses and other current
assets $ 94,000 $ -
========== =========
In prior years, due to new products, the relative volatility of the industry
the Company operates in and the limited track record of profitability, the
Company had recorded a full valuation allowance against the deferred tax
assets. In recognition of market acceptance of the Company's product as
evidenced by the expansion of sales, along with two consecutive years of
profitability, the Company has reduced the valuation allowance by $282,408,
primarily in the fourth quarter. which results in the recognition of $94,000
in net operating loss carry forwards anticipated to be utilized in fiscal
1998.
F-11
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Income Taxes-continued
The change in the valuation allowance is as follows:
Years ended September 30,
1997 1996
---- ----
Balance at the beginning of the year $ 702,206 $ 807,250
Reduction in the carrying value of
deferred tax assets (see above) (188,408) (105,044)
Anticipated utilization of net operating
loss operating carryforward (94,000) -
------- -------
Balance at the end of the year $419,798 $702,206
======== =======
As of September 30, 1997, the Company had net operating losses, (which
expire in the years through 2010), of $675,951 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, all of the
remaining unused net operating losses are subject to limitations per Internal
Revenue code section 382. The Company's carry forward utilization of these
restricted net operating losses is limited to $275,386 per year. In 1997,
the Company utilized $275,386 of restricted net operating losses and $147,361
of unrestricted net operating losses to offset 1997 taxable income. As of
September 30, 1997, all of the non restricted net operating loss carry
forwards have been utilized.
The difference between the actual income tax provision and the tax
provision computed by applying the Federal statutory income tax rate to the
income before income tax is attributable to the following:
Years ended September 30,
1997 1996
---- ----
Income tax at 34% $ 354,816 $ 105,044
Reduction in deferred income tax
valuation allowance (see above) (282,408) (105,044)
Income taxed at lower than
statutory rates (36,020) -
State income taxes, net of federal
benefit 19,615 30,000
------ ------
$ 56,003 $ 30,000
======= ======
During the fourth quarter, the Company disposed of previously reserved
obsolete inventory and established a deferred tax asset for the future
utilization of net operating losses of $158,693 and $94,000 respectively.
F-12
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. 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 was increased to $1,600,000 upon receipt of the Company's
audited September 30, 1996 consolidated financial statements. Advances shall
be made on a revolving basis based on 70% of eligible domestic and foreign
receivables not older than 90 days. The Agreement provides that foreign
receivables must be credit insured, except for one customer, which the MTB
Bank has verbally agreed to exclude from the credit insurance provision.
Based on the Company's September 30, 1996 financial performance, the advance
rate for eligible credit insured foreign receivables increased to 80%. An
interest rate of 2 1/2 % above MTB's prime commercial lending rate on a
floating basis will be charged on all advances. Borrowings against the credit
line are secured by the assets of the Company. In addition, the Company, HCW
Distributing Corp., Hauppauge Computer Works GmbH, Hauppauge Computer Works
Ltd., and two of the Company's principal shareholders, have guaranteed the
obligations of Hauppauge Computer Works, Inc. The guarantees of the two
principal shareholders are each limited to of 20% of the borrowings
outstanding with a cap of $150,000 each and a minimum of $50,000. The loan
requires the Company to maintain a consolidated net worth of $1,750,000 until
September 30, 1996 and $2,000,000 thereafter. The Company is prohibited from
paying cash dividends during the term of the Credit Agreement. As of
September, 30, 1997, the Company has not utilized this loan facility.
6. SHAREHOLDERS' EQUITY
a. Exercise of Underwriter's Unit Purchase Option
In connection with the Company's January 10, 1995 Initial Public
Offering (IPO) (See note 6d), the Company sold to Lew Lieberbaum & Co., Inc.
(the Underwriter) 133,333 Underwriters Unit Purchase Options (Purchase
Options), each exercisable at $4.41. Each unit consisted of one share of the
Company's Common Stock and one Underwriter Warrant. The Underwriter's
Warrant entitled the holder to purchase one share of Common Stock at an
exercise price of $3.75 and are identical to the Class A Warrants offered in
the IPO.
On May 7, 1996, in light of the market conditions that existed at the time,
the Company allowed the Underwriter to exercise 67,000 Purchase Options at
3.75 per share (the market price of the shares at the date of reduction in
exercise price was $3.38), which they exercised on May 24, 1996. On June 7,
1996, the remaining 66,333 Purchase Options were exercised by the Underwriter
for $4.41. The net proceeds of $543,779 will be used for working capital and
general corporate purposes.
b. Exercise and Redemption Class A Warrants
On June 3, 1996, the Company, in accordance with Article VI of a Warrant
Agreement dated January 10, 1995 between the Company and North American
Transfer, called for the redemption of all the outstanding warrants at a
price of $.10 per share. Each Warrant entitled the holder to purchase one
share of the Company's $.01 par value Common Stock at $3.75 per share. The
expiration date, originally July 5, 1996, was extended at the discretion of
the Company until July 17, 1996.
F-13
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b. Exercise and Redemption Class A Warrants-continued
At the July 17, 1996 expiration date, 1,575,786 warrants, which included
133,333 Warrants obtained by the Underwriter in the exercise of their
Purchase Option, were exercised and 33,730 warrants were redeemed. The
exercise and redemption of the Warrants resulted in gross proceeds to the
Company of $5,909,197. After deducting expenses of the redemption, which
included a 5% solicitation fee payable to the Underwriter for a portion of
the warrants, accounting, legal, printing costs and the $0.10 per share
redemption price payable to warrant holders who did not exercise their
Warrants, the net proceeds from the Warrant redemption were $5,676,813.
c. Treasury Stock
On November 8, 1996, the Company approved a stock repurchase program for
the repurchase of up to 300,000 shares of its own Common Stock. The
repurchased shares will be used by the Company for certain employee benefit
programs. As of September 30, 1997, the Company had repurchased 59,200 for
$193,953, at an average price of $3.28.
d. Stock Compensation Plans
In August 1994, the Company adopted an Incentive Stock Option Plan
("ISO"), as defined in section 422(A) of the Internal Revenue Code. Pursuant
to the ISO, 200,000 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. As of September 30, 1997, 145,900 options were
outstanding, ranging in prices from $2.69 to $3.75.
On December 14, 1995, the Board of Directors authorized the adoption of
the 1996 Non-Qualified Stock Option Plan (the "1996 Non-Qualified Plan")
which was approved by the Company's stockholders on March 5, 1996. The Non-
Qualified Plan authorizes the grant of 250,000 shares. The plan terminates on
March 5, 2006. This plan does not qualify for treatment as an incentive stock
option plan under the Internal Revenue Code. There are various tax benefits
which could accrue to the Company upon exercise of non qualified stock
options that may not be available to the Company upon exercise of qualified
incentive stock options. The purpose of the plan is to provide the Company
greater flexibility in rewarding key employees, consultants, and other
entities without burdening the Company's cash resources. As of September 30,
1997, 40,000 options ranging inn prices from $2.69 to $3.00 have been granted
under the 1996 Non-Qualified Plan.
On September 30, 1997, in connection with employment contracts the
Company has with the Chief Executive Officer and President (see Note 9b),
60,000 non-qualified stock options became exercisable due to Company
attaining certain specified pre tax income levels. Such options are
currently exercisable at the IPO price of $3.15 per share.
F-14
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
d.Stock Compensation Plans-continued
The Company accounts for its stock option awards under the intrinsic
value based method, as prescribed by APB Opinion 25, "Accounting for Stock
Issued to Employees" and related interpretations. Under APB 25, because the
exercise price of the employees stock options equals the market price of the
underlying stock at the date of the grant, no compensation is cost is
recognized.
FASB Statement 123, "Accounting for Stock Based Compensation," requires
the Company to provide pro forma information regarding net income and
earnings per share as if compensation cost for the Company's stock option
plans had been determined in accordance with the fair value based method
prescribed in FASB 123. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1997 and 1996: risk free interest rates of
5.92% for both years, volatility factor of the expected market price of the
Company's stock 35% for both years, and expected lives of either 5 or ten
years. The weighted average fair value of options granted in 1997 and 1996
were $1.15 to $1.75 and $1.58 to $1.77, respectively.
Under the accounting provisions of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
Years Ended September 30,
1997 1996
---- ----
Net income:
As reported $ 985,808 $ 278,952
Pro forma 843,123 266,348
Net income, per share:
As reported $0.22 $0.09
Pro forma 0.19 0.08
A summary of the status of the Company's fixed option plans as of September
30, 1997 and 1996 changes during the years ending those dates is presented
below:
Weighted Weighted
Average Average
Exercise Non Exercise
ISO Price Qualified Price
Outstanding at the beginning
of year $ - $ - $ - $ -
Granted 87,000 3.68 30,000 3.00
Exercised - -
Forfeited - -
------- ------ ------- ------
Balance at September 30,
1996 87,000 3.68 30,000 3.00
Granted 91,100 2.78 70,000 3.08
Exercised - -
Forfeited (20,600) 3.70 -
-------- ----- ----- ------
Balance at September 30,
1997 157,500 $ 2.95 100,000 $3.06
======== =======
Options exercisable at
year end 19,066 $ 3.54 73,000 $3.08
F-15
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
d. Stock Compensation Plans-continued
The following table summarizes information about stock options outstanding
at September 30, 1997:
Options Outstanding Options Exercisable
------------------- -------------------
Range of Weighted Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise
- - ------ ----------- ---------------- -------------- ---------- --------
$ 2.69 73,900 4.7 years $ 2.69 - -
2.69 10,000 5.0 2.69 10,000 $ 2.69
3.00 30,000 10.0 3.00 3,000 3.00
3.15 60,000 7.3 3.15 60,000 3.15
3.15 10,000 9.8 3.15 6,666 3.15
2.93 1,600 5.0 2.93 - 2.93
3.37 5,000 5.0 3.37 - 3.37
3.50 5,000 5.0 3.50 - 3.50
3.75 62,000 4.3 3.75 12,400 3.75
------ ------
257,500 92,066
======= ======
7. SIGNIFICANT CUSTOMER INFORMATION
For the years ended September 30, 1997 and 1996, the Company had only
two customers in fiscal 1997 and one customer in fiscal 1996 who accounted
for more than 10% of total consolidated sales. Customer A accounted for 12%
and 11% of sales for fiscal 1997 and 1996. Customer B accounted for 11 % of
sales for fiscal 1997. Accounts receivable for Customer A was $361,510 and
$105,628 as of September 30, 1997 and 1996, respectively. Accounts receivable
for Customer B was $255,897 as of September 30, 1997.
8. RELATED PARTY TRANSACTIONS
The Company, rents its principal office and warehouse space in
Hauppauge, New York from a real estate partnership owned by the two
principal shareholders of the Company. The lease term expires on January 31,
2006 and includes an option to extend for three additional years. The lease
provides for rent increases of 5% per year. On December 17, 1997 in
connection with a renegotiation of the lease term, the Company granted 60,000
options to a real estate partnership owned by the principal shareholders at
an exercise price of $3.81 per share. The market price of the option equaled
the exercise price at the date of the grant. The effect of imputing the fair
value of the options granted is immaterial.
The indebtedness incurred by the two principal shareholders to purchase
the building is also guaranteed by the Company and totaled $1,147,989 at
September 30, 1997.
F-16
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Related party transactions-continued
Annual lease payments are as follows:
Year ended September 30,
------------------------
1998 338,056
1999 354,959
2000 372,706
2001 391,342
2002 410,909
Thereafter 1,521,277
---------
$3,389,249
=========
Rent expense totaled approximately $373,704 and $367,290 for the years
ended September 30, 1997 and 1996, respectively. The Company pays the real
estate taxes and is responsible for normal building maintenance.
9. COMMITMENT AND 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 ten years from the
date of grant (January 10, 1995) at $3.15 per share, (which was the IPO
price), or earlier at a rate of 20% per year if the Company attains certain
specified pre tax income levels.
c. Forward Exchange Contracts
During the fourth fiscal quarter of 1997, the Company, in an effort to
manage the volatility of the German Mark, sold German Marks in a series of
window contracts based on future estimated revenue. The amount of window
contracts open as of September 30, 1997 was 5,650,000 German Marks ranging
in prices from 1.84 to 1.73 German Marks to the dollar. Based on the German
Mark price of 1.76 DM to a dollar at September 30, 1997, the Company had net
deferred losses of approximately $100,000. The Company will continue this
strategy of hedging projected future Deutchmark revenues in an effort to
control the impact of foreign currency fluctuations.
F-17
</TABLE>
EXHIBIT 3.2.1
-------------
3/5/97 MINUTES:
RESOLVED that the following be added as Article X to the By-Laws of the
corporation:
"ARTICLE X - INDEMNIFICATION
The corporation shall indemnify any person made, or threatened
to be made, a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment
in its favor by reason of his being or having been a director or
officer of the corporation, or of any other corporation which he
served as such at the request of the corporation, against the
reasonable expenses including attorneys' fees, actually and
reasonably incurred by him in connection with the defense or
settlement of such action or suit, or in connection with an appeal
therein, except in relation to matters as to which such director or
officer is adjudged to have been guilty of negligence or misconduct
in the performance of his duty to the corporation.
The corporation shall indemnify and person made, or threatened
to be made, a party to any threatened, pending or completed action,
suit or proceeding other than one by or in the right of the
corporation to procure a judgment in its favor, whether civil,
criminal, administrative or investigative brought to impose a
liability or penalty on such person for an act alleged to have been
committed by such person in his capacity of director or officer of
the corporation, or of any other corporation which he served as
such at the request of the corporation, against judgments, fines,
amounts paid in settlement and reasonable expenses, including
attorneys' fees, actually and reasonably incurred n connection with
such action, suit or proceeding, or any appeal therein, if such
director or officer acted in good faith in the reasonable belief
that such action was in the best interests of the corporation, and
in criminal actions or proceedings, without reasonable ground for
belief that such action was unlawful. The termination of any such
civil or criminal action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not in itself create a presumption that any such
director or officer did not act in good faith in the reasonable
belief that such action was in the best interests of the
corporation or that he had reasonable ground for belief that such
action was unlawful.
Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf
of such director or officer to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified
by the corporation."
EXHIBIT 23(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Hauppauge Digital, Inc.
Hauppauge, New York
We hereby consent to the incorporation by reference in the Registration
Statements of Hauppauge Digital, Inc. on Form S-8, File No. 333-25947, filed
with the Securities and Exchange Commission on April 28, 1997, of our report
dated December 12, 1997 on the consolidated financial statements of Hauppauge
Digital, Inc., appearing in the Company's Annual Report on Form 10-KSB for
the year ended September 30, 1997.
/s/ BDO Seidman, LLP
- - --------------------
BDO Seidman, LLP
Mitchel Field, New York
December 23, 1997
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