<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to __________
Commission file number 1-13550
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HAUPPAUGE DIGITAL, INC.
-----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-3227864
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(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
91 Cabot Court, Hauppauge, New York 11788
-----------------------------------------
(Address of principal executive offices)
(516) 434-1600
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90
days.
YES X NO
---- -----
As of February 9, 1998, 4,394,102 shares of .01 par value Common Stock of the
registrant were outstanding, not including treasury shares.
Page 1 of 13 pages.
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HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
----------------------------------------
INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
- ----------------------------
Condensed Consolidated Balance Sheets-
December 31, 1997 and September 30, 1997 3
Condensed Consolidated Statements of Operations-
Three Months ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows-
Three Months ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
PART II. OTHER INFORMATION
- ---------------------------
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
As of As of
December 31, September 30,
1997 1997
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 6,504,921 $5,602,412
Accounts receivable, net
of allowance for doubtful
accounts 3,375,976 3,194,128
Inventories (Note 2) 4,962,687 4,844,366
Prepaid expenses and other
current assets 469,716 553,540
---------- ----------
Total Current Assets 15,313,300 14,194,446
---------- ----------
Property, plant and equipment
at-cost 597,567 494,220
Less: Accumulated depreciation
and amortization 291,212 276,832
----------- -----------
306,355 217,388
----------- -----------
Security Deposits and other
noncurrent assets 58,812 59,470
----------- -----------
$15,678,467 $14,471,304
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 4,523,298 4,403,787
Accrued expenses 1,710,262 1,100,745
----------- ---------
Total Current Liabilities 6,233,560 5,504,532
----------- ---------
SHAREHOLDERS' EQUITY
Common Stock $.01 par value;
10,000 shares authorized
4,472,302 and 4,465,302 issued as
of December 31, 1997 and
September 30, 1997 44,723 44,653
Additional paid-in capital 10,365,724 10,344,844
Accumulated deficit (729,693) (1,228,772)
Treasury Stock, at cost,
68,200 shares (Note 5) (235,847) (193,953)
------------ -----------
9,444,907 8,966,772
----------- ----------
$15,678,467 $14,471,304
=========== ==========
See accompanying notes to consolidated financial statements
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HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31,
1997 1996
(Unaudited) (Unaudited)
---------- -----------
NET SALES $ 9,575,745 $ 6,546,188
COST OF SALES 7,235,944 4,917,290
----------- ------------
Gross Profit 2,339,801 1,628,898
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES 1,521,919 1,003,662
RESEARCH & DEVELOPMENT EXPENSES 174,263 108,749
----------- ------------
Income from operations 643,619 516,487
OTHER INCOME (EXPENSE):
Interest income 60,546 71,064
Other, net 40,729 (6,685)
----------- -----------
Income before income
tax provision 744,894 580,866
INCOME TAX PROVISION (Note 4) 245,815 130,927
----------- -----------
Net Income $499,079 $449,939
=========== ===========
Net income per share-basic
(Note 3) $0.11 $0.10
Net income per share-diluted
(Note 3) $0.11 $0.10
=========== ===========
See accompanying notes to consolidated financial statements
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<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31,
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $499,079 $ 449,939
------- -------
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 15,037 10,632
Provision for uncollectible accounts
receivable 10,000 3,000
Provision for system board obsolescence 50,000 10,000
Changes in current assets and liabilities:
Accounts receivable (191,847) (1,358,736)
Inventories (168,321) (1,850,784)
Prepaid expenses and other current assets 83,824 (81,854)
Accounts payable 119,511 1,937,560
Accrued expenses 609,517 261,807
---------- ---------
527,721 (1,068,375)
----------- ----------
Net cash provided by (used in) operating
activities 1,026,800 (618,436)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (103,347) (19,003)
--------- ----------
Net cash used in investing activities (103,347) (19,003)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of Treasury Stock (41,894) (78,914)
--------- ----------
Proceeds from the exercise of stock options 20,950 -
--------- ----------
Net cash used by financing activities (20,944) (78,914)
--------- ---------
Net increase (decrease) in cash and
cash equivalents 902,509 (716,353)
CASH AND CASH EQUIVALENTS, beginning of period 5,602,412 6,559,175
--------- ----------
CASH AND CASH EQUIVALENTS, end of period $6,504,921 $5,842,822
========= ==========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $29,392 $5,467
========= ==========
See accompanying notes to consolidated financial statements
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HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared in accordance with generally accepted
accounting principles for interim period reporting in conjunction with the
instructions to Form 10-QSB. Accordingly, these statements do not include all
of the information required by generally accepted accounting principles for
annual financial statements, and are subject to year-end adjustments. In the
opinion of management, all known adjustments (consisting of normal recurring
accruals and reserves) necessary to present fairly the quarterly financial
results for the period have been included. It is suggested that these interim
statements be read in conjunction with the financial statements and related
notes included in the Company's September 30, 1997 Form 10-KSB.
The operating results for the three months December 31, 1997 are not
necessarily indicative of the results to be expected for the September 30,
1998 year end.
NOTE 2. INVENTORIES
Inventories have been valued at the lower of average cost or market. The
components of inventory at December 31, 1997 and September 30, 1997 consist
of:
December 31, September 30,
1997 1997
---- ----
Component Parts $ 1,583,545 $ 1,545,790
Work in Progress 2,234,525 2,181,249
Finished Goods 1,144,617 1,117,327
--------- ---------
$ 4,962,687 $ 4,844,366
============ ============
NOTE 3. NET INCOME PER SHARE
In 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 128, "Earnings per Share." Statement
128 replaced the previously reported primary and fully diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. Net income per share amounts for the three
months ended December 31, 1997 and 1996 have been presented or, as in the
case of the prior year's first quarter, restated, to conform to Statement
128 requirements. Conformity to Statement 128 did not have a material
affect on the previous year's reported first quarter earnings per share.
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HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net income (loss) per share - continued
Weighted average shares outstanding listed below were used in the basic
and diluted per share computation:
Three Months Ended
December 31,
1997 1996
---- ----
Weighted average shares outstanding-basic 4,406,178 4,456,191
Common stock equivalents 89,720 13,448
--------- ---------
Weighted average outstanding-diluted 4,495,898 4,469,639
On November 8, 1996, the Company approved a stock repurchase program. On
December 17, 1997, the buyback plan was extended until December 31, 1998 (See
note 5). Shares outstanding for the quarter ended December 31, 1997 reflect
a reduction on a weighted average basis for the repurchased shares. Weighted
average shares for the prior year's quarter have been restated to reflect
the provisions of SFAS Number 128.
NOTE 4. INCOME TAXES
Income taxes are based on annualized statutory rates for federal and
state income taxes. The provision for income taxes reflects an annualized
effective tax rate after deductions for the utilization of restricted carry
forwards, adjusted for applicable federal and state alternative minimum tax
provisions. The benefits of these operating loss carry forwards had
previously been subject to a 100% valuation allowance. However, based on
actual fiscal 1997 taxable income and projected fiscal 1998 taxable income,
management has reduced the valuation allowance accordingly. The amount of
future reductions in the valuation allowance will be predicated on projected
results for future years.
NOTE 5. STOCK REPURCHASE PROGRAM
On November 8, 1996, the Company approved a stock repurchase program for
the repurchase of up to 300,000 shares of its own stock. The Company will use
the repurchased shares for certain employee benefit programs. On December
17, 1997 stock repurchase program was extended by a resolution of the Board
of Directors until December 31, 1998. As of December 31, 1997, the Company
had repurchased 68,200 shares for $235,847 at an average purchase price of
approximately $3.46 per share.
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ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
Results of Operations
- ----------------------
Three Month Period ended December 31, 1997 versus December 31, 1996
- -------------------------------------------------------------------
Net sales for the three months ended December 31, 1997 were $9,575,745
compared to $6,546,188 for the comparable period in the prior fiscal year,
resulting in an increase of $3,029,557 or 46%. The increase in sales was
primarily due the expansion of the Company's distribution channels in
Europe, continued penetration of products at nationwide and regional
retailers, plus continued strong sales to direct corporate customers.
Net sales of the Company's products are summarized as follows:
Three Months Ended December 31, Increase
1997 1996 (Decrease)%
---- ---- -----------
System Sales $ 89,624 $ 179,342 (50)
Video & Conferencing Boards 9,486,121 6,366,846 49
--------- --------- --
Total Company Sales $9,575,745 $6,546,188 46
========== ========= ==
Unit sales of digital video and conferencing boards increased to
approximately 94,700 as compared to approximately 82,000 for the prior year.
Sales to domestic customers for the three month period were 23% of net sales
for the current quarter and 38% for the prior year's quarter. Sales to
international customers were 77% of net sales for the current quarter and 62%
for the comparable quarter of last year.
Gross profit increased to $2,339,801 from $1,628,898, an increase of
$710,903 or 44% over the prior comparable fiscal year period. The gross
profit percentage was 24% for both the current quarter and the quarter ended
December 31, 1996. For the prior fiscal year ended September 30, 1997,
margins finished at 22%. The increase in margins during the current quarter
as compared to the prior fiscal year was primarily due to a decrease in
duties of approximately 8%, stability obtained from the sale of German Marks
pursuant to forward exchange contracts which hedge our German selling prices,
and the absorption of manufacturing overhead over a greater number of units.
Selling, general and administrative expenses increased $518,257 over
the prior year, but as a percentage of revenue remained relatively stable
at 16% when compared to 15% for the three months ended December 31, 1996.
The increase in expenses was primarily due to increased sales and marketing
expenses of $365,453, which is a result of the Company's commitment of
increasing its domestic market presence and is mainly for higher personnel
costs due to an increased outside sales staff, increased commissions
resulting from the 46% sales increase plus higher marketing and promotional
costs in support of retail sales; higher technical support costs of
- 8-
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Item 2. Management's Discussion and Analysis -Continued
- -----------------------------------------------------------
$19,404 for additional staff required to consistently maintain a high level
of customer support in light of the Company's expanding customer base;
increased freight costs of $47,994 due to the higher volume of shipments,
and higher general and administrative costs of $85,406, mainly for
contractual wage increases and higher rent, utilities, building costs and
communications for the Company's sales office in California, which opened in
June 1997.
Research and development expenses increased $65,514 or approximately
60%. The increase was due to the strategic addition of personnel which is
in line with the Company's commitment to expand its engineering research
and development resources to continually enhance current products and further
develop future product lines.
The Company had net other income of $101,275 for the December 31, 1997
three month period compared to net other income of $64,379 for the
corresponding three months of the preceding fiscal year. The increase in net
other income was primarily foreign currency exchange rate gains as a result
of favorable foreign rates. Provision for income taxes increased to
$245,815 or an effective tax rate of 33% in fiscal 1998 compared to$130,927
or an effective tax rate of 22.5% for fiscal 1997. The increase in the
effective tax rate is due to the utilization of all the unrestricted net
operating loss carry forwards in fiscal 1997, leaving only restricted net
operating loss carry forwards which can be utilized to offset current year
taxable income. .
As a result of all of the above, the Company recorded a net profit after
taxes for the three months ended December 31, 1997 of $499,079, which
resulted in basic and diluted earnings per share of $0.11 on weighed average
basic and diluted shares outstanding of 4,406,178 and 4,495,898, as opposed
to a net income after taxes of $449,939, which resulted in basic and diluted
earnings per share of $0.10 on weighted average basic and diluted shares of
4,456,191 and 4,469,639 for the corresponding quarter of the prior fiscal
year.
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 quarter (October to December), which
due to the holiday season is a strong quarter for computer equipment sales.
In addition, the Company's international sales, mostly into the European
market, have been 66% and 54% of sales for fiscal 1997 and 1996 and are 77%
for the first quarter ended December 31, 1997. Due to this, the Company's
sales for its fourth fiscal quarter (July to September) can potentially be
impacted by the reduction of activity in Europe during the July and August
summer holiday period.
To offset the above cycles, the Company is targeting a wide range of
customer types in order to moderate the seasonality of the retail sales.
-9-
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Liquidity and Capital Resources
- -------------------------------
The Company had a net cash position of $6,504,921, working capital of
$9,079,740 and shareholders' equity of $9,444,907 as of December 31, 1997.
The significant items of cash provided by and cash (used ) are detailed
below:
Net income(adjusted for non cash items) $ 574,116
Increase in investments of current assets (276,344)
Increase in current liabilities-net 729,028
Purchase of Property, Plant & Equipment (103,347)
Purchase of treasury stock (41,894)
Net cash of $1,026,800 provided by operating activities was primarily
due to the cash generated from the company's net income and cash provided by
operations funded by vendor financing which was in excess of the cash
required to finance accounts receivable and inventory as a result of the
growth in sales.
The Company currently has in place an asset based line of credit.
Advances are to be made on a revolving basis based on a formula of eligible
domestic and foreign receivables not older than 90 days. As of December 31,
1997, the Company has not utilized this loan facility. The loan facility
expires on February 28, 1998. The Company has decided not to renew the
existing facility. The Company feels it is in a position to obtain new
financing at more competitive rates, and is currently seeking new
institutions to replace the expiring loan facility.
On November 8, 1996, the Company approved a stock repurchase program for
the repurchase of up to 300,000 shares of its own stock. The Company will use
the repurchased shares for certain employee benefit programs. On December
17, 1997 stock repurchase program was extended by a resolution of the Board
of Directors until December 31, 1998. As of December 31, 1997, the Company
had repurchased 68,200 shares for $235,847 at an average purchase price of
approximately $3.46 per share.
The Company believes that its current cash position and its internally
generated cash flow will be sufficient to satisfy the Company's anticipated
operating needs for a least the ensuing twelve months.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS AND 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, such as information contained in this Form 10-QSB,
including certain statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" may contain forward looking
information. The words "Estimate", "Plan", "Intend", "Believes", "Expect" and
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS-CONTINUED
- -----------------------------------------------------------
similar expressions are intended to identify forward looking statements. Such
forward looking statements involve and are subject to known and unknown
risks, uncertainties and other factors which could cause the actual results,
performance and achievements of the Company to be materially different from
any future results, performance ( financial or operating), or achievements
expressed or implied by such forward looking statements. Such factors
include, among others, the following: rapid changes in technology; lack of
funds for future research; competition, proprietary patents and rights of
others; loss of major customers; loss of sources of supply for 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, seasonality of the business cycle, as well as
general conditions and other factors external to the Company.
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PART II. OTHER INFORMATION
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Item 5 Other Information
-----------------
(a) On December 17, 1997 the Company authorized, at the discretion of its
executive officers, the repurchase of up to 300,000 shares of common stock on
the open market less the 66,200 shares that had already been purchased at
such time, for the period November 8, 1997 to December 31, 1998.
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
- ------------
None
(b) Reports on form 8-K
- -----------------------
None
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<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAUPPAUGE DIGITAL, INC.
-----------------------
Registrant
Date: February 9, 1998 By /s/Kenneth Plotkin
---------------- ------------------
KENNETH PLOTKIN
Vice President and
Chief Executive Officer
Date: February 9, 1998 By /s/Gerald Tucciarone
---------------- ---------------------
GERALD TUCCIARONE
Treasurer and Chief
Financial Officer
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/DOCUMENT>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 6,504,921
<SECURITIES> 0
<RECEIVABLES> 3,375,976
<ALLOWANCES> 120,000
<INVENTORY> 4,962,687
<CURRENT-ASSETS> 15,513,300
<PP&E> 597,567
<DEPRECIATION> 291,212
<TOTAL-ASSETS> 302,355
<CURRENT-LIABILITIES> 6,233,560
<BONDS> 0
0
0
<COMMON> 44,723
<OTHER-SE> 9,400,184
<TOTAL-LIABILITY-AND-EQUITY> 9,447,907
<SALES> 9,575,745
<TOTAL-REVENUES> 9,575,745
<CGS> 7,235,944
<TOTAL-COSTS> 1,696,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 744,894
<INCOME-TAX> 245,815
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 499,079
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
