UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
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
HAUPPAUGE DIGITAL, INC.
(Exact Name of registrant as specified in its charter)
Delaware 11-3227864
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
91 Cabot Court, Hauppauge, New York 11788
(Address of principal executive offices)
(516) 434-1600
(Issuer's telephone number)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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 May 7, 1999, 4,314,302 shares of .01 par value Common Stock of the
registrant were outstanding, not including treasury shares
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements Page No.
Condensed Consolidated Balance Sheets-
March 31, 1999 and September 30, 1998 3
Condensed Consolidated Statements of Income-
Six Months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Income-
Three Months ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows-
Six Months ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition 10-16
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17/18
Item 6. Exhibits and Reports on form 8-K 18
SIGNATURES
19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31,
1999 September 30,
(Unaudited) 1998
------------- - -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $5,736,065 $6,281,852
Accounts receivable, net of allowance for doubtful accounts 7,610,783 6,497,163
Inventories (Note 2) 9,402,186 8,552,097
Prepaid expenses and other current assets 442,294 468,763
Deferred tax assets (Note 4) 720,031 597,131
------- -------
Total current assets 23,911,359 22,397,006
Property, plant and equipment-at cost 1,089,212 805,953
Less: Accumulated depreciation and amortization 436,399 362,343
------- -------
652,813 443,610
Security deposits and other non-current assets 55,522 56,838
------ ------
$24,619,694 $22,897,454
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY :
CURRENT LIABILITIES:
Accounts payable $9,271,829 $9,497,003
Accrued expenses 2,446,547 2,342,380
Income taxes payable 1,046,458 1,021,173
--------- ---------
Total current liabilities 12,764,834 12,860,556
---------- ----------
SHAREHOLDERS' EQUITY
Common stock $.01 par value; 10,000,000 shares authorized, 4,521,602 and
4,501,402 issued, respectively 45,216 45,014
10,528,789 10,465,707
Retained earnings 2,547,984 729,781
Treasury Stock, at cost, 214,300 and 207,200 shares, respecitvely (Note 5) (1,267,129) (1,203,604)
---------- ----------
Total stockholders' equity 11,854,860 10,036,898
---------- ----------
$24,619,694 $22,897,454
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended March 31,
1999 1998
(Unaudited) (Unaudited)
---------------------------------------
<S> <C> <C>
Net Sales $29,569,767 $17,401,235
Cost of Sales 21,525,525 13,192,004
---------- ----------
Gross Profit 8,044,242 4,209,231
Selling, General and Administrative Expenses 4,597,699 2,849,464
Research and Development Expenses 526,256 348,281
------- -------
Income from operations 2,920,287 1,011,486
Other Income :
Interest income 94,147 120,395
Other, net (74,231) 60,639
------- ------
Income before income tax provision 2,940,203 1,192,520
Income Tax Provision (Note 4) 1,122,000 392,815
--------- -------
Net income $1,818,203 $799,705
========== ========
Net income per share-basic (Note 3) $0.42 $0.18
Net income per share-diluted (Note 3) $0.39 $0.18
===== =====
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(Unaudited) (Unaudited)
---------------------------------------
<S> <C> <C>
Net Sales $14,512,768 $7,825,490
Cost of Sales 10,477,415 5,956,060
---------- ---------
Gross Profit 4,035,353 1,869,430
Selling, General and Administrative Expenses 2,288,385 1,327,545
Research and Development Expenses 285,164 174,018
------- -------
Income from operations 1,461,804 367,867
Other Income, (expense)
Interest income 44,742 59,849
Other, net (115,994) 19,910
--------- ------
Income before income tax provision 1,390,552 447,626
Income Tax Provision (Note 4) 525,000 147,000
------- -------
Net income $865,552 $300,626
======== ========
Net income per share-basic (Note 3) $0.20 $0.07
Net income per share-diluted (Note 3) $0.19 $0.07
===== =====
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Ended March 31,
1999 1998
(Unaudited) (Unaudited)
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,818,203 $799,705
---------- --------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 75,369 15,037
Provision for uncollectible accounts receivable 20,000 10,000
Provision for system board obsolescence 100,000 50,000
Compensation paid in stock 2,400 -
Deferred tax benefits (122,900) -
Changes in current assets and liabilities:
Accounts receivable (1,133,618) (191,847)
Inventories (950,089) (168,321)
Prepaid expenses and other current assets 26,469 83,824
Accounts payable (225,173) 119,511
Accrued expenses 129,452 609,517
------- -------
(2,078,090) 527,721
---------- -------
Net cash (used in) provided by operating activities (259,887) 1,327,426
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (283,259) (103,347)
-------- --------
Net cash used in investing activities (283,259) (103,347)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (63,525) (41,894)
Proceeds from the exercise of stock options 60,884 20,950
------ ------
Net cash used in financing activities (2,641) (20,944)
------ -------
Net (decrease) increase in cash and cash equivalents (545,787) 1,203,135
Cash and Cash Equivalents, beginning of period 6,281,852 5,602,412
--------- ---------
Cash and Cash Equivalents, end of period $5,736,065 $6,805,547
========== ==========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $1,313,615 $29,392
========== =======
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
included herein have been prepared in accordance with generally accepted
accounting principles for interim period reporting in conjunction with the
instructions to Form 10-Q. 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 financial position, results of
operations and cash flows for the three month and six month periods ended March
31, 1999 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, 1998 Form 10-KSB.
The operating results for the three months and six months ended March
31, 1999 are not necessarily indicative of the results to be expected for the
September 30, 1999 year end.
NOTE 2. INVENTORIES
Inventories have been valued at the lower of average cost or market.
The components of inventory at March 31, 1999 and September 30, 1998 consist of:
March 31, September 30,
1999 1998
---- ----
Component Parts $ 2,324,550 $ 1,445,811
Work in Progress 481,080 511,640
Finished Goods 6,596,556 6,594,646
--------- ---------
$ 9,402,186 $ 8,552,097
============ ============
<PAGE>
NOTE 3. NET INCOME PER SHARE
Earnings per share are computed using Financial Accounting Standards Number
128, ("SFAS 128") "Earnings per Share." The statement provides for the
calculation of "basic" and "diluted" earnings per share. Basic earnings per
share is computed by dividing income available to common shareholders by the
weighted average shares outstanding for the period, and excludes any dilutive
effects of stock options, warrants and convertible securities. Diluted earnings
per share reflects the dilutive effect of additional shares of common stock that
could be issued upon the exercise of stock options, warrants and convertible
securities. Net income per share amounts for the three months and six months
ended March 31, 1999, and 1998 have been presented per the requirements of "SFAS
128".
The table below shows the number of weighted average shares used in
determining basic and diluted earnings per share:
Three Months Ended
March 31,
1999 1998
---- ----
Weighted average shares outstanding-basic 4,309,201 4,400,524
Number of shares issued on the assumed
exercise of stock options 325,985 148,965
----------- ----------
Weighted average shares outstanding-diluted 4,635,186 4,549,489
----------- ----------
Six Months Ended
March 31,
1999 1998
---- ----
Weighted average shares outstanding-basic 4,303,357 4,403,382
Number of shares issued on the assumed
exercise of stock options 311,754 115,809
---------- ----------
Weighted average shares outstanding-diluted 4,615,111 4,518,991
---------- ----------
Shares outstanding for the quarter ended and six months ended March 31, 1999
reflect a reduction on a weighted average basis for repurchased shares. (See
note 5).
<PAGE>
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 net operating loss
carry forwards, adjustments for items deductible for book purposes but not
currently deductible for tax purposes and the benefit which results from the
utilization of a foreign sales corporation. The benefits of these operating loss
carry forwards and deferred tax benefits had previously been subject to a 100%
valuation allowance. However, based on three years of profitability up through
the end of fiscal 1998 and projected fiscal 1999 taxable income, management
reduced the valuation allowance at September 30, 1998 to $127,000. In
recognition of continued profitability, the Company reduced the valuation
allowance by $60,000 during the first six months of 1999 and anticipates total
elimination of the valuation by the end of the fiscal year.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 intends to
use the repurchased shares for certain employee benefit programs. On December
17, 1997, the stock repurchase program was extended by a resolution of the Board
of Directors. Through March 31, 1999, the Company had repurchased 214,300 shares
for $1,267,129 at an average purchase price of approximately $5.91 per share.
<PAGE>
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Six Month Period ended March 31, 1999 versus March 31, 1998
- --------------------------------------------------------------
Sales for the six months ended March 31, 1999 were $29,569,767 compared
to $17,401,235 for the comparable period ending March 31, 1998, resulting in an
increase of $12,168,532 or 70%. The primary forces driving the sales growth was
an increase in the Company's domestic distribution and retail channels,
increased European sales due to the Company's expansion into new geographic
markets, increased sales to our existing European customers, plus a growth in
sales to direct corporate customers.
Unit sales of digital video and conferencing boards for the six months
ended March 31, 1999 increased about 93% to approximately 327,000 as compared to
approximately 169,000 for the prior year. Sales to domestic customers for the
six month period were 23% of net sales for the current fiscal year and 26% for
the prior year. Sales to international customers were 77% of net sales for the
current fiscal year compared to 74% for the comparable six month period of the
prior fiscal year.
Gross profit increased to $8,044,242 from $4,209,231, an increase of
$3,835,011 or 91% over the prior fiscal year. The gross profit percentage was
27% for the six months ended March 31, 1999 compared to 24% for the six months
ended March 31, 1998. The increase in margins was primarily due to the shifting
of production and shipping for most of the Company's European sales to a
subcontractor in Scotland which reduced unit production costs, absorption of
manufacturing overhead over a greater number of units and hedging foreign sales
to manage currency exposure.
The chart below illustrates the components of selling, general and
administrative expenses:
<TABLE>
<CAPTION>
Six months ended March 31,
---------------------- ---
Dollar Costs Percentage of Sales
------------ -------------------
Increase/
1999 1998 Increase 1999 1998 (Decrease)
---- ---- -------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales & Promotional $2,848,261 $1,676,234 $1,172,027 9.5% 9.6% ( .1%)
Customer Support 213,449 142,238 71,211 .7% .8% ( .1%)
Product Handling 280,904 171,205 109,699 .9% 1.0% ( .1%)
General & Admin 1,255,085 859,787 395,298 4.2% 4.9% ( .7%)
----------- -------- --------- ----- -------- ----------
Total $4,597,699 $2,849,464 $1,748,235 15.3% 16.3% ( 1.0%)
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis -Continued
As a percentage of sales, Selling, General and Administrative expenses for
the six months ended March 31, 1999 declined by 1.0% when compared to the prior
fiscal year. Sales & Promotional, Customer Support and Product Handling declined
by an aggregate total of .3%, and General and Administrative expenses declined
by .7%. Represented in dollars, Selling, General and Administrative expenses
increased $1,748,235 over the comparable prior year's six month period. The
largest component of this increase was Sales and Promotional expenses whose
increase of $1,172,027 over the prior year represents approximately 67% of the
total increase. The increase in Sales and Promotional expenses was primarily due
to the expansion of marketing funds required to support product visibility at a
higher number of retail locations, higher commissions resulting from the 70% net
sales increase and increased personnel costs.
Customer Support, Product Handling, and General and Administrative
expenses, which represents approximately 33% of the increase over the prior
year, increased $71,211, $109,699 and $395,298 respectively. Additional
worldwide staff required to consistently maintain a high level of customer
support in light of the Company's expanding domestic and international customer
base caused the Customer Support costs to increase. Increased Product Handling
costs was a function of greater shipment volume to customers. The increase in
General and Administrative costs was mainly for contractual wage increases,
higher professional fees for consulting work performed for the Company, and
increased incentive compensation due to the increased profitability of the
Company.
Research and development expenses increased $177,975 or approximately 51%.
The increase was due to the added funds allocated for increased personnel and
prototypes costs as the Company expands its current product line and develops
its new line of digital products.
The Company had net other income for the six months ended March 31, 1999 of
$19,196 compared to net other income for the prior year of $181,034. The
decrease in net other income was primarily due to lower returns on monies
invested and foreign currency losses due to the decline of the Euro.
Provision for income taxes was $1,122,000, or an effective tax rate of 38%
for the six months ended March 31, 1999 compared to $392,815 or an effective tax
rate of 33% for the six months ended March 31, 1998. The increase in the net
effective rate is primarily due to the timing of certain reserves which are
deductible for book purposes but not currently deductible for tax purposes,
which resulted in an addition to the deferred tax asset account of $62,900.
As a result of the above, the Company recorded net income after taxes for
the six months ended March 31, 1999 of $1,818,203, which resulted in basic and
diluted earnings per share of $0.42 and $0.39, respectively, on weighted average
basic and diluted shares outstanding of 4,303,357 and 4,615,111, respectively,
compared to net income after taxes of $799,705 for the six months
<PAGE>
ended March 31, 1998, which resulted in basic and diluted earnings per share of
$0.18 on weighted average basic and diluted shares of 4,403,382 and 4,518,991,
respectively.
Three Month Period ended March 31, 1999 versus March 31, 1998
- ----------------------------------------------------------------
Sales for the three months ended March 31, 1999 were $14,512,768 compared
to $7,825,490 for the prior fiscal quarter ending March 31, 1998, resulting in
an increase of $6,687,278 or 85%. The primary forces driving the sales growth
was an increase in the Company's domestic distribution and retail channels,
increased European sales due to the Company's expansion into new geographic
markets, increased sales to our existing European customers, plus a growth in
sales to direct corporate customers.
Unit sales of digital video and conferencing boards for the three months
ended March 31, 1999 increased about 117% to approximately 161,000 as compared
to approximately 74,000 for the prior year. Sales to domestic customers for this
year's second fiscal quarter were 20% of net sales compared to 29% for the prior
year's second fiscal quarter. Sales to international customers were 80% of net
sales for the second fiscal quarter compared to 71% for the comparable second
quarter of the prior fiscal year.
Gross profit increased to $4,035,353 from $1,869,430, an increase of
$2,165,923 or 116% over the prior fiscal year's second quarter. The gross profit
percentage was 27% for the three months ended March 31, 1999 compared to 24% for
the three months ended March 31, 1998. The increase in margins was primarily due
to the shifting of production and shipping for most of the Company's European
sales to a subcontractor in Scotland which reduced unit production costs,
absorption of manufacturing overhead over a greater number of units and hedging
foreign sales to manage currency exposure.
The chart below illustrates the components of selling, general and
administrative expenses:
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------ ---
Dollar Costs Percentage of Sales
------------ -------------------
Increase
1999 1998 Increase 1999 1998 (Decrease)
---- ---- -------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales & Promotional $1,387,423 $794,528 $592,895 9.6% 10.1% ( .5%)
Customer Support 116,687 67,644 49,043 .8% .9% ( .1%)
Product Handling 154,675 51,635 103,040 1.0% .7% .3%
General & Admin 629,600 413,738 215,862 4.4% 5.3% ( .9%)
------------ -------- --------- ----- -------- ----------
Total $2,288,385 $1,327,545 $960,840 15.8% 17.0% ( 1.2%)
</TABLE>
<PAGE>
As a percentage of sales, Selling, General and Administrative expenses for
the three months ended March 31, 1999 declined by 1.2% when compared to the
second quarter of the prior fiscal year. Aggregate declines in Sales and
Marketing, Customer Support, and General and Administrative expenses of 1.5%
were offset by a .3% increase in Product Handling expense. Represented in
dollars, Selling General and Administrative expenses increased $960,840 over the
comparable prior year's three month period. The largest component of this
increase was Sales and Promotional expenses whose increase of $592,895 over the
prior year's second fiscal quarter represents approximately 62% of the total
increase. The increase in sales and promotional expenses was primarily due to
the expansion of marketing and advertising funds required to support product
visibility at a higher number of retail locations, higher commissions resulting
from the 85% net sales increase and higher personnel costs.
Customer Support, Product Handling, and General and Administrative
expenses, which represents approximately 38% of the increase over the prior
year, increased $49,043, $103,040 and $215,862 respectively. Additional
worldwide staff required to consistently maintain a high level of customer
support in light of the Company's expanding domestic and international customer
base caused the Customer Support costs to increase. Increased Product Handling
costs was a function of greater shipment volume to customers. The increase in
General and Administrative costs was mainly for contractual wage increases,
higher professional fees for consulting work performed for the Company, and
increased incentive compensation due to the increased profitability of the
Company.
Research and development expenses increased $111,146 or approximately 64%.
The increase was due to the added funds allocated for increased personnel and
prototypes costs as the Company expands its current product line and develops
its new line of digital products.
The Company had net other expenses for the three months ended March 31,
1999 of $(71,252) compared to net other income for the prior year of $79,759.
The decrease in net other income was primarily due to lower returns on monies
invested and foreign currency losses due to the decline of the Euro.
Provision for income taxes was $525,000, or an effective tax rate of 38%
for the three months ended March 31, 1999 compared to $147,000 or an effective
tax rate of 33% for the three months ended March 31, 1998. The increase in the
net effective rate is primarily due to the timing of certain reserves which are
deductible for book purposes but not currently deductible for tax purposes.
<PAGE>
At the end of fiscal 1998, the Company had a deferred tax valuation
allowance of $127,000. In recognition of the continued profitability during the
first six months of fiscal 1999, the valuation allowance during the second
fiscal quarter was reduced by $30,000. For the six month period ending March 31,
1999, the valuation allowance has been reduced by $60,000.
As a result of the above, the Company recorded net income after taxes for
the three months ended March 31, 1999 of $865,552, which resulted in basic and
diluted earnings per share of $0.20 and $0.19, respectively, on weighted average
basic and diluted shares outstanding of 4,309,201 and 4,635,186, respectively,
compared to net income after taxes of $300,626 for the three months ended March
31, 1998, which resulted in basic and diluted earnings per share of $0.07 on
weighted average basic and diluted shares of 4,400,524 and 4,549,489,
respectively.
In two of the previous four 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. The
Company experienced this trend in each of the fiscal years ended September 30,
1998 and September 30, 1997. In addition, the Company's international sales,
mostly in the European market, were 72 % and 66% of sales for fiscal 1998 and
1997, respectively, and 77% for the first six months of fiscal 1999. 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.
Liquidity and Capital Resources
The Company had a net cash position of $5,736,065, working capital of
$11,146,525 and shareholders' equity of $11,854,860 as of March 31, 1999,
compared to cash, working capital and shareholders' equity of $6,281,852,
$9,536,450 and $10,036,898, respectively, as of September 30, 1998 . The
significant items of cash provided by and cash (consumed) are detailed below:
<TABLE>
<CAPTION>
<S> <C>
Net income (adjusted for non cash items), excluding deferred tax benefits $ 2,015,972
Additions to deferred tax assets ( 122,900)
Increase in investment for current assets ( 2,057,238)
Cash expended for reduction in current liabilities-net ( 95,721)
Purchase of Property, Plant & Equipment ( 283,259)
Other ( 2,641)
</TABLE>
Net cash of $ 259,887 consumed by operating activities was primarily due to
cash invested
<PAGE>
in current assets of $2,057,238, increase in deferred tax benefits of $122,900
and cash consumed attributable to the reduction of current liabilities of
$95,721, offset partially by the Company's net income, adjusted for non cash
items, of $2,015,972.
Additional cash was used to purchase fixed assets. Minimal cash was
provided by and consumed by the exercise of employee options and the purchase of
additional treasury shares, respectively.
The Company's asset based credit facility expired on February 28, 1998. The
company has chosen not to renew the loan facility. The Company feels it is in a
position to obtain new financing at more competitive rates, and is currently
negotiating with new institutions to replace the expired 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, the stock repurchase program was extended by a resolution of the Board of
Directors. Through March 31, 1999, the Company had repurchased 214,300 shares
for $1,267,129 at an average purchase price of approximately $5.91 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 at least the ensuing twelve months.
Year 2000
An issue affecting most companies is whether computer systems and
applications will recognize and process the Year 2000 and beyond. Many computer
systems were not designed to handle dates beyond the Year 1999. The Company has
evaluated the effect of Year 2000 issues relating to its internal computer
systems (primarily used for accounting, inventory control, word processing and
certain other administrative functions) and has concluded that certain aspects
of its system are not Year 2000 compliant. In recognition of this, the Company
during 1998 studied the feasibility of upgrading its existing computer software
or purchasing new software. The Company concluded that the purchase of new
software and the upgrading of computer hardware was the best course of action.
During the first fiscal quarter of 1999, the Company has selected new software.
The hardware upgrades and the implementation of new software began during
January 1999. Testing will be performed in house by Company personnel, with
assistance from an outside consultant. The Company expects to have the system
operational by the middle of 1999. The Company estimates the cost to the Company
to remedy the Year 2000 issue with regard to their
<PAGE>
internal computer system will be approximately $150,000. The Company expects to
fund this project through internally generated cash flow, and will account for
the project as prescribed by the rules under generally accepted accounting
principles.
The Company initiated communications in February 1999 with third parties
the Company does business with in order to identify, if possible, the status of
the third parties' Year 2000 readiness. The Company is currently receiving these
third party questionnaires and is quantifying these responses. The Company will
attempt to have this completed by the middle of 1999. However, the Company has
limited or no control over the actions taken by these third parties.
Accordingly, there can be no assurance that all the third parties the Company
does business with will successfully resolve all of their Year 2000 issues. The
failure of these third parties to resolve their Year 2000 issues could have a
potentially adverse affect on the Company. During 1999, the Company will attempt
to monitor the readiness of third parties it currently does business with and
look to transact business with third parties who are Year 2000 compliant in an
effort to minimize the risk to the Company.
It is the Company's intention to address its Year 2000 issues prior to
being affected by them. If the Company identifies significant risks associated
with Year 2000 compliance, or if the Company's Year 2000 project deviates from
its expected completion date, the Company will devise a contingency plan which
the Company intends to develop concurrently with the implementation of the new
computer system. Management believes that current plans and monitoring actions
will provide ample response time to avoid material adverse affects on the
Company's business and financial results.
The Company has evaluated its currently available products and believes
that they are Year 2000 compliant. The Company's currently available products
are generally not date sensitive, although the PCs in which they may be
installed may have Year 2000 issues not associated with the Company's products.
The inability of any of the Company's products to operate properly in the Year
2000 could result in increased warranty costs, customer satisfaction issues,
litigation, or other material costs and liabilities, which could have a material
adverse affect on the Company, its results of operations and financial
condition.
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-Q, 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", "Anticipates", "Projects" and
similar words or expressions are intended to identify forward looking
statements. These statements speak only as of the date of this report. Such
forward looking statements involve and are
<PAGE>
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; domestic and foreign economic conditions; currency fluctuations; the
inability of the Company to profitably sell its products and the impact of
complications due to Year 2000 compliance. 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.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
In January 1998, Advanced Interactive Incorporated ("AII") contacted
Hauppauge Computer Works, Inc. ("HCW") and attempted to induce HCW to enter into
a patent license or joint venture agreement with AII relative to certain of
HCW's products. AII alleged that such products infringe U.S. Patent No. 4, 426,
698 (the "AII Patent"). At such time, HCW's engineering staff analyzed the AII
Patent and determined that HCW's products did not infringe any such patent.
Accordingly, HCW rejected AII's offer.
On October 6, 1998, HCW received notice that AII had commenced an action
against it and multiple other defendants in the United States District Court for
the Northern District of Illinois, alleging that the certain of HCW's products
infringe on certain patent rights allegedly owned by the plaintiff. The
complaint seeks unspecified compensatory and statutory damages with interest.
HCW denies such allegations and intends to vigorously defend this action. On
December 22, 1998, HCW filed its Answer (the "Answer"). Among other things,
pursuant to the Answer, HCW denies that its products infringe AII's patent
rights and asserts certain affirmative defenses, including challenging the
validity of the Patent.
Notwithstanding the foregoing, because of the uncertainties of litigation,
no assurances can be given as to the outcome of the AII litigation. In the event
that HCW were not to prevail in this litigation, HCW could be required to pay
significant damages to AII and could be enjoined from further use of such
technology as it presently exists. Although a negative outcome in the AII
litigation would have a material adverse affect on HCW, including, but not
limited to, its operations and financial condition, HCW believes that, if it is
held that HCW's products infringe AII's patent rights, HCW would attempt to
design components to replace the infringing components or would attempt to
negotiate with AII to utilize its system, although no assurances can be given
that HCW
<PAGE>
would be successful in these attempts. At the present time, HCW can not assess
the possible cost of designing and implementing a new system or obtaining rights
from AII. As of March 31, 1999, the Company estimated that legal fees incurred
were approximately $50,000.
Item 4 Submission of Matters to a Vote of Security Holders
The following propositions were submitted to the shareholders for approval
at the annual meeting of shareholders held on March 25,1999 at the offices of
the Company and were approved by the votes as indicated:
No. 1: Election of Directors
The following directors were elected by the votes as indicated to serve
until the election and qualification of their respective successors:
For Withheld
--- --------
Kenneth A. Aupperle 3,987,639 8,004
Kenneth Plotkin 3,987,639 7,804
Steven J. Kuperschmid 3,987,639 11,404
Bernard Herman 3,984,239 7,904
No. 2: Appointment of BDO Seidman LLP as independent auditors
The appointment of BDO Seidman LLP as independent auditors for the fiscal
year ended September 30, 1999 was approved by the vote as indicated:
For Against Abstain
--- ------- -------
3,982,169 7,509 5,975
.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on form 8-K
None
<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: May 9, 1999 By /s/ Kenneth Plotkin
------------- ----------------------------
KENNETH PLOTKIN
Vice President and
Chief Executive Officer
Date: May 9, 1999 By /s/ Gerald Tucciarone
------------- -----------------------------
GERALD TUCCIARONE
Treasurer and Chief
Financial Officer
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