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: June 30, 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 August 6 , 1999, 4,332,302 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- 3
June 30, 1999 and September 30, 1998
Condensed Consolidated Statements of Income-
Nine Months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Income-
Three Months ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows-
Nine Months ended June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis 10-16
of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30,
1999 September 30,
(Unaudited) 1998
------------------ ----------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 6,349,019 $6,281,852
Accounts receivable, net of allowance for doubtful accounts 5,290,755 6,497,163
Inventories (Note 2) 12,728,940 8,552,097
Prepaid expenses and other current assets 488,022 468,763
Deferred tax assets 749,161 597,131
------- -------
Total current assets 25,605,897 22,397,006
Property, plant and equipment-at cost 1,146,623 805,953
Less: Accumulated depreciation and amortization 484,039 362,343
------- -------
662,584 443,610
Security deposits and other non-current assets 54,865 56,838
------ ------
$26,323,346 $22,897,454
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 9,724,299 $9,497,003
Accrued expenses 2,591,015 2,342,380
Income taxes payable 1,407,729 1,021,173
--------- ---------
Total current liabilities 13,723,043 12,860,556
---------- ----------
SHAREHOLDERS' EQUITY
Common stock $.01 par value; 10,000,000 shares authorized, 4,544,802 and
4,501,402 issued as of June 30, 1999 and September 30, 1998 45,448 45,014
Additional paid-in capital 10,608,411 10,465,707
Retained earnings 3,213,573 729,781
Treasury Stock, at cost, 214,300 and 207,200 shares, respectively (Note 5) (1,267,129) (1,203,604)
---------- ----------
Total shareholders' equity 12,600,303 10,036,898
---------- ----------
$ 26,323,346 $22,897,454
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1999 1998
(Unaudited) (Unaudited)
----------------------------------
<S> <C> <C>
Net Sales $42,923,460 $26,443,939
Cost of Sales 31,124,402 19,820,546
---------- ----------
Gross Profit 11,799,058 6,623,393
Selling, General and Administrative Expenses 7,029,837 4,649,857
Research and Development Expenses 879,685 576,670
------- -------
Income from operations 3,889,536 1,396,866
Other Income (Expense):
Interest income 153,937 178,875
Other, net (89,681) 81,940
------- ------
Income before income tax provision 3,953,792 1,657,681
Income tax Provision (Note 4) 1,470,000 546,815
--------- -------
Net income $2,483,792 $1,110,866
========== ==========
Net income per share-basic (Note 3) $0.58 $0.25
Net income per share-diluted (Note 3) $0.53 $0.24
===== =====
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
(Unaudited) (Unaudited)
---------------------------------
<S> <C> <C>
Net Sales $13,353,693 $9,042,704
Cost of Sales 9,598,877 6,628,542
--------- ---------
Gross Profit 3,754,816 2,414,162
Selling, General and Administrative Expenses 2,432,138 1,800,393
Research and Development Expenses 353,429 228,389
------- -------
Income from operations 969,249 385,380
Other Income (Expense):
Interest income 59,790 58,480
Other, net (15,450) 21,301
------- ------
Income before income tax provision 1,013,589 465,161
Income tax Provision (Note 4) 348,000 154,000
------- -------
Net income $665,589 $311,161
======== ========
Net income per share-basic (Note 3) $0.15 $0.07
Net income per share-diluted (Note 3) $0.14 $0.07
===== =====
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1999 1998
(Unaudited) (Unaudited)
------------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $2,483,792 $1,110,866
---------- ----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 123,666 49,311
Provision for uncollectible accounts receivable 25,000 10,000
Provision for system board obsolescence 150,000 80,000
Compensation paid in stock 2,400 29,656
Deferred tax benefits (152,030)
Changes in current assets and liabilities:
Accounts receivable 1,181,409 (1,913,017)
Inventories (4,326,843) (505,630)
Prepaid expenses and other current assets (19,259) 46,181
Accounts payable 227,297 199,942
Accrued expenses 635,191 945,323
------- -------
(2,153,169) (1,058,234)
---------- ----------
Net cash provided by operating activities 330,623 52,632
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (340,670) (251,664)
-------- --------
Net cash used in investing activities (340,670) (251,664)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (63,525) (105,046)
Proceeds from the exercise of stock options 140,739 80,808
------- ------
Net cash provided by (used in) financing activities 77,214 (24,238)
------ -------
Net increase (decrease) in cash and cash equivalents 67,167 (223,270)
Cash and Cash Equivalents, beginning of period 6,281,852 5,602,412
--------- ---------
Cash and Cash Equivalents, end of period $6,349,019 $5,379,142
========== ==========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $1,328,615 $42,306
========== =======
</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 nine month periods ended June
30, 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 nine months ended June 30,
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 June 30, 1999 and September 30, 1998 consist of:
June 30, September 30,
1999 1998
---- ----
Component Parts $ 3,578,437 $ 1,445,811
Work in Progress 580,080 511,640
Finished Goods 8,570,423 6,594,646
--------- ---------
$ 12,728,940 $ 8,552,097
=========== ============
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 reflect the dilutive effect of additional shares of common stock that
could be issued upon the exercise stock options, warrants and convertible
securities. Net income per share amounts for the three months and nine months
ended June 30, 1999, and 1998 have been presented per the requirements of "SFAS
128".
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net income per share - continued
The table below shows the number of weighted average shares used in
determining basic and diluted earnings per share:
Three Months Ended
June 30,
1999 1998
---- ----
Weighted average shares outstanding-basic 4,320,717 4,406,870
Number of shares issued on the assumed
Exercise of stock options 447,425 343,584
------- -------
Weighted average shares outstanding-diluted 4,768,142 4,750,454
--------- ---------
Nine Months Ended
June 30,
1999 1998
---- ----
Weighted average shares outstanding-basic 4,309,144 4,404,545
Number of shares issued on the assumed
Exercise of stock options 333,630 206,625
------- -------
Weighted average shares outstanding-diluted 4,642,774 4,611,170
--------- ---------
Shares outstanding for the quarter ended and nine months ended June 30, 1999
reflect a reduction on a weighted average basis for repurchased shares. (See
note 5).
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 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 $93,000
during fiscal 1999 and anticipates total elimination of the valuation by the end
of the fiscal year.
<PAGE>
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. As of June 30, 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
Nine Month Period ended June 30, 1999 versus June 30, 1998
- --------------------------------------------------------------
Sales for the nine months ended June 30, 1999 were $42,923,460 compared to
$26,443,939 for the comparable period ending June 30, 1998, resulting in an
increase of $16,479,521 or 62%. The primary forces driving the sales growth were
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 the Company's existing European customers, plus a
growth in sales to direct corporate customers.
Unit sales for the nine months ended June 30, 1999 increased about 70% to
approximately 466,000 as compared to approximately 275,000 for the prior year.
Sales to domestic customers for the nine month period were 25% of net sales for
the current fiscal year and 32% for the prior year. Sales to international
customers were 75% of net sales for the current fiscal year compared to 68% for
the comparable nine month period of the prior fiscal year.
Gross profit increased to $11,799,058 from $6,623,393, an increase of
$5,175,665 or 78% over the prior fiscal year. The gross profit percentage was
27% for the nine months ended June 30, 1999 compared to 25% for the nine months
ended June 30, 1998. The increase in margins was primarily due to economies of
scale resulting from higher production volume, the shifting of most of the
Company's production to subcontractors in Scotland and Malaysia, 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>
Nine months ended June 30,
Dollar Costs Percentage of Sales
------------ -------------------
Increase/
1999 1998 Increase 1999 1998 (Decrease)
---- ---- ----------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Sales & Promotional $4,367,817 $2,847,025 $1,520,792 10.2% 10.8% ( .6%)
Customer Support 327,303 218,717 108,586 .8% .8% -
Product Handling 488,302 283,450 204,852 1.1% 1.1% -
General & Admin 1,846,415 1,300,665 545,750 4.3% 4.9% ( .6%)
--------- --------- ------- --- --- -----
Total $7,029,837 $4,649,857 $2,379,980 16.4% 17.6% (1.2%)
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis -Continued
As a percentage of sales, Selling, General and Administrative expenses for the
nine months ended June 30, 1999 declined by 1.2% when compared to the prior
fiscal year, with Sales and Promotional and General and Administrative expenses
each declining by .6%. Represented in dollars, Selling General and
Administrative expenses increased $2,379,980 over the comparable prior year's
nine month period. The increase in Sales and Promotional expenses of $1,520,792
over the prior year represents approximately 64% of the total increase. The
increase was primarily due to the increase in marketing development funds
required to support product visibility at a greater number of retail locations,
higher commissions resulting from the 62% net sales increase and increased
worldwide sales and marketing personnel costs.
Customer Support, Product Handling, and General and Administrative
expenses, which represents approximately 36% of the increase over the prior
year, increased $108,586, $204,852 and $545,750, respectively. Additional
worldwide staff required to maintain a high level of customer support to support
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 larger
incentive bonus accruals based on the increased profitability of the Company.
Research and Development expenses increased $303,015 or approximately 53%.
The increase was due to additional funds allocated for increased personnel and
prototype 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 nine months ended June 30, 1999 of
$64,256 compared to net other income for the prior year of $260,815. The
decrease in net other income was primarily due to lower returns on monies
invested and foreign currency exchange losses due to the decline of the Euro.
Provision for income taxes was $1,470,000, or an effective tax rate of 37%
for the nine months ended June 30, 1999 compared to $546,815 or an effective tax
rate of 33% for the nine months ended June 30, 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 $152,900.
As a result of the above, the Company recorded net income after taxes for
the nine months ended June 30, 1999 of $2,483,792, which resulted in basic and
diluted earnings per share of $0.58 and $0.53, respectively, on weighted average
basic and diluted shares outstanding of 4,309,144 and 4,642,774, respectively,
compared to net income after taxes of $1,110,866 for the nine months ended June
30, 1998, which resulted in basic and diluted earnings per share of $0.25 and
$0.24, respectively, on weighted average basic and diluted shares of 4,404,545
and 4,611,170, respectively.
<PAGE>
Item 2. Management's Discussion and Analysis -Continued
Three Month Period ended June 30, 1999 versus June 30, 1998
- --------------------------------------------------------------
Sales for the three months ended June 30, 1999 were $13,353,693 compared to
$9,042,704 for the fiscal quarter ending June 30, 1998, resulting in an increase
of $4,310,989 or 48%. The primary forces driving the sales growth were 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 the Company's existing European customers, plus a growth in
sales to direct corporate customers.
Unit sales for the three months ended June 30, 1999 increased about 32% to
approximately 140,000 as compared to approximately 106,000 for the prior year.
Sales to domestic customers for this year's third fiscal quarter were 30% of net
sales compared to 43% for the prior year's third fiscal quarter. Sales to
international customers were 70% of net sales for the third fiscal quarter
compared to 57% for the comparable third quarter of the prior fiscal year.
Gross profit increased to $3,754,816 from $2,414,162, an increase of
$1,340,654 or 56% over the prior fiscal year's third quarter. The gross profit
percentage was 28% for the three months ended June 30, 1999 compared to 27% for
the three months ended June 30, 1998. The increase in margins was primarily due
to economies of scale resulting from higher production volume, the shifting of
most of the Company's production to subcontractors in Scotland and Malaysia,
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 June 30,
----------------------- ---
Dollar Costs Percentage of Sales
------------ -------------------
Increase/
1999 1998 Increase 1999 1998 (Decrease)
---- ---- ----------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Sales & Promotional $1,519,556 $1,170,791 $348,765 11.4% 13.0% (1.6%)
Customer Support 113,854 76,479 37,375 .8% .8% -
Product Handling 207,398 112,245 95,153 1.6% 1.2% .4%
General & Admin 591,330 440,878 150,452 4.4% 4.9% ( .5%)
------- ------- ------- --- --- - --
Total $2,432,138 $1,800,393 $631,745 18.2% 19.9% (1.7%)
</TABLE>
As a percentage of sales, Selling, General and Administrative expenses for the
three months ended June 30, 1999 declined by 1.7% when compared to the third
quarter of the prior fiscal year. Aggregate declines in Sales and Promotional
and General and Administrative expenses of 2.1% were offset by a .4% increase in
Product Handling expenses. Represented in dollars, Selling, General and
Administrative expenses increased $631,745 over the comparable prior year's
three
<PAGE>
month period. The increase in Sales and Promotional expenses of $348,765
over the prior year's third fiscal quarter represents approximately 55% of the
total increase. The increase in Sales and Promotional expenses was primarily due
to the increase in marketing development funds required to support product
visibility at a greater number of retail locations, higher commissions resulting
from the 48% net sales increase and higher personnel costs.
Item 2. Management's Discussion and Analysis -Continued
Customer Support, Product Handling, and General and Administrative
expenses, which represents approximately 45% of the increase over the prior
year's fiscal third quarter, increased $37,375, $95,153 and $150,452,
respectively. Additional worldwide staff required to maintain a high level of
customer service in support 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 larger incentive bonus accruals based on the
increased profitability of the Company.
Research and Development expenses increased $125,040 or approximately 55%.
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 three months ended June 30, 1999
of $44,340 compared to net other income for the prior year of $79,781. The
decrease in net other income was primarily due to lower returns on monies
invested and foreign currency exchange losses due to the decline of the Euro.
Provision for income taxes was $348,000, or an effective tax rate of 34%
for the three months ended June 30, 1999 compared to $154,000 or an effective
tax rate of 33% for the three months ended June 30, 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.
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 nine months of fiscal 1999, the valuation allowance during the third
fiscal quarter was reduced by $33,000. For the nine month period ending June 30,
1999, the valuation allowance has been reduced by $93,000.
<PAGE>
Item 2. Management's Discussion and Analysis -Continued
As a result of the above, the Company recorded net income after taxes for
the three months ended June 30, 1999 of $665,589 which resulted in basic and
diluted earnings per share of $0.15 and $0.14, respectively, on weighted average
basic and diluted shares outstanding of 4,320,717 and 4,768,142, respectively,
compared to net income after taxes of $311,161 for the three months ended June
30, 1998, which resulted in basic and diluted earnings per share of $0.07 and
$0.07, respectively, on weighted average basic and diluted shares of 4,406,870
and 4,750,454, 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 75% for the first nine 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 $6,349,019, working capital of
$11,882,854 and shareholders' equity of $12,600,303 as of June 30, 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 $ 2,784,858
Additions to deferred tax assets ( 152,030)
Increase in investment for current assets ( 3,164,693)
Operations funded by current liabilities-net 862,488
Purchase of Property, Plant & Equipment ( 340,670)
Other 77,214
</TABLE>
Net cash of $330,623 provided by operating activities was primarily due to
cash generated from net income (adjusted for non-cash items) of $2,784,858 and
operations funded by the increase in current liabilities of $862,488, offset
partially by cash invested in current assets of $3,164,693 and an increase in
deferred tax benefits of $152,030.
<PAGE>
Liquidity and Capital Resources-continued
Cash of $340,670 was used to purchase fixed assets. Additional cash was
provided by the exercise of employee options and consumed by the purchase of
additional treasury shares.
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 June 30, 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 selected new software. The
hardware upgrades and the implementation of new software began during January
1999. Testing is currently being performed in house by Company personnel, with
assistance from an outside consultant. The Company expects to have the system
operational by the fourth calendar quarter of 1999. The Company estimates the
cost to the Company to remedy the year 2000 issue with regard to their 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
with whom the Company does business 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 fourth
<PAGE>
calendar quarter of 1999. However, the Company has limited or no control over
the actions taken by these third parties.
Year 2000-continued
Accordingly, there can be no assurance that all the third parties with whom the
Company does business 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 with whom it currently does
business and look to transact business with third parties who are year 2000
compliant in an effort 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 effects 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 effect 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 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
<PAGE>
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.
<PAGE>
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
In January 1998, Advanced Interactive Incorporated ("AII") contacted
Hauppauge Computer Works, Inc. ("HCW"), the Company's wholly-owned subsidiary,
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 effect 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 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 June 30, 1999, the Company estimated that legal fees
incurred were approximately $60,000.
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 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: August 12, 1999 By /s/ Kenneth Plotkin
- --------------------- ----------------------
KENNETH PLOTKIN
Vice President and
Chief Executive Officer
Date: August 12, 1999 By /s/ Gerald Tucciarone
- --------------------- ------------------------
GERALD TUCCIARONE
Treasurer and Chief
Financial Officer
<PAGE>
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