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, 2000
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, 2000 8,866,100 shares of .01 par value Common Stock of the
registrant were outstanding, not including treasury shares
1
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
Condensed Consolidated Balance Sheets-
March 31, 2000 and September 30, 1999 3
Condensed Consolidated Statements of Income-
Six Months ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Income-
Three Months ended March 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows-
Six Months ended March 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition 9-18
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal proceedings 18
Item 6. Exhibits and Reports on form 8-K 18
SIGNATURES 19
- ----------
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
ASSETS 2000 September 30,
(Unaudited) 1999
<S> <C> <C> <C>
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,543,620 $6,122,922
Accounts receivable, net of allowance for doubtful accounts
of $165,000 and $135,000, respectively 9,316,657 6,973,452
Inventories 13,588,630 12,957,439
Prepaid expenses and other current assets 695,326 407,916
Deferred tax assets 465,879 477,074
------- -------
Total current assets 27,610,112 26,938,803
Property, plant and equipment-net 892,453 718,562
Security deposits and other non-current assets 484,570 70,219
------- ------
$28,987,135 $ 27,727,584
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 11,541,955 $11,208,777
Accrued expenses 1,373,031 2,698,161
Income taxes payable 591,439 498,555
------- -------
Total current liabilities 13,506,425 14,405,493
========== ==========
STOCKHOLDERS' EQUITY:
Common stock $.01 par value; 10,000,000 shares authorized, 9,290,900
and 9,120,604 issued as of March 31 , 2000 and September 30, 1999 92,909 91,206
Additional paid-in capital 11,073,902 10,650,605
Retained earnings 5,581,028 3,847,409
Treasury Stock, at cost, 428,600 shares (1,267,129) (1,267,129)
---------- ----------
Total stockholders' equity 15,480,710 13,322,091
---------- ----------
$28,987,135 $ 27,727,584
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended March 31,
2000 1999
(Unaudited) (Unaudited)
----------------------------------
<S> <C> <C>
Net Sales $41,568,846 $29,569,767
Cost of Sales 32,262,974 21,525,525
---------- ----------
Gross Profit 9,305,872 8,044,242
Selling, General and Administrative Expenses 6,270,859 4,597,699
Research and Development Expenses 762,825 526,256
------- -------
Income from operations 2,272,188 2,920,287
Other Income:
Interest income 72,703 94,147
Other, net (96,272) ( 74,231)
------- - ------
Income before taxes on income 2,248,619 2,940,203
Taxes on income 515,000 1,122,000
------- ---------
Net income $1,733,619 $1,818,203
========== ==========
Net income per share-basic $0.20 $0.21
Net income per share-diluted $0.18 $0.20
===== =====
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(Unaudited) (Unaudited)
--------------------------------
<S> <C> <C>
Net Sales $19,525,197 $14,512,768
Cost of Sales 15,527,250 10,477,415
---------- ----------
Gross Profit 3,997,947 4,035,353
Selling, General and Administrative Expenses 3,187,657 2,288,385
Research and Development Expenses 359,855 285,164
------- -------
Income from operations 450,435 1,461,804
Other Income:
Interest income 26,203 44,742
Other, net (134,174) (115,994)
-------- --------
Income before taxes on income 342,464 1,390,552
Taxes on income 85,000 525,000
------ -------
Net income $257,464 $865,552
======== ========
Net income per share-basic $0.03 $0.10
Net income per share-diluted $0.03 $0.09
===== =====
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Ended March 31,
2000 1999
(Unaudited) (Unaudited)
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $1,733,619 $1,818,203
---------- ----------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 115,459 75,369
Provision for uncollectible accounts receivable 30,000 20,000
Deferred tax benefits 11,195 (122,900)
Other non cash items 41,008 2,400
Changes in current assets and liabilities:
Accounts receivable (2,373,205) (1,133,618)
Inventories (631,191) (850,089)
Prepaid expenses and other assets (287,410) 26,469
Other assets (414,358) -
Accounts payable and other current liabilities (899,068) (95,721)
-------- -------
(4,407,570) (2,078,090)
---------- - ---------
Net cash used in operating activities (2,673,951) (259,887)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (289,350) (283,259)
-------- --------
Net cash used in investing activities (289,350) (283,259)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock - (63,525)
Proceeds from the exercise of stock options 383,999 60,884
------- ------
Net cash provided by (used in) financing activities 383,999 (2,641)
------- ------
Net decrease in cash and cash equivalents (2,579,302) (545,787)
Cash and Cash Equivalents, beginning of period 6,122,922 6,281,852
--------- ---------
Cash and Cash Equivalents, end of period $ 3,543,620 $5,736,065
=========== ==========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $414,677 $1,313,615
======== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<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. 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 and six month period ended March 31, 2000 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,
1999 Form 10-K.
The operating results for the three and six month period ended March 31,
2000 are not necessarily indicative of the results to be expected for the
September 30, 2000 year end.
NOTE 2. INVENTORIES
Inventories have been valued at the lower of average cost or market. The
components of inventory consist of:
March 31, September 30,
2000 1999
----- ----
Component Parts $ 3,979,487 $ 4,875,940
Work in Progress 485,296 494,285
Finished Goods 9,123,847 7,587,214
--------- ---------
$ 13,588,630 $12,957,439
============ ===========
NOTE 3. NET INCOME PER SHARE
Basic earnings per share includes no dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflect, in the periods in which they have a
dilutive effect, the dilution which would occur upon the exercise of stock
options. A reconciliation of the shares used in calculating basic and diluted
earnings per share follows:
7
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net income per share - continued
Three Months Ended
March 31,
2000 1999
---- ----
Weighted average shares outstanding-basic 8,819,900 8,618,402
Number of shares issued on the assumed
Exercise of stock options 1,112,433 651,970
--------- -------
Weighted average shares outstanding-diluted 9,932,333 9,270,372
--------- ---------
Six Months Ended
March 31,
2000 1999
---- ----
Weighted average shares outstanding-basic 8,796,541 8,606,714
Number of shares issued on the assumed
Exercise of stock options 1,067,585 623,508
--------- -------
Weighted average shares outstanding-diluted 9,864,126 9,230,222
--------- ---------
On February 10, 2000 the Company's Board of Directors authorized a two for one
stock split effected as a 100% common stock dividend. The stock split has been
reflected retroactively for all issued common stock.
NOTE 4. INCOME TAXES
Income taxes through fiscal 1999 were 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.
Effective October 1, 1999, the Company restructured its foreign operations.
The result of the restructuring eliminated the foreign sales corporation and
established a new Luxembourg corporation, which will function as the entity
which services the Company's European customers.
The Company's tax provision reflects, for the three and six months ended
March 31, 2000, this new structure.
8
<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,
extended by a resolution of the Board of Directors. The Company has repurchased
on a basis adjusted for the stock split, 428,600 shares for $1,267,129 at an
average purchase price of approximately $2.955 per share.
NOTE 6 . PROSPECTIVE ACCOUNTING CHANGES
Investment Derivatives and Hedging Activities Income
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
("SFAS 133"), Accounting for Derivative Investments and Hedging Activities
Income. SFAS 133 is effective for transactions entered into after June 15, 2000.
SFAS 133 requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of the derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designed as part of the hedge transaction and the type
of hedge transaction. The ineffective portion of all hedges will be recognized
in earnings. The Company is in the process of determining the impact that the
adoption of SFAS 133 will have on its results of operations and financial
position.
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Six Month Period ended March 31, 2000 versus March 31, 1999
Sales for the six months ended March 31, 2000 were $41,568,846 compared to
$29,569,767 for six months ended March 31, 1999, an increase of $11,999,079 or
41%, comprised of a 76% increase in domestic sales and a 26% increase in
international sales. The forces driving the sales growth were:
- - Sales of new products introduced during the latter part of fiscal 1999.
- - The opening of new geographic markets.
- - Sales contribution from the Company's Singapore office, which was opened
during the fourth quarter of fiscal 1999.
9
<PAGE>
Item 2. Management's Discussion and Analysis -Continued
Unit sales of digital video and conferencing boards for the six months
ended March 31, 2000 increased 80% to approximately 587,000 as compared to
approximately 327,000 for the prior year. Sales to domestic customers for the
six month period were 28% of net sales for the current period and 23% for the
prior comparable period. Sales to international customers were 72% of net sales
for the current period compared to 77% for the comparable prior period.
Gross profit increased to $9,305,872 from $8,044,242, an increase of
$1,261,630 or 16% over the prior period. The gross profit percentage was 22% for
the current period compared to 27% for the prior comparable period. The
fluctuation in margins can be attributed to:
- - Slow takeoff of the digital TV market
- - Larger sales mix of lower margin product
- - Decline in the Euro exchange rate.
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/
2000 1999 Increase 2000 1999 (Decrease)
---- ---- ----------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales & Promotional $4,119,276 $2,848,261 $1,271,015 9.9% 9.6% .3%
Customer Support 252,564 213,449 39,115 .6% .7% (.1%)
Product Handling 404,723 280,904 123,819 1.0% 1.0% -
General & Admin 1,494,296 1,255,085 239,211 3.6% 4.3% (.7%)
--------- --------- ------- --- --- ----
Total $6,270,859 $4,597,699 $1,673,160 15.1% 15.6% (.5%)
</TABLE>
As a percentage of sales, Selling, General and Administrative expenses for the
six months ended March 31, 2000 declined by .5% when compared to the prior
comparable period. Declines in Customer Support and General and Administrative
expenses of .8% were offset by an increase in Sales and Promotional expenses of
.3%. Represented in dollars, Selling General and Administrative expenses
increased $1,673,160 over the comparable prior year's six month period.
The increase in sales and promotional expense of $1,271,015 was mainly due to:
- - Higher commission attributable to increased sales.
- - Employment of additional sales and marketing personnel.
- - Sales and marketing expenses of the Company's Singapore office.
- - Increased European marketing activities.
- - Increased Latin America marketing activities.
10
<PAGE>
Item 2. Management's Discussion and Analysis -Continued
Customer Support and Product Handling expenses increased $39,115 and
$123,819 respectively. Customer Support costs increased due to additional staff
required to maintain a high level of customer service in light of the Company's
expanding worldwide customer base. Increased Product handling costs was a
function of greater shipment volume to customers.
The increase in General and Administrative expenses of $239,211 was primarily
due to:
- - Contractual salary increases for senior executives.
- - Higher professional fees for investment, tax and litigation advice.
- - General and administrative expenses of the Company's Singapore office.
Research and development expenses increased $236,569 or approximately 45%.
The increase was due to engineering and development costs of our Singapore
office, increased personnel and increased material for new product prototypes.
The Company had net other expenses for the six months ended March 31, 2000
of $23,569 compared to net other income for the prior year of $19,917. 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 $515,000, or an effective tax rate of 23%
for the six months ended March 31, 2000 compared to $1,122,000 or an effective
tax rate of 38% for the six months ended March 31, 1999. Effective October 1,
1999, the Company restructured its foreign operations. The result of the
restructuring eliminated the foreign sales corporation and established a new
Luxembourg corporation, which will function as the entity which services the
Company's European customers. The Company's tax provision for the quarter ended
March 31, 2000 was based on this new structure.
On February 10, 2000 the Company's Board of Directors authorized a two for one
stock split effected as a 100% common stock dividend. The stock split has been
reflected retroactively for all issued common stock.
11
<PAGE>
Item 2. Management's Discussion and Analysis -Continued
As a result of the above, the Company's net income after taxes for the six
months ended March 31, 2000 was $1,733,619, which resulted in basic and diluted
earnings per share of $0.20 and $0.18, respectively, on weighted average shares,
adjusted for the stock split, of 8,796,541 and 9,864,126, respectively, compared
to net income after taxes of $1,818,203 for the six months ended March 31, 1999,
which resulted in basic and diluted earnings per share of $0.21 and $0.20 on
weighted average shares, adjusted for the stock split, of 8,606,714 and
9,230,222, respectively.
Three Month Period ended March 31, 2000 versus March 31, 1999
Sales for the three months ended March 31, 2000 were $19,525,197 compared
to $14,512,768 for the prior years second fiscal quarter, an increase of
$5,012,429 or 35%, comprised of an 80% increase in domestic sales and a 20%
increase in international sales.
The primary forces driving the sales growth was an increase in the
- - Sales of new products introduced during the latter part of fiscal 1999.
- - The opening of new geographic markets.
- - Sales contribution from the Company's Singapore office, which was opened
during the fourth quarter of fiscal 1999.
Unit sales of digital video and conferencing boards for the three months
ended March 31, 2000 increased about 76% to approximately 284,000 as compared to
approximately 161,000 for the prior year. Sales to domestic customers for this
year's second fiscal quarter were 25% of net sales compared to 20% for the prior
year's second fiscal quarter. Sales to international customers were 75% of net
sales for the second fiscal quarter compared to 80% for the comparable second
quarter of the prior fiscal year.
Gross profit for the quarter was $3,997,947 as compared to $4,035,353 for
the prior fiscal year's second quarter. The gross profit percentage was 20% for
the three months ended March 31, 2000 compared to 28% for the three months ended
March 31, 1999. The fluctuation in margins can be attributed to:
- - Slow take off of the digital TV market
- - Larger sales mix of lower margin product
- - Decline in the Euro exchange rate.
12
<PAGE>
Item 2. Management's Discussion and Analysis -Continued
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/
2000 1999 Increase 1999 1998 (Decrease)
---- ---- ----------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales & Promotional $2,087,662 1,387,423 $700,239 10.7% 9.6% 1.1%
Customer Support 126,031 116,687 9,344 .6% .8% (.2%)
Product Handling 192,039 154,675 37,364 1.0% 1.0% -
General & Admin 781,925 629,600 152,325 4.0% 4.4% (.4%)
------- ------- ------- --- --- ---
Total $3,187,657 $2,288,385 $899,272 16.3% 15.8% .5%
</TABLE>
As a percentage of sales, Selling, General and Administrative expenses for the
three months ended March 31, 2000 increased by .5% when compared to the second
quarter of the prior fiscal year. Declines in Customer Support, and General and
Administrative expenses of .6% were offset by a 1.1% increase in Sales and
Promotional expense. Represented in dollars, Selling General and Administrative
expenses increased $899,272 over the comparable period of the last fiscal year.
The increase in sales and promotional expense of $700,239 was mainly due to:
- - Higher commission attributable to increased sales.
- - Increased sales and marketing personnel.
- - Sales and marketing expenses of the Company's Singapore office.
- - Increased European marketing activities.
- - Increased Latin America marketing activities.
Customer Support and Product Handling increased $9,344 and $37,364
respectively. Customer Support costs increased due to additional staff required
to maintain a high level of customer service in support of the Company's
expanding worldwide customer base. Increased Product handling costs was a
function of greater shipment volume to customers.
The increase in General and Administrative expenses of $ 152,325 was primarily
due to:
- - Contractual salary increases for senior executives.
- - Higher professional fees for investment, tax and litigation advice.
- - General and administrative expenses of the Company's Singapore office.
Research and development expenses increased $74,691 or approximately 26%.
The increase was due to engineering and development costs of our Singapore
office, increased personnel and increased material for new product prototypes.
13
<PAGE>
Item 2. Management's Discussion and Analysis -Continued
The Company had net other expenses for the three months ended March 31,
2000 of $107,971 compared to net other expenses for the prior comparable period
of $71,252. The increase in net other expense 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 $85,000, or an effective tax rate of 22% for
the three months ended March 31, 2000 compared to $525,000 or an effective tax
rate of 38% for the three months ended March 31, 1999. Effective October 1,
1999, the Company restructured its foreign operations. The result of the
restructuring eliminated the foreign sales corporation and established a new
Luxembourg corporation, which will function as the entity which services the
Company's European customers. The Company's tax provision for the three months
ended March 31, 2000 was based on this new structure
On February 10, 2000 the Company's Board of Directors authorized a two for one
stock split effected as a 100% common stock dividend. The stock split has been
reflected retroactively for all outstanding common stock.
As a result of the above, the Company's net income after taxes for the
three months ended March 31, 2000 was $257,464, which resulted in basic and
diluted earnings per share of $0.03, on weighted average shares, adjusted for
the stock split, of 8,819,900 and 9,932,333, respectively, compared to net
income after taxes of $865,552 for the three months ended March 31, 1999, which
resulted in basic and diluted earnings per share of $0.10 and $0.09, on weighted
average shares, adjusted for the stock split, of 8,618,402 and 9,270,372,
respectively.
Since the Company sells primarily to the consumer market, the Company has
experienced certain revenue trends. 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, 1999 and September 30, 1998. In addition, the Company's
international sales, mostly in the European market, were 73%, 72% and 66% of
sales for the years ended 1999, 1998 and 1997, respectively. 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 continues to target a wide a range
of customer types in order to moderate the seasonality of retail sales.
14
<PAGE>
Liquidity and Capital Resources
The Company's cash, working capital and stockholders' equity position is
disclosed below:
March 31, 2000 September 30, 1999
-------------- ------------------
Cash $ 3,543,620 $ 6,122,922
Working capital 14,103,687 12,533,310
Stockholders' equity 15,480,710 13,322,091
The significant items of cash provided by and cash (consumed) for the six month
period ended March 31, 2000 are detailed below:
<TABLE>
<CAPTION>
<S> <C>
Net income (adjusted for non cash items), excluding deferred tax benefits $ 1,920,086
Change in deferred tax assets 11,195
Increase in investment for current assets (3,291,806)
Increase in other assets (414,358)
Cash expended for reduction in current liabilities-net (899,068)
Purchase of Property, Plant & Equipment (289,350)
Proceeds from the exercise of options 383,999
</TABLE>
Net cash of $2,673,951 consumed by operating activities was primarily due
to cash invested in current assets of $3,291,806, primarily receivables and
inventory, cash invested in other assets of $414,358, and cash used for the
reduction of current liabilities of $899,068 offset partially by the Company's
net income, adjusted for non cash items, of $1,920,086 and a change in deferred
tax assets of $11,195.
Cash of $289,350 was used to purchase fixed assets. The exercise of stock
options provided a cash source of $383,999.
The Company's credit facility expired on February 28, 1998. The Company has
chosen not to renew the loan facility. The Company has reached an agreement with
Chase Manhattan Bank for a new $6,500,000 credit facility. The facility allows
the Company, at its option, to borrow at the prime rate or 1.25% above the
London Interbank Offered Rate "LIBOR". The facility is secured by the assets of
the Company, and expires on March 31, 2001.
On November 8, 1996, the Company approved a stock repurchase program. The
Company has repurchased on a basis adjusted for the stock split, 428,600 shares
for $1,267,129 at an average purchase price of approximately $2.955 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.
Inflation
While inflation has not had a material effect on the Company's operations
in the past, there can be no assurance that the Company will be able to continue
to offset the effects of inflation on the costs of its products or services
through price increases to its customers without experiencing a reduction in the
demand for its products; or that inflation will not have an overall
15
<PAGE>
effect on the computer equipment market that would have a material affect on the
Company.
Effect of New Accounting Pronouncements
Investment Derivatives and Hedging Activities Income
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
("SFAS 133"), Accounting for Derivative Investments and Hedging Activities
Income. SFAS 133 is effective for transactions entered into after June 15, 2000.
SFAS 133 requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of the derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designed as part of the hedge transaction and the type
of hedge transaction. The ineffective portion of all hedges will be recognized
in earnings. The Company is in the process of determining the impact that the
adoption of SFAS 133 will have on its results of operations and financial
position.
Year 2000
Many computer systems were not designed to handle dates beyond the year 1999.
The Company evaluated the effect of Year 2000 issues relating to its internal
computer systems and has concluded that its system was not Year 2000 compliant.
In recognition of this, the Company purchased and installed new software and
upgraded its computer hardware during fiscal 1999. Testing was performed in
house by Company personnel, with assistance from an outside consultant. The
hardware upgrades and the implementation of new software began in January 1999.
The new system was fully operational on October 1, 1999. The cost to the Company
to become Year 2000 compliant was approximately $150,000, which was funded
through internally generated cash flow, capitalized to fixed assets and will be
amortized over a period as prescribed by generally accepted accounting
principles.
The Company has been advised by its vendor that the Company's phone system,
installed during fiscal 1998, is Year 2000 compliant. The Company's facility
security system was upgraded during fiscal 1999 and the Company has been advised
by its vendor that such system is Year 2000 compliant.
During fiscal 1999, the Company sent Year 2000 questionnaires to third
parties the Company does business with in order to identify, if possible, the
status of the third parties' Year 2000 readiness. The Company received a
majority of responses back by the close of the 1999 fiscal year. Although the
responses showed that these third parties were either Year 2000 compliant or
working to resolve their Year 2000 compliance issues, 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. The Company continues to monitor the readiness of third
parties we currently due business with and look to procure new third parties who
are year 2000 compliant in an effort minimize the risk to the Company.
The Company has a contingency plan to respond to the possible effects the
Year 2000 problem has on third parties that are important to the Company's
operations. The Company has
16
<PAGE>
Year 2000- continued
communicated with its critical suppliers, vendors, customers, utilities,
financial institutions and telecommunication providers with whom it does
significant business to identify any Year 2000 issues. The Company will continue
to communicate with and review the progress of these third party enterprises in
resolving their Year 2000 issues. The ability to accurately assess the Company's
third parties' readiness is dependent in large part upon the reliability and
completeness of their representations.
To date, the Company has not experiences any Year 2000 issues.
Market Risks
Since the Company has extensive sales to European customers, the Company is
exposed to market risks resulting from the fluctuations in the foreign currency
exchange rates to the dollar. The Company attempts to reduce these risks by
utilizing foreign exchange hedging contracts.
The value of the Euro and British Pound against the dollar can affect the
Company's financial results. Changes in exchange rates may positively or
negatively affect the Company's revenues (as expressed in U.S. dollars), gross
margins, operating income and retained earnings. Where it deems prudent, the
Company engages in hedging programs aimed at limiting, in part, the impact of
currency fluctuations. Primarily selling foreign currencies through window
contracts, the Company attempts to hedge its foreign sales against currency
fluctuations.
These hedging activities provide only limited protection against currency
exchange risks. Factors that could impact the effectiveness of the Company's
programs include volatility of the currency markets and availability of hedging
instruments. The contracts the Company procures are specifically entered into to
as a hedge against existing or anticipated exposure. The Company does not enter
into contracts for speculative purposes. Although the Company maintains these
programs to reduce the impact of changes in currency exchange rates, when the
U.S. dollar sustains a strengthening position against the currencies in which
the Company sells it products, the Company's revenues can be adversely affected.
Special Note Regarding Forward Looking Statements
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
following: the Company's ability to manage growth; the risks associated with
successfully integrating acquired businesses; the risks associated with
dependence on resellers, contract manufacturers and other third-party
relationships; the uncertainty of continued market acceptance of PC-based video
products; the Company's highly competitive industry and rapid
17
<PAGE>
technological change within the Company's industry; the risks associated with
development and introduction of new products; the need to manage product
transitions; the risks associated with product defects and reliability problems;
the risks associated with single source suppliers; the uncertainty of patent and
proprietary technology protection and reliance on technology licensed from third
parties; the risks of third party claims of infringement; the Company's
dependence on retention and attraction of key employees; the risks associated
with future acquisitions; the risks associated with international licensing and
operations; general economic and business conditions; and other factors
referenced in this Report.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
There are no new events to report subsequent to the disclosures contained
in the Company's September 30, 1999 Form 10K.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on form 8-K
None
18
<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 15, 2000 By /s/ Kenneth Plotkin
------------- -------------------------
KENNETH PLOTKIN
Vice President and
Chief Executive Officer
Date: May 15, 2000 By /s/ Gerald Tucciarone
------------ -------------------------
GERALD TUCCIARONE
Treasurer and Chief
Financial Officer
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000930803
<NAME> Hauppauge Digital, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1.000
<CASH> 3,543,620
<SECURITIES> 0
<RECEIVABLES> 9,316,657
<ALLOWANCES> 165,000
<INVENTORY> 13,588,630
<CURRENT-ASSETS> 27,610,112
<PP&E> 1,525,568
<DEPRECIATION> (633,115)
<TOTAL-ASSETS> 28,987,135
<CURRENT-LIABILITIES> 13,506,425
<BONDS> 0
0
0
<COMMON> 92,909
<OTHER-SE> 15,387,801
<TOTAL-LIABILITY-AND-EQUITY> 28,987,135
<SALES> 41,568,846
<TOTAL-REVENUES> 41,568,846
<CGS> 32,262,974
<TOTAL-COSTS> 7,033,684
<OTHER-EXPENSES> 23,569
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,248,619
<INCOME-TAX> 515,000
<INCOME-CONTINUING> 1,733,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,733,619
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.18
</TABLE>
