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, 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 August 7, 2000 8,881,978 shares of .01 par value Common Stock of the
registrant were outstanding, not including treasury shares
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
-----------------------------
<S> <C>
Item 1.Financial Statements Page No.
--------------------------- --------
Condensed Consolidated Balance Sheets-
June 30, 2000 (unaudited) and September 30, 1999 3
Condensed Consolidated Statements of Income-
Nine Months ended June 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Income-
Three Months ended June 30, 2000 and 1999 (unaudited) 5
Condensed Consolidated Statements of Cash Flows-
Nine Months ended June 30, 2000 and 1999 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition 9-17
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risks 17
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal proceedings 18-19
Item 6. Exhibits and Reports on form 8-K 19
SIGNATURES 20
----------
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
------- ---------------------
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
ASSETS 2000 September 30,
(Unaudited) 1999
<S> <C> <C>
----------- ----
CURRENT ASSETS:
Cash and cash equivalents $ 2,585,127 $ 6,122,922
Accounts receivable, net of allowance for doubtful accounts
Of $165,000 and $135,000, respectively 5,451,047 6,973,452
Inventories 11,936,164 12,957,439
Prepaid expenses and other current assets 691,476 407,916
Deferred tax assets 1,166,879 477,074
--------- -------
Total current assets 21,830,693 26,938,803
Property, plant and equipment-net 935,720 718,562
Other non-current assets 840,111 70,219
------- ------
$23,606,524 $ 27,727,584
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY :
CURRENT LIABILITIES:
Accounts payable $ 8,292,035 $ 11,208,777
Accrued expenses 1,215,825 2,698,161
Income taxes payable 300,274 498,555
------- -------
Total current liabilities 9,808,134 14,405,493
--------- ----------
STOCKHOLDERS' EQUITY:
Common stock $.01 par value; 10,000,000 shares authorized, 9,310,578
And 9,089,604 issued as of June 30 , 2000 and September 30, 1999 93,106 91,206
Additional paid-in capital 11,146,065 10,650,605
Retained earnings 3,826,348 3,847,409
Treasury Stock, at cost, 428,600 shares (1,267,129) (1,267,129)
------- ---------- ----------
Total stockholders' equity 13,798,390 13,322,091
---------- ----------
$ 23,606,524 $ 27,727,584
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended June 30,
<S> <C> <C>
2000 1999
(Unaudited) (Unaudited)
----------- -----------
Net Sales $53,291,070 $ 42,923,460
Cost of Sales 43,020,074 31,124,402
---------- ----------
Gross Profit 10,270,996 11,799,058
Selling, General and Administrative Expenses 9,464,076 7,029,837
Research and Development Expenses 1,177,749 879,685
--------- -------
Income from operations (370,829) 3,889,536
Other Income (expense):
Interest income 96,541 153,937
Other, net (163,773) (89,681)
-------- -------
Income(loss) before income tax expense (benefit) (438,061) 3,953,792
Income tax expense (benefit) (417,000) 1,470,000
-------- ---------
Net income (loss) $(21,061) $ 2,483,792
======== ===========
Net income per share-basic $ 0.00 $ 0.29
Net income per share-diluted $ 0.00 $ 0.26
======== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Net Sales $11,722,224 $13,353,693
Cost of Sales 10,757,100 9,598,877
---------- ---------
Gross Profit 965,124 3,754,816
Selling, General and Administrative Expenses 3,193,217 2,432,138
Research and Development Expenses 414,924 353,429
------- -------
Income (loss) from operations (2,643,017) 969,249
Other Income (expense):
Interest income 23,838 59,790
Other, net (67,501) (15,450)
------- -------
Income (loss) before income tax expense (benefit) (2,686,680) 1,013,589
Income tax expense (benefit) (932,000) 348,000
-------- -------
Net income (loss) $(1,754,680) $ 665,589
=========== ==========
Net income (loss) per share-basic $ (0.20) $ 0.08
Net income (loss) per share-diluted $ (0.20) $ 0.07
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Nine Months Ended June 30,
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income, (loss) $ (21,061) $ 2,483,792
============ ============
Adjustments to reconcile net income to net cash
(Used in) provided by operating activities:
Depreciation and amortization 185,369 123,666
Provision for uncollectible accounts receivable 30,000 25,000
Deferred tax benefits (689,805) (152,030)
Other non cash items 50,512 2,400
Changes in current assets and liabilities:
Accounts receivable 1,492,405 1,181,409
Inventories 1,021,275 (4,176,843)
Prepaid expenses and other assets (283,560) (19,259)
Other assets (15,286) -
Accounts payable and other current liabilities (4,597,359) 862,488
---------- -------
(2,806,449) (2,153,169)
---------- ----------
Net cash (used in) provided by operating activities (2,827,510) 330,623
---------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition, net of cash acquired (803,445) -
Purchases of property, plant and equipment (353,698) (340,670)
-------- --------
Net cash used in investing activities (1,157,143) (340,670)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock - (63,525)
Proceeds from the exercise of common stock options 446,858 140,739
------- -------
Net cash provided by financing activities 446,858 77,214
------- ------
Net (decrease), increase in cash and cash equivalents (3,537,795) 67,167
Cash and Cash Equivalents, beginning of period 6,122,922 6,281,852
--------- ---------
Cash and Cash Equivalents, end of period $ 2,585,127 $ 6,349,019
=========== ============
SUPPLEMENTAL DISCLOSURES:
Income taxes paid $ 414,677 $ 1,328,615
=========== ============
</TABLE>
See accompanying notes to condensed 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. 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 nine month period ended June 30, 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 nine month period ended June 30,
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:
June 30, September 30,
2000 1999
---- ----
Component Parts $ 3,618,078 $ 4,875,940
Work in Progress 389,287 494,285
Finished Goods 7,928,799 7,587,214
--------- ---------
$ 11,936,164 $ 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:
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net income per share - continued
Three Months Ended
June 30,
2000 1999
---- ----
Weighted average shares outstanding-basic 8,874,211 8,641,434
Number of shares issued on the assumed
Exercise of stock options - 894,950
--------- -------
Weighted average shares outstanding-diluted 8,874,211 9,536,384
--------- ---------
Nine Months Ended
June 30,
2000 1999
---- ----
Weighted average shares outstanding-basic 8,822,336 8,618,288
Number of shares issued on the assumed
Exercise of stock options - 667,260
--------- -------
Weighted average shares outstanding-diluted 8,822,336 9,285,548
--------- ---------
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.
Options to purchase 1,462,226 shares of common stock were outstanding as of June
30, 2000, but were not included in the computation of diluted earnings per share
because they were anti-dilutive.
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.
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company's tax provision reflects, for the three and nine months ended
June 30, 2000, this new structure.
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 . BUSINESS ACQUISITION
On June 1, 2000 the Company acquired certain assets of EsKape Labs Inc.
("EsKape"), a California based company specializing in designing and
manufacturing television and video products for Apple Macintosh computers. The
purchased assets expands and complements the Company's product line into the
Macintosh market. The cash price for the acquisition, which was accounted for
under the purchase method, was approximately $800,000. The excess of the
acquisition cost over the fair value of identifiable assets acquired will be
amortized on a straight line basis over 10 years.
In addition to the price paid for the acquired assets, the purchase agreement
also call for contingent additoinal consideration as follows:
- For the twelve months commencing June 1, 2000, the purchaser
shall pay to the seller an earn out equal to 16.25% of net sales
of such product, as defined in the purchase agreement, which are
in excess of $4,000,000
- In no event shall an earn out be paid if the net sales for such
period are $4,000,000 or less
- In no event shall the additional consideration exceed $2,600,000
- Any additional consideration due the seller shall be paid in
Hauppauge Stock, valued at $11.50 and subject to customary
adjustments for stock splits, stock dividends and the like. If
the issuance of shares in payment of the addiitonal consider-
ation results in the seller or its authorized successors owning
more than 5% of the issued and outstanding shares of Hauppauge,
the purchaser may, at its sole discretion, substitute cash for
any portion of the additional consideration which would result
in the seller being the holder of more than 5% of the then out-
standing shares of Hauppauge stock.
The supplemental information below summarizes, on a pro forma basis, the
companies results for the nine months ended June 30, 2000 and June 30, 1999 had
the companies combined at the beginning of each period presented.
Nine months ended June 30,
2000 1999
---- ----
Net sales 53,409,268 43,541,148
Net income (loss) (275,502) 1,756,694
Earnings (loss) per share
Basic (0.03) 0.20
Diluted (0.03) 0.19
Pro forma net income (loss) may not be indicative of actual results,
primarily because the pro forma results are historical results of the acquired
entity and do not reflect any cost savings that may be obtained from the
integration and elimination of redundant functions.
NOTE 7. 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
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 . PROSPECTIVE ACCOUNTING CHANGES-CONTINUED
133 is effective for transactions entered into after October 1, 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
---------------------
Nine Month Period ended June 30, 2000 versus June 30, 1999
----------------------------------------------------------
Sales for the nine months ended June 30, 2000 were $ 53,291,070 compared to
$42,923,460 for nine months ended June 30, 1999, an increase of $10,367,610 or
24%, comprised of a 40% increase in domestic sales and a 14% increase in
European 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.
Unit sales of digital video and conferencing boards for the nine months
ended June 30, 2000 increased 61% to approximately 752,000 as compared to
approximately 466,000 for the prior year. Sales to domestic customers for the
nine month period were 28% of net sales for the current period and 25% for the
prior comparable period. Sales to international customers were 72% of net sales
for the current period compared to 75% for the comparable prior period .
Gross profit for the nine month period was $10,270,996 compared to
$11,799,058 for the prior fiscal year, resulting in a decrease of $1,528,062.
The gross profit percentage was 19% for the current period compared to 27% for
the prior comparable period. Factors in the decrease in margins include:
- A $1,000,000 reserve for certain excess inventory related to the
Company's digital television receiver products
- Larger sales mix of lower margin product
- Decline in the Euro exchange rate.
<PAGE>
Item 2. Management's Discussion and Analysis-continued
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/
2000 1999 Increase 2000 1999 (Decrease)
---- ---- ----------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales & Promotional $5,934,385 $4,367,817 $1,566,568 11.1% 10.2% .9%
Customer Support 370,186 327,303 42,883 .7% .8% (.1%)
Product Handling 662,711 488,302 174,409 1.3% 1.1% .2%
General & Admin 2,496,794 1,846,415 650,379 4.7% 4.3% .4%
--------- --------- ------- --- --- --
Total $9,464,076 $7,029,837 $2,434,239 17.8% 16.4% 1.4%
</TABLE>
As a percentage of sales, Selling, General and Administrative expenses for the
nine months ended June 30, 2000 increased by 1.4% when compared to the prior
comparable period. Represented in dollars, Selling General and Administrative
expenses increased $2,434,239 over the comparable prior year's nine month
period.
The increase in sales and promotional expense of $1,566,568 was mainly due to :
- Higher commission attributable to increased sales
- Increased European marketing activities
- Compensation costs for Singapore office and EsKape Labs
personnel and increased personnel in the marketing department
- Increased cost of European sales offices
- Higher trade show costs.
Customer Support and Product Handling expenses increased $42,883 and
$174,409 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 $ 650,379 was primarily
due to :
- Hiring of Corporate in house counsel
- Increased rent due to opening of distribution center in Ireland
- Contractual salary increases for senior executives
- Administrative costs of the Singapore office and EsKape Labs
- Higher professional fees for investment, tax and litigation
advice.
Research and development expenses increased $298,064 or approximately 34%.
The increase was due to engineering and development costs of our Singapore
office and additional engineering personnel required to support the development
of existing and future EsKape Labs product.
<PAGE>
Item 2. Management's Discussion and Analysis-continued
------------------------------------------------------
The Company had net other expenses for the nine months ended June 30, 2000
of $67,232 compared to net other income for the prior year of $64,256. 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.
The Company recorded an income tax benefit of $417,000 for the nine months
ended June 30, 2000 compared to a tax provision of $1,470,000 for the nine
months ended June 30, 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 nine months ended June 30, 2000 was based on
this new structure. As a result of losses attributed to domestic operations, the
tax benefit derived from domestic losses taxed at a 38% effective rate offset
the taxes due on income attributable to the European operation which were taxed
at an effective tax rate of 17%.
As a result of the above, the Company incurred a net loss after taxes for
the nine months ended June 30, 2000 of $21,061, which resulted in basic and
diluted per share results of $0.00, on weighted average basic and diluted of
shares of 8,822,336, compared to net income after taxes of $2,483,792 for the
nine months ended June 30, 1999, which resulted in basic and diluted earnings
per share of $0.29 and $0.27 on weighted average shares, adjusted for the stock
split, of 8,618,288 and 9,285,548, respectively. Options to purchase 1,462,226
shares of common stock were outstanding as of June 30, 2000, but were not
included in the computation of diluted earnings per share because they were
anti-dilutive
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.
Three Month Period ended June 30, 2000 versus June 30, 1999
-----------------------------------------------------------
Sales for the three months ended June 30,2000 were $11,722,224 compared to
$13,353,693 for the prior year's second fiscal quarter, a decrease of $1,631,469
or 12%, comprised of a 17% decrease in domestic sales and a 16% decrease in
European sales offset partially by an increase in Asian sales.
The primary forces causing the decrease were:
- Continued strength of the United States dollar in relation to
the Euro
- Seasonal slowdown of analog boards in the European market
- Slower than expected acceptance of digital TV tuner products.
<PAGE>
Item 2. Management's Discussion and Analysis-continued
------------------------------------------------------
Unit sales of digital video and conferencing boards for the three months
ended June 30, 2000 increased about 19% to approximately 166,000 as compared to
approximately 139,000 for the prior year. Sales to domestic customers for this
year's third fiscal quarter were 28% of net sales compared to 30% for the prior
year's second fiscal quarter. Sales to international customers were 72% of net
sales for the second fiscal quarter compared to 70% for the comparable quarter
of the prior fiscal year.
Gross profit for the quarter was $965,124 as compared to $3,754,816 for the
prior fiscal year's third quarter. The gross profit percentage was 8% for the
three months ended June 30, 2000 compared to 28% for the three months ended June
30, 1999. Factors in the decrease in margins include:
- A $1,000,000 reserve for certain excess inventory related to the
Company's digital television receiver products
- Larger sales mix of lower margin product
- Decline in the Euro exchange rate
- Fixed overhead absorbed over lower sales volume.
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/
2000 1999 Increase 2000 1999 (Decrease)
---- ---- ----------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales & Promotional $1,815,109 1,519,556 $295,553 15.4% 11.3% 4.1%
Customer Support 117,622 113,854 3,768 1.0% .9% .1%
Product Handling 257,988 207,398 50,590 2.2% 1.6% .6%
General & Admin 1,002,498 591,330 411,168 8.6% 4.4% 4.2%
----------- ------- -------- ----- ----- ----
Total $3,193,217 $2,432,138 $761,079 27.2% 18.2% 9.0%
</TABLE>
As a percentage of sales, Selling, General and Administrative expenses for the
three months ended June 30, 2000 increased by 9.0% when compared to the third
quarter of the prior fiscal year, which was the result of increased SG&A
absorbed over lower sales. Represented in dollars, Selling General and
Administrative expenses increased $761,079 over the comparable period of the
last fiscal year.
The increase in sales and promotional expense of $295,553 was mainly due to :
- Compensation costs for Singapore office and EsKape Lab personnel
and increased personnel in marketing department
- Increased cost of German and UK sales offices
- Higher trade show costs.
Customer Support and Product Handling increased $3,768 and $50,590
respectively. Increased Product handling costs was a function of greater
shipment volume to customers
<PAGE>
Item 2. Management's Discussion and Analysis-continued
------------------------------------------------------
The increase in General and Administrative expenses of $ 411,168 was primarily
due to :
- Contractual salary increases for senior executives
- Hiring of Corporate in house counsel
- Increased rent due to opening of distribution center in Ireland
- Contractual salary increases for senior executives
- Administrative costs of the Singapore office and EsKape Lab
- Higher professional fees for investment, tax and litigation
advice.
Research and development expenses increased $61,495 or approximately 17%.
The increase was due to engineering and development costs of our Singapore
office and additional engineering personnel required to support the development
of existing and future EsKape Labs product.
The Company had net other expenses for the three months ended June 30, 2000
of $43,663 compared to net other income for the prior comparable period of
$44,340. 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.
The Company recorded an income tax benefit of $932,000 for the quarter
ended June 30, 2000 compared to a tax provision of $348,000 for the three months
ended June 30, 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 June 30, 2000 was based on this new
structure.
As a result of the above, the Company incurred a net loss after taxes for
the three months ended June 30, 2000 of $1,754,680, which resulted in basic and
diluted loss per share of $0.20 on weighted average basic and diluted shares of
8,874,211, compared to net income after taxes of $665,589 for the three months
ended June 30, 1999, which resulted in basic and diluted earnings per share of
$0.08 and $0.07, on weighted average shares, adjusted for the stock split, of
8,641,434 and 9,536,284, respectively. Options to purchase 1,462,226 shares of
common stock were outstanding as of June 30, 2000, but were not included in the
computation of diluted earnings per share because they were anti-dilutive.
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.
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
<PAGE>
Item 2. Management's Discussion and Analysis-continued
------------------------------------------------------
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.
Liquidity and Capital Resources
-------------------------------
The Company's cash, working capital and stockholders' equity position is
disclosed below:
June 30, 2000 September 30, 1999
------------- ------------------
Cash $ 2,585,127 $ 6,122,922
Working capital 12,022,559 12,533,310
Stockholders' equity 13,798,390 13,322,091
The significant items of cash provided by and cash (consumed ) for the nine
month period ended June 30, 2000 are detailed below:
<TABLE>
<CAPTION>
<S> <C>
Net income (adjusted for non cash items), excluding deferred tax benefits $ 244,820
Change in deferred tax assets (689,805)
Decrease in investment for current assets 2,230,120
Increase in other assets (15,286)
Cash expended for reduction in current liabilities-net (4,597,359)
Acquisition of EsKape (803,445)
Purchase of Property, Plant & Equipment (353,698)
Proceeds from the exercise of options 446,858
</TABLE>
Net cash of $ 2,827,510 consumed by operating activities was primarily due
to cash disbursed for the payment of current liabilities of $ 4,597,359 and an
increase in deferred taxes of $689,805, partially offset by cash generated by
the reduction in current assets of $2,230,120 and net income adjusted for non
cash items of $244,820. Other items of cash consumption included $803,445 for
the EsKape acquisition and $353,698 used to purchase fixed assets. The exercise
of stock options provided a cash source of $446,858.
The Company's credit facility with a bank expired on February 28, 1998. The
Company has chosen not to renew the loan facility. The Company has signed an
agreement on July 12, 2000 with Chase Manhattan Bank, who will provide the
Company with a $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, its internally
generated cash flow and its line of credit will be sufficient to satisfy the
Company's anticipated operating needs for at least the ensuing twelve months.
<PAGE>
Inflation
---------
While inflation has not had a material effect on the Company's operations
in the past, there can be no assurance that the Company will be able to continue
to offset the effects of inflation on the costs of its products or services
through price increases to its customers without experiencing a reduction in the
demand for its products; or that inflation will not have an overall effect on
the computer equipment market that would have a material 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 October 1,
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.
<PAGE>
Year 2000-continued
-------------------
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 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 experienced any Year 2000 issues.
Item 3. Quantitative and Qualitative Disclosures about Market Risks 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
<PAGE>
Special Note Regarding Forward Looking Statements-continued
-------------------------------------- --------------------
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
------ -----------------
In January 1998, Advanced Interactive Incorporated ("AII") contacted the
Company and attempted to induce the Company to enter into a patent license or
joint venture agreement with AII relative to certain of the Company's products.
AII alleged that such products infringe U.S. Patent No.4,426,698 (the "AII
Patent"). At such time, the Company's engineering staff analyzed the AII Patent
and determined that the Company's products did not infringe any such patent.
Accordingly, the Company rejected AII's offer.
On October 6, 1998, the Company 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 (the "District Court"), alleging that the
certain of the Company's products infringed on certain patent rights allegedly
owned by the plaintiff (the "Complaint"). The Complaint sought unspecified
compensatory and statutory damages with interest. The Company denied such
allegations and vigorously defended this action. On December 22, 1998, the
Company filed its answer (the "Answer"). Among other things, pursuant to the
Answer, the Company denied that its products infringed AII's patent rights and
asserted certain affirmative defenses. In addition, the Answer included a
counterclaim challenging the validity of AII's alleged patent rights. On March
5, 1999, the Company joined a Motion for Partial Adjudication of Claim
Construction Issues, filed by one of the multiple defendants. The Motion
provided the defendants' interpretation of certain limitations of the claims at
issue. On February 17, 2000, the District Court granted the Motion en toto.
On June 20, 2000, AII and the Company, inter alia, entered into an Agreed Motion
to Entry of Judgment, where AII stipulated that based on the District Court's
claim construction, certain claim elements in the claims at issue were not
present in the Company's accused products. On June 26, 2000, the District Court
granted the Agreed Motion and directed a Final Judgment of Non-infringement as
to the Company.
On July 25, 2000, AII filed a Notice of Appeal with the U.S. Court of Appeals
for the Federal Circuit, appealing the District Court's Order granting the
Motion for Partial Adjudication of Claim Construction Issues and Order entering
Final Judgment of Noninfringement.
<PAGE>
Item 1 Legal Proceedings-continued
------ ---------------------------
Notwithstanding the foregoing, because of the uncertainties of litigation, no
assurances can be given as to the outcome of AII's appeal. It is possible that
the U.S. Court of Appeals for the Federal Circuit may reverse the District's
Court's rulings and remand the case back to the District Court. In such an
event, and if the Company were not to prevail in the remanded litigation, the
Company 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
the Company, including, but not limited to, its operations and financial
condition, the Company believes that, if it is held that the Company's products
infringe AII's patent rights, the Company 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 the Company would
be successful in these attempts. At the present time, the Company can not assess
the possible cost of designing and implementing a new system or obtaining rights
from AII.
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: August 10, 2000 By: /s/ Kenneth Plotkin
------------------------------
KENNETH PLOTKIN
Vice President and
Chief Executive Officer
Date: August 10, 2000 By:/s/ Gerald Tucciarone
------------------------------
GERALD TUCCIARONE
Treasurer and Chief
Financial Officer
<PAGE>
