SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(x) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
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( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-13550
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HAUPPAUGE DIGITAL, INC.
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(Name of small business issuer in its charter)
Delaware 11-3227864
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
91 Cabot Court, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (631) 434-1600
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Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
$.01 par value Common Stock
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Exchange Act of 1934 during the past twelve
(12) months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to the filing requirements for the past
ninety (90) days.
YES X NO
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ ]
State registrant's revenues for its most recent fiscal year: $66,292,491
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The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 19, 2000 was approximately $12,724,768. Non-affiliates
include all stockholders other than officers, directors and 5% stockholders of
the Company. Market value is based upon the price of the Common Stock as of the
close of business on December 19, 2000 which was $2.00 per share as reported by
NASDAQ.
As of December 18, 2000, the number of shares of Common Stock outstanding was
8,882,976 (exclusive of treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Part III which includes Item 10 (Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the Exchange Act), Item 11
(Executive Compensation), Item 12 (Security Ownership of Certain Beneficial
Owners and Management), and Item 13 (Certain Relationships and Related
Transactions) will be incorporated in the Company's Proxy Statement to be filed
within 120 days of September 30, 2000 and are incorporated herein by reference.
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PART I
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 others, those discussed
under the subsection entitled "Risk Factors" under Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations. In
addition to statements which explicitly describe such risks and uncertainties,
readers are urged to consider statements labeled with the terms "believes,"
"belief," "expects," "plans," "anticipates," or "intends," and derivations
thereof and similar words to be uncertain and forward-looking. All cautionary
statements made in this Form 10-K should be read as being applicable to all
related forward-looking statements wherever they appear.
Item 1. BUSINESS
Hauppauge Digital Inc. (the "Company"), through its subsidiaries, develops,
manufactures, markets and sells products for the Personal Computer market which
allow PC users to watch TV in a resizable window on their PC screen. The
Company's main product line, called the WinTV(R), connects directly to cable TV,
broadcast TV or satellite TV receivers, and is sold primarily through computer
retail stores in the U.S., Europe and Asia. All references herein to the Company
include the Company, its wholly owned subsidiaries and their subsidiaries,
unless otherwise indicated or the context otherwise requires.
Management believes the most common reason for using the WinTV is the
entertainment and information value derived by allowing PC users to watch either
important or otherwise interesting TV shows while they work on their PC's. For
example, a stockbroker can have a financial TV program in a small window on
their PC screen while seeing stock quotes in another window. An end user who
likes to watch music video shows on TV can have the music video TV show in one
window on their PC screen, while surfing the Internet, working on e-mail, or
performing any other PC activity.
In fiscal 2000, the Company shipped its two millionth WinTV board.
Management believes that the Company's sales have grown over the last five years
as a result of, among other things, PC users spending more time working with
their PC's on such activities as Internet surfing and e-mail writing. Management
believes that when a PC user spends time working with their PC, they do not want
to miss the important or entertaining TV shows they would typically watch on a
standard TV set.
In addition to allowing users to watch TV on a PC, the WinTV boards can
also receive certain data that maybe transmitted along with the TV signal. The
transmission of data along with a TV signal is called "Data Broadcasting". As
the United States and Europe transition from analog TV to digital TV, the data
rates supported by Data Broadcasting are expected to increase to well over 1
million bits per second. With such high data rates, Data Broadcasting has the
ability to create new business opportunities for both TV broadcasters and the
Company.
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The United States is in a multi-year transition period from analog to
digital TV. Management believes that the demand for the Company's digital TV
products will grow as: 1) more digital TV stations come "on-line", 2) the amount
of compelling and original digital TV programming increases, and 3) as new
services which use the unique characteristics of digital TV data broadcasts are
introduced. In Europe, similar market dynamics are present, though the standards
and technical characteristics are different from the U.S. market.
The Company markets its products through computer retailers, computer
products distributors and original equipment manufacturers ("OEMs"). Computer
retailers typically stock the products on their shelves and sell them to end
users for installation in their own PC's. Distributors typically stock and sell
the products to retail stores and value added resellers (VARs), while OEMs
typically purchase TV and video conferencing boards to incorporate them into
their own products, which are then ultimately sold to end users.
Company Strategy
Since its entry into the PC digital video market in 1991, the Company has
become a leading provider by focusing on four primary strategic fronts:
innovating and diversifying its product line by developing and exploiting core
technologies; forging strategic relationships with key industry players;
expanding its worldwide sales and distribution channels; and maintaining and
improving profit margins.
Significant product lines include a wide range of analog TV receiver boards
covering a 3:1 range in price across most major world TV standards; digital TV
receiver boards for terrestrial transmissions in the U.S. and satellite
transmissions in Europe; external TV products based on the USB (Universal Serial
Bus); video capture boards for origination and editing of video streams for
Internet and other uses; and an overall software architecture with a human
interface that unites all of the product lines.
Management believes that strategic relationships with key suppliers, OEMs,
broadcasters, and Internet and e-commerce solutions providers give the Company
important advantages in developing new technologies and marketing its products.
Working with a variety of other companies allows the Company to leverage its
investment in research and development and minimize time to market.
The Company's sales organization cultivates a variety of distribution
channels, including retail stores, distributors and other resellers, as well as
OEMs which incorporate the Company's products into their own. Management
believes that rapidly developing and growing its worldwide presence gives the
Company an important strategic position, allows it to benefit many times over
from investments in product development, and more firmly establishes the WinTV
brand name in the global market.
Maintaining and improving the Company's profit margins involves, among
other things, outsourcing production for each geographic region to
subcontractors best suited for the type and volume of work, as well as
leveraging worldwide supplier relationships to ensure being the lowest cost
producer in the category. Engineering products for low cost and high flexibility
in production is another important way that technology leadership contributes to
the bottom line.
Products
The WinTV products are designed so that a PC user can watch TV in a
resizable window on a PC video
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monitor during normal computer use. This activity requires operating software to
control functions such as channel change, volume adjustment, freeze frame, and
channel scan. All required functions, such as video digitizing, windowing, color
space conversion and chroma keying, are performed on the WinTV board, in the
external WinTV-USB, or in the operating software. WinTVs include audio functions
so that sound can be heard while watching TV or video. The audio can be
connected to speakers or to a PC's sound card.
In fiscal 2000, the Company's primary products included the following:
- WinTV-Go - a low cost WinTV, for the mass
consumer market
- WinTV-PCI-FM - a single slot internal plug in
board which enables the user to bring TV and broadcast
data to their PC
- WinTV-Primio - only sold in Europe, it is an
enhanced version of the Company's WinTV-Go board
- WinTV-USB - which brings WinTV capabilities to
desktop and laptop computers by connecting
externally through a PC's USB port
Of these products, the WinTV-Go and WinTV-USB were new product
introductions in fiscal 1999, continuing the Company's strategy of rapidly
exploiting new cutting edge technology development.
In fiscal 2000, product development focused in three areas: a new product
family: personal video recorders which are called "WinTV-PVRs", new digital TV
receivers and an update on the Company's existing analog TV product line to
reduce manufacturing costs.
The WinTV-PVR (Personal Video Recorder) product line include both internal
and external TV receivers products which are designed to add the ability to
record TV shows to a PC's hard disk. The TV recording uses a high quality
hardware MPEG 2 encoder built onto the WinTV-PVR device, which makes the
recorded TV shows consume less hard disk space than an uncompressed file while
providing excellent image quality. The WinTV-PVR user can record TV to disk
using a TV scheduler, play back the shows into the WinTV window (resizable on
playback as well as during live viewing and recording), or record the recorded
TV show onto CD- ROM for playback on a home DVD player or a laptop or desktop
PC. In addition to the recording feature, the WinTV-PVR can also pause live TV
and provide instant replay.
The Company also worked on the development of new digital TV receivers for
the U.S. market and for the international markets. The WinTV-HD is expected to
be shipped to the U.S. consumer market mid-2001. The WinTV-Nova, a lower cost
European satellite receiver and a companion device which enables pay TV channels
to be received and decoded, was also shipped internationally early in fiscal
2001.
The Company also developed a new platform, which went into production late
fiscal 2000, for most of its worldwide analog TV receivers. The purpose of this
development was to reduce the cost to build existing models of WinTV boards,
which continue in high volume production.
The acquisition of certain assets of Eskape Labs, late in the third quarter
of fiscal 2000, also added a number of models to the product line. These models
allow Apple Macintosh users to enjoy many of the same features PC users have
enjoyed using WinTVs.
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Current production models
With the line of analog WinTV boards still generating the bulk of the
Company's revenues, the Company has, as of the end of fiscal 2000, roughly 40
different products in the marketplace, ranging from the VCB for video capture
and video conferencing applications, to WinTV-DVB, the Company's digital TV
receiver boards. The Company normally sells between 4 and 8 models into each
geographic market.
The Company's product can be broadly grouped into the following seven
categories:
Personal video recorder products:
The WinTV-PVRs (Personal Video Recorders) include both internal and
external TV receiver products which are designed to add the ability to
record TV shows to a PC's hard disk. The TV recorder uses a high
quality hardware MPEG 2 encoder built onto the WinTV-PVR device, which
makes the recorded TV shows consume less hard disk space while
providing excellent image quality. The WinTV-PVR user can record TV to
disk using a TV scheduler, play the shows back into the WinTV window
(resizable on playback as well as during live viewing and recording),
or record the recorded TV show onto CD-ROM for playback on a home DVD
player or a laptop or desktop PC. In addition to the recording feature,
the WinTV-PVR can also pause live TV and provide instant replay.
Internal PCI-based WinTV boards for analog TV reception:
The WinTV-pci products are single slot internal plug in boards which
connect to cable TV, a satellite TV receiver or a TV antenna and enable
a user to watch TV in a resizable window on their PC monitor.. The
WinTV has a 125 channel cable ready TV tuner with automatic channel
scan and a video digitizer. The video digitizer allows the user to
capture still and motion video images to a hard disk, creating high
impact presentations, and to videoconference over the Internet (using
the supplied Microsoft NetMeeting software). In Europe, the WinTV
products can be used to receive teletext data broadcasts.
The WinTV-Go is a low cost TV receiver, which has all of the features
mentioned above. The WinTV-Go has mono audio. There are models for the
U.S., European and Asian markets.
WinTV-Primio is only sold in Europe and is an enhanced version of the
Company's WinTV-Go board.
The WinTV-dbx model has all of the features of the WinTV-pci models,
plus offers high quality dbx-TV for stereo decoding, and is sold
primarily in the U.S. In Europe, the WinTV-PCI-stereo offers high
quality NICAM stereo audio, a European audio format.
The WinTV-Radio has all the features of the WinTV-dbx and
WinTV-PCI-stereo models, plus adds an FM radio tuner and FM radio
control software. There are models for the U.S., European and Asian
markets.
The WinTV-Theater has all the features of the WinTV-Radio stereo
models, plus adds a built-in Dolby ProLogic Surround sound decoder.
Many prime time TV shows, as well as many sporting events, are
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broadcast using Dolby ProLogic Surround sound. The WinTV-Theater can be
connected to 5 speakers so that the user can get a complete home
theater experience while working at their PC. There are WinTV- Theater
models for the U.S. and European markets.
External WinTV products for analog TV reception:
The WinTV-USB brings TV-in-a-window to both desktop and laptop PCs
equipped with a USB port. The WinTV-USB connects to a PC via a USB port
and is an external device, so the user does not have to open up the PC
during installation. There are two models for the U.S., European and
Asian markets.
Apple Macintosh Compatible Products:
The Eskape Labs product line, consisting of MyTV, MyView, MyCapture and
MyVideo, all connect to Apple Macintosh computers via USB ports. MyTV
has features comparable to WinTV-USB. MyCapture allows the capture of
composite and S-Video source programs to the Macintosh's hard drive,
MyView outputs video clips from the hard drive to composite and S-Video
devices, and MyVideo combines the features of MyCapture and MyView in
one convenient package.
Internal WinTV boards for digital TV reception:
The WinTV-D, marketed in the United States, and the WinTV-DVB, marketed
in most other parts of the World, are PC-based digital TV receivers.
They can decode digital TV transmissions and format the video portion
of the transmission into a window on the PC screen. The WinTV-D and
WinTV-DVB can simultaneously extract data from the digital TV
transmission and send this data to an application which is running in
the PC. For example, there are Data Broadcast services in Europe which
send Internet web pages in a digital TV transmission. The WinTV-DVB can
extract this data and send it to a Web browser such as Internet
Explorer for display.
The ongoing transition to digital broadcast signals in the United
States is intended to enable networks and broadcasters to package data
along with the broadcast digital signal. Called datacasting, this
technique provides for a range of information formats at speeds several
times faster than cable modems. With over 150 stations currently
broadcasting a digital TV signal, and more expected to sign on
throughout the year 2001, customers will be offered a wide range of
digital content, from TV programming to datacasted music, video games
and e-commerce content. In Europe, the growth in digital TV may provide
similar opportunities to mix TV and data.
ImpactVCB boards for OEM video capturing applications:
The Impact Video Capture Board ("ImpactVCB") is a low cost PCI board
for high performance access to digitized video. Designed for PC based
video conferencing and video capturing in industrial applications, the
ImpactVCB features live video in a window, still image capture and a
Microsoft Video for Windows compatible motion video capture driver.
As of the end of fiscal 2000, 8 different ImpactVCB models were in
production, each with different video input and power configurations.
Most of these models have been developed for specific customers under
OEM arrangements.
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DV Wizard-pro for desktop video editing of home video tapes:
The DV Wizard allows the capture of full frame live video from digital
video camcorders or VCRs and stores it to the hard disk so that it can
be digitally edited on a PC. DV Wizard-pro uses the IEEE1394 (Firewire)
technology to connect to these devices. The compression technology used
in the DV Wizard allows the board to capture 60 fields per second,
resulting in more accurate frame-by-frame video editing and more
realistic video playback. The DV Wizard can also output the edited
video clips from the PC's hard drive, which can be recorded on tape by
a digital video camcorder.
The DV Wizard was designed to be used to edit home video tapes, and to
add flair to home videos. It can also be used by corporate marketing
communication departments, training video developers, trade show
demonstration creators, video hobbyists, CD-ROM title producers and
creators of corporate product literature on CD-ROM.
WinTV products which are sold through the computer retail market are
essentially the same as those which are available to the OEM market. The
differences are in the packaging and in the sophistication of the operating
software. The Company's WinTV boards are primarily sold to the retail market and
are also sold in the OEM market. DV Wizard-pro is sold primarily in the retail
market, and VCB video capture boards are primarily sold in the OEM market.
For the international market, the Company has developed a capability for
most WinTV models called teletext decoding. This capability allows the reception
of digital data which is transmitted along with the live TV signal. Though
relatively unknown in the United States, teletext is standard on most European
TV sets. Examples of teletext data transmitted by TV stations include weather
information, travel schedules, stock market data and home shopping services.
Teletext and several newer services are all forms of data broadcasting. The
Company believes that, due to the capability of its products to receive digital
information in PCs, data broadcasting represents a key growth opportunity.
Technology
The Company has developed five generations of WinTV since first introducing
the products in 1991. The first generation of WinTVs put the TV image on the PC
screen using chroma keying, requiring a dedicated "feature connector cable"
between the WinTV and the VGA board. Despite issues with screen resolution, for
the first time a PC user could watch TV in a resizable window on their PC
screen. Initial customers were mostly professional PC users who spent many hours
on their PC's and found having TV in a window on their desktop useful and
entertaining. For example, Management believes PC users involved in financial
markets need to be able to see stock market related TV shows while they work on
their PCs. Video clip capture and teletext capabilities, valued features in
today's models, can also trace their origins to the first WinTV products.
In 1993, the Company invented a technique called "smartlock", which
eliminated the need for, and the installation problems associated with, the
"feature connector cable." In 1994, the Company introduced its "WinTV-Celebrity"
generation of TV tuner boards based on this "smartlock" technology, greatly
improving customer satisfaction. The CinemaPro series of WinTV boards then used
smartlock and other techniques to
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further reduce cost and improve performance.
In June of 1996, the Company introduced the WinTV-PCI line of TV tuner
boards for PCs. These boards were developed to eliminate the relatively
expensive "smartlock" circuitry and memory used on the WinTV- Celebrity and
CinemaPro boards. The WinTV-PCI used a technique called "PCI Push" and was
designed to be used in the emerging Intel Pentium market. These Pentium based
PCs had a new type of system expansion "bus", called the PCI bus, which allowed
data to be moved at a much higher rate than the older ISA bus, which the
previous WinTV generations used. The "PCI Push" technique moves the video image
30 times per second (in Europe the image is moved 25 times a second) over the
PCI bus. In addition to being less expensive to manufacture, the WinTV-PCI had
higher digital video movie capture performance than the previous generations,
capturing video at up to 30 quarter screen frames per second. With this higher
performance capture capability, the WinTV-PCI found new uses in video
conferencing, video surveillance and Internet streaming video applications.
The fourth generation of WinTV boards, introduced in 1999, are digital TV
receivers. The United States and Europe are in a transition period from analog
TV to digital TV. The Company's WinTV-D board, developed during the 1999 fiscal
year and delivered to the market in the beginning of fiscal 2000, is the first
digital TV receiver for the U.S. market which allows PC's to receive and display
digital TV signals, in addition to conventional analog TV signals. The software
to control the digital TV reception is based on the Company's "WinTV-2000"
software, which was developed during 1999. In fiscal 1999, the Company also
introduced the WinTV-DVB board for the European market. This board brings
digital TV to PCs, and is based on the European Digital Video Broadcast
standard. Both the WinTV-D and the WinTV-DVB have the ability to receive special
data broadcasts which some broadcasters may send along with the digital TV
signal, in addition to displaying digital TV in a resizable window. Data
broadcasts on digital TV are transmitted at several million bits per second. The
Company has developed proprietary software which can decode and display some of
these special data broadcasts, and intends to work on standardized reception and
display software, if such broadcasts become standardized.
The fifth generation of WinTV products are the PVR (Personal Video
Recorder) models, developed during fiscal 2000 and introduced to the market in
early fiscal 2001. The WinTV-PVRs (Personal Video Recorders) include both
internal and external TV receiver products which are designed to add the ability
to record TV shows to a PC's hard disk. The TV recorder uses a high quality
hardware MPEG 2 encoder built onto the WinTV-PVR device, which makes the
recorded TV shows consume less hard disk space while providing excellent image
quality. The WinTV-PVR user can record TV to disk using a TV scheduler, play the
shows back into the WinTV window (resizable on playback as well as during live
viewing and recording), or record the recorded TV show onto CD-ROM for playback
on a home DVD player or a laptop or desktop PC. In addition to the recording
feature, the WinTV-PVR can also pause live TV and provide instant replay.
Research and Development
The Company's development efforts are currently focused on extending the
range and features of the PVR products, additional externally attached TV
products, and high-definition digital TV products. The Company is also
developing more highly integrated versions of its hardware products to further
improve performance and cost points, and new versions of its software to add
features, improve ease of use, and provide support for new operating systems.
The Company is also developing additional capabilities in the data broadcasting
field, in the
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e-commerce area, and enhancing the capabilities of its products in the Apple
Macintosh market.
The Company currently has three Research and Development operations: one
based in the Company's New York headquarters, one based in Pleasanton,
California and one based in Singapore. The Company's Singapore R&D team is
mainly focused on external TV products, and on Asian versions of the Company's
products. The Pleasanton, California R&D operation develops products for the
Apple Macintosh computer, while the New York R&D operation is aimed at the
digital receiver market, the PVR models, user interface software and low level
drivers for all PC products.
The technology underlying the Company's products and other products in the
computer industry, in general, is subject to rapid change, including the
potential introduction of new types of products and technologies, which may have
a material adverse impact upon the Company's business. The Company will need to
maintain an ongoing research and development program, and the Company's success,
of which there can be no assurances, will depend in part on its ability to
respond quickly to technological advances by developing and introducing new
products, successfully incorporating such advances in existing products, and
obtaining licenses, patents, or other proprietary technologies to be used in
connection with new or existing products. The Company continues to increase it
research and development expenditures. The Company expended approximately
$1,666,000, $1,257,000 and $808,000 for research and development expenses for
the years ended September 30, 2000, 1999 and 1998. There can be no assurance
that the Company's research and development will be successful or that the
Company will be able to foresee and respond to such advances in technological
developments and to successfully develop other products. Additionally, there can
be no assurances that the development of technologies and products by
competitors will not render the Company's products or technologies
non-competitive or obsolete. See "Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors."
Product Production and Suppliers
The Company designs the WinTV products and also writes the operating
software to be used in conjunction with many versions of the popular
Microsoft(R) Windows(TM) operating system, including Windows98, WindowsMe,
WindowsNT and Windows2000. The Company subcontracts the manufacturing and
assembly of the WinTV boards to independent third parties at facilities in
various countries. The Company monitors the quality of the completed product at
its facilities in Hauppauge, New York, Singapore, and Ireland before packaging
the product and shipping it to customers.
Although certain components essential to the Company's business are
generally available from multiple sources, other key components (including, but
not limited to, TV tuners, video decoder chips and application-specific
integrated circuits (ASICs)) are currently obtained by the Company from single
or limited sources; in addition, these and other key components (including, but
not limited to, DRAM), while currently available to the Company from multiple
sources, are at times subject to industry wide availability and pricing
pressures. Any availability limitations, interruption in supplies, or price
increases relative to these and other components could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, new products introduced by the Company often initially utilize custom
components obtained from only one source until the Company has evaluated whether
there is a need for and subsequently qualifies additional suppliers. In
situations where a component or product utilizes new technologies, initial
capacity constraints may exist until such time as the suppliers' yields have
matured. Components are normally acquired through purchase orders, as is common
in the industry, typically covering the Company's requirements
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for periods from 60 to 120 days. However, the Company continues to evaluate the
need for a supply contract in each situation.
If the supply of a key component to the Company were to be delayed or
curtailed or in the event a key manufacturing vendor delays shipment of
completed products to the Company, the Company's ability to ship products in
desired quantities and in a timely manner could be adversely affected. The
Company's business and financial performance could also be adversely affected,
depending on the time required to obtain sufficient quantities from the original
source or, if possible, to identify and obtain sufficient quantities from an
alternative source. The Company attempts to mitigate these potential risks by
working closely with its key suppliers on product introduction plans, strategic
inventories, coordinated product introductions, and internal and external
manufacturing schedules and levels.
The Company has from time to time experienced significant price increases
and limited availability of certain components that are available from multiple
sources. Any similar occurrences in the future could have a material adverse
effect on the Company's business, operating results and financial condition
Manufacturing is performed by a select group of contract manufacturers.
Product design specifications are provided to insure proper assembly. Contract
manufacturing is either done on a consignment basis, in which the Company
provides all the component parts and pays an assembly charge for each board
produced, or on a turnkey basis, in which all components and labor are provided
by the contract manufacturer, and the manufacturing price the Company is charged
includes parts and assembly costs. The Company continuously monitors the quality
of its selected manufacturers. The Company has qualified five contract
manufacturers and utilizes three. These three contract manufacturers are
presently being utilized to handle the majority of production. If demand were to
increase dramatically, the Company believes additional production could be
absorbed by these and other contract manufacturers.
During fiscal 1998, the Company began producing boards for the majority of
its European sales through a subcontractor in Scotland. The production is done
on a turnkey basis with assembly, testing and rework being handled in Scotland.
The packaging and shipping of the product to customers is being performed at the
Company's Ireland location. By shifting its European production to Europe, the
Company anticipates savings on the production costs and shipping costs of the
boards, in addition to the elimination of duties charged on boards entering
Europe from the United States. In fiscal 1999, the Company added a subcontractor
in Malaysia, who is equipped to assemble domestic and international products.
Finally, in fiscal 2000, the Company added a subcontractor in Hungary, who now
produces a significant amount of its product for the European market.
Customers and Markets
The Company primarily markets the WinTV to the consumer market to allow PC
users to watch their favorite TV shows while they work on their PCs. To reach
this consumer market, the Company has expanded its sales through a network of
computer retailers in the U.S., Europe and Asia. The Company uses both direct
sales to retailers and sales through computer products distributors to service
this market. To attract new PC users in the consumer market, the Company
advertises with and runs special promotions with computer retailers. The Company
actively participates in trade shows to educate and train key computer retail
marketing personnel. Most of the Company's sales and marketing budget is aimed
at the consumer market.
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In addition to the consumer market, the Company markets to the professional
stock brokerage market, where the WinTV is primarily used to display financial
TV shows in a window on a stock brokers workstation while they continue to
operate their financial applications. The Company has sold its WinTV products to
two large financial services information providers for incorporation into their
workstations, and several independent financial institutions. This market
segment is typically project based.
The Company also has sold products to PC OEMs, that either embed a WinTV
product in a PC that they resell, or sell the WinTV as an accessory to its PCs.
Distribution to the Retail Market
During fiscal 2000, net sales to distributors and retailers of the Company
totaled approximately $60,214,000 or 91% of the Company's net sales compared to
approximately $52,398,000 or 89% and $33,008,000 or 85% for the years ended
September 30, 1999 and 1998. The Company has no exclusive distributor or
retailer and sells through a multitude of retailers and distributors, no one of
which accounted for more than 10% of the Company's net sales.
Sales to Original Equipment Manufacturers ("OEMs")
The OEM business is one where a PC manufacturer incorporates the Company's
WinTV board or Impact video conferencing board into a product sold under the
OEM's label. Although no assurances can be made, management believes, but there
can be no assurances, the Company's OEM business is expected to increase in the
next few years. Factors which could impact the expansion of the Company's OEM
business include, among other things, the ability to successfully negotiate and
implement agreements with original equipment manufactures. Management believes,
but there can be no assurances, that FCC regulations mandating the digital
broadcasting of TV signals by the year 2006 will attract consumer interest in
devices, such as those models of the Company's WinTV(R) boards which are
equipped to receive digital TV broadcasts.
The Company's OEM business totaled approximately $6,079,000, $ 6,203,000
and $5,749,000 for the years ended September 30, 2000, 1999 and 1998. The
Company sold product to a variety of OEM customers, none of which accounted for
more than 10% of total sales in any of the three years. Sales to OEM customers
accounted for approximately 9%, 11% and 15% of the Company's net sales for 2000,
1999 and 1998, respectively.
Marketing and Sales
The Company sells both domestically and internationally through Company
sales offices in New York, California, Germany, the United Kingdom, France and
Singapore, plus through independent sales representative offices in the
Netherlands and The People's Republic of China. For the fiscal years ended
September 30, 2000, 1999 and 1998, approximately 29%, 27% and 28% of the
Company's net sales were made within the United States, respectively, while
approximately 71%, 73% and 72% were outside the United States (predominately in
Germany, the United Kingdom, France and the Asia) respectively.
For further information on the Company's geographic segments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in Item 7 and Note 1 to the Consolidated Financial
10
<PAGE>
Statements.
The Company advertises its products in a number of PC magazines
internationally. The Company also participates in retailers' market promotion
programs, such as store circulars, promotions and retail store displays. These
in store promotional programs, magazine advertisements plus a public relations
program aimed at editors of key PC computer magazines and an active web site on
the Internet, are the principal means of getting the product introduced to end
users. The sales rate in the computer retail market is closely related to the
effectiveness of these programs, along with the technical capabilities of the
product itself. The Company also lists its products in catalogs of various mail
order companies and attends various worldwide trade shows.
The Company currently has 8 sales persons located in Europe, 2 sales
persons in the Far East and 4 sales persons in the United States, located in New
York and California. The Company also has 4 manufacturer representatives
retained by it on a non-exclusive basis, who work with customers in certain
domestic geographic areas.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" with reference to a discussion on the impact seasonality
has on the Company's sales.
Foreign Currency Fluctuations
Due to extensive sales to European customers denominated in local
currencies, the Company is a net receiver of currencies other than the U.S.
dollar and as such benefits from a weak dollar and is adversely affected by a
strong dollar relative to the major worldwide currencies, especially the Euro
and British Pound Sterling. Consequently, changes in exchange rates expose the
Company to market risks resulting from the fluctuations in the foreign currency
exchange rates to the U.S. dollar. The Company attempts to reduce these risks by
entering into foreign exchange forward contracts with financial institutions to
protect against currency exchange risks associated with its foreign denominated
accounts receivable.
The strength or weakness of the U.S. dollar against the value of the Euro
and British Pound Sterling impact the Company's financial results. Changes in
exchange rates may positively or negatively affect the Company's revenues, gross
margins, operating income and retained earnings (which are expressed in U.S.
dollars). 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 forward window contracts, the Company attempts to
hedge its foreign sales against currency fluctuations.
As of September 30, 2000, the Company has foreign currency forward
contracts outstanding of approximately $11.3 million for the Euro. The contracts
expire through December 2000. As of September 30, 2000, the Company had
unrecognized gains from foreign currency forward contracts of $319,000.
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 short term impact of changes in currency exchange rates,
when the U.S. dollar sustains a long term strengthening position against the
currencies
11
<PAGE>
in which the Company sells it products, the Company's revenues, gross margins,
operating income and retained earnings can be adversely affected.
Competition
The Company's business is subject to significant competition. Competition
exists from larger and smaller companies that might possess substantially
greater technical, financial, sales and marketing resources than that which the
Company has. The dynamics of competition in this market involve short product
life cycles, declining selling prices, evolving industry standards and frequent
new product introductions. The Company competes in this emerging market against
companies such as ATI Technologies Inc., 3dfx Interactive Inc. and Pinnacle
Systems, Inc., among others. The Company believes that competition from new
entrants will increase as the market for digital video in a PC expands. There
can be no assurances that the Company will not experience increased competition
in the future. Such increased competition may have a material adverse effect on
the Company's ability to successfully market its products.
Though management believes that the delivery of TV via the Internet will
become more popular in the future, it also believes that TV delivered to PC's
via cable, broadcast or satellite will continue to dominate. As the Company's
WinTV products connect directly to cable, broadcast and satellite receivers, and
deliver a higher quality image, management views WinTV as the preferred way to
watch TV on the PC versus the delivery of TV via the Internet.
Patents, Copyrights and Trademarks
With the proliferation of new products and rapidly changing technology,
there has been a significant volume of patents and other intellectual property
rights held by third parties. There are a number of companies that hold patents
for various aspects of the technologies incorporated in some of the PC and TV
industries' standards. Given the nature of the Company's products and
development efforts, there are risks that claims associated with such patents or
intellectual property rights could be asserted against it by third parties. The
Company expects that parties seeking to gain competitive advantages will
increase their efforts to enforce any patent or intellectual property rights
that they may have. The holders of patents from which the Company has not
obtained licenses may take the position that it is required to obtain a license
from them.
If a claimant refuses to offer such a license, or refuses to offer such a
license on terms acceptable to the Company, there is a risk of incurring
substantial litigation or settlement costs regardless of the merits of the
allegations, and regardless of which party eventually prevails. In the event of
litigation, if the Company does not prevail, it may be required to pay
significant damages and/or to cease sales and production of infringing products
and may incur significant defense costs in any event. Additionally, the Company
may need to attempt to design around a given technology, although there can be
no assurances that this would be possible nor economical.
The Company currently uses technology licensed from third parties in
certain of its products. Its business, financial condition and operating results
could be adversely affected by a number of factors relating to these third-party
technologies, including:
- failure by a licensor to accurately develop, timely introduce, promote
or support the technology;
12
<PAGE>
- delays in shipment of products;
- excess customer support or product return costs due to problems with
licensed technology; and
- termination of the Company's relationship with such licensors.
The Company may not be able to protect its intellectual property adequately
through patent, copyright, trademark and other protection. If it fails to
adequately protect its intellectual property, it may be misappropriated by
others, invalidated or challenged, which would materially harm its ability to
sell its products. For example, in the event that the Company was to be issued
any patents, they might not be upheld as valid if litigation over any such
patent were initiated. If the Company is unable to protect its intellectual
property adequately, it could allow competitors to duplicate its technology or
may otherwise limit any competitive technological advantage it may have. Because
of the rapid pace of technological change, the Company believes its success is
likely to depend more upon continued innovation, technical expertise, marketing
skills and customer support and service rather than upon legal protection of its
proprietary rights. However, the Company will aggressively assert its
intellectual property rights when necessary.
Even though the Company independently develops its hardware and software
products, the Company's success will depend, in large part, on its ability to
innovate, obtain or license patents, protect trade secrets and operate without
infringing on the proprietary rights of others. The Company maintains copyrights
on its designs and software programs, but currently has no patent on the
WinTV(R) board and the Company believes that such technology cannot be patented.
On December 27, 1994, the Company's mark, "WinTV(R)", was registered with
the United States Patent and Trademark Office. The Company's "Hauppauge" name
logo is also registered.
See "Legal Proceedings" for a discussion of certain litigation and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Employees
As of September 30, 2000, the Company had 118 employees worldwide,
including its executive officers, all of which are full-time, none of which are
represented by a union.
Corporate Structure
The Company was incorporated in the state of Delaware on August 2, 1994 and
has six wholly owned subsidiaries, Hauppauge Computer Works, Inc., HCW
Distributing Corp., Hauppauge Digital Asia Pte. Ltd., which is incorporated in
Singapore, Hauppauge Digital Europe SARL, which is incorporated in Luxembourg,
Eskape Acquisition Corp, which is incorporated in Delaware and Hauppauge
Computer Works, LTD, a Virgin Islands corporation responsible for handling sales
in Central and South America. Hauppauge Digital Europe SARL is the owner of all
the outstanding shares of Hauppauge Computer Works, GmbH, a German corporation
responsible for directing European marketing efforts, Hauppauge Computer Works
SARL, a French Corporation responsible for sales and marketing efforts in France
and Hauppauge Computer Works LTD, an English corporation which directs the
Company's sales and marketing efforts in the United Kingdom.
13
<PAGE>
In 1999, the Company established a new sales, warehousing, packing and R&D
facility in Singapore. This is the headquarters for Hauppauge Digital Asia Pte.
Ltd. The purpose of this facility is to better provide sales and marketing
support for the Asia market, and to expand the Company's Research and
Development capacity.
During fiscal 2000, the Company established a warehousing and packing
facility just outside of Dublin in Blanchardstown, Ireland. This Company, named
Hauppauge Digital SARL Ireland, was established as a branch office of Hauppauge
Digital Europe SARL in Luxembourg. The purpose of this facility is to better
provide a more cost effective and operationally efficient Company run
distribution center for the European market, in addition to reducing the
Company's overall tax rate.
The Company's executive offices are located at 91 Cabot Court, Hauppauge,
New York 11788, its telephone number at that address is (631) 434-1600 and its
Internet address is http://www.hauppauge.com.
Item 2 DESCRIPTION OF PROPERTY
The Company occupies approximately 25,000 square feet at a facility located
at 91 Cabot Court, Hauppauge, New York which it uses as its executive offices
and for the testing, storage, and shipping of its products. The Company
considers the premises to be suitable for its needs at such location. The
building is owned by a partnership consisting of the Company's principal
stockholders and their wives and is leased to the Company under a lease
agreement expiring on January 31, 2006 which may be extended, at the Company's
option, for an additional three years. Rent is currently at the annual rate of
$372,707 and will increase to $391,342 per year on February 1, 2001. The rent is
payable in equal monthly installments and increases at a rate of 5% per year on
February 1 of each year thereafter including during the option period. The
premises are subject to two mortgages which have been guaranteed by the Company
upon which the outstanding principal amount due as of September 30, 2000 was
$961,469. The Company pays the taxes and operating costs of maintaining the
premises.
The Company, through Hauppauge Computer Works, Inc., occupies approximately
3,300 square feet in Fremont, California, which it uses as the Company's western
region sales office for Hauppauge Computer Works, Inc. and Eskape Labs. The
lease expires on May 31, 2004 and requires the Company to pay annual rent of
approximately $67,200, with the rent increasing 3.8 percent annually during the
lease term. The Company is also responsible for a portion of common area
maintenance charges based on the space it occupies.
The Company, through Hauppauge Computer Works GmbH, occupies approximately
6,000 square feet in Germany which it uses as sales office, customer support
area, a demonstration room and a storage facility. The Company pays a annual
rent of approximately $44,400 for this facility pursuant to a rental agreement
which expires on October 31, 2006.
The Company, through Hauppauge Digital Asia Pte. Ltd., occupies
approximately 6,400 square feet in Singapore, which it uses as a sales and
administration office and for the testing, storage and shipping of its products.
The lease, which expires on November 30, 2002, calls for an annual rent of
$56,400. The rent includes an allocation for common area maintenance charges.
In April 2000, the Company, through Hauppauge Digital SARL, leased a 15,000
square foot building in Blanchardstown, Dublin, Ireland, which houses the
European warehousing and distribution functions. The lease,
14
<PAGE>
which is for one year, calls for a annual rent of $ 86,400. The rent includes an
allocation for common area maintenance charges.
Item 3. 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 Non infringement. AII filed its Brief for
Plaintiff-Appellant on October 13, 2000, while the Company joined the Brief for
Defendents-Appellees, filed on December 22, 2000. As with the prior action in
the District Court, the Company intends to defend this action vigorously.
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.
15
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
The following proposals were submitted to the stockholders for approval at
the annual meeting of stockholders held on July 18,2000 at the offices of the
Company and were approved by the votes as indicated:
Proposal No. 1: Election of Directors
The following directors were elected by the votes indicated:
For Withheld
Kenneth A. Aupperle 8,803,608 56,565
Kenneth Plotkin 8,803,278 56,895
Steven J. Kuperschmid 8,799,079 70,094
Bernard Herman 8,790,079 60,383
Proposal No. 2: Amendment to Certificate of Incorporation to increase number
of authorized shares of common stock from 10,000,000 to 25,000,000
The Amendment to Certificate of Incorporation to increase the number of
authorized shares of common stock was approved by the votes indicated:
For Against Abstain
8,625,385 214,989 495,632
Proposal No. 3: Adoption of the 2000 Performance and Equity Incentive Plan
The adoption of the 2000 Performance Equity Incentive Plan was approved by
the votes indicated:
For Against Abstain
3,711,660 278,589 5,300,834
Proposal No. 4: Adoption of the Employee Stock Purchase Plan
The adoption of the Employee Stock Purchase Plan was approved by the votes
indicated:
For Against Abstain
3,856,546 138,682 5,300,834
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<PAGE>
Proposal No. 5: Appointment of BDO Seidman LLP as independent auditors
The appointment of BDO Seidman LLP as independent auditors for the fiscal
year ended September 30, 2000 was approved by the vote indicated:
For Against Abstain
8,775,021 159,187 375,740
17
<PAGE>
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDE MATTERS.
(a) The principal market on which the common stock of the Company (the
"Common Stock") is traded is the over-the counter market. The Common Stock is
quoted on the NASDAQ National Market and its symbol is HAUP. The table below
sets forth the high and low bid prices of the Company's Common Stock as
furnished by NASDAQ. Quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Fiscal Year Ended
September 30, 2000 High* Low*
------------------- ------ ----
First Quarter 14 5/8 10 1/16
Second Quarter 48 11 3/16
Third Quarter 16 8 7/16
Fourth Quarter 10 1/4 5 1/4
Fiscal Year Ended
September 30, 1999 High* Low*
------------------- ------ ----
First Quarter 5 1/16 2 13/16
Second Quarter 5 3/43 3 7/8
Third Quarter 15 3/16 4 29/32
Fourth Quarter 16 1/16 10 11/16
----------------------
* On February 7, 2000, the Company's Board of Directors approved a 2 for 1 stock
split effective March 27, 2000. The per share prices reflect the stock split for
the periods presented.
(b) The Company has been advised by its transfer agent, North American Transfer
Co., that the approximate number of holders of record of the Common Stock as of
December 9, 2000 was 125. The Company believes there are in excess of 12,000
beneficial holders of the Common Stock.
(c) No cash dividends have been paid during the past two years. The Company has
no present intention of paying any cash dividends in its foreseeable future and
intends to use its net income, if any, in its operations.
Item 6. SELECTED FINANCIAL DATA
The following selected financial data with respect to the Company's
financial position and its results of operations for each of the five years in
the period ended September 30, 2000 set forth below has been derived from the
Company's audited consolidated financial statements. The selected financial
information presented below should be read in conjunction with the Consolidated
Financial Statements and related notes thereto in Item
18
<PAGE>
8 and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Item 7 included in this 10-K.
<TABLE>
<CAPTION>
Consolidated Statement of Operations Data 2000 1999 1998 1997 1996
Years ended September 30, ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands, except for per share amounts)
--------------------------------------------
Net Sales $ 66,292 $ 58,602 $ 38,757 $ 25,613 $ 14,695
Cost of sales 53,535 42,435 28,643 19,962 11,014
------ ------ ------ ------ ------
Gross Profit 12,757 16,167 10,114 5,651 3,681
Selling, General and Administrative
Expenses 13,121 10,458 7,244 4,283 3,022
Research & Development Expenses 1,666 1,256 808 560 448
----- ----- --- --- ---
Income (loss) from operations (2,030) 4,453 2,062 808 211
Other Income (Expense):
Interest Income 109 201 236 243 82
Interest Expense ( 15) - - - -
Other, net (247) (61) 184 (9) 16
---- --- --- -- --
Income (loss) before taxes on income ( 2,183) 4,593 2,482 1,042 309
Income tax (benefit) provision ( 1,184) 1,602 1,027 150 30
Reduction in deferred tax valuation allowance - (127) (503) (94) -
------- ---- ---- ---
Net tax (benefit) provision ( 1,184) 1,475 524 56 30
------- ----- --- -- --
Net income (loss) $ ( 999) $ 3,118 $ 1,958 $ 986 $ 279
============ ========= ======= ====== ======
Net income (loss) per share:
Basic $ ( 0.11) $ 0.36 $ 0.22 $ 0.11 $ 0.04
============== ========= ======= ====== ======
Diluted $ ( 0.11) $ 0.33 $ 0.21 $ 0.11 $ 0.04
============== ========= ======= ====== ======
Weighted average shares outstanding:
Basic 8,837 8,632 8,806 8,854 6,522
Diluted 8,837 9,480 9,354 8,870 6,522
Consolidated Balance Sheet Data (at period end):
Working capital $ 11,767 $ 12,533 $9,536 $8,689 $ 7,969
Total assets 26,315 27,728 22,897 14,471 11,931
Stockholders' equity 13,654 13,322 10,037 8,966 8,174
</TABLE>
Note: All per share amounts and weighted average shares have been retroactively
restated to reflect a two for one stock split effective March 27, 2000
19
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Years ended September 30, 2000 and 1999
Sales for the year ended September 30, 2000 were $66,292,491 compared to
$58,601,611 for year ended September 30, 1999, an increase of $7,690,880 or 13%,
comprised of a 22% increase in domestic sales and a 10% increase in European
sales. The forces driving the sales growth were:
- Sales of new products introduced during the latter part of fiscal
1999, including the WinTV-USB, the WinTV-DVB and the WinTV-Go.
- Sales contribution from the Company's Singapore office, which was
opened during the fourth quarter of fiscal 1999.
- Sales contribution of Eskape Labs line of products for the Macintosh
market.
Unit sales of the WinTV and ImpactVCB products for the year ended September
30, 2000 increased 45% to approximately 969,000 as compared to approximately
670,000 for the prior year. Sales to domestic customers for the fiscal 2000 were
29% of net sales compared to 27% for fiscal 1999. Sales to international
customers were 71% of net sales for fiscal 2000 compared to 73% for the prior
fiscal year.
Gross profit for the year was $12,757,030 compared to $16,166,999 for the
prior fiscal year, a decrease of $3,409,969. The gross profit percentage was 19%
for the current period compared to 28% for the prior comparable period. Factors
contributing to the decrease in gross profit margins include:
- Decline in the Euro to U.S. dollar exchange rate.
- Larger sales mix of lower margin product.
- A $1,000,000 reserve for certain excess inventory related to the
Company's digital TV receiver products recorded during the quarter
ended June 30, 2000 to reflect tepid sales of digital products.
The chart below illustrates the components of selling, general and
administrative expenses:
<TABLE>
<CAPTION>
Years ended September 30,
Dollar Costs Percentage of Sales
Increase/
2000 1999 Increase 2000 1999 (Decrease)
---- ---- -------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales & Promotional $ 8,159,606 $ 6,073,732 $2,085,874 12.4% 10.4% 2.0%
Customer Support 464,921 447,860 17,061 .7% .7% -
Product Handling 890,145 592,494 297,651 1.3% 1.0% .3%
General & Admin 3,606,480 3,343,627 262,853 5.4% 5.7% (.3%)
--------- --------- ------- --- --- ---
Total $13,121,152 $10,457,713 $2,663,439 19.8% 17.8% 2.0%
</TABLE>
As a percentage of sales, selling, general and administrative expenses for the
year ended September 30, 2000 increased by 2.0% when compared to the prior
comparable period. Represented in dollars, selling, general and
20
<PAGE>
administrative expenses increased $2,663,439 over the comparable prior fiscal
year.
The increase in sales and promotional expense of $2,085,874 was mainly due to :
- Full year compensation costs for Singapore office.
- Compensation costs for Eskape Labs' personnel.
- Increased marketing department staff.
- Higher commission attributable to increased
sales and higher effective commission rate.
- Higher coop advertising costs due to increased
sales.
- Increased cost of European sales offices due
to expanded marketing and customer support activities.
- Increased Trade show costs due to attendance at
shows geared to the Macintosh market.
Customer support and product handling expenses increased $17,061 and
$297,651 respectively. Customer support costs increases were mainly due to
customer support service required to handle Asian customers. Increased product
handling costs was a function of the 45% increase in unit shipment volume.
The increase in general and administrative expenses of $262,853 was primarily
due to:
- Higher professional fees for worldwide investment, tax and
litigation advice and the cost of defending a patent litigation
lawsuit.
- Hiring of in house staff counsel.
- Contractual salary increases for senior
executives.
- Compensation of Eskape Labs' administrative
staff.
- Compensation of Singapore office's administrative staff.
- Increased rent of the California office due to additional space
required to house Eskape Lab personnel.
- Full year of rent for the Singapore office.
- Direct building overhead costs of the Singapore and Eskape
Lab offices.
- Increased communication costs due to Singapore
and Eskape Lab offices.
- Amortization of Goodwill and other intangible
assets acquired in the Eskape acquisition.
- Depreciation for fixed assets located at the Singapore and
Eskape Lab offices.
Research and development expenses increased $409,064 or approximately 33%.
The increase was due to the engineering compensation costs at the Company's
Singapore and Eskape Labs offices.
The Company had net other expenses for the year ended September 30, 2000 of
$153,565 compared to net other income for the prior year of $139,878. 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 and British
Pound Sterling.
The Company recorded an income tax benefit of $1,184,072 for the year ended
September 30, 2000 compared to a tax provision of $1,475,000 for the year ended
September 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 year ended September 30, 2000 was based on this new structure.
As a result of losses attributed to domestic operations, the tax benefit derived
from
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<PAGE>
domestic losses offset the taxes due on income attributable to the European
operation.
As a result of the above, the Company incurred a net loss after taxes for
the year ended September 30, 2000 of $999,215, which resulted in a basic and
diluted loss per share of $0.11, on weighted average basic and diluted shares of
8,837,256, compared to net income after taxes of $3,117,628 for the year ended
September 30, 1999, which resulted in basic and diluted earnings per share of
$0.36 and $0.33 on weighted average shares, adjusted for the stock split, of
8,632,432 and 9,479,748, respectively. Options to purchase 1,610,226 and 95,000
shares of common stock were outstanding as of September 30, 2000 and 1999, 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.
Results of Operations
Years ended September 30, 1999 and 1998
Sales for the year ended September 30, 1999 were $58,601,611 compared to
$38,757,443 for the year ended September 30, 1998, resulting in an increase of
$19,844,168 or 51%, comprised of an increase in domestic sales of 44% and an
increase in international sales of 54%. The primary forces driving the sales
growth were:
- The full year effect of the increase in the
Company's domestic distribution and retail channel to
approximately 3,000 locations.
- Increased European sales due to the Company's
expansion into new geographic markets combined with increased
sales to the Company's existing European customers.
- Growth in sales to direct corporate customers.
Unit sales for the year ended September 30, 1999 increased 62% to
approximately 670,000 as compared to approximately 413,000 for the prior year.
Domestic sales were 27% of net sales for the current year compared to 28% for
the prior year. International sales were 73% of net sales for the current year
compared to 72% for the prior year.
Gross profit increased to $16,166,999 from $10,113,600, an increase of
$6,053,399 or 60% over the prior year. The gross profit percentage was 27.6% for
the year ended September 30, 1999 compared to 26.1% for the year ended September
30, 1998.
The increase in gross profit was primarily due to:
- Shifting the majority of the Company's production to
subcontractors in Scotland and Malaysia, resulting in a
reduction of import duties and lower unit manufacturing costs.
- A reduction in material, labor and other subcontractor
production costs due to the benefits of increased production
volume, which resulted in improved material prices and
allocation of fixed production overhead spread over a larger
volume of boards.
22
<PAGE>
The chart below illustrates the components of selling, general and
administrative expenses:
<TABLE>
<CAPTION>
Twelve months ended September 30,
Dollar Costs Percentage of Sales
Increase/
1999 1998 Increase 1999 1998 (Decrease)
---- ---- -------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales & Promotional $ 6,073,732 $4,603,989 $1,469,743 10.4% 11.9% (1.5%)
Customer Support 447,860 301,860 146,000 .8% .8% -
Product Handling 592,494 449,999 142,495 1.0% 1.2% (.2%)
General & Admin 3,343,627 1,887,970 1,455,657 5.7% 4.9% .8%
--------- --------- --------- --- --- --
Total $10,457,713 $7,243,818 $3,213,895 17.9% 18.8% (.9%)
</TABLE>
As a percentage of sales, selling, general and administrative expenses for
the year ended September 30, 1999 declined by .9% when compared to the prior
year. Sales and promotional expenses and product handling expenses declined 1.5%
and .2% respectively. General and Administrative expenses increased by .8%.
Represented in dollars, selling, general and administrative expenses increased
$3,213,895 compared to the prior year.
The increase in sales and promotional expenses of $1,469,743 was primarily due
to:
- Increase in marketing and promotional programs to support
product visibility at a greater number of retail locations.
- Higher commissions resulting from the 51% net sales increase.
- The opening of sales offices in the United Kingdom and France.
- Additional marketing personnel required to handle expanded
market locations.
Customer support and product handling expenses increased $146,000 and
$142,495 respectively. Customer support costs increased due to the additional
staff required to maintain a high level of customer service to support the
Company's expanding domestic and international customer base. Increased product
handling costs was a function of greater shipment volume to customers.
The increase in general and administrative costs of $1,455,657 was primarily due
to:
- Contractual wage increases for senior executives.
- Retaining professional services for public relations and
investment banking advice.
- Fees for legal and accounting services, primarily for tax
consultation, patent issues and acquisition advice.
- Larger incentive bonus accruals based on increased
profitability.
- Increased bad debt expense, due primarily to a
customer filing for bankruptcy.
Research and development expenses increased $448,448 or approximately 56%.
The increase was due to the initiation and completion of several projects in
fiscal 1999 which led to the introduction of several new products in the USB and
digital video areas.
23
<PAGE>
The Company had net other income for the twelve months ended September 30,
1999 of $139,878 compared to net other income for the prior year of $420,796.
The decrease in net other income was primarily due to lower returns on monies
invested throughout the year and foreign currency exchange losses due to the
decline of the Euro.
Provision for income taxes was $1,475,000, or an effective tax rate of 32%
for the year ended September 30, 1999 compared to $523,937 or an effective tax
rate of 21% for the year ended September 30, 1998. The net effective rate for
fiscal 1999 and 1998 was reduced by a reduction in the deferred tax valuation
allowance of $127,000 and $503,131, recorded during the fourth quarters of
fiscal 1999 and 1998, respectively. The reduction lowered the effective rate tax
rate from 35% to 32% in fiscal 1999 and 41% to 21% in fiscal 1998, respectively.
The reduction in the effective tax rate, before the reduction of the
deferred tax valuation allowance, for 1999 to 35% from 41% for 1998, was due to
the tax benefits derived primarily from the allocation of income to a foreign
sales corporation.
As a result of the above, the Company recorded net income after taxes for
the year ended September 30, 1999 of $3,117,628, or an increase of 59%, when
compared to $1,958,553 for the year ended September 30, 1998. Earnings per
share, on a basic and diluted basis were, $0.36 and $0.33, respectively, for
1999, on weighted average basic and diluted shares outstanding adjusted for the
March 27, 2000 stock split of 8,632,432 and 9,479,748, respectively. Earnings
per share, on a basic and diluted basis for 1998 were $0.22 and $0.21,
respectively for 1998 on weighed average basic and diluted shares outstanding
adjusted for the stock split of 8,806,711 and 9,353,494, respectively.
Seasonality
Since the Company sells primarily to the consumer market, the Company has
experienced certain revenue trends. The sales of the Company's products, which
are primarily sold through distributors and retailers, have 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. In addition, the Company's international sales, mostly
in the European market, were 71%, 73 % and 72% of sales for the years ended
September 30, 2000, 1999 and 1998, 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.
24
<PAGE>
Liquidity and Capital Resources
The Company's cash, working capital and stockholders' equity position is
disclosed below:
As of September 30,
2000 1999 1998
------- ---- ----
Cash $ 2,744,855 $ 6,122,922 $ 6,281,852
Working Capital 11,766,900 12,533,310 9,536,450
Stockholders' Equity 13,653,677 13,322,091 10,036,898
The significant items of cash provided by and cash (consumed ) for the fiscal
year ended September 30, 2000 are detailed below:
Net income (loss) (adjusted for non cash items) $ (643,308)
Changes to deferred tax assets (790,723)
Tax benefit related to options exercised by employees 883,000
Changes in investment for current assets 1,389,408
Income taxes receivable (1,496,045)
Decrease in current liabilities-net (2,744,297)
Acquisition of Eskape Labs (899,587)
Purchase of Property, Plant & Equipment (449,304)
Proceeds from exercise of options 387,798
Proceeds from loan 1,000,000
Other (15,009)
------------
Net Cash Consumed $(3,378,067)
Net cash of $ 3,416,974 consumed by operating activities was primarily due
to net cash required to fund the net loss (adjusted for non cash items) of $
643,308, a net increase in the deferred tax asset of $790,723, cash required to
funded the net decrease in current liabilities of $ 2,744,297, an increase in
other assets of $15,009 and an increase in income taxes receivable of $
1,496,045 offset partially by a net decrease in current assets of $ 1,389,408
and the tax benefit derived from the exercise of options by employees.
Cash of $449,304 was used to purchase fixed assets. The exercise of
employee options provided additional cash of $387,798.
On June 1, 2000 the Company acquired certain assets of Eskape Labs Inc.
("Eskape"), a California based company specializing in designing and
manufacturing TV and video products for Apple Macintosh computers. The purchased
assets expand and complement 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 $899,587, which includes legal and accounting
acquisition costs. In addition to the price paid for the acquired assets, the
purchase agreement also calls for contingent additional consideration. See "Note
10" to "Consolidated Financial Statements."
25
<PAGE>
On July 12, 2000 the Company signed an agreement 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 prime rate, which was 9.50% at
September 30, 2000 or 1.25% above the London Interbank Offered Rate. The
facility is secured by the assets of the Company, and expires on March 31, 2001.
As of September 30, 2000, the Company had $1 million in borrowings from this
line of credit outstanding.
On November 8, 1996, the Company approved a stock repurchase program for
the repurchase of up to 600,000 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. As of September 30, 2000, the Company held 429,602 treasury shares
for $1,334,064 at an average purchase price of approximately $3.11 per share.
The Company believes that its current cash position, its bank line of credit and
its internally generated cash flow will be sufficient to satisfy the Company's
anticipated operating needs for at 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 effect on
the computer equipment market that would have a material affect on the Company.
Euro
On January 1, 1999, the Euro was adopted in Europe as the common legal
currency among 11 of the 15 member countries of the European Community. On that
date, the participating countries established fixed Euro conversion rates (i.e.
the conversion exchange rate between their existing currencies and the Euro).
The Euro now trades on currency exchanges and is available for non cash
transactions. A new European Central Bank was established to direct monetary
policy for the participating countries.
Prior to the adoption of the Euro, the Company billed its European
customers in German Marks or British Pounds, depending upon which currency the
customer preferred to be billed in. Effective January 1, 1999, the Company began
invoicing its customers, located in the eleven member countries, in Euros. The
Company continued to bill customers location in the United Kingdom in British
Pounds. The benefits to the Company were twofold:
- The Company's foreign currency hedging program was streamlined
to the Euro and the British Pound.
- The pricing from country to country was harmonized, eliminating
price differences between countries due to the fluctuating local
currencies.
The conversion to the Euro was handled by the Company without any material
disruptions to the Company's operations. See Item 7A -- Market Risks .
26
<PAGE>
Effect of New Accounting Pronouncements
Investment Derivatives and Hedging Activities
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 by the Company after
October 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 effect of implementing SFAS 133 will be presented in
the Company's 10Q for the quarter ended December 31, 2000 as a cumulative effect
of a change in accounting principle. At September 30, 2000, the Company's
unrecognized gain or ineffective portion of $319,000 will be reported in income,
the effective portion will be reported as a component of accumulated
comprehensive income and the fair value of the $11,310,000 in Euro forward
contracts in current assets and current liabilities, respectively.
Revenue Recognition
During December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB No. 101), "Revenue Recognition in Financial
Statements." SAB No. 101 is effective for fiscal years beginning after December
15, 1999. The adoption of this bulletin is not expected to have an effect on the
consolidated financial statements.
Risks Factors
If TV technology for the PC or the Company's implementation of this technology
is not accepted, the Company will not be able to sustain or expand its business.
The Company's future success depends on the growing use and acceptance of
TV and video applications for PCs. The market for these applications is still
evolving, and may not develop to the extent necessary to enable the Company to
expand its business. The Company has invested and expects to continue to invest
significant time and resources in the development of new products for this
market. The Company's dependence on sales of TV and video products for the PC,
its lack of market diversification, the lack of development of the market for
the Company's products, and the development of competing technology could each
have a material adverse effect on the Company's business, operating results and
financial condition .
The Company relies upon sales of a small number of product lines, and the
failure of any one product lines to be successful in the market could
substantially reduce its sales.
The Company currently relies upon sales from two product lines, its
Internal PCI-based WinTV Boards and External WinTV Products, to generate a
majority of its sales. The Company is developing additional products within
these and its other product lines, but there can be no assurance that it will be
successful in doing so. Consequently, if the existing or future products are not
successful, sales could decline substantially, which would have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company relies heavily on dealers and OEMs to market, sell and distribute
its products. In turn, it depends heavily on the success of these resellers. If
these resellers do not succeed in effectively distributing the Company's
products, its sales could be reduced.
27
<PAGE>
These resellers may not effectively promote or market the Company's
products or they may experience financial difficulties and even close
operations. These dealers and retailers are not contractually obligated to sell
the products. Therefore, they may, at any time:
- Refuse to promote the products; and
- Discontinue the products in favor of a competitor's product.
Also, with this distribution channel standing between the Company and the
actual market, the Company may not be able to accurately gauge current demand
for products and anticipate demand for its products. For example, dealers may
place large initial orders for a new product just to keep their stores stocked
with the newest products and not because there is a significant demand for them.
The Company's distribution network includes several consumer channels,
including large distributors of products to computer software and hardware
retailers, which in turn sell products to end users. It also sells its consumer
products directly to certain retailers. Rapid change and financial difficulties
of distributors have characterized distribution channels for consumer retail
products. These arrangements have exposed the Company to the following risks,
among others:
- The Company may be obligated to provide price protection to
certain retailers and distributors and, while certain
agreements limit the conditions under which product can be
returned, the Company may be faced with product returns or
price protection obligations;
- The distributors or retailers may not continue to stock and
sell the Company's products; and
- Retailers and retail distributors often carry competing
products.
If these resellers do not succeed in effectively distributing the Company's
products, it could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company operates in a highly competitive market, and many of its competitors
have much greater resources, which may make it unable to remain competitive.
The Company's business is subject to significant competition. Competition
exists from larger companies that possess substantially greater technical,
financial, sales and marketing resources than that which the Company has. The
dynamics of competition in this market involve short product life cycles,
declining selling prices, evolving industry standards and frequent new product
introductions. The Company competes in this emerging market against companies
such as ATI Technologies, Inc., 3dfx Interactive Inc. and Pinnacle Systems,
Inc., among others. The Company believes that competition from new entrants will
increase as the market for digital video in a PC expands. There can be no
assurances that the Company will not experience increased competition in the
future. Such increased competition may have a material adverse affect on the
Company's ability to successfully market its products. Competition is expected
to remain intense and, as a result, the Company may lose some of its business to
its competitors. Further, the Company believes that the market for its products
will continue to be price competitive and thus it could continue to experience
lower selling prices, lower gross profit margins and reduced profitability
levels for such products than in the past.
28
<PAGE>
Rapid technological changes and short product life cycles in the Company's
industry could harm its business.
The technology underlying the Company's products and other products in the
computer industry, in general, is subject to rapid change, including the
potential introduction of new types of products and technologies, which may have
a material adverse impact upon the Company's business. The Company will need to
maintain an ongoing research and development program, and the Company's success,
of which there can be no assurances, will depend in part on its ability to
respond quickly to technological advances by developing and introducing new
products, successfully incorporating such advances in existing products, and
obtaining licenses, patents, or other proprietary technologies to be used in
connection with new or existing products. The Company continues to increase it
research and development expenditures. The Company expended approximately
$1,666,000, $1,257,000 and $808,000 for research and development expenses for
the years ended September 30, 2000, 1999 and 1998. There can be no assurance
that the Company's research and development will be successful or that the
Company will be able to foresee and respond to such advances in technological
developments and to successfully develop other products. Additionally, there can
be no assurances that the development of technologies and products by
competitors will not render the Company's products or technologies
non-competitive or obsolete. See Item 7 Management's Discussion and Analysis-
Risks and Forward Looking Statements.
If TV or video capabilities are included in PCs, it could result in a
reduction in the demand for add-on TV and video devices. In addition, the
Company believes its WinTV software is a competitive strength. However, as
operating systems such as Windows move to integrate and standardize software
support for video capabilities, the Company will be challenged to further
differentiate its products. The Company's operating results and ability to
retain its market share are also dependent on continued growth in the underlying
markets for PC TV and video products.
The Company may not be able to timely adopt emerging industry standards, which
may make its products unacceptable to potential customers, delay its product
introductions or increase its costs.
The Company's products must comply with a number of current industry
standards and practices established by various international bodies. Failure to
comply with evolving standards, including video compression standards, TV
transmission standards, and PC interface standards, will limit acceptance of its
products by the market. If new standards are adopted in the industry, the
Company may be required to adopt those standards in its products. It may take a
significant amount of time to develop and design products incorporating these
new standards, and the Company may not succeed in doing so. It may also become
dependent upon products developed by third parties and have to pay royalty fees,
which may be substantial, to the developers of the technology that constitutes
the newly adopted standards.
The Company is heavily dependent upon foreign markets for sales of its products,
primarily the European and Asian markets, and adverse changes in these markets
could reduce its sales.
The Company's future performance will likely be dependent, in large part,
on its ability to continue to compete successfully in the European and Asian
markets, where a large portion of its current and potential customers are
located. Its ability to compete in these markets will depend on many factors,
including:
29
<PAGE>
- the economic conditions in these regions;
- the stability of the political environment in these regions;
- adverse changes in the relationships between major countries in
these regions;
- the state of trade relations among these regions and the
United States;
- restrictions on trade in these regions;
- the imposition or changing of tariffs by the countries in these
regions on products of the type that the Company sells;
- changes in the regulatory environment in these regions;
- export restrictions and export license requirements;
- restrictions on the export of critical technology;
- the Company's ability to develop PC TV products that meet the varied
technical requirements of customers in each of these regions;
- its ability to maintain satisfactory relationships with its foreign
customers and distributors; o changes in freight rates;
- its ability to enforce agreements and other rights in the countries
in these regions;
- difficulties in staffing and managing international operations;
- difficulties assessing new and existing international markets and
credit risks; and
- potential insolvency of international customers and difficulty in
collecting accounts.
If the Company is unable to address any of these factors, it could have a
material adverse effect on the Company's business, financial operating results
and financial condition.
The Company is heavily dependent upon foreign manufacturing facilities for its
products, primarily facilities in Europe and Asia, which exposes it to
additional risks.
The Company has a majority of its product built at contract manufacturing
facilities in Europe and Asia. Its ability to do this successfully will depend
on several factors, including:
- the economic conditions in these regions;
- the stability of the political environment in these regions;
- adverse changes in the relationships between major countries in
these regions;
- the state of trade relations among these regions and the
United States;
- restrictions on trade in these regions;
- the imposition or changing of tariffs by the countries in these
regions on products of the type that the Company sells;
- changes in the regulatory environment in these regions;
- import restrictions and import license requirements;
- its ability to maintain satisfactory relationships with its foreign
manufacturers;
- changes in freight rates;
- difficulties in staffing and managing international operations; and
- potential insolvency of vendors and difficulty in obtaining
materials.
If the Company is unable to address any of these factors, it could have a
material adverse effect on the Company's business, financial operating results
and financial condition.
30
<PAGE>
Foreign currency exchange fluctuations could adversely affect the Company's
results.
Due to extensive sales to European customers denominated in local
currencies, the Company is a net receiver of currencies other than the U.S.
dollar and as such benefits from a weak dollar and is adversely affected by a
strong dollar relative to the major worldwide currencies, especially the Euro
and British Pound Sterling. Consequently, changes in exchange rates expose the
Company to market risks resulting from the fluctuations in the foreign currency
exchange rates to the U.S. dollar. The Company attempts to reduce these risks by
entering into foreign exchange forward contracts with financial institutions to
protect against currency exchange risks associated with its foreign denominated
accounts receivable.
The strength or weakness of the U.S. dollar against the value of the Euro
and British Pound Sterling impact the Company's financial results. Changes in
exchange rates may positively or negatively affect the Company's revenues, gross
margins, operating income and retained earnings (which are expressed in U.S.
dollars). 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 forward window contracts, the Company attempts to
hedge its foreign sales against currency fluctuations.
As of September 30, 2000, the Company has foreign currency forward
contracts outstanding of approximately $11.3 million for the Euro. The contracts
expire through December 2000. As of September 30, 2000, the Company had
unrecognized gains from foreign currency forward contracts of $319,000.
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.
However, it is not possible to completely protect the Company from the
risks of foreign currency exchange fluctuations, and there can be no assurances
that the measures it takes will be successful nor sufficient.
Additionally, there is the risk that foreign exchange fluctuations will
make the Company's products less competitive in foreign markets, which would
substantially reduce its sales.
The Company may be unable to develop new products that meet customer
requirements in a timely manner.
The Company's success is dependent on its ability to continue to introduce
new products with advanced features, functionality and performance that its
customers demand. The Company may not be able to introduce new products on a
timely basis, that are accepted by the market, and that sell in quantities
sufficient to make the products viable for the long-term. Sales of new products
may negatively impact sales of existing products. In addition, the Company may
have difficulty establishing its products' presence in markets where it does not
currently have significant brand recognition.
31
<PAGE>
The Company may experience declining margins.
The Company may experience declining gross margins due to the following
factors, among others:
- Changes in foreign currency exchange rates;
- Larger sales mix of lower margin products;
- Possible future reserves for excess inventory;
- Increases in material acquisition costs; and
- Differing gross margins in different markets.
Consequently, as margins may decline, the Company's profitability will be more
dependent upon effective cost and management controls. There can be no
assurances that such cost and management controls can be implemented and
maintained, and if implemented, that they will be successful. See "Item 7.
Managements' Discussion and Analysis of Financial Condition and Results of
Operations."
The Company has experienced, and expects to continue to experience, intense
downward pricing pressure on its products, which could substantially impair its
operating performance.
The Company is experiencing, and is likely to continue to experience,
downward pricing pressure on its products. As a result, it has experienced, and
expects to continue to experience, declining average sales prices for its
products. Increases in the number of units that the Company is able to sell or
reductions in per unit costs may not be sufficient to offset reductions in per
unit sales prices, in which case its net income could be reduced or it could
incur losses. Since the Company must typically negotiate supply arrangements far
in advance of delivery dates, it may need to commit to price reductions for its
products before it is aware of how, or if, these cost reductions can be
obtained. As a result, any current or future price reduction commitments and any
inability of the Company to respond to increased price competition could result
in substantially reduced revenues and significant losses.
The Company is dependent upon contract manufacturers for its production. If
these manufacturers do not meet the Company's demand, either in volume or
quality, then it could be materially harmed.
The Company designs the WinTV products and also writes the operating
software to be used in conjunction with many versions of the popular
Microsoft(R) Windows(R) operating system, including Windows98, WindowsMe,
WindowsNT and Windows 2000. The Company subcontracts the manufacturing and
assembly of the WinTV Boards to independent third parties at facilities in
various countries. The Company monitors the quality of the completed product at
its facilities in New York, Singapore, and Ireland before packaging the product
and shipping it to customers.
Manufacturing is performed by a select group of contract manufacturers.
Product design specifications are provided to insure proper assembly. Contract
manufacturing is either done on a consignment basis, in which the Company
provides all the component parts and pays an assembly charge for each board
produced, or on a turnkey basis, in which components and labor are provided by
the contract manufacturer, and the manufacturing price the Company is charged
includes parts and assembly costs. The Company continuously monitors the quality
of its selected manufacturers. The Company has qualified five contract
manufacturers and utilizes three. These three contract manufacturers are
presently being utilized to handle the majority of production. If demand were
32
<PAGE>
to increase dramatically, the Company believes additional production could be
absorbed by these and other contract manufacturers.
The Company produces product for the majority of its European sales through
a subcontractor in Hungary. The packaging and shipping of the product to
customers is being performed at the Company's Ireland location. By shifting its
European production to Europe, the Company anticipates savings on production
costs and shipping costs of the Boards, in addition to the elimination of duties
charged on Boards entering Europe from the United States, however, no such
assurances can be given. A subcontractor in Malaysia produces product for
domestic, European and Asian markets.
Relying on subcontractors involves a number of significant risks,
including:
- loss of control over the manufacturing process;
- potential absence of adequate production capacity;
- potential delays in production lead times;
- unavailability of certain process technologies;
- reduced control over delivery schedules, manufacturing
yields, quality and costs; and
- unexpected increases in component costs.
The Company may need to hold more inventory than is immediately required to
compensate for potential manufacturing disruptions. This could lead to an
increase in the costs of manufacturing or assembling its products.
If any significant subcontractor becomes unable or unwilling to continue to
manufacture these products in required volumes, the Company will have to
identify qualified alternate subcontractors. Additional qualified subcontractors
may not be available, or may not be available on a timely basis. Any
interruption in the supply of or increase in the cost of the products
manufactured by third party subcontractors could have a material adverse effect
on the Company's business, operating results and financial condition.
The Company is dependent upon single or limited source suppliers for its
components. If these suppliers do not meet the Company's demand, either in
volume or quality, then it could be materially harmed.
Although certain components essential to the Company's business are
generally available from multiple sources, other key components (including, but
not limited to, TV tuners, video decoder chips and application-specific
integrated circuits (ASICs)) are currently obtained by the Company from single
or limited sources; in addition, these and other key components (including,
without limitation, DRAM), while currently available to the Company from
multiple sources, are at times subject to industry wide availability and pricing
pressures. Any availability limitations, interruption in supplies, or price
increases relative to these and other components could have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, new products introduced by the Company often initially utilize custom
components obtained from only one source until the Company has evaluated whether
there is a need for and subsequently qualifies additional suppliers. In
situations where a component or product utilizes new technologies, initial
capacity constraints may exist until such time as the suppliers' yields have
matured. Components are normally acquired through purchase orders, as is common
in the industry, typically covering the Company's requirements for periods from
60 to 120 days. However, the Company continues to evaluate the need for a supply
contract in each situation.
33
<PAGE>
If the supply of a key component to the Company were to be delayed or
curtailed or in the event a key manufacturing vendor delays shipment of
completed products to the Company, the Company's ability to ship products in
desired quantities and in a timely manner could be adversely affected. The
Company's business and financial performance could also be adversely affected,
depending on the time required to obtain sufficient quantities from the original
source or, if possible, to identify and obtain sufficient quantities from an
alternative source. The Company attempts to mitigate these potential risks by
working closely with its key suppliers on product introduction plans, strategic
inventories, coordinated product introductions, and internal and external
manufacturing schedules and levels.
The Company may need to hold more inventory than is immediately required to
compensate for potential component shortages or discontinuation. This could lead
to an increase in the costs of manufacturing or assembling its products.
If any single or limited source supplier becomes unable or unwilling to
continue to supply these components in required volumes, the Company will have
to identify and qualify acceptable replacements or redesign its products with
different components. Additional sources may not be available, or product
redesign may not be feasible on a timely basis. Any interruption in the supply
of or increase in the cost of the components provided by single or limited
source suppliers could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company may incur excessive expenses if it is unable to accurately predict
sales of its products.
The Company generally ships products within one to four weeks after receipt
of orders. Therefore, its sales backlog is typically minimal. Accordingly, its
expectations of future net sales and its product manufacturing plans are based
largely on its own estimates of future demand and not on firm customer orders.
If the Company experiences orders in excess of its forecasts, it may be
unable to increase production to meet demand which could have a material adverse
effect on the Company's business, operating results and financial condition. If
its net sales do not meet expectations, profitability could be adversely
affected, the Company may be burdened with excess inventory, and it may be
subject to excess costs or inventory write-offs.
The Company may experience a reduction in sales if it is unable to respond
quickly to changes in the market demand for its products.
The Company's net sales can be affected by changes in the quantity of
products that its distributor and OEM customers maintain in their inventories.
The Company may be directly and rapidly affected by changes in the market,
including the impact of any slowdown or rapid increase in end user demand.
Despite efforts to reduce distribution channel inventory exposure, distribution
partners and OEM customers may still choose to alter their inventory levels,
which could cause a reduction in the Company's net sales.
The Company may accumulate inventory to minimize the impact of shortages from
manufacturers and suppliers, which may result in obsolete inventory that it may
need to write off and suffer resulting losses.
Managing the Company's inventory is complicated by fluctuations in the
demand for its products; however, it must plan to have sufficient quantities of
its products available to satisfy its customers' demand. As
34
<PAGE>
a result, the Company sometimes accumulates inventory for a period of time to
minimize the impact of possible insufficient capacity at its manufacturers and
suppliers. Although it expects to sell the inventory within a short period of
time, products may remain in inventory for extended periods of time and may
become obsolete because of the passage of time and the introduction of new
products. In these situations, the Company would be required to write off
obsolete inventory which could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company may need additional financing, and may not be able to raise
additional financing on favorable terms or at all, which could limit its ability
to grow and increase its costs.
The Company anticipates that it may need to raise additional capital in the
future to continue its longer term expansion plans, to respond to competitive
pressures or to respond to unanticipated requirements. The Company cannot be
certain that it will be able to obtain additional financing on commercially
reasonable terms or at all. The Company's failure to obtain additional financing
or its inability to obtain financing on acceptable terms could require it to
limit its plans for expansion, incur indebtedness that has high rates of
interest or substantial restrictive covenants, issue equity securities that will
dilute existing stockholders' holdings or discontinue a portion of its
operations.
The Company may become involved in costly intellectual property disputes.
With the proliferation of new products and rapidly changing technology,
there has been a significant volume of patents and other intellectual property
rights held by third parties. There are a number of companies that hold patents
for various aspects of the technologies incorporated in some of the PC and TV
industries' standards. Given the nature of the Company's products and
development efforts, there are risks that claims associated with such patents or
intellectual property rights could be asserted against it by third parties. The
Company expects that parties seeking to gain competitive advantages will
increase their efforts to enforce any patent or intellectual property rights
that they may have. The holders of patents from which the Company has not
obtained licenses may take the position that it is required to obtain a license
from them.
If a claimant refuses to offer such a license, or refuses to offer such a
license on terms acceptable to the Company, there is a risk of incurring
substantial litigation or settlement costs regardless of the merits of the
allegations, and regardless of which party eventually prevails. In the event of
litigation, if the Company does not prevail, it may be required to pay
significant damages and/or to cease sales and production of infringing products
and may incur significant defense costs in any event. Additionally, the Company
may need to attempt to design around a given technology, although there can be
no assurances that this would be possible nor economical.
The Company currently uses technology licensed from third parties in
certain of its products. Its business, financial condition and operating results
could be adversely affected by a number of factors relating to these third-
party technologies, including:
- failure by a licensor to accurately develop, timely introduce,
promote or support the technology;
- delays in shipment of products;
- excess customer support or product return costs due to problems
with licensed technology; and
- termination of the Company's relationship with such licensors.
35
<PAGE>
The Company may be unable to enforce its intellectual property rights.
The Company may not be able to protect its intellectual property adequately
through patent, copyright, trademark and other protection. If it fails to
adequately protect its intellectual property, it may be misappropriated by
others, invalidated or challenged, which would materially harm its ability to
sell its products. For example, in the event that the Company was to be issued
any patents, they might not be upheld as valid if litigation over any such
patent were initiated. If the Company is unable to protect its intellectual
property adequately, it could allow competitors to duplicate its technology or
may otherwise limit any competitive technological advantage it may have. Because
of the rapid pace of technological change, the Company believes its success is
likely to depend more upon continued innovation, technical expertise, marketing
skills and customer support and service rather than upon legal protection of its
proprietary rights. However, the Company will aggressively assert its
intellectual property rights when necessary.
The Company's success and ability to compete depends partly upon its
proprietary technology. It relies on a combination of trade secrets, copyright
and trademark laws, nondisclosure and other contractual agreements and technical
measures to protect its proprietary rights. Currently, it has no patents issued
or pending that relate to its technology. The Company is subject to a number of
risks relating to intellectual property rights, including the following:
- the means by which it seeks to protect its proprietary rights
may not be adequate to prevent others from misappropriating
its technology or from independently developing or selling
technology or products with features based on or similar to
the Company's;
- its products may be sold in foreign countries that provide
less protection to intellectual property than is provided
under U.S. laws; and
- its intellectual property rights may be challenged,
invalidated, violated or circumvented and may not provide it
with any competitive advantage.
The Company may not be able to attract and retain qualified managerial and other
skilled personnel.
The Company's success depends, in part, on its ability to identify,
attract, motivate and retain qualified managerial, technical and sales
personnel. Because its future success is dependent on its ability to manage
effectively the enhancement and introduction of existing and new products and
the marketing of such products, it is particularly dependent on its ability to
identify, attract, motivate and retain qualified managers, engineers and
salespersons. The loss of the services of a significant number of engineers or
sales people or one or more senior officers or managers could be disruptive to
product development efforts or business relationships and could seriously harm
the Company's business.
The Company depends on a limited number of key personnel, and the loss of any of
their services could adversely affect its future growth and profitability and
could substantially interfere with its operations.
Because the Company's products are complex and its market is evolving, the
success of its business depends in large part upon the continuing contributions
of its management and technical personnel. The loss of the services of any of
its key officers could adversely affect its future growth and profitability and
could substantially interfere with its operations. Key officers include:
36
<PAGE>
Kenneth H. Plotkin, its Chairman of the Board and Chief Executive Officer; and
Kenneth R. Aupperle, its President and Chief Operating Officer.
The Company's dependence upon these officers is increased by the fact that
they are responsible for its sales and marketing efforts, as well as its overall
operations. The Company does not have key person life insurance policies
covering any of its employees other than Messrs. Plotkin and Aupperle, and the
insurance coverage that it has on Messrs. Plotkin and Aupperle may be
insufficient to compensate it for the loss of their services.
The Company may not be able to effectively integrate businesses or assets that
it acquires.
The Company may identify and pursue acquisitions of complementary companies
and strategic assets, such as customer bases, products and technology. However,
there can be no assurance that it will be able to identify suitable acquisition
opportunities.
If any such opportunity involves the acquisition of a business, the Company
cannot be certain that:
- it will successfully integrate the operations of the acquired
business with its own;
- all the benefits expected from such integration will be realized;
- management's attention will not be diverted or divided, to the
detriment of current operations;
- amortization of acquired intangible assets will not have a
negative effect on operating results or other aspects of the
Company's business;
- delays or unexpected costs related to the acquisition will not have
a detrimental effect on the combined business, operating results and
financial condition;
- customer dissatisfaction with, or performance problems at, an
acquired company will not have an adverse effect on the Company's
reputation; and
- its respective operations, management and personnel will be
compatible.
In most cases, acquisitions will be consummated without seeking and
obtaining stockholder approval, in which case stockholders will not have an
opportunity to consider and vote upon the merits of such an acquisition.
Although the Company will endeavor to evaluate the risks inherent in a
particular acquisition, there can be no assurance that it will properly
ascertain or assess such risks.
The Company's products could contain defects, which could result in delays in
recognition of sales, loss of sales, loss of market share, or failure to achieve
market acceptance, or claims against the Company.
The Company develops complex products for TV and video processing. Despite
testing by its engineers, subcontractors and customers, errors may be found in
existing or future products. This could result in, among other things, a delay
in recognition of sales, loss of sales, loss of market share, failure to achieve
market acceptance or substantial damage to its reputation. The Company could be
subject to material claims by customers, and it may need to incur substantial
expenses to correct any product defects. The Company does not have product
liability insurance to protect it against losses caused by defects in its
products, and it does not have "errors and omissions" insurance. As a result,
any payments that the Company may need to make to satisfy its customers may be
substantial.
37
<PAGE>
The Company may experience fluctuations in its future operating results, which
will make predicting its future results difficult.
Historically, the Company's quarterly and annual operating results have
varied significantly from period to period, and it expects that they will
continue to do so. These fluctuations result from a variety of factors,
including:
- market acceptance of the Company's products;
- changes in order flow from its customers, and its customers'
inability to forecast their needs accurately;
- the timing of new product announcements by the Company
and its competitors;
- increased competition, including changes in pricing by
the Company and its competitors;
- delays in deliveries by the Company's limited number of
suppliers and subcontractors; and
- difficulty in implementing effective cost management
constraints.
Since the Company sells primarily to the consumer market, the Company has
experienced certain revenue trends. The sales of the Company's products, which
are primarily through distributors and retailers, have historically recorded
stronger sales results during the Company's first fiscal quarter (October to
December), which due to the holiday season is typically a strong quarter for
computer equipment sales. In addition, the Company's international sales, mostly
to the European market, were 71%, 73% and 72% of sales for the years September
30, 2000, 1999 and 1998, 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. Accordingly, any sales or net income in any particular period
may be lower than the sales and net income in a preceding or comparable period.
Period-to-period comparisons of the Company's results of operations may not be
meaningful, and should not be relied upon as indications of its future
performance. In addition, its operating results may be below the expectations of
securities analysts and investors in future periods. The Company's failure to
meet these expectations will likely cause its share price to decline.
The Company's stock price may be highly volatile.
The market price of the Company's common stock has been, and may continue
to be, subject to a high degree of volatility. Numerous factors relating to the
Company and its competitors may have a significant impact on the market price of
its common stock, including:
- general conditions in the PC and TV industries;
- product pricing;
- new product introductions;
- market growth forecasts;
- technological innovations;
- mergers and acquisitions; and
- announcements of quarterly operating results.
In addition, stock markets have experienced extreme price volatility and broad
market fluctuations in recent years. This volatility has had a substantial
effect on the market price of securities issued by many high technology
companies, including the Company, in many cases for reasons unrelated to the
operating performance of the
38
<PAGE>
specific companies. The Company's common stock has experienced volatility not
necessarily related to announcements of its performance.
The Company's principal stockholders, executive officers and directors have
substantial control over most matters submitted to a vote of the stockholders,
limiting the ability of outside stockholders to control its management, and any
premium over market price that an acquirer might otherwise pay may be reduced
and any merger or takeover may be delayed.
The Company's officers and directors beneficially own 20.6% of its common
stock not including presently exercisable stock options. As a result, these
stockholders will have substantial control over the outcome of most matters
submitted to a vote of stockholders, including the election of members of the
Company's board, and the approval of significant corporate transactions. This
concentration of ownership may also impede a merger, consolidation, takeover or
other business consolidation involving the Company, or discourage a potential
acquirer from making a tender offer for its shares. This concentration of
ownership could also negatively affect the Company's share price or decrease any
premium over market price that an acquirer might otherwise pay.
No dividends and none anticipated.
The Company has not paid any cash dividends on its common stock since its
inception and does not contemplate or anticipate paying any cash dividends on
its common stock in the foreseeable future. It is currently anticipated that
earnings, if any, will be used to finance the development and expansion of the
Company's business.
From time to time, information provided by the Company, statements made by
its employees or information provided in its Securities and Exchange Commission
filings, including information contained in this Form 10-K, may contain forward
looking information. The Company's actual future results may differ materially
from those projections or statements made in such forward looking information as
a result of various risks and uncertainties, including but not limited to rapid
changes in technology, lack of funds for research and development, competition,
proprietary patents and rights of others, loss of major customers, loss of
sources of supply for its digital video processing chips, non-availability of
management, government regulation, currency fluctuations and the inability of
the Company to profitably sell its products. The market price of the Company's
common stock may be volatile at times in response to fluctuation in the
Company's quarterly operating results, changes in analysts' earnings estimates,
market conditions in the computer hardware industry, seasonality of the business
cycle, as well as general conditions and other factors external to the Company.
Item 7A. Market Risks
Due to extensive sales to European customers denominated in local
currencies, the Company is a net receiver of currencies other than the U.S.
dollar and as such benefits from a weak dollar and is adversely affected by a
strong dollar relative to the major worldwide currencies, especially the Euro
and British Pound Sterling. Consequently, changes in exchange rates expose the
Company to market risks resulting from the fluctuations in the foreign currency
exchange rates to the U.S. dollar. The Company attempts to reduce these risks by
entering into foreign exchange forward contracts with financial institutions to
protect against currency exchange risks associated with its foreign denominated
accounts receivable.
39
<PAGE>
The strength or weakness of the U.S. dollar against the value of the Euro
and British Pound Sterling impact the Company's financial results. Changes in
exchange rates may positively or negatively affect the Company's revenues, gross
margins, operating income and retained earnings (which are expressed in U.S.
dollars). 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 forward window contracts, the Company attempts to
hedge its foreign sales against currency fluctuations.
As of September 30, 2000, the Company has foreign currency forward
contracts outstanding of approximately $11.3 million for the Euro. The contracts
expire through December 2000. As of September 30, 2000, the Company had
unrecognized gains from foreign currency forward contracts of $319,000.
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.
Item 8. Financial Statements and Supplementary Data
See Consolidated Financial Statements annexed hereto
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
40
<PAGE>
PART III
Item 10 (Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act), Item 11 (Executive
Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and
Management), and Item 13 (Certain Relationships and Related Transactions) will
be incorporated in the Company's Proxy Statement to be filed within 120 days of
September 30, 2000 and are incorporated herein by reference.
41
<PAGE>
Item 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number
3.1 Certificate of Incorporation, as amended to date (1)
3.2 By-laws, as amended to date (1) (3)
4.1 Form of Common Stock Certificate (1)
4.2 1994 Incentive Stock Option Plan (1)
4.3 1996 Non-Qualified Stock Option Plan (4)
4.4 1998 Incentive Stock Option Plan (5)
4.5 2000 Hauppauge Digital Inc. Performance and Equity Incentive Plan(6)
4.6 Hauppauge Digital Inc. Employee Stock Purchase Plan (7)
10.1 Form of Employment Agreement with Kenneth R. Aupperle(8)
10.2 Form of Employment Agreement with Kenneth Plotkin(8)
10.3 Lease dated February 7, 1990 between Ladokk Realty Company and
Hauppauge Computer Works, Inc.(1) 10.3.1 Modification made February 1,
1996 to lease dated 1990 between LADOKK Realty and Hauppauge Computer
Works, Inc. (2)
10.8 Long Island Development Corporation ("LIDC") Mortgage Loan
Agreements(1)
10.9 The Company's Guaranty of LIDC Loan Agreements (1)
10.10 Shawmut Mortgage Loan Agreements (1)
10.11 The Company's Guaranty of the Shawmut Mortgage Loan Agreements (1)
10.12 Master Purchase Agreement between Reuters Ltd. and Hauppauge Computer
Works Inc. (1)
10.13 Security Agreement by and between The Chase Manhattan Bank and
Hauppauge Computer Works, Ltd., dated July 12, 2000
10.14 Security Agreement by and between The Chase Manhattan Bank and HCW
Distributing Corp., dated July 12, 2000
10.15 Security Agreement by and between The Chase Manhattan Bank and
Hauppauge Computer Works, GmbH, dated July 12, 2000
10.16 Security Agreement by and between The Chase Manhattan Bank and
Hauppauge Digital Europe Sarl, dated July 12, 2000
10.17 Security Agreement by and between The Chase Manhattan Bank and
Hauppauge Computer Works Sarl, dated July 12, 2000
10.18 Security Agreement by and between The Chase Manhattan Bank and
Hauppauge Digital Asia Pte. Ltd., dated July 12, 2000
10.19 Security Agreement by and between The Chase Manhattan Bank and
Hauppauge Digital, Inc., dated July 12, 2000
10.20 Security Agreement by and between The Chase Manhattan Bank and
Hauppauge Computer Works, Inc., dated July 12, 2000
10.21 Guaranty by and between Hauppauge Digital, Inc. and Hauppauge Computer
Works, Inc. and The Chase Manhattan Bank, dated July 12, 2000
10.22 Grid Promissory Note by and between Hauppauge Digital, Inc. and
Hauppauge Computer Works, Inc. and The Chase Manhattan Bank, dated
July 12, 2000
42
<PAGE>
21 Subsidiaries of the Company
23 Consent of BDO Seidman LLP
27 Financial Data Schedule
1. Denotes document filed as an exhibit to the Company's Registration
Statement on Form SB-2 (No. 33-85426), as amended, effective January 10,
1995 and incorporated herein by reference.
2. Denotes document filed as an exhibit to the Company's Form 10-KSB for
September 30, 1996 and incorporated herein by reference.
3. With respect to Article X of the By-Laws, denotes document filed as an
exhibit to the Company's Annual Report on Form 10-KSB for September 30,
1997 and incorporated herein by reference.
4. Denotes document filed as an Exhibit to the Company's definitive Proxy
Statement pursuant to Section 14 (a) of the Securities Exchange Act of
1934, as filed on January 27, 1998, and incorporated herein by reference.
5. Denotes document filed as an Exhibit to the Company's definitive Proxy
Statement pursuant to Section 14 (a) of the Securities Exchange Act of
1934, as filed on January 27, 1998 and incorporated herein by reference.
6. Denotes document filed as an Exhibit to the Company's Registration
Statement on Form S-8 (no. 333-46906),
and incorporated herein by reference.
7. Denotes document filed as an Exhibit to the Company's Registration
Statement on Form S-8 (no. 333-46910), and incorporated herein by
reference.
8. Denotes document filed as an exhibit to the Company's Form 10-KSB for
September 30, 1998 and incorporated herein by reference.
(b) Reports on form 8K
No report on form 8K was filed by the Company during the fourth quarter of
the fiscal year ended September 30, 2000.
43
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
endorsed.
HAUPPAUGE DIGITAL INC.
By:/s/ Kenneth Plotkin Date: January 2, 2001
---------------------- ---------------
KENNETH PLOTKIN
Chief Executive Officer, Vice-
President, and Secretary
By:/s/ Gerald Tucciarone Date: January 2, 2001
----------------------- ---------------
GERALD TUCCIARONE
Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and as of the date indicated.
By:/s/ Kenneth R. Aupperle Date: January 2, 2001
----------------------- ---------------
KENNETH R. AUPPERLE
Director
By:/s/ Kenneth R. Plotkin Date: January 2, 2001
----------------------- ---------------
KENNETH PLOTKIN
Director
By:/s/ Steven J. Kuperschmid Date: January 2, 2001
------------------------- ---------------
STEVEN J. KUPERSCHMID
Director
By:/s/ Bernard Herman Date: January 2, 2001
----------------------- ---------------
BERNARD HERMAN
Director
44
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of September 30,
2000 and 1999 F-3
Consolidated Statements of Operations for the
years ended September 30, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity
for the years ended September 30, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years
ended September 30, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7 - F-22
Report of Independent Certified Public Accountants F-23
Schedule II-Valuation and Qualifying Accounts F-24
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Hauppauge Digital, Inc. and Subsidiaries
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Hauppauge
Digital, Inc. and Subsidiaries as of September 30, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended September 30, 2000. These financial
statements are the responsibility of the management of Hauppauge Digital, Inc.
and Subsidiaries. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hauppauge Digital,
Inc. and Subsidiaries as of September 30, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2000 in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Melville, New York December 7, 2000, except for Note 9a which is as of December
22, 2000
F-2
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
ASSETS 2000 1999
<S> <C> <C>
Current Assets:
Current Assets:
Cash and cash equivalents $ 2,744,855 $ 6,122,922
Accounts receivable, net of allowance for doubtful
accounts of $165,000 and $135,000 6,172,993 6,973,452
Inventories 12,289,975 12,957,439
Prepaid expenses and other current assets 456,431 407,916
Income taxes receivable 1,496,045 -
Deferred income taxes 1,267,797 477,074
--------- -------
Total current assets 24,428,096 26,938,803
Property, plant and equipment, net 977,030 718,562
Goodwill and intangible assets-net 824,519 -
Security deposits and other non current assets 85,228 70,219
------ ------
$ 26,314,873 $ 27,727,584
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY :
Current Liabilities:
Accounts payable $ 10,481,714 $ 11,208,777
Accrued expenses 952,482 2,698,161
Loan payable 1,000,000 -
Income taxes payable 227,000 498,555
------- -------
Total current liabilities 12,661,196 14,405,493
========== ==========
Commitments and Contingencies (Notes 5, 8, 9 and 10)
Stockholders' Equity
Common stock $.01 par value; 25,000,000 shares authorized, 9,312,578
and 9,120,604 issued, respectively 93,126 92,011
Additional paid-in capital 12,046,421 10,649,800
Retained earnings 2,848,194 3,847,409
Treasury stock, at cost, 429,602 and 428,600 shares, respectively (1,334,064) (1,267,129)
---------- ----------
Total stockholders' equity 13,653,677 13,322,091
---------- ----------
$ 26,314,873 $ 27,727,584
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended September 30,
2000 1999 1998
---- ----- ----
<S> <C> <C> <C>
Net sales $66,292,491 $58,601,611 $38,757,443
Cost of sales 53,535,461 42,434,612 28,643,843
---------- ---------- ----------
Gross profit 12,757,030 16,166,999 10,113,600
Selling , general and administrative expenses 13,121,152 10,457,713 7,243,818
Research and development expenses 1,665,600 1,256,536 808,088
--------- --------- -------
Income (loss) from operations (2,029,722) 4,452,750 2,061,694
Other income (expense):
Interest income 109,435 201,392 236,441
Interest expense (15,134) - -
Other, net (247,866) (61,514) 184,355
-------- ------- -------
Income (loss) before income taxes (2,183,287) 4,592,628 2,482,490
Taxes on income (benefit) on loss (1,184,072) 1,475,000 523,937
---------- --------- -------
Net income (loss) $(999,215) $3,117,628 $1,958,553
========= ========== ==========
Net income (loss) per share-basic $(0.11) $0.36 $0.22
====== ===== =====
Net income (loss)per share-diluted $(0.11) $0.33 $0.22
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
Retained
Additional Earnings
Number Paid-In (Accumulated Treasury
of shares Amount Capital Deficit) Stock Total
--------- ------ ------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1997 8,930,604 $ 89,306 $ 10,300,191 ($1,228,772) $ (193,953) $ 8,966,772
Net income 1,958,553 1,958,553
Purchase of treasury stock (1,009,651) (1,009,651)
Exercise of stock options 59,200 592 90,976 91,568
Stock issued to pay bonuses 13,000 130 29,526 29,656
------ --- ------ ---------- ---------- ------
BALANCE AT SEPTEMBER 30, 1998 9,002,804 $ 90,028 $ 10,420,693 $ 729,781 $(1,203,604) $10,036,898
Net income 3,117,628 3,117,628
Purchase of treasury stock (63,525) (63,525)
Exercise of stock options 117,200 1,172 191,519 192,691
Compensation for consulting services
paid in options - - 36,000 36,000
Stock issued to pay bonuses 600 6 2,393 2,399
--- - ----- ----------- ----------- -----
BALANCE AT SEPTEMBER 30, 1999 9,120,604 $ 91,206 $ 10,650,605 $ 3,847,409 $(1,267,129) $13,322,091
Net (loss) ( 999,215) (999,215)
Exercise of stock options 190,274 1,903 452,830 (66,935) 387,798
Compensation for consulting services paid
in options - 38,004 38,004
Tax benefit related to options exercised
by employees - 883,000 883,000
Stock issued to pay bonuses 1,700 17 21,982 21,999
----- -- ------ ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 2000 9,312,578 $ 93,126 $ 12,046,421 $ 2,848,194 $(1,334,064) $13,653,677
========= ======== ============ =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(999,215) $ 3,117,628 $ 1,958,553
--------- ------------ -----------
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 265,904 158,967 88,138
Provision for doubtful accounts 30,000 35,000 50,000
Deferred income taxes (790,723) 120,057 (503,131)
Compensation paid in stock and options 60,003 38,399 29,656
Changes in current assets and liabilities:
Accounts receivable 770,459 (511,289) (3,353,030)
Income taxes receivable (1,496,045) - -
Tax benefit related to options exercised by employees 883,000 - -
Inventories 667,464 (4,405,342) (3,707,731)
Prepaid expenses and other current assets (48,515) 60,847 (9,223)
Other assets (15,009) - -
Accounts payable (727,063) 1,711,774 5,093,216
Accrued expenses and income taxes (2,017,234) (166,837) 2,262,808
---------- -------- ---------
Total adjustments (2,417,759) (2,958,424) (49,297)
---------- ---------- -------
Net cash (used in) provided by operating activities (3,416,974) 159,204 1,909,256
Cash flows from investing activities:
Purchases of property, plant and equipment (449,304) (431,288) (311,733)
Business acquisition (899,587) - -
Other - (16,012) -
--------- ------- --------
Net cash used in investing activities (1,348,891) (447,300) (311,733)
Cash flows from financing activities:
Purchase of treasury stock - (63,525) (1,009,651)
Proceeds from the exercise of stock options 387,798 192,691 91,568
Proceeds from bank loan 1,000,000 - -
--------- ------- ----------
Net cash provided by (used in) financing activities 1,387,798 129,166 (918,083)
--------- ------- --------
Net (decrease) increase in cash and cash equivalents (3,378,067) (158,930) 679,440
Cash and cash equivalents, beginning of year 6,122,922 6,281,852 5,602,412
--------- --------- ---------
Cash and cash equivalents, end of year $ 2,744,855 $ 6,122,922 $ 6,281,852
============ ============ ===========
Supplemental disclosure:
Interest paid $ 8,180 - -
Income taxes paid $ 503,217 $ 1,971,561 $148,522
========= ============ ========
Supplemental disclosure of non cash financing activities:
Shares exchanged for exercise of stock options $66,935 - -
======= ========== ========
See accompanying notes to consolidated financial statements
</TABLE>
F-6
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Hauppauge
Digital, Inc. and its wholly owned subsidiaries, Hauppauge Computer Works, Inc.,
HCW Distributing Corp., Eskape Acquisition Corporation, Hauppauge Digital Asia,
PTE, and Hauppauge Digital Europe SARL, as well as Hauppauge Computer Works,
GMBH, Hauppauge Computer Works, Ltd., and Hauppauge Computer Works SARL France,
which are wholly owned subsidiaries of Hauppauge Digital Europe SARL Inc.
(collectively, the "Company"). All inter company accounts and transactions have
been eliminated.
Nature of Business
The Company is primarily engaged in the design, manufacture and marketing
of WinTV(R) video computer boards and video conferencing boards. The Company
relies upon primarily one subcontractor with locations in Hungary and Malaysia
to manufacture its products. Win/TV boards convert moving video images from
cable TV, video cameras or a VCR to a digital format which is displayed in a
sizable window on a PC monitor. These video images can be viewed simultaneously
with normal PC operations such as word processing programs and spreadsheet
applications. The WinTV(R) board is marketed worldwide through retailers,
distributors, original equipment manufacturers and manufacturers'
representatives. Net sales to international and domestic customers were
approximately 71% and 29%, 73% and 27%, and 72% and 28% of total sales for the
years ended September 30, 2000, 1999 and 1998, respectively. The Company
operates in only one segment. The Company maintains sales offices in both Europe
and Asia. Long lived assets of the foreign operations are immaterial and
therefore not separately disclosed.
Net sales to customers by geographic location consist of:
Years ended September 30,
Sales to: 2000 1999 1998
--------- ----- ---- ----
United States 29% 27% 28%
Germany 40% 43% 38%
United Kingdom 11% 13% 19%
France 5% 6% 2%
Asia 4% - -
Netherlands 1% 2% 3%
Other Countries 10% 9% 10%
--- -- ----
Total 100% 100% 100%
F-7
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
Company reviews all significant estimates affecting the financial statements on
a recurring basis and records the effect of any adjustments when necessary.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity date of three
months or less to be cash equivalents.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. At times such cash in banks are in excess of the FDIC insurance
limit. Concentration of credit risk with respect to accounts receivable exists
because the Company operates in one industry (also see Note 7). Although the
Company operates in one industry segment, it does not believe that it has a
material concentration of credit risk either from an individual counter party or
a group of counter parties, due to the large and diverse user group for its
products.
Revenue Recognition
The Company records revenue when its products are shipped. Provisions for
estimated sales allowances and returns are accrued at the time revenues are
recognized.
Warranty Policy
The Company warrants that its products are free from defects in material
and workmanship for a period of one year from the date of initial retail
purchase. The warranty does not cover any losses or damage that occur as a
result of improper installation, misuse or neglect and repair or modification by
anyone other than the Company or an authorized repair agent. The Company accrues
anticipated warranty costs based upon historical percentages of items returned
for repair within one year of the initial sale.
Inventories
Inventories are valued at the lower of cost (principally average cost) or
market. A reserve has been provided to reduce obsolete and/or excess inventory
to its net realizable value.
F-8
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Depreciation of office equipment and machinery and amortization of
leasehold improvements is provided for using both accelerated and straight line
methods over the estimated useful lives of the related assets as follows:
Office Equipment and Machinery: 5 to 7 years
Leasehold improvements: Asset life or lease term, whichever is shorter
Goodwill and intangibles assets
The net assets of businesses purchased are recorded at their fair value at
the acquisition date, and the consolidated financial statements include their
operations from that date. Any excess of acquisition costs over the fair value
of identifiable net assets acquired is included in goodwill and is amortized on
a straight line basis over periods not exceeding 10 years. Contingent
consideration, when applicable, may be paid in the event certain financial
performance targets are satisfied over periods defined at the date of
acquisition.
Accumulated amortization and amortization expense for the period ended
September 30, 2000 was $35,483.
Income taxes
The Company follows the liability method of accounting for income taxes.
Deferred income taxes are recorded to reflect the temporary differences in the
tax bases of the assets or liabilities and their reported amounts in the
financial statements.
Long-Lived Assets
Long-lived assets, such as property and equipment and goodwill, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value. To
date, there have been no material write downs.
Research and Development
Expenditures for research and development are charged to expense as incurred.
Foreign Currency Transactions and Operations
The Company sells products and services to foreign customers through local
sales offices. Revenues and expenses are recorded in U.S. dollars at the current
exchange rate at the time of the transaction. Gains due to the changes in
exchange rate totaling approximately $184,000 for fiscal 1998 and losses
totaling approximately $247,000 and $62,000 for fiscal 2000 and 1999,
respectively were included as a component of Other, net, in the statement of
operations.
F-9
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments
The Company uses forward exchange contracts to hedge certain firm
commitments denominated in foreign currencies. Gains and losses on these
positions are deferred and included in the statement of operations as part of
Other, net, when the transaction is completed.
Fair Value of Financial Instruments
The carrying amounts of certain financial instruments, including cash,
accounts receivable and accounts payable and debt, approximate fair value as of
September 30, 2000 because of the relatively short term maturity of these
instruments.
Net income (loss) per share
Basic earnings (loss) per share includes no dilution and is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflect, in
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 (loss) per share follows:
<TABLE>
<CAPTION>
Years ended September 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Weighted average shares outstanding-basic 8,837,256 8,632,432 8,806,714
Common stock equivalents-stock options - 847,316 546,780
--------- ------- -------
Weighted average shares outstanding-diluted 8,837,256 9,479,748 9,353,494
========= ========= =========
</TABLE>
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 was
effective as of March 27, 2000. All prior periods have been retroactively
restated to reflect the stock split.
Options to purchase 1,610,226 and 95,000 shares of common stock at prices
ranging $1.35 to $ 10.06 and $8.75 and $10.00 respectively were outstanding as
of September 30, 2000 and 1999, but were not included in the computation of
diluted earnings per share because they were anti-dilutive. These options expire
through 2005.
Stock Based Compensation
The Company accounts for its stock option awards under the intrinsic value based
method of accounting as prescribed by APB Opinion Number 25 "Accounting for
Stock Issued to Employees". Under the intrinsic value based method, compensation
cost is the excess, if any, of the quoted market price of the stock at grant
date or other
F-10
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
measurement date over the amount an employee must pay to acquire the stock. The
Company discloses the pro forma impact on net income and earnings per share as
if the fair value based method had been applied as required by SFAS No. 123,
"Accounting f or Stock Based Compensation" .
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 by the Company after
October 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 effect of implementing SFAS 133 will be presented in
the Company's 10Q for the quarter ended December 31, 2000 as a cumulative effect
of a change in accounting principle. At September 30, 2000, the Company's
deferred gain or ineffective portion of $319,000 would have been reported in
income, the effective portion will be reported as a component of accumulated
comprehensive income and the fair value of the $11,310,000 in Euro forward
contracts in current assets and current liabilities, respectively.
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), Revenue Recognition in Financial
Statements." SAB No. 101 is effective for fiscal years beginning after December
15, 1999. The adoption of this bulletin is not expected to have an effect on the
consolidated financial statements.
2. Inventories
Inventories consist of the following:
September 30,
2000 1999
----- ----
Component Parts $6,059,247 $ 4,875,940
Work in Process 111,446 494,285
Finished Goods 6,119,282 7,587,214
--------- --------
$12,289,975 $12,957,439
=========== ============
F-11
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Property, Plant and Equipment
The following is a summary of property, plant and equipment:
September 30,
2000 1999
---- ----
Office Equipment and Machinery $1,670,762 $1,178,805
Leasehold Improvements 69,413 58,436
---------- ---------
1,740,175 1,237,241
Less: Accumulated depreciation and amortization 763,145 518,679
---------- ----------
$ 977,030 $ 718,562
========== ==========
Depreciation expense totaled $230,421, $159,962 and $88,138 for September 30,
2000, 1999 and 1998.
4. Income Taxes
The income tax provision consists of the following:
<TABLE>
<CAPTION>
Years ended September 30,
2000 1999 1998
<S> <C> <C> <C>
Current tax expense (benefit):
Federal income tax (benefit) $ (473,452) $ 1, 125,234 $ 932,653
State income taxes (benefit) (46,897) 129,709 94,415
Foreign income taxes 127,000 100,000 -
------- ------- ---------
Total current $ (393,349) $ 1,354,943 $1,027,068
------------ ------------- ----------
Deferred tax expense (benefit)
Federal (707,489) 107,417 (450,170)
State (83,234) 12,640 (52,961)
------- ------ -------
Total deferred (790,723) 120,057 (503,131)
-------- ------- --------
Total taxes on income $ (1,184,072) $ 1,475,000 $ 523,937
============ ============= ==========
</TABLE>
F-12
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of deferred taxes are as follows:
Years ended September 30,
2000 1999
Deferred tax assets:
Net operating loss carry forwards $ 47,612 $ 47,612
Tax credit carryforward 150,000 -
Inventory obsolescence reserve 573,657 125,400
Warranty reserve 23,142 27,550
Allowance for doubtful accounts 62,700 66,107
Deferred rent payments 41,632 39,632
Capitalized inventory costs 80,790 92,109
Sales return reserve 286,026 65,189
Goodwill amortization 3,725 -
Other reserves (1,487) 13,475
------ ------
Total deferred assets $ 1,267,797 $ 477,074
------------- -------------
Prior to 1997, due to new products, the relative volatility of the industry
the Company operates in and the limited track record of profitability, the
Company had recorded a full valuation allowance against the deferred tax assets.
In recognition of market acceptance of the Company's product as evidenced by the
expansion of sales, along with consecutive years of profitability, the Company
reduced the valuation allowance by $127,000 and $292,798 primarily in the fourth
quarter of fiscal 1999 and 1998, respectively, which resulted in the recognition
of deferred tax benefits of $127,000 and $503,131, respectively.
As of September 30, 2000, the Company had net operating losses, (which
expire in the years through 2010), of $125,295 available to offset future
taxable income. Due to the change in control which resulted from the Company's
January 10, 1995 initial public offering of stock, all of the remaining unused
net operating losses were subject to limitations per Internal Revenue code
section 382. In 1999 and 1998, the Company utilized $275,386 in restricted tax
loss carry forwards.
As of September 30, 2000, the Company was able to utilize the current year loss
and the $883,000 benefit received from the exercise of employee stock options to
carry back the net operating loss against prior year taxes paid totaling $
1,496,045. In addition, the Company has a tax credit carry forward for research
and development expenses totaling $150,000, which it expects to utilize in the
next year.
F-13
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The difference between the actual income tax provision (benefit) and the
tax provision (benefit) computed by applying the Federal statutory income tax
rate of 34% to the income before income tax is attributable to the following:
<TABLE>
<CAPTION>
Years ended September 30,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Income tax (benefit) at federal statutory rate $ (742,318) $ 1,561,494 $ 844,047
Reduction in deferred income tax
Valuation allowance (see above) - (127,000) (292,798)
Permanent differences 57,283 48,356 21,250
Income taxed at lower than statutory rates (387,418) ( 159,219) (104,995)
State income taxes, (benefit) net of federal benefit (85,886) 85,608 62,040
Foreign income taxes 127,000 100,000 -
Research and Development credit (150,000) (100,000) (75,000)
Other (2,733) 65,761 69,393
------ ------ ------
Taxes on income $ (1,184,072) $1,475,000 $ 523,937
============= ========== =========
</TABLE>
5. Line of Credit
On July 12, 2000, the Company signed an agreement with a bank, that 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, which was 9.50% at
September 30, 2000 or 1.25% above the London Interbank Offered Rate. The
facility is secured by the assets of the Company, and expires on March 31, 2001.
As of September 30, 2000, the Company had $1 million in borrowings from this
line of credit outstanding.
6. Stockholders' Equity
a. Treasury Stock
On November 8, 1996, the Company approved a stock repurchase program
for the repurchase of up to 600,000 shares of its own Common Stock. The
repurchased shares will be used by the Company for certain employee benefit
programs. As of September 30, 2000 and 1999, 429,602 and 428,600 treasury
shares valued at $1,334,064 and $ 1,267,129 with average prices of $ 3.11
and $2.95 were held by the Company as treasury shares.
b. Stock Compensation Plans
In August 1994, the Company adopted an Incentive Stock Option Plan
("ISO"), as defined in section 422(A) of the Internal Revenue Code.
Pursuant to the ISO, 400,000 options may be granted for up to ten years
with exercise prices during the first two years subsequent to the IPO being
the greater of the IPO offering price per unit
F-14
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($1.68) or the fair market value of the common stock at the date of the grant.
After the initial two year period, the option price shall be no less than the
fair market value of the stock on the date the options are granted. As of
September 30, 2000, 1999 and 1998, 168,000, 221,600 and 334,400 options were
outstanding, respectively, ranging in prices from $1.35 to $2.55. All amounts
have been adjusted for the March 27, 2000 two for one stock split.
On December 14, 1995, the Board of Directors authorized the adoption of the
1996 Non-Qualified Stock Option Plan (the "1996 Non-Qualified Plan") which was
approved by the Company's stockholders on March 5, 1996. The 1996 Non-Qualified
Plan authorizes the grant of 500,000 shares. The plan terminates on March 5,
2006. This plan does not qualify for treatment as an incentive stock option plan
under the Internal Revenue Code. There are various tax benefits which could
accrue to the Company upon exercise of non qualified stock options that may not
be available to the Company upon exercise of qualified incentive stock options.
The purpose of the plan is to provide the Company greater flexibility in
rewarding key employees, consultants, and other entities without burdening the
Company's cash resources. As of September 30, 2000, 1999 and 1998, 281,304,
318,000 and 220,000 options ranging in prices from $1.35 to $10 were outstanding
under the 1996 Non-Qualified Plan. All amounts have been adjusted for the March
27, 2000 two for one stock split.
On December 17, 1997 the Company's Board of Directors adopted and
authorized a new incentive stock option plan ("1997 ISO") pursuant to section
422A of the Internal Revenue Code. This plan was approved by the Company's
stockholders at the Company's March 12, 1998 annual stockholders' meeting. The
1997 ISO plan as adopted authorizes the grant of 700,000 shares of common stock,
subject to adjustment as provided in the. This plan terminates on December 16,
2007. The options terms may not exceed ten years. Options can not be granted at
less than 100% of the market value at the time of grant. Options granted to
employees who own more the 10% of the Company's outstanding common stock can not
be granted at less than 110% of the market value at the time of grant. As of
September 30, 2000, 1999 and 1998, 611,722, 669,900 and 296,300 options were
outstanding with exercise prices from $2.25 to $ 10.06. All amounts have been
adjusted for the March 27, 2000 two for one stock split.
The Company's Board of Directors on May 9, 2000 adopted the 2000
Performance and Equity Incentive Plan (the "2000 Plan"). This plan was approved
by the stockholders at the Company's July 18, 2000 annual stockholders' meeting.
The purpose of the 2000 Plan is to attract, retain and motivate key employees,
directors and non employee consultants of the Company.
The 2000 Plan as adopted reserves 500,000 shares of common stock to be
issued pursuant to stock options grants or other awards, subject to adjustment
for any merger, reorganization, consolidation, recapitalization, stock dividend,
stock split or any other changes on corporate structure affecting the common
stock. This plan is to be administered by the Board of Directors. Grants of
awards to non employee directors require the approval of the Board of Directors.
F-15
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This plan allows the granting of options as either incentive stock options
or non qualified options. Non employee directors and non employee consultants
may only be granted Non-Qualified Stock Options. Incentive stock options are
priced at the market value at the time of grant and shall be exercisable no more
than ten years after the date of the grant. Incentive stock options granted to
employees who own 10% or more of the combined voting power of the Company can
not be granted at less than 110% of the market value at the time of grant. Non
qualified options shall be granted at a price determined by the Board of
Directors and shall be exercisable no more than 10 years and one month after the
grant. The aggregate fair market value of shares subject to an incentive stock
option granted to an optionee in any calendar year shall not exceed $100,000. As
of September 30, 2000, 69,200 shares have been issued from this plan at an
average price $5.78.
The Company's Board of Directors on May 9, 2000 adopted the Employee Stock
Purchase Plan. This plan was approved by the stockholders at the Company's July
18, 2000 annual stockholders' meeting. This plan is intended to provide full
time employees of the Company an opportunity to purchase an ownership interest
in the Company through the purchase of common shares. The Company has reserved
100,000 common shares for issuance under the plan. This plan is to be
administered by the Board of Directors. Employees must have completed six months
of employment and who work more than 20 hours per week for more than five months
in the year are eligible to participate in the plan. The employee may elect to
payroll deductions up to 10% per pay period. The purchase price shall either be
the lower of 85% of the closing price on the offering commencement date or the
offering termination date. No employee will be grated an option to purchase
common shares if such employee would own shares or holds options to purchase
shares which would cause the employee own more than 5% of the combined voting
power of all classes of stock. Non employees are not eligible to participate.
This plan terminates on December 31, 2003. The maximum number of shares that may
be issued in any quarterly offering is 10,000, plus unissued shares from prior
offerings whether offered on not. As of September 30, 2000, no common shares
were purchased under this plan.
On September 30, 1999 and 1998 , in connection with employment contracts
the Company had with the Chief Executive Officer and President, 120,000 non
qualified stock options for each year became exercisable.
The Company accounts for its stock option awards under the intrinsic value
based method, as prescribed by APB Opinion 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. Under APB 25, because the
exercise price of the employees stock options equals the market price of the
underlying stock at the date of the grant, no compensation is cost is
recognized.
SFAS Statement 123 "Accounting for Stock Based Compensation," ("SFAS 123")
requires the Company to provide pro forma information regarding net income and
earnings per share as if compensation cost for the Company's stock option plans
had been determined in accordance with the fair value based method prescribed in
SFAS123. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for 2000, 1999 and 1998: risk free interest rates of 5.25%, 4.25%
and 4.25% for 2000, 1999 and 1998, volatility factor of the expected market
price of the Company's stock 40%, 35 % and 37% for 2000, 1999 and 1998, and
expected lives of either five or ten years. The weighted average fair value of
options granted in 2000, 1999 and 1998 were $2.27 to $4.60, $.86 to $3.33 and
$.82 to $1.29, respectively.
F-16
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the accounting provisions of FASB Statement 123, the Company's net
income (loss) and earnings (loss) per share would have been reduced to the pro
forma amounts indicated below:
Years Ended September 30,
2000 1999 1998
------ ------ -----
Net income (loss):
As reported $ (999,215) $ 3,117,628 $ 1,958,553
Pro forma (1,283,184) 2,749,697 1,724,754
Net income, per share:
As reported
Basic $ (0.11) $ 0.36 $ 0.22
Diluted $ (0.11) $ 0.33 0.21
Pro Forma
Basic $ (0.15) $ 0.32 0.20
Diluted $ (0.15) $ 0.29 0.19
A summary of the status of the Company's fixed options plans as of September 30,
2000, 1999 and 1998 and changes during the years ending those dates is presented
below:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Non Exercise
ISO Price Qualified Price
--- ------ ----------- -------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 315,000 $ 1.48 200,000 $ 1.53
Granted 381,300 2.37 260,000 2.05
Exercised (59,200) 1.55 - -
Forfeited (6,400) 1.55 - -
------ ---- ------ ----
Balance at September 30, 1998 630,700 $ 2.05 460,000 $ 1.82
Granted 394,000 4.32 218,000 4.01
Exercised (117,200) 1.65 - -
Forfeited (16,000) 1.98 -
======= ==== ======= ====
Balance at September 30, 1999 891,500 $ 3.12 678,000 $ 2.53
Granted 111,700 6.08 43,300 5.25
Exercised (110,278) 2.33 (79,996) 2.53
Forfeited (44,000) 6.91 - -
------- ---- ------- ----
Balance at September 30, 2000 848,922 $ 3.40 641,304 $ 2.71
======= ======== ======= =======
Options exercisable at year end 221,622 $ 4.41 514,504 $ 2.16
======= ======== ======= =======
</TABLE>
F-17
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at
September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------- ---------------------
Range of Weighted Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise
------ ----------- ------------------ --------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.35 52,204 2.4 years $1.35 10,004 $ 1.35
1.50 48,000 5.4 1.50 48,000 1.50
1.58 360,000 4.3 1.58 360,000 1.58
1.47 1,600 2.8 1.47 - -
1.69 9,000 2.9 1.69 3,000 1.69
1.86 33,200 1.6 1.86 9,200 1.86
2.07 9,000 3.0 2.07 - -
2.55 180,000 2.3 2.55 120,000 2.55
2.32 120,000 7.3 2.32 72,000 2.32
2.25 124,500 2.4 2.25 14,100 2.25
3.22 10,000 3.3 3.22 10,000 3.22
10.00 50,000 3.8 10.00 10,000 10.00
3.94 252,722 3.5 3.94 42,322 3.94
2.82 60,000 3.0 2.82 20,000 2.82
8.75 25,000 3.7 8.75 5,000 8.75
10.06 10,000 4.3 10.06 - -
5.25 12,500 4.8 5.25 12,500 5.25
5.78 69,200 4.8 5.78 - -
5.25 63,300 4.8 5.25 - -
--------- -------
1,490,226 736,126
========= =======
</TABLE>
7. Significant Customer Information
For the years ended September 30, 2000, 1999 and 1998 the Company had no single
customer who accounted for more that 10% of net sales. As of September 30, 2000,
1999 and 1998 the Company had six, (one for 16%), five and four customers who
accounted for 50%, 66% and 51%, respectively of the net accounts receivable.
8. Related Party Transactions
The Company rents its principal office and warehouse space in Hauppauge, New
York from a real estate partnership owned by the two principal stockholders of
the Company. The lease term expires on January 31, 2006 and includes an option
to extend for three additional years. The lease provides for rent increases of
5% per year. Rent is currently at the annual rate of $372,707 and will increase
to $391,342 annually of February 1, 2001. On December 17, 1997 in connection
with a re-negotiation of the lease term, the Company granted 60,000, (120,000
after two for one stock split) options to a real estate partnership owned by the
principal stockholders at an exercise price of $3.81 per share ($1.905 per share
adjusted for stock split), which are exercisable through the lease term. The
market price of the option equaled the exercise price at the date of the grant.
The effect of imputing the fair value of the options granted was immaterial.
The indebtedness incurred by the two principal stockholders to purchase the
building is also guaranteed by the Company and totaled $961,469 at September 30,
2000.
F-18
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Minimum annual lease payments to related parties and third parties are as
follows:
Years ended September 30,
2001 618,406
2002 584,304
2003 561,918
2004 553,202
2005 527,150
Thereafter 220,274
--------
$3,065,254
==========
Rent expense totaled approximately $552,277, $432,196 and $399,166 for the
years ended September 30, 2000, 1999 and 1998, respectively. The Company pays
the real estate taxes and is responsible for normal building maintenance.
9. Commitments and Contingencies
a. Litigation
In the normal course of business, the Company is a party to various claims
and/or litigation. Management and the Company's legal counsel believe that the
settlement of all such claims and or/litigation, considered in the aggregate,
will not have a material adverse effect on the Company's financial position and
results of operations.
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,
F-19
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Non infringement. AII filed its Brief for
Plaintiff-Appellant on October 13, 2000, while the Company joined the Brief for
Defendents-Appellees, filed on December 22, 2000. As with the prior action in
the District Court, the Company intends to defend this action vigorously.
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.
b. Employment Contracts
On January 10, 1998, upon the expiration of prior employment agreements,
the Company's chief executive officer and president entered into new employment
agreements with the Company. The term of the employment agreements are for three
years which are automatically renewed each year unless otherwise not authorized
by the Board of Directors. The agreements provide each executive with an annual
base salary of $125,000, $150,000 and $180,000 for the first, second and third
year of the contract. For each annual year thereafter, compensation shall be
mutually determined, but can not be less that the preceding year.
The contract also provides for a bonus of 2% of operating income (income
from operations but before interest and other income) to be paid if the
operating income exceeds the prior year's operating earnings by 120%. A 1% bonus
on operating income will be paid if the operating income exceed the prior year's
operating by less than 120%. The agreement also obligates the Company to provide
certain disability, medical and life insurance, and other benefits. In the event
of a change of control as defined in the employment agreement, a one time bonus
shall be paid equal to the executive's average annual compensation, including
base compensation, bonus and benefits, received by him during the thirty six
month period preceding the change in control.
Pursuant to the January 10, 1998 employment agreements, on January 21,
1998, incentive stock options to acquire 45,000 shares each (90,000 after two
for one stock split), exercisable in increments of 331/3% per year at $5.0875 ($
2.5438 after stock split) for a period of five years from the date the options
first become exercisable, were granted to the chief executive officer and the
president. In addition, options to
F-20
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchase 30,000 (60,000 post split) non qualified options were issued to the
chief executive officer and president, exercisable for a period of ten years at
$4.625 ($2.3125 post split).
c. Forward Exchange Contracts
Due to extensive sales to European customers denominated in local
currencies, the Company is a net receiver of currencies other than the U.S.
dollar and as such benefits from a weak dollar and is adversely affected by a
strong dollar relative to the major worldwide currencies, especially the Euro
and British Pound Sterling. Consequently, changes in exchange rates expose the
Company to market risks resulting from the fluctuations in the foreign currency
exchange rates to the U.S. dollar. The Company attempts to reduce these risks by
entering into foreign exchange forward contracts with financial institutions to
protect against currency exchange risks associated with its foreign denominated
accounts receivable. .
The strength or weakness of the U.S. dollar against the value of the Euro
and British Pound Sterling impact the Company's financial results. Changes in
exchange rates may positively or negatively affect the Company's revenues, gross
margins, operating income and retained earnings (which are expressed in U.S.
dollars). 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 forward window contracts, the Company attempts to
hedge its foreign sales against currency fluctuations.
As of September 30, 2000, the Company has foreign currency forward
contracts outstanding of approximately $11.3 million for the Euro. The contracts
expire through December 2000. As of September 30, 2000, the Company had
unrecognized gains from foreign currency forward contracts of $319,000.
10. 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 TV 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 $900,000, including legal and accounting
acquisition costs and a restrictive covenant totaling $50,000. 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 and the restrictive covenant on
a straight line basis over two years.
In addition to the price paid for the acquired assets, the purchase agreement
also call for contingent additional consideration, which if earned will be
treated as additional purchase price, 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.
F-21
<PAGE>
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Any additional consideration due the seller shall be paid in the
Company's 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 additional consideration results in the
seller or its authorized successors owing more than 5% of the issued
and outstanding shares of the Company's, 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 that 5% of the then outstanding shares of the Company's stock.
The unaudited supplemental information below summarizes, on a pro forma basis,
the companies results for the twelve months ended September 30, 2000 and
September 30, 1999 had the companies combined at the beginning of each period
presented
Years ended September 30,
2000 1999
----- ----
Net sales 66,410,689 59,454,136
Net income (loss) (1,707,656) 2,018,605
Earnings (loss) per share
Basic (0.19) 0.23
Diluted (0.19) 0.21
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.
F-22
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
Hauppauge Digital, Inc. and Subsidiaries
Hauppauge, New York
The audits referred to in our report dated December 7, 2000 relating to the
consolidated financial statements of Hauppauge Digital, Inc. and Subsidiaries
included the audits of the financial statement Schedule II-Valuation and
Qualifying Accounts for each of the three years in the period ended September
30, 2000. This financial statement schedule is the responsibility of management.
Our responsibility is to express an opinion on this schedule based on our
audits.
In our opinion, such financial statement Schedule-Valuation and Qualifying
Accounts, presents fairly, in all material respects, the information set forth
therein.
/s/ BDO Seidman, LLP
----------------------------
BDO Seidman, LLP
Melville, New York
December 7, 2000
F-23
<PAGE>
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Description Beginning of Costs Charged to Balance at
Period and Expenses Accounts Other Deductions (1) End of Period
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 2000
Reserve and allowances deducted from asset accounts 135,000 30,000 - 165,000
Allowance for doubtful accounts
YEAR ENDED SEPTEMBER 30, 1999
Reserve and allowances deducted from asset accounts
Allowance for doubtful accounts 100,000 585,000 550,000 135,000
YEAR ENDED SEPTEMBER 30, 1998
Reserve and allowances deducted from asset accounts
Allowance for doubtful accounts 100,000 50,000 50,000 100,000
(1) Doubtful accounts written off net of collections
</TABLE>
F-24
<PAGE>
