-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JsgNgkTfcYqRMrgo+cHvbEmzvX32/aGaZHN+JCOvaGKMaSPz3fhpj409/44Fx5w1 cK3Syn36NS1k6+RQxYzm9Q== 0000930803-96-000019.txt : 19961231 0000930803-96-000019.hdr.sgml : 19961231 ACCESSION NUMBER: 0000930803-96-000019 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961224 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAUPPAUGE DIGITAL INC CENTRAL INDEX KEY: 0000930803 STANDARD INDUSTRIAL CLASSIFICATION: 3577 IRS NUMBER: 113227864 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-13550 FILM NUMBER: 96685646 BUSINESS ADDRESS: STREET 1: 91 CABOT COURT CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5164341600 MAIL ADDRESS: STREET 1: 91 CABOT COURT CITY: HAUPPAUGE STATE: NY ZIP: 11788 10KSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Fiscal Year Ended September 30, 1996 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ___________ to ___________ Commission File No. 1-13550 ------- HAUPPAUGE DIGITAL, INC. -------------------------------------------- (Name of small business issuer in its charter) DELAWARE 11-3227864 ---------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 91 Cabot Court, Hauppauge, New York 11788 -------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (516) 434-1600 -------------- Securities registered pursuant to Section 12 (b) of the Act: $.01 par value Common Stock 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 --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B 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-KSB or any amendment to this Form 10-KSB: [X] State registrant's revenues for its most recent fiscal year: $14,695,100 The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 4, 1996 was approximately $15,035,000. Non-affiliates include all shareholders other than officers, directors and 5% shareholders of the Company. Market value is based upon the price of the Common Stock as of the close of business on December 4, 1996 which was $4 5/8 per share as reported by NASDAQ. As of December 4, 1996, the number of shares outstanding of the Common Stock was 4,444,102 shares (exclusive of treasury shares). DOCUMENTS INCORPORATED BY REFERENCE Part III which includes Item 9 (Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act), Item 10 (Executive Compensation), Item 11 (Security Ownership of Certain Beneficial Owners and Management), and Item 12 (Certain Relationships and Related Transactions) will be incorporated in the Company's Proxy Statement to be filed within 120 days of September 30, 1996 and are incorporated herein by reference. PART I ------- Item 1. DESCRIPTION OF BUSINESS ----------------------- (a) Business Development. Hauppauge Digital, Inc. (the "Company") was incorporated in the state of Delaware on August 2, 1994 and has two wholly owned subsidiaries, Hauppauge Computer Works, Inc., which was incorporated in the state of New York on December 14, 1982, and HCW Distributing Corp., which was incorporated in the state of New York on September 13, 1984. Hauppauge Computer Works, Inc. is the owner of all the outstanding shares of Hauppauge Computer Works, GmbH, a German corporation responsible for directing European marketing efforts, and is the owner of all the outstanding shares of Hauppauge Computer Works, LTD, a Virgin Islands corporation responsible for handling sales outside of the United States. All references herein to the Company include the Company, its two wholly owned subsidiaries and their subsidiaries. The Company's executive offices are located at 91 Cabot Court, Hauppauge, New York 11788, its telephone number at that address is (516) 434-1600 and its internet address is http://www.hauppauge.com/hcw/index.htm. From 1987 and until 1991, the Company concentrated its business on the development and sale of system boards which are the "heart" of a personal computer ("PC") and which may be used to upgrade older PCs. Since 1992, the Company has changed the focus of its business and is presently engaged primarily in the business of designing, manufacturing and selling digital video products for the IBM and IBM compatible PC market, consisting of Win/TV and WinCast boards. Win/TV boards are used to convert moving video images from a video camera, video tape recorder or cable TV to a digital format which is displayed in a resizable window on a PC video monitor. These video images may be viewed simultaneously with normal PC operations such as word processing and may also be used in conjunction with CD-ROM packages. WinCast boards add the capability of receiving Intercast(TM) data transmissions. The Company has entered the PC-based digital video market by distributing the Win/TV boards to computer retailers and Original Equipment Manufacturers ("OEMs"). Computer retailers typically stock Win/TV boards on their shelves and sell them to end users for installation in their own PCs, while OEMs typically purchase Win/TV boards and incorporate them in multimedia PC packages, which are then ultimately sold to the end user. Since the close of fiscal year 1995, the Company has added five new products to its line of WIN/TV board products, bringing the total number of products available for sale to ten. Net sales of the Company's products for the Company's last two fiscal years are summarized as follows: Year Ended Year Ended September 30, 1996 September 30, 1995 ------------------ ------------------ PC System Sales $ 1,421,359 $ 792,857 Win/TV Boards 13,273,741 10,758,312 ------------ ------------ Total Company Sales $ 14,695,100 $ 11,551,169 ============ ============ (b) Business of Issuer. Products The Win/TV board was designed so that a PC user can watch television in a resizable window on their PC video monitor during normal computer use. This activity requires a board that plugs into a PC, and operating software to control functions such as channel change, volume adjustment, freeze frame, and channel scan. The application of the Win/TV board does not interfere with the normal operation of the PC. All hardware functions required, such as video digitizing, windowing, color space conversion and chroma keying, are performed on the Win/TV board and do not affect the operation of the PC. The Win/TV board includes audio functions so that sound can be heard while watching TV or video. The audio can be connected to speakers or to a PCs sound card. All Win/TV board models come with software that runs under the popular Microsoft(R) Windows(TM) operating system, including Windows(TM) 95, that allows the TV picture to be resized from a tiny window size all the way to full screen, all under the control of the mouse. The Company presently has 10 models of the Win/TV board. It is the Company's strategy to provide a wide range of Win/TV boards for the PC market. With a Win/TV board installed in a PC, a user sees live video within a window on the PC video monitor without interfering with the normal operation of the computer. The user can resize this video image, making it small so that it will take up less space on the video monitor, or the user can enlarge the image to full screen if the user wants to see bigger image detail. The video images can be viewed simultaneously with normal PC operations such as word processing programs and spread sheet applications. A stockbroker who is working on a PC and watching CNBC might keep the image small on the PC video monitor while receiving stock quotations, and then with one click, the user can enlarge the video image to full screen size. The Win/TV-Celebrity ("Celebrity") board is primarily sold through computer retailers and distributors. This model uses a proprietary Company designed technology called "SmartLock". This feature has made the Celebrity popular for use in PCs that are already installed in the office or home. The SmartLock feature on the Celebrity allows the Win/TV board to be used in all existing PCs. Previously, when digital video products were sold through the computer retail market, there were installation problems which were due to the way in which the digital video boards were connected to the PC. SmartLock eliminates such problems and has been a key selling feature, intended to reduce sales returns and the need for additional technical support. The Win/TV-CinemaPro board ("CinemaPro") is a new product with similar capabilities to the Celebrity but with a lower manufacturing cost. The CinemaPro is expected to substantially replace the Celebrity for shipments in 1997. The Win/TV-HighQ ("HighQ") board was designed for users who need higher quality digitizing of video images for use in a PC. Uses include medical imaging, such as the creation of medical databases of images captured from microscopes; industrial imaging, such as parts inspection; and desktop publishing. The HighQ supports a scheme called "square pixel" digitizing, where the horizontal and vertical aspects of the digitized image are kept to exactly a 1:1 ratio, an important feature for medical and industrial applications. The HighQ is the only model that does not include a cable ready television tuner, but it does use the SmartLock feature. The Win/TV Prism board ("Prism") is a low cost video board that combines many of the features of the Company's higher-end boards. The Prism is cable and TV antenna ready and comes equipped with an automatic 122 channel scan. The Prism can be connected to sound cards, VCR's and video cameras. The Prism does not use the SmartLock feature used in the Company's higher-end boards and requires an active feature connector on an SVGA card. The Win/Motion 60 board ("Win/Motion") digitizes full frame live video from a video camera or VCR and stores it to the hard disk so that it can be digitally edited on a PC. The Win/Motion uses Motion-JPEG compression technology which increases performance and reduces the storage space required for digital video clips. The compression technology allows the board to capture 60 fields per second, resulting in more accurate frame-by-frame video editing and more realistic video playback. The Win/Motion can also play back full screen video clips from a hard disk, which can be recorded on tape or displayed on a video monitor. The Win/Motion was designed for 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. The following five products have been introduced since the close of the 1995 fiscal year. The Win/TV-Spectrum board ("Spectrum") is a digital video overlay and TV tuner board. The Spectrum can receive video from cable TV or an external video source such as a video camera, digitizes and scales the live video image, and pushes the digitized video image into the memory of a Cirrus Logic based VGA subsystem. The Spectrum software can capture and save individual video images to disk. The Spectrum also features channel surfing and image capture, and a remote that controls TV functions. The WinCast/TV board ("WinCast") is a single slot PC board which enables the user to bring TV and Intercast(TM) Web pages to their PC, using Intel's Intercast(TM) Viewer to display Intercast(TM) Web pages in a window alongside the live TV window. The WinCast also 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. In addition to the standard model, the WinCast/TV dbx model offers high quality dbx-TV for awesome stereo sound. The Win/TV pci board is a single slot PC board equipped with Pal-I or Pal-B/G tuners and teletext capabilities for the English and European market. The board has features similar to the WinCast/TV board. Since European broadcasters do not transmit Intercast(TM) information, the pci board does not need to have Intercast(TM) capabilities. The Video Magic board provides many high quality features for editing videos on the user's PC. Video Magic can capture full motion video images at up to 30 frames per second. Combined with the Media Studio Video editor, the user can add titles, special effects, multiple video and audio overlays, two and three dimensional effects plus fades and blends. The Video Magic board can be used to create sales presentations, make video training tapes and to add flare to home videos. The Hauppauge Impact Video Conferencing Board (ImpactVCB) is a low cost PC bus card for high performance access to the digitized video. Designed for video conferencing and industrial applications requiring video, the ImpactVCB features live video in a window, still image capture and an AVI capture driver. The Win/TV boards which are for sale to the computer retail market are essentially the same as the ones which are for sale to the OEM market. The differences are in the packaging and in the sophistication of the operating software. The Company believes that the WinCast and CinemaPro are currently the digital video board of choice for the computer retail market and the WinCast and VCB boards are the choice of the OEM market. The Celebrity and CinemaPro models accounted for approximately 57% of the Company's net sales for its 1996 fiscal year. For the international market, the Company has developed an option for the Win/TV board called a teletext decoder. This device allows the reception of digital text which is transmitted along with live television. Though relatively unknown here in the United States, internationally, teletext is standard on all European TV sets. The types of teletext data transmitted by TV stations include weather information, travel schedules, stock market data and home shopping services. Until 1988, the Company actively marketed system boards which are the "heart" of a PC and which could be used to upgrade older PCs. The Company still designs and assembles custom made PCs. This line of business in not emphasized and is not sold in the retail market. However, the Company does specific designs to meet particular customer requirements. The Company purchases all of the hardware and software, assembles the machine and installs the software. These products are popular with companies that require specific configurations not available through off-the-shelf wholesalers or retailers. Product Production The Company designs the Win/TV boards and also writes the operating software of the Win/TV boards to be used in conjunction with the popular Microsoft(R) Windows(TM) operating system, the WindowsNT operating system and the IBM OS/2 operating system. The Company subcontracts the manufacturing and assembly of the Win/TV boards to independent third parties. The Company then tests the completed product at its facility in Hauppauge, New York before shipping to customers to ensure the quality of its products. The Company is dependent upon AuraVision Corporation ("AuraVision") for its supply of digital video processing chips, which are necessary for the production of the Celebrity and CinemaPro models of the Win/TV digital video board. The Company is not aware of an alternate source of supply for the digital video processing chips manufactured by AuraVision. In the event that the Company were unable to obtain its supply of digital video processing chips from AuraVision, the Company might not be able to produce its Celebrity and CinemaPro model Win/TV boards and its business may be adversely affected. No assurance can be given that the Company will continue to be able to retain such source or obtain products from another source. The Company is also dependent upon Philips, a division of North American Philips Company and Brooktree Corporation,a division of Rockwell Semiconductors Systems, Inc., manufacturers of video digitizers, which are also necessary for the production of various models of the Win/TV digital video board. If the foregoing suppliers do not supply their products to the Company, the business of the Company might be adversely affected because the Company would have to seek alternative suppliers of video digitizers which may result in additional costs and delays and therefore adversely affect the Company's production and profitability. See Item 6 Management's Discussion and Analysis - Risks and Forward Looking Statements. Digital Video Market The digital video market, as it pertains to the Win/TV board, involves the use of a PC to turn a video image into a digital form which can be stored on a PC's hard disk drive. Once a video image is on the PC's hard disk drive, the image can be merged into a document using various word processing systems such as WordPerfect(R) or Microsoft(R) Word(R). A sequence of video images that are digitized are stored in a form called "AVI", which has digital audio and video interleaved to create a digital movie. This digital movie can be edited on the PC, adding special effects, audio overdubs and titles. These digital movies are used in multimedia presentations and multimedia CD-ROMs. The digital video sequences can also be transmitted to another location over the highspeed communication lines, which allows for video conferencing. Typical Win/TV board owners might include business persons who need to keep in touch with news while working on a PC. Other owners might include business users who want to merge video images into a document, watch financial television news programs while working on personal computers, or video conference with PC users in other locations. End users may use the Win/TV board for the entertainment value of being able to watch television on their PC and to capture video images for use with "paintbrush" software. Other home uses might include the ability to edit video tapes on a home PC and to have video conferencing in the home. Another popular use of the Win/TV board may be for multimedia development. The Win/TV board digitizes live video and allows this video to be stored on the PC hard disk drive. The stored video can be used to create presentations that combine the digitized video with text, create multimedia CD-ROM packages, and digitally edit video tapes. During July, 1996, a new broadcast technology called Intercast(TM) was introduced during the 1996 Summer Olympics in Atlanta. Intercast(TM) Web pages are broadcast in a portion of the TV signal called the Vertical Blanking Interval. Intercast(TM) Web pages add a new dimension to TV shows by allowing TV producers to add real time information to their broadcasts. These pages are standard Internet Web pages, but are sent with TV signals over the airways instead of being sent over the telephone lines. In addition to Web pages specific to the show being broadcast, broadcasters can use the Intercast(TM) medium to add other types of information to their TV transmissions, such as real time stock market information along with their Web pages. Intercast(TM) information broadcast by TV show producers is designed to increase viewing pleasure by providing viewers with textual information which coincides with broadcasted video images. Industrial uses of the Win/TV board might include, among other things, medical applications (eye surgery, microscope imaging and hearing aid fitting), image recognition applications (automobile license plate identification, parts inspection), i.d. badges and driver's licenses. In addition, the Win/TV board may be utilized by real estate brokerage firms to merge digital pictures of real estate into faxes. The uses of digital video represents recent technology that is becoming widely applied in PCs. The Company believes that there is a trend toward replacing projects currently done in text on PCs into projects that include full motion video or still video pictures. For example, a real estate broker today might, on a desktop PC, create a fax describing a property for sale. Equipped with the Win/TV board, the broker could include a picture of the property in the fax. The Win/TV board would be used to digitize a video image coming from a camcorder, and this image could be included in the fax generated on the desktop PC. Sales people who currently create written proposals may create proposals that are played on portable computers that include digital videos to describe processes or procedures, making their proposals more effective. The Win/TV board can be used to both digitize the raw video from a camcorder and to play back the digital video from the PC hard disk drive. Distribution to the Retail Market During fiscal 1996, net sales to the retail market through distributors from the Company totaled approximately $9,633,000 or 66% of the Company's net sales. This is in comparison to net sales of approximately $7,785,000 or 67% for the year ended September 30, 1995. The Company has no exclusive distributor and sells through a multitude of distributors, no one of which accounted for more than 10% of the Company's net sales. These distributors sell to a variety of retailers who sell personal computer products. Original Equipment Manufacturers ("OEMs") The OEM business is one where a PC manufacturer adds the Win/TV board and its operating software to create a new model PC. Most of the activity by the Company to date regarding OEMs has been to create new model multimedia PCs and video conferencing products. Until recently, multimedia equipped PCs had a sound card and a CD-ROM. The new products currently being designed by OEMs include digital video and in particular TV video with the ability to receive Intercast(TM) information broadcast by cable program providers. The Company presently sells video boards under a Master Purchase Agreement to a major news service provider. This news service provider has developed a financial news service which utilizes Hauppauge's digital video TV board. The Company's net sales to this customer for the year ended September 30, 1996 and for the year ended September 30, 1995 totaled approximately $1,615,000 (11% of total net sales) and approximately $1,922,000 (17% of total net sales), respectively. This is the only customer that accounts for more than ten (10%) percent of the Company's net sales. The Company's remaining OEM business totaled approximately $3,447,000 for fiscal 1996 compared to approximately $1,844,000 for the year ended September 30, 1995. For fiscal 1996, approximately 34% of the Company's net sales were for the OEM market as compared to 33% for the year ended September 30, 1995. Marketing and Sales The Company sells both domestically and internationally through sales offices in New York, London and Germany. For the fiscal year ended September 30, 1996 and the year ended September 30, 1995, approximately 46% and 30% of the Company's net sales were made within the United States, respectively, while approximately 54% and 70% were outside the United States (predominately in Germany and Great Britain), respectively. Hauppauge Computer Works, LTD handles all sales outside of the United States. The Company advertises its products in a number of U.S. and international PC magazines. These magazines, plus a public relations program aimed at editors of key personal 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 very much determined by 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 3 international sales persons and 4 sales persons in the United States, located in New York and California. The Company also has 2 manufacturer representatives retained by it on a non-exclusive basis, who work with customers in certain geographic areas. Competition 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 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. However, the Company believes that through research and development and aggressive marketing it can compete in this very competitive market, although there can be no assurances of such. Patents and Trademarks 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 Win/TV board and the Company believes that such technology cannot be patented. On December 27, 1994, the Company's mark, "Win/TV", was registered with the United States Patent and Trademark Office. Governmental Regulations The Company believes that existing or probable governmental regulations have no material effect on the Company's business. Research and Development 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 expended approximately $270,000 for research and development expenses for the year ended September 30, 1995 and approximately $448,000 during fiscal 1996. 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 6 Management's Discussion and Analysis - Risks and Forward Looking Statements. Compliance with Environmental Laws The costs and effects of compliance with environmental laws (federal, state and local) will have no material effect upon the business of the Company. Employees As of September 30, 1996, the Company had 48 employees including its executive officers, all of which are full-time. None of the Company's employees are represented by a union, and management considers its relationship with its employees to be excellent. Item 2. DESCRIPTION OF PROPERTY ----------------------- The Company occupies a 25,000 square foot facility 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 all its needs. The building is owned by a partnership consisting of Messrs. Aupperle and Plotkin and their wives and is leased to the Company expiring January 31, 2006 with an option of the Company to extend the lease for an additional three years. Rent is currently at the annual rate of $306,627, and will increase to $321,958 per year on February 1, 1997. 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, 1996 was $1,205,376. The Company pays the taxes and operating costs of maintaining the premises. In addition, the Company, through HCW, GmbH, maintains an office in Germany, which consists of approximately 2,500 square feet. This facility contains a sales office, a demonstration room and a storage facility for a limited number of the Company's products. The Company pays a monthly rent of approximately $2,000 per month for this facility pursuant to a rental agreement which expires on December 31, 1996 and contains an option to renew for two additional years. Item 3. LEGAL PROCEEDINGS. ----------------- The Company is presently party to no pending material legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. --------------------------------------------------- Not Applicable. Executive Officers of Registrant First Elected Offices and an Officer of Name Age(1) Positions Held the Company - - ---- ------ --------------- -------------- Kenneth R. Aupperle 39 President, chief 1982 operations officer and Director Kenneth Plotkin 45 Chairman of the board of 1982 directors, chief executive officer, vice-president, secretary and Director Gerald Tucciarone 41 Chief financial officer 1995 and treasurer John Casey 40 Vice-president - technology 1987 _____________ (1) Age as of September 30, 1996. All of the above Executive Officers have been elected to serve until the next annual meeting of the Board of Directors presently scheduled for March, 1997 or until their respective successors are elected and qualified. There are no family relationships between any Executive Officers. Kenneth R. Aupperle is the husband of Laura Aupperle, a director. Kenneth Plotkin is the husband of Dorothy Plotkin, a director. Except for Gerald Tucciarone, each of the Executive Officers listed above has served the Company in the above executive capacities on a full time basis for the past five years. Gerald Tucciarone, prior to his employment with the Company in January, 1995, served as a vice-president of finance from 1985 to 1992 with Walker- Telecommunications, Inc., a manufacturer of phones and voice mail equipment and from 1992 to 1995, as assistant controller with Chadbourne and Parke, a law firm. Mr. Tucciarone is a certified public accountant. PART II ------- Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 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 traded on NASDAQ on the Small-Cap Market and its symbol is HAUP and the Boston Stock Exchange under the symbol HAU. Effective January 10, 1995, the Company offered for sale 1,333,333 units (the "Units"), each of which consisted of one class A common stock purchase warrant ("Class A Warrant"), exercisable at $3.75 per share commencing January 10, 1996 and expiring on January 9, 2000, and one share of Common Stock. The Common Stock became separately tradeable from the Class A Warrants on April 25, 1995. At such time, trading in the Units ceased. The following chart sets forth the high and low bid prices as determined from NASDAQ for the Common Stock from April 25, 1995 until September 30, 1996. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. High Low ---- --- Fiscal Year Ended September 30, 1996 - - ------------------ First Quarter 3 3/4 1 3/4 Second Quarter 4 3/8 3 Third Quarter 7 3/4 3 1/8 Fourth Quarter 5 1/4 3 9/16 High Low ---- --- Fiscal Year Ended September 30, 1995(1) - - --------------------- Third Quarter (commencing April 25, 1995) 3 1/2 2 1/8 Fourth Quarter 2 1/2 1 5/8 ____________ (1) From January 10, 1995 to April 24, 1995 the high and low bid price of the Units were as follows: High Low ---- --- Second Quarter (commencing January 10, 1995) 4 1/16 3 5/8 Third Quarter (until April 24, 1995) 4 1/8 3 3/4 (b) The approximate number of holders of record of the Common Stock as of December 4, 1996 was 78. The Company believes there are in excess of 564 beneficial holders of the Common Stock. (1) No dividends have been paid during the past two years. (2) 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. The Company is prohibited by its loan agreements with MTB Bank from declaring or paying any cash dividends. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS Change in Fiscal Year The Company changed its fiscal year end from December 31 to September 30, effective September 30, 1994. All comparisons presented herein reflect this change in fiscal year. Results of Operations Years ended September 30, 1996 and 1995 --------------------------------------- Sales for the year ended September 30, 1996 were $14,695,100, compared to $11,551,169 for the year ended September 30, 1995, resulting in an increase of $3,143,931 or 27%. The increase in sales has been attributable to the Company's increased investment in marketing and production capabilities due to the capital derived from the Company's January 1995 public offering and the proceeds derived from the July 1996 exercise of the Company's Class A Warrants. The ability of the Company to procure additional inventory and expand production sources enabled the Company to gain market share and meet the increased sales demand. Net sales of the Company's products are summarized as follows: Years Ended September 30, Increase 1996 1995 (Decrease)% ---- ---- ----------- P.C. System Sales $ 1,421,359 $ 792,857 79 Win/TV Boards 13,273,741 10,758,312 23 ----------- ---------- -- Total Company Sales $14,695,100 $11,551,169 27 =========== =========== == Unit sales of Win/TV boards, the Company's digital video TV board, increased to approximately 62,000 as compared to approximately 41,600 for the prior year, resulting in an increase of 48%. Sales to domestic customers for the year ended September 30, 1996 were 46% of net sales as compared to 30% for the prior year. Sales to international customers, which were primarily in U.S. Dollars, were 54% of net sales for the current year and 70% for fiscal 1995. The increase in domestic sales as a percentage of sales reflects a commitment by the Company to expand its domestic sales base by introducing new products, such as the WinCast/TV board capable of receiving Intercast data broadcast by network and cable TV content providers, and the strategic hiring of additional sales and marketing personnel. Gross profit increased to $3,680,640 from $2,307,413, an increase of $1,373,227 or 60% over the fiscal year ended September 30, 1995. The gross profit percentage increased to 25% from 20%. The increase in the margin percentage was due to lower component costs resulting from the economies gained by purchasing larger volumes of inventory plus fixed production costs absorbed over a greater number of units, which lowered the labor costs per unit. In addition, reserve for inventory obsolescence charged to operations decreased to $38,000 for fiscal 1996 as compared to $164,511 for fiscal 1995. Selling, general and administrative expenses declined to 21% of net revenue from 27% of net revenue for the year ended September 30, 1995, resulting in a decrease of $129,206 when compared to the prior year. The decrease in expenses was primarily due to $187,660 charged to operations in fiscal 1995, which represented the excess of fair market value over the selling price pursuant to a sale of shares in July 1995 owned by the principal shareholders ofthe Company and sold to certain key employees (See note 6g of the accompanying financial statements). Other decreases were lower professional services costs of $92,614 and lower Technical Support costs of $45,480, primarily due to lower warranty repair costs. These decreases were offset partially by higher commissions of $70,445 due to the 27% sales increase over fiscal 1995, increased sales compensation of $57,902 due to the strategic hiring of additional sales personnel, and increased administrative compensation of $59,036 due to contractual increases in executive compensation and the full year effect of a slightly higher staffing levels. Research and development expenses increased $178,424 or approximately 66%. The increase was due to the infusion of new capital from the Company's January 1995 public offering and the July 1996 conversion of the Company's Class A Warrants, which enabled the Company to expand its engineering research and development resources to enhance current products and further develop future product lines. The Company had net other income of $98,438 for the year ended September 30, 1996 as opposed to net other expense of $409,583 for the preceding fiscal year. The increase in net other income was primarily due to non recurring private placement financing costs of $480,652 charged to fiscal 1995 operations plus higher fiscal 1996 net interest income due to higher levels of cash invested. As a result of all of the above, the Company recorded a net profit after taxes for the year ended September 30, 1996 of $278,952 or $0.09 per share as opposed to a net loss after taxes (which taxes for the prior year were nominal) of ($1,523,078) or ($0.64) per share. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 121, "Accounting for the Impairment of long lived assets and for long lived assets to be disposed of" ("SFAS Number 121"). SFAS 121 is effective for fiscal years beginning after December 15, 1995. SFAS 121 requires the long lived assets and certain identifiable intangibles to be held and used by an entity to be reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable. The impact of adopting SFAS Number 121 is not expected to be material. The Financial Accounting Standards Board issued Statement of Financial Accounting Standard Number 123 "Accounting for Stock Based Compensation" ("SFAS Number 123") in October 1995. Statement Number 123 encourages companies to recognize expense for stock options and other stock based employee compensation plans based on their fair value at the date of grant. As permitted by Statement 123, the Company plans to continue to apply its current accounting policy under APB Opinion Number 25 "Accounting for Stock Issued to Employees" in 1997 and future years, and will provide disclosure of the pro forma impact on net income and earnings per share as if the fair value based method had been applied. Year ended September 30, 1995 compared to the Nine months ended September 30, 1994 ------------------ Net sales for the year ended September 30, 1995 were $11,551,169, compared to $4,166,807 for the nine months ended September 30, 1994, resulting in an increase of $7,384,362 or 177%. The increase in net sales has been attributable to the Company's ability to accelerate production of Win/TV boards and increase marketing programs due to the infusion of capital derived from the Company's October 1994 Private Placement Offering and January 1995 public offering (See Notes 6c and 6d to the attached financial statements), plus the elimination in 1994 of development problems, which created strong product demand and significant sales increases. Net sales of the Company's products are summarized as follows: Nine months Year ended September 30, Increase 1995 1994 (Decrease)% ------ ----- ----------- System Boards $ 792,857 $1,208,573 (34) Win/TV Boards 10,758,312 2,958,234 264 ---------- --------- ---- Total Net Sales $11,551,169 $4,166,807 177 =========== ========== === Unit sales of Win/TV boards, the Company's newest product line, increased to approximately 41,600 as compared to approximately 8,800 for the prior nine month period, resulting in an increase of 375%. Sales to domestic customers for the year ended September 30 were 30% of net sales for the current year and 55% for the nine months ended September 30, 1994. Sales to international customers, which were primarily in U.S. Dollars, were 70% of net sales for the current year and 45% for the nine months ended September 30, 1994. Gross profit increased $1,753,937 or 317% when compared to the prior nine month period. The gross profit percentage increased to 20% from 13%. The negative impact of $300,000 charged to the reserve for inventory obsolescence during the nine months ended September 30, 1994 due to the declining sales of systems boards plus the dynamics of the market mix of product sold were the major contributors to the contraction of the 1994 gross profit percentage. Though selling, general and administrative expenses for the year ended September 30, 1995 increased $1,529,910 over the nine month period ended September 30, 1994, they declined to 27% of net sales in fiscal 1995 compared to 39% of net sales for the nine months ended September 30, 1994. The increase in expenses was primarily due to increased sales and marketing expenses, strategically implemented to obtain worldwide penetration, of $701,407, consisting primarily of increases for advertising and trade shows of $487,448 and increased commissions of $156,531 resulting from higher sales; technical support costs and receiving and shipping costs increased $55,322 and $66,062 respectively, mainly due to the increased support and freight costs needed to handle the 375% increase in unit board sales, plus higher administrative costs mainly due to increased professional services costs and stock exchange listing fees associated with becoming a publicly traded company of $89,370, consulting fees of $57,000, which includes $27,000 paid to the Underwriter. In addition, $187,660, which represents the excess of the fair market value over the price of the shares sold relating to a July 1995 sale of 99,740 shares owned by the principal shareholders and sold for $0.03 per share to certain key employees, was charged to operations as additional compensation. Research and development expenses increased $55,714, or approximately 26%. The increase was due to the infusion of new capital generated by the IPO which enabled the Company expand its research and development resources to further the implementation of existing product lines and develop new product lines. The Company had net other expense of $409,583 for the year ended September, 30, 1995 as opposed to net other expense of $7,108 for the nine months ended September 30, 1994. The increase in expense was primarily due to the cash expenses of the Private Placement Offering, $30,674, and the underlying value of the units issued, $449,978 (142,850 shares valued at the IPO price of $3.15) which were charged to expense under the caption "Private Placement Financing Costs" (See Note 6c to the attached financial statements), offset somewhat by higher interest income. In light of the above, the Company experienced a decrease in the net loss from operations of $168,313 for the year ended September 30, 1995. Due to the nonrecurring charge of $480,652 for private placement financing costs incurred during 1995, the net loss increased $205,530 when compared to the nine months ended September 30, 1994. Over the prior two fiscal years, the Company has experienced certain revenue trends. Since a major portion of the Company's products are sold through distributors and retailers, the Company has historically recorded strong 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 into the European market, have been 54% and 70% of sales for fiscal 1996 and 1995. Due to this, the Company's sales for its fourth fiscal quarter (July to September) are impacted by the reduction of activity experienced with Europe during the July and August summer holiday period. To offset the above cycles, the Company is working to increase its penetration of the domestic retail market to create counterbalancing domestic sales. Since it is difficult to control the seasonality of retail sales, the Company is also looking to create strategic OEM alliances to create a consistent level of annual revenue to help offset the seasonality of the retail segment of its business. Liquidity and Capital Resources-As of September 30, 1996 - - -------------------------------------------------------- The Company had a net cash position of $6,559,175, working capital of $7,969,496 and shareholders' equity of $8,174,917 as of September 30, 1996. For year ended September 30, 1996, the Company's cash position increased by $5,344,235. The detail of significant cash sources and (uses) were: Net income adjusted for non cash items: $ 371,212 Investments in current assets (1,692,607) Increase in current liabilities, net 485,241 Net proceeds from the exercise of Underwriter's Unit Purchase Option 543,779 Net proceeds from the exercise of Class A Warrants 5,676,813 In connection with the Company's January 10, 1995 Initial Public Offering (IPO), the Company sold to Lew Lieberbaum & Co., Inc. (the Underwriter) 133,333 Underwriters Unit Purchase Options (Purchase Options), each exercisable at $4.41. Each unit consisted of one share of the Company's Common Stock and one Underwriter Warrant. The Underwriter's Warrant entitled the holder to purchase one share of Common Stock at an exercise price of $3.75 and are identical to the Class A Warrants offered in the IPO. On May 7, 1996, in light of the market conditions that existed at the time, the Company allowed the Underwriter to exercise 67,000 Purchase Options at $3.75 per Purchase Option, which they exercised on May 24, 1996. On June 7, 1996, the remaining 66,333 Purchase Options were exercised by the Underwriter for $4.41. The net proceeds of $543,779 will be used for working capital and general corporate purposes (See note 6a). On June 3, 1996, the Company, in accordance with Article VI of a Warrant Agreement dated January 10, 1995 between the Company and North American Transfer, called for the redemption of all the outstanding warrants at a price of $.10 per share. Each Warrant entitled the holder to purchase one share of the Company's $.01 par value Common Stock at $3.75 per share. The expiration date, originally July 5, 1996, was extended at the discretion of the Company until July 17, 1996. At the July 17, 1996 expiration date, 1,575,786 warrants, which included 133,333 Warrants obtained by the Underwriter in the exercise of their Purchase Option, were exercised and 33,730 warrants were redeemed. The exercise and redemption resulted in gross proceeds to the Company of $5,909,197. After deducting expenses of the redemption, which include a 5% solicitation fee payable to the Underwriter for a portion of the warrants, accounting, legal, printing costs and the $.10 per share redemption price payable to the warrant holders who did not exercise their Warrants, the net proceeds from the Warrant redemption were $5,676,813. As a result of the Warrant redemption and exercise of the Underwriters Unit Purchase Option, total shares issued and outstanding as of September 30, 1996 were 4,465,302. The net proceeds will be used for working capital and general corporate purposes (See note 6b). On March 28, 1996, Hauppauge Computer Works, Inc, a wholly owned subsidiary of Hauppauge Digital, Inc., entered into a Credit Agreement with the MTB Bank. The Credit Agreement provides for, among other things, a two year asset based line of credit, whereby the Company may borrow up to $1,100,000, which increases to $1,600,000 upon receipt of the Company's audited September 30, 1996 consolidated financial statements (See note 5). On November 8, 1996, the Company approved a stock repurchase program for the repurchase of up to 300,000 shares of its own stock. The repurchased shares will be used by the Company for certain employee benefit programs. As of December 12, 1996, the Company had repurchased 21,200 shares at an average purchase price of $3.72 per share. The Company believes that the proceeds received from the exercise of the Class A Warrants and the Underwriter's Unit Purchase Option, its internally generated cash flow and its asset based line of credit, will be sufficient to satisfy the Company's anticipated operating needs for at least the ensuing twelve months. Risk Factors - - ------------ From time to time, information provided by the company, statements made by its employees or information provided in its Securities and Exchange Commission filings, including information contained in this Form 10-KSB, 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, 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, as well as general conditions and other factors external to the Company. Item 7. Financial Statements -------------------- See Consolidated Financial Statements annexed hereto. Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ----------------------------------- (a) Effective August 10, 1995 The Company dismissed Arthur Andersen, LLP ("Andersen") as its independent public accountants. Andersen had served as the Company's independent public accountants for the Company's fiscal year ended December 31. 1993 and for the nine months ended September 30, 1994. During such periods the reports prepared by Andersen did not contain any adverse opinions or disclaimer of opinions nor were they qualified or modified at to uncertainties, audit scope or accounting principles except that the report for the nine months ended September 30, 1994 was prepared assuming the Company would continue as a going concern and it expressed doubt about the Company's ability to continue as a going concern. That report was prepared before the Company's consummation of its public offering. The decision to change accountants was recommended and approved by the Company's board of directors. There were no disagreements with Andersen on any matter of accounting principles or practices, financial statement disclosure or auditing scope procedures while Andersen served as the Company's independent public accountants. The dismissal of Andersen was because of fee considerations. (b) Effective August 10, 1995, BDO Seidman, LLP ("Seidman") was named as the Company's independent public accountants. Seidman was not previously consulted by the Company with respect to any matter preceding the date of their appointment. PART III --------- Item 9 (Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act), Item 10 (Executive Compensation), Item 11 (Security Ownership of Certain Beneficial Owners and Management), and Item 12 (Certain Relationships and Related Transactions) will be incorporated in the Company's Proxy Statement to be filed within 120 days of September 30, 1995 and are incorporated herein by reference. PART IV ------- Item 13. EXHIBITS AND REPORTS ON FORM 8-K. --------------------------------- (a) Exhibits. The following exhibits are incorporated by reference to the Company's Registration Statement on Form SB-2 (No. 33-85426) as amended, effective January 10, 1995. (1.1) Form of Underwriting Agreement with Lew Lieberbaum & Co., Inc. (3.1) Certificate of Incorporation, as amended to date (3.2) By-laws (4.1) Form of Common Stock Certificate (4.5) 1994 Incentive Stock Option Plan (10.1) Form of Employment Agreement with Kenneth R. Aupperle (10.2) Form of Employment Agreement with Kenneth Plotkin (10.3) Lease dated February 7, 1990 between Ladokk Realty Company and Hauppauge Computer Works, Inc. (10.8) Long Island Development Corporation ("LIDC") Mortgage Loan Agreements (10.9) The Company's Guaranty of LIDC Loan Agreements (10.10) Shawmut Mortgage Loan Agreements (10.11) The Company's Guaranty of the Shawmut Mortgage Loan Agreements (10.12) Master Purchase Agreement between Reuters Ltd. and Hauppauge Computer Works Inc. (10.13) Credit Agreement between MTB Bank and Hauppauge Computer Works, Inc. dated March 28, 1996 (22) Subsidiaries of the Company The following exhibits are incorporated by reference to the Company's Form 8-K dated August 10, 1995: (16) Letter from Arthur Andersen, LLP dated August 11, 1995. The following exhibits are annexed hereto: (10.3.1) Modification made February 1, 1996 to Lease dated February 7, 1990 between Ladokk Realty Company and Hauppauge Computer Works, Inc. (b) Reports on Form 8-K The following reports on Form 8-K have been filed since June 30, 1996: a. Report dated July 31, 1996 under Item 5 Other Events with respect to exercise by Lew Lieberbaum and Co., Inc. of its Underwriters Options and the redemption and exercise of the Company's Class A Warrants. b. Report dated November 8, 1996 under Item 5 Other Events with respect to the Company's program to repurchase up to 300,000 shares of its own Common Stock. 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: 12/18/96 ------------------------ ----------- KENNETH PLOTKIN Chief Executive Officer, Vice- President, and Secretary By:/s/ GERALD TUCCIARONE Date: 12/18/96 ------------------------- ----------- 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: 12/18/96 -------------------------- ----------- KENNETH R. AUPPERLE Director By:/s/ KENNETH PLOTKIN Date: 12/18/96 -------------------------- ----------- KENNETH PLOTKIN Director By:/s/ DOROTHY PLOTKIN Date: 12/18/96 -------------------------- ----------- DOROTHY PLOTKIN Director By:/s/ LAURA AUPPERLE Date: 12/18/96 -------------------------- ----------- LAURA AUPPERLE Director By:/s/ LEONARD A. NEUHAUS Date: 12/18/96 -------------------------- ----------- LEONARD A. NEUHAUS Director By:/s/ BERNARD HERMAN Date: 12/18/96 -------------------------- ----------- BERNARD HERMAN Director INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page(s) -------- Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets as of September 30, 1996 and 1995 F-3 Consolidated Statements of Operations for the years ended September 30, 1996 and 1995 F-4 Consolidated Statements of Shareholders' Equity for the years ended September 30, 1996 and 1995 F-5 Consolidated Statements of Cash Flows for the years ended September 30, 1996 and 1995 F-6 Notes to Consolidated Financial Statements F-7 - F-19 F-1 Report of Independent Certified Public Accountants To the Board of Directors and Shareholders of Hauppauge Digital, Inc. and Subsidiaries Hauppauge, New York We have audited the consolidated balance sheets of Hauppauge Digital, Inc. and Subsidiaries as of September 30, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. 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 audit provides 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 at September 30, 1996 and 1995 and the results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP -------------------- BDO Seidman, LLP Mitchel Field, New York December 12, 1996 F-2 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS September 30, ----------------------------- 1996 1995 ------------ ----------- CURRENT ASSETS: Cash and Cash Equivalents (Note 1) . . . . . . . . . . $ 6,559,175 $1,214,940 Accounts receivable, net of allowance for doubtful accounts of approximately $75,000 in 1996 and $62,000 in 1995. . . . . . . 1,835,882 1,146,865 Inventories (Notes 1 and 2). . 3,138,961 2,187,981 Prepaid expenses and other current assets . . . . . . . 191,161 192,689 ---------- ---------- Total Current Assets . . . 11,725,179 4,742,475 ---------- ---------- Property, plant and equipment at-cost(Notes 1 and 3) . . . 374,218 334,443 Less: Accumulated depreciation and amortization . . . . . . 228,678 193,188 ----------- ----------- 145,540 141,255 ----------- ----------- SECURITY DEPOSITS AND OTHER ASSETS 59,881 62,085 ----------- ----------- $11,930,600 $4,945,815 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable. . . . . . . 2,818,832 2,645,268 Accrued expenses. . . . . . . 936,851 625,174 ----------- --------- Total Current Liabilities 3,755,683 3,270,442 ---------- --------- COMMITMENTS AND CONTINGENCIES (Notes 5 and 9) SHAREHOLDERS' EQUITY (Notes 6 and 10) Common Stock $.01 par value; 10,000,000 shares authorized 4,465,302 and 2,756,183 issued and outstanding as of September 30, 1996 and 1995 . . . . . 44,653 27,562 Additional paid-in capital . . . . . . . . . . 10,344,844 4,141,343 Accumulated deficit . . . . (2,214,580) (2,493,532) =========== =========== 8,174,917 1,675,373 ----------- ---------- $11,930,600 $4,945,815 =========== ========== See accompanying notes to consolidated financial statements F-3 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended September 30, 1996 1995 ---------- ----------- NET SALES (Notes 1 and 7). . . $14,695,100 $11,551,169 COST OF SALES (Note 2) . . . . 11,014,460 9,243,756 ----------- ----------- Gross Profit . . . . . . . 3,680,640 2,307,413 SELLING, GENERAL & ADMINISTRATIVE EXPENSES(Notes 6g and 8). . 3,021,814 3,151,020 RESEARCH & DEVELOPMENT EXPENSES . . . . . . . . . 448,312 269,888 ----------- ----------- Income, (loss) from operations 210,514 (1,113,495) OTHER INCOME (EXPENSE): Interest income . . . . . . 81,633 50,026 Interest expense . . . . . - (20,233) Private placement financing costs (Note 6c) . . . . . . . . - (480,652) Miscellaneous income . . . 16,805 41,276 ----------- ----------- Income, (loss) before income tax provision . . 308,952 (1,523,078) INCOME TAX PROVISION (Notes 1 and 4) . . . . . . 30,000 - ----------- ----------- Net income (loss) . . . . . . 278,952 (1,523,078) =========== =========== Net income (loss) per share. . $0.09 $0.64 =========== =========== Weighted average share outstanding (Note 1) . . . $ 3,261,126 $ 2,382,928 =========== =========== See accompanying notes to consolidated financial statements F-4 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND 1995
Retained Common Stock Additional Earnings ----------------- Number of Paid in (Accumulated Shares Amount Capital Deficit) Total ---------- ------ -------- -------- ------ BALANCE AT OCTOBER 1, 1994 1,280,000 12,800 343,466 (970,454) (614,188) Net loss for the year ended September 30, 1995 - - - (1,523,078) (1,523,078) Issuance of shares pursuant to a private placement offering (Note 6c) 142,850 1,429 356,527 - 357,956 Issuance of shares pursuant to the Company's initial public offering (Note 6d) 1,333,333 13,333 3,253,690 - 3,267,023 Compensation related to transfer of shares (Note 6g) - - 187,660 - 187,660 -------- ------ --------- -------- -------- BALANCE AT SEPTEMBER 30, 1995 $2,756,183 $27,562 $4,141,343 ($2,493,532) $1,675,373 ========== ====== ========= =========== ========== Net income for the year ended September 30, 1996 278,952 278,952 Issuance of shares pursuant to the exercise of Underwriter's Unit Purchase Options (Note 6a) 133,333 1,333 542,446 - 543,779 Issuance of shares pursuant to the redemption and exercise of Class A Warrants - net (Note 6b) 1,575,786 15,758 5,661,055 - 5,676,813 --------- ------ --------- ------ --------- BALANCE AT SEPTEMBER 30, 1996 4,465,302 $44,653 $10,344,844 $(2,214,580) $8,174,917 ========= ======== ========== =========== ========== See accompanying notes to consolidated financial statements F-5 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended September 30, 1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income, (loss) $278,952 ($1,523,078) ------- --------- Adjustments to reconcile net income,(loss) to net cash (used in) provided by operating activities: Depreciation and amortization 38,119 33,693 Provision for uncollectible accounts receivable 16,141 49,200 Provision for system board obsolescence 38,000 164,511 Private placement financing costs --- 480,652 Compensation related to transfer of shares --- 187,660 Increase (decrease) in cash resulting from changes in operating assets and liabilities: Accounts receivable (705,155) (641,420) Inventories (988,980) (1,473,342) Prepaid expenses and other current assets 1,528 (154,030) Accounts payable 173,564 878,402 Accrued expenses 311,677 383,345 ------- -------- (1,115,106) (91,329) ---------- -------- Net cash used in operating activities (836,154) (1,614,407) ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (39,775) (57,749) Purchase of software rights -- (13,156) Security deposits (428) (483) -------- ------ Net cash used in investing activities (40,203) (71,388) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from private placement offering --- 477,304 Net proceeds from Initial Public Offering --- 3,267,023 Net proceeds from exercise of Underwriters Purchase Options 543,779 --- Net proceeds from redemption and exercise of Class A Warrants 5,676,813 --- Principal payment on bank loan --- (395,000) Principal payment on private placement bridge loan --- (60,000) -------- -------- Net cash provided by financing activities 6,220,592 2,749,327 -------- --------- Net increase in cash and cash equivalents 5,344,235 1,063,532 CASH AND CASH EQUIVALENTS, beginning of period 1,214,940 151,408 -------- --------- CASH AND CASH EQUIVALENTS, end of period $6,559,175 $1,214,940 ======== ========= SUPPLEMENTAL DISCLOSURES: Interest paid --- $46,206 ========= ========= Income taxes paid $15,151 $19,322 ======== ======== See accompanying notes to consolidated financial statements F-6 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 two wholly owned subsidiaries, Hauppauge Computer Works, Inc. and HCW Distributing Corp., as well as Hauppauge Computer Works, GMBH and Hauppauge Computer Works, Ltd., both wholly owned subsidiaries of Hauppauge Computer Works, Inc. (collectively, the "Company"). All intercompany accounts and transactions have been eliminated. Nature of Business The Company is primarily engaged in the design, manufacture and selling of Win/TV digital video computer boards. 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 Win/TV board is marketed worldwide through retailers, distributors, original equipment manufacturers and manufacturers' representatives. Net sales to international and domestic customers were approximately 54% and 46%, respectively, of total sales for the year ended September 30, 1996, and 70% and 30%, respectively, for the year ended September 30, 1995. Substantially all of the Company's assets are located in the United States. Net sales to international customers consist of: Year ended Year ended Sales to: September 30, 1996 September 30, 1995 - - --------- ------------------ ------------------ United Kingdom 16% 22% Germany 17% 20 % The Netherlands 7% 5 Other countries 14% 23% --- --- 54% 70% === === Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that effect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from estimates. F-7 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 counterparty or a group of counterparties, due to the large and diverse user group for its products. Revenue Recognition The Company records revenue when its products are shipped. 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. Property, Plant and Equipment Depreciation of machinery and equipment 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: F-8 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Office Equipment and Machinery: 5 to 7 years Leasehold improvements: Asset life or lease term, whichever is shorter Income Taxes During 1995, Hauppauge Computer Works, Inc. and HCW Distributing Corp. filed an election, which was approved by the state and federal tax authorities, to change their tax reporting year to September 30. Effective with the fiscal year ended September 30, 1995, the Company now files a consolidated federal tax return for Hauppauge Digital, Inc., and its subsidiaries, Hauppauge Computer Works, Inc. and HCW Distributing Corp.. 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. Foreign Currency Transactions The Company sells products and services to foreign customers. Revenues and expenses are recorded in U.S. dollars at the current exchange rate at the time of the transaction. Gains and losses due to the changes in exchange rate are recorded in the statement of operations. Net Income, (Loss) per Share Net income, (loss) per share has been computed on the basis of weighted average number of common shares outstanding for each period presented. Included in the 1995 year end computation were 142,850 and 1,333,333 shares issued through a private placement offering and an IPO. During fiscal 1996, 1,575,786 and 133,333 shares were issued through the exercise of the Company's Class A Warrants and the exercise of the Underwriter's Purchase Unit Options. (See Note 6-a,b,c and d). In 1996, all of the Company's Class A Warrants were either exercised or redeemed. In 1995, warrants were not included in the weighted average shares calculation because they were antidilutive. F-9 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value of Financial Instruments The carrying amounts of certain financial instruments, including cash, accounts receivables and accounts payable, approximate fair value as of September 30, 1996 because of the relatively short term maturity of these instruments. Prospective Accounting Changes In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 121, "Accounting for the Impairment of long lived assets and for long lived assets to be disposed of" ("SFAS Number 121"). SFAS 121 is effective for fiscal years beginning after December 15, 1995. SFAS 121 requires the long lived assets and certain identifiable intangibles to be held and used by an entity to be reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable. The impact of adopting SFAS Number 121 is not expected to be material. The Financial Accounting Standards Board issued Statement of Financial Accounting Standard Number 123 "Accounting for Stock Based Compensation" ("SFAS Number 123") in October 1995. Statement Number 123 encourages companies to recognize expense for stock options and other stock based employee compensation plans based on their fair value at the date of grant. As permitted by Statement 123, the Company plans to continue to apply its current accounting policy under APB Opinion Number 25 "Accounting for Stock Issued to Employees" in 1997 and future years, and will provide disclosure of the pro forma impact on net income and earnings per share as if the fair value based method had been applied. 2. INVENTORIES Inventories consist of the following: September 30, 1996 1995 ---- ---- Component Parts $ 849,324 $738,846 Work in Process 1,861,391 974,706 Finished Goods 428,246 474,429 ------- ------- $3,138,961 $2,187,981 ========== ========== The Company continually reviews the inventory for potential obsolescence. Reserves of approximately $38,000 and $165,000 for the years ended September 30, 1996 and 1995, respectively, were included in the cost of sales. 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: 1996 1995 ---- ---- Office Equipment and Machinery $348,562 $308,787 Leasehold Improvements 25,656 25,656 ------ ------ 374,218 334,443 Less: Accumulated depreciation 228,678 193,188 ------- ------- Total $145,540 $141,255 ======== ======== 4. INCOME TAXES The income tax provision consists of the following: Years ended September 30, 1996 1995 ---- ---- State income tax provision $ 30,000 $ 4,420 Tax benefit-overstated liability - (4,420) ---------- --------- $ 30,000 $ - ------------ ---------- Components of deferred taxes are as follows: Years ended September 30, 1996 1995 ---- ---- Deferred tax assets: Net operating loss carryforwards $394,636 $574,945 Inventory obsolescence reserve 170,850 157,930 Warranty reserve 23,800 20,400 Allowance for doubtful accounts 22,216 16,728 Other reserves 12,886 - ------- ------- Total deferred tax assets 624,388 770,003 Valuation allowance (624,388) (770,003) --------- ------- Net deferred tax assets $ - $ - ========== ======== Because the Company's principal product is relatively new, the relative volatility of the industry the Company operates in and the limited track record of profitability to date, the Company has continued to record a full valuation allowance against the deferred tax assets as of September 30, 1996. The change in valuation allowance is as follows: F-11 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income Taxes-continued Years ended September 30, 1996 1995 ----- ----- Balance at the beginning of the year $770,003 $463,085 Increase in non utilization of net operating loss carryforwards - 213,860 Utilization of net operating loss carryforwards (180,309) - Increase in reserve for inventory obsolescence 12,920 55,930 Increase in warranty reserve 3,400 20,400 Increase in allowance for doubtful accounts 5,488 16,728 Increase in other reserves 12,886 - ------ ------ Balance at the end of the year $624,388 $770,003 ======= ======== As of September 30, 1996, the Company had net operating losses, (which expire in the years through 2010), of $1,160,664 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, (Note 6d), $951,337 of the net operating losses are subject to limitations per Internal Revenue code section 382. The Company's carryforward utilization of these restricted net operating losses is limited to $275,386 per year. Net operating losses of $209,327 which occurred after January 10, 1995 are unrestricted. In 1996, the Company utilized $275,386 of restricted net operating losses and $142,736 of unrestricted net operating losses to offset 1996 taxable income. The difference between the actual income tax provision (benefit) and the tax provision computed by applying the Federal statutory income tax rate to the income, (loss) before income tax is attributable to the following: Years ended September 30, 1996 1995 ---- ---- Income tax (benefit) at 34% $ 105,044 $ (485,330) Deferred taxes 75,265 - Utilization of net operating loss carryforwards (180,309) - Loss producing no tax benefit - 485,330 State income and franchise taxes 30,000 4,420 Tax benefit-overstated liability - (4,420 -------- -------- Income tax provision $ 30,000 $ - ======== ======== 5. LINE OF CREDIT On March 28, 1996, Hauppauge Computer Works, Inc, a wholly owned subsidiary of Hauppauge Digital, Inc., entered into a Credit F-12 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS a. Exercise of Underwriter's Unit Purchase Option-continued Purchase Options were exercised by the Underwriter for $4.41. The net proceeds of $543,779 will be used for working capital and general corporate purposes. b. Exercise and Redemption Class A Warrants On June 3, 1996, the Company, in accordance with Article VI of a Warrant Agreement dated January 10, 1995 between the Company and North American Transfer, called for the redemption of all the outstanding warrants at a price of $.10 per share. Each Warrant entitled the holder to purchase one share of the Company's $.01 par value Common Stock at $3.75 per share. The expiration date, originally July 5, 1996, was extended at the discretion of the Company until July 17, 1996. At the July 17, 1996 expiration date, 1,575,786 warrants, which included 133,333 Warrants obtained by the Underwriter in the exercise of their Purchase Option, were exercised and 33,730 warrants were redeemed. The exercise and redemption of the Warrants resulted in gross proceeds to the Company of $5,909,197. After deducting expenses of the redemption, which included a 5% solicitation fee payable to the Underwriter for a portion of the warrants, accounting, legal, printing costs and the $0.10 per share redemption price payable to warrant holders who did not exercise their Warrants, the net proceeds from the Warrant redemption were $5,676,813. As a result of the Warrant redemption and exercise of the Underwriter's Unit Purchase Option, total shares issued and outstanding as of September 30, 1996 were 4,465,302. The net proceeds will be used for working capital and general corporate purposes. c. Private Placement Through a private placement offering consummated on October 12, 1994, for gross proceeds of $600,000, the Company issued $600,000 in principal amount of 5%, $25,000 promissory notes and such number of units comprised of the Company's common stock and Class A redeemable common stock purchase warrants as shall equal $18,750 divided by the IPO unit price of $3.15. The resulting 142,850 units of common stock is determined by dividing $18,750 by the offering price of $3.15 per unit and multiplying that result by 24 private placement units ($600,000 divided by $25,000 per unit), rounded to exclude fractional shares. These units were issued in conjunction with the IPO, effective January 10, 1995 (Note 6d, Initial Public Offering-IPO). The promissory notes were subject to F-14 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS c. Private Placement-continued mandatory prepayment from the proceeds of any public or other private offering of the Company's debt or equity securities. On January 17, 1995, the $600,000 plus accrued interest of $7,910 was repaid. All the units issued to the former noteholders have been registered with the Securities and Exchange Commission concurrently with the IPO. A summary of the application of the net proceeds (approximately $477,000) is listed below: Payment of loan to Shawmut Bank $ 50,000 Partial expenses of IPO 122,000 Purchase of inventory, reduction of trade payables and general working capital purposes 305,000 ------- $477,000 ======= Based on certain factors such as: 1) the nature of the borrowing, 2) the Company's financial position and 3) the economic environment, the 5% interest rate on the promissory notes did not reflect the effective financing costs when considering the value of the units of common stock and warrants issued. Accordingly, $449,978 (the value of 142,850 units at the IPO price of $3.15) has been charged to operations under the caption "Private Placement Financing Costs" in the year ended September 30, 1995. Additionally, $30,674 of fees and costs relating to the private placement financing costs were charged to operations within the same caption in the year ended September 30, 1995. d. Initial Public Offering (IPO) Effective January 10, 1995 the Company completed an IPO of securities. The Company sold 1,333,333 units at $3.15 per unit. Each unit consisted of one share of $.01 par value common stock and one Class A redeemable stock purchase warrant. Each Class A warrant entitles the holder to purchase one share of common stock at an exercise price of $3.75 per share, subject to adjustments for anti-dilution provisions in certain circumstances, for a four-year period commencing one year after the January 10, 1995 effective date and expiring January 9, 2000. The warrants were redeemable by the Company, in whole or in part at a price of $.10 per warrant, commencing one year after the effective date (or sooner with the consent of the Underwriter), in accordance with a Warrant Agreement between the Company, its Warrant Agent and the Underwriter. For the period of 180 days after the date of the Prospectus (January 10, 1995), which period could have been terminated sooner with the sole consent of the Underwriter, the warrants were neither detachable, F-15 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS d. Initial Public Offering (IPO)-continued separately tradeable nor transferable from the common stock with which they were issued. On April 20, 1995 the Underwriter consented to accelerate the separation date. The Company's units were split into Common Stock and Class A Warrants. The Common Stock and Class A Warrants began trading separately on April 25, 1995. As of July 17, 1996, all of the Class A Warrants have either been exercised or redeemed (See Note 6b). As part of the offering, the Company sold to the Underwriter, for a nominal fee of $10, the Underwriter's Unit Purchase Option, which entitles the Underwriter to purchase 133,333 units at an exercise price of $4.41 (140% of the offering price) for a period of four years, commencing one year after the January 10, 1995 effective date. The units are identical to those offered to the public. On May 24, 1996 and June 7, 1996, the Underwriter exercised all of their Underwriter's Unit Purchase Options (See note 6a). The Company and the Underwriter have entered into a two year Consulting Agreement. The Consulting Agreement obligates the Company to pay the Underwriter a fee of $72,000, of which $36,000 was paid upon the closing of the offering, and $3,000 per month for the twelve month period subsequent to the closing. The net proceeds received by the Company after deducting Underwriter discounts and commissions plus expenses of the IPO were $3,267,023. e. Incentive Stock Option Plan In August 1994, the Company adopted an Incentive Stock Option Plan ("ISO"), as defined in section 422(A) of the Internal Revenue issuance under the ISO. Pursuant to the ISO, 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 ($3.15) 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. On May 7, 1996, options to acquire 77,000 shares exercisable at $3.75 per share were granted under this plan. f. 1996 Non-Qualified Stock Option Plan 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. F-16 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS f. 1996 Non-Qualified Stock Option Plan-continued The Non-Qualified Plan authorizes the grant of 250,000 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, 1996, no options have been granted under the 1996 Non-Qualified Plan. g. Compensation Related to Transfer of Shares During July 1995, the Company's founders and principal shareholders sold 99,740 shares of their common stock to several key employees for $0.03 per share. The Company recorded compensation expense of $187,660 based on the difference between the market price of the stock at the date of the sale and the price paid. 7. SIGNIFICANT CUSTOMER INFORMATION For the years ended September 30, 1996 and 1995, the Company had only one customer who accounted for more than 10% of total consolidated sales. This customer accounted for 11% and 17% of sales for fiscal 1996 and 1995. Accounts receivable from this customer was $105,628 and $83,960 as of September 30, 1996 and 1995, respectively. 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 shareholders 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. The indebtedness incurred by the two principal shareholders to purchase the building is also guaranteed by the Company and totaled $1,205,000 at September 30, 1996. F-17 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Related party transactions-continued Annual lease payments are as follows: Year ended September 30, ------------------------ 1997 321,958 1998 338,056 1999 354,959 2000 372,706 2001 391,342 Thereafter 1,771,069 ---------- $3,550,090 ========== Rent expense totaled approximately $367,290 and $295,025 for the years ended September 30, 1996 and 1995, respectively. The Company pays the real estate taxes and is responsible for normal building maintenance. 9. 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. b. Employment Contracts On January 10, 1995, the effective date of the IPO, the Company's president and chief executive officer entered into a three year employment agreement with the Company. The agreements each provide for an annual salary of $60,000 during the first year, $80,000 during the second year and $100,000 during the third year. The agreements also provide for a reasonable auto allowance, term life insurance, medical insurance and certain other benefits as is standard for employees of the Company. In addition, the president and chief executive officer were granted an option to purchase 150,000 shares of the Company's common stock. Such options are exercisable for ten years at $3.15 per share, (which was the IPO price), only after the Company attains certain specified pre tax income levels. F-18 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. SUBSEQUENT EVENTS On November 8, 1996, the Company approved a stock repurchase program for the repurchase of up to 300,000 shares of its own Common Stock. The repurchased shares will be used by the Company for certain employee benefit programs. As of December 12, 1996, the Company had repurchased 21,200 shares at an average purchase price of $3.72 per share. F-19
EX-10.3.1 2 LADOKK REALTY COMPANY 91 Cabot Court Hauppauge, New York 11788 February 1, 1996 Hauppauge Computer Works, Inc. 91 Cabot Court Hauppauge, New York 11788 Re: Modification to Lease Dated February 7, 1990 ("Lease") by and between Ladokk Realty Company ("Landlord") and Hauppauge Computer Works, Inc. ("Tenant") Gentlemen: This letter will confirm that as of the date hereof, the terms of the Lease are hereby modified as follows: 1. The Lease has been renegotiated to a term of ten years beginning February 1, 1996 and ending January 31, 2006. 2. Tenant is given an option to extend the Lease for an additional three years (the "Option Period"); provided Tenant is not in default of the Lease at the time it exercises this option; and provided written notice of the exercise of such option is given by Tenant to Landlord no later than July 31, 2005. 3. During the Option Period the annual rental shall increase at the rate of 5% per annum over the rent of the previous year, including that for the first year of the Option Period for which such increase shall be 5% over the year ended January 31, 2006. All other terms of the Lease shall be applicable to the Option Period. Except as modified herein, all terms and conditions of the Lease shall continue in full force and effect. Very truly yours, LADOKK REALTY COMPANY By: /s/ KENNETH AUPPERLE _____________________________ KENNETH AUPPERLE CONSENTED TO: Hauppauge Computer Works, Inc. By: /s/ _________________________ EX-27 3
5 0000930803 HAUPPAUGE DIGITAL, INC. YEAR YEAR SEP-30-1996 SEP-30-1995 SEP-30-1996 SEP-30-1995 6,559,175 1,214,940 0 0 1,835,882 1,146,865 75,000 62,000 3,138,961 2,187,981 11,725,179 4,742,475 374,218 334,443 228,678 193,188 11,930,600 4,945,815 3,755,683 3,270,442 0 0 44,653 27,562 0 0 0 0 8,130,264 1,647,811 11,930,600 4,945,815 14,695,100 11,551,169 14,695,100 11,551,169 11,014,460 9,243,756 3,470,126 3,420,908 98,438 (409,583) 16,141 49,200 0 20,233 308,952 (1,523,078) 30,000 0 278,952 (1,523,078) 0 0 0 0 0 0 278,952 (1,523,078) 0.09 (0.64) 0.09 (0.64)
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