-----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, FdzkCbmukP+rAGyywmXgTNHVc38V434tNK3e+zXOjGnKS0CUWa0GA17G1JM9XFUg Fm6KybBONZztrQCP8Tl9aA== 0000950117-06-002211.txt : 20060512 0000950117-06-002211.hdr.sgml : 20060512 20060512144222 ACCESSION NUMBER: 0000950117-06-002211 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060512 DATE AS OF CHANGE: 20060512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAUPPAUGE DIGITAL INC CENTRAL INDEX KEY: 0000930803 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 113227864 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13550 FILM NUMBER: 06834124 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 10-Q 1 a42018.htm HAUPPAUGE DIGITAL INC.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission file number 1-13550

HAUPPAUGE DIGITAL, INC.

(Exact name of registrant as specified in its charter)

91 Cabot Court, Hauppauge, New York 11788

(Address of principal executive offices)

(631) 434-1600

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x YES o NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (See definition of “accelerated filer and large accelerated filer’ in Rule 12b-2 of the Exchange Act).


o LARGE ACCELERATED FILER	o ACCELERATED FILER	x NON-ACCELERATED FILER

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange act).

o YES x NO

As of May 3, 2006, 9,623,772 shares of .01 par value Common Stock of the registrant were outstanding.

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

INDEX


	Page No.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets – March 31, 2006 (unaudited) and September 30, 2005 (audited)	5

Condensed Consolidated Statements of Income - Three Months ended March 31, 2006 (unaudited) and 2005 (unaudited)	6

Condensed Consolidated Statements of Income - Six Months ended March 31, 2006 (unaudited) and 2005(unaudited)	7

Condensed Consolidated Statements of Other Comprehensive Income - Three and six months ended March 31, 2006 (unaudited) and 2005 (unaudited)	8

Condensed Consolidated Statements of Cash Flows - Six Months ended March 31, 2006 (unaudited) and 2005 (unaudited)	9

Notes to Condensed Consolidated Financial Statements	10 - 18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19 - 31

Item 3. Quantitative and Qualitative Disclosures about Market Risk	31

Item 4. Controls and Procedures	32


PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 6. Exhibits	33

Signatures	34

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31, 2006 (unaudited)			September 30, 2005 (audited)

Assets:

Cash and cash equivalents	$	4,455,518		$	7,567,393
Receivables, net of various allowances		27,861,474			13,048,076
Inventories		12,752,933			9,806,785
Prepaid expenses and other current assets		1,138,202			1,087,453

Total current assets		46,208,127			31,509,707

Property, plant and equipment, net		542,169			525,108
Security deposits and other non current assets		83,240			81,529

Total assets	$	46,833,536		$	32,116,344


Liabilities and Stockholders’ Equity:

Current Liabilities:
Accounts payable	$	23,568,278		$	10,750,560
Accrued expenses-licensing fees		4,437,659			4,126,506
Accrued expenses		1,378,634			1,121,842
Income taxes payable		198,577			175,944

Total current liabilities		29,583,148			16,174,852

Stockholders’ Equity:

Common stock $.01 par value; 25,000,000 shares authorized, 10,226,804 and 10,107,936 issued, respectively		102,269			101,080
Additional paid-in capital		13,995,648			13,603,705
Retained earnings		5,290,240			3,311,888
Accumulated other comprehensive (loss) income		(379,818	)		682,770
Treasury Stock, at cost, 607,547 shares		(1,757,951	)		(1,757,951	)

Total stockholders’ equity		17,250,388			15,941,492

Total liabilities and stockholders’ equity	$	46,833,536		$	32,116,344

See accompanying notes to condensed consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)


	Three months ended March 31,

	2006		2005


Net sales	$	26,685,393	$	20,362,293
Cost of sales		21,503,859		15,542,399

Gross profit		5,181,534		4,819,894

Selling, general and administrative expenses		3,429,858		3,326,814
Research & development expenses		768,832		631,437

Income from operations		982,844		861,643

Other income:
Interest income		6,275		3,150
Foreign currency		13,487		7,672

Other income		19,762		10,822

Income before taxes on income		1,002,606		872,465
Tax provision		44,728		45,000

Net income	$	957,878	$	827,465


Net income per share:
Basic	$	0.10	$	0.09
Diluted	$	0.10	$	0.08

See accompanying notes to condensed consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)


	Six months ended March 31,

	2006		2005


Net sales	$	51,730,383	$	43,722,736
Cost of sales		41,317,065		33,591,477

Gross profit		10,413,318		10,131,259

Selling, general and administrative expenses		6,810,926		6,753,870
Research & development expenses		1,562,833		1,188,967

Income from operations		2,039,559		2,188,422

Other income (expense):
Interest income		11,481		4,661
Foreign currency		14,451		(928	)

Other income		25,932		3,733

Income before taxes on income		2,065,491		2,192,155
Tax provision		87,139		101,000

Net income	$	1,978,352	$	2,091,155


Net income per share:
Basic	$	0.21	$	0.22
Diluted	$	0.20	$	0.21

See accompanying notes to condensed consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(UNAUDITED)


	Three months ended March 31,

	2006			2005

Net income	$	957,878		$	827,465
Foreign currency translation (loss) gain		(175,651	)		406,300
Forward exchange contracts marked to market		(39,528	)		(237,461	)

Other comprehensive income	$	742,699		$	996,304


	Six months ended March 31,

	2006			2005

Net income	$	1,978,352		$	2,091,155
Foreign currency translation (loss) gain		(918,922	)		126,509
Forward exchange contracts marked to market		(143,666	)		346,800

Other comprehensive income	$	915,764		$	2,564,464

See accompanying notes to condensed consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	Six months ended March 31,

	2006			2005

Net income	$	1,978,352		$	2,091,155

Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		90,609			109,084
Non cash stock compensation expense		187,824			—
Other non cash items		(1,711	)		—
Changes in current assets and liabilities:
Accounts receivable		(14,813,398	)		(3,239,030	)
Inventories		(2,946,148	)		117,778
Prepaid expenses and other current assets		(50,749	)		(346,477	)
Accounts payable		12,817,718			303,466
Accrued expenses and other current liabilities		590,578			444,796

Total adjustments		(4,125,277	)		(2,610,383	)

Net cash used in operating activities		(2,146,925	)		(519,228	)


Cash Flows From Investing Activities:
Purchases of property, plant and equipment		(107,670	)		(145,514	)

Net cash used in investing activities		(107,670	)		(145,514	)


Cash Flows From Financing Activities:
Proceeds from exercise of stock options and employee stock purchases		205,308			656,309
Purchase of treasury stock		—			(149,757	)

Net cash provided by financing activities		205,308			506,552

Effect of exchange rates on cash		(1,062,588	)		473,309
Net (decrease) increase in cash and cash equivalents		(3,111,875	)		315,119
Cash and cash equivalents, beginning of period		7,567,393			8,661,589

Cash and cash equivalents, end of period	$	4,455,518		$	8,976,708

Supplemental disclosures:
Income taxes paid	$	16,776		$	38,863

See accompanying notes to condensed consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles for interim period reporting in conjunction with the instructions to Form 10-Q. Accordingly, these statements do not include all of the information required by generally accepted accounting principles for annual financial statements. In the opinion of management, all known adjustments (consisting of normal recurring accruals and reserves) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows as of and for the interim periods have been included. It is suggested that these interim statements be read in conjunction with the financial statements and related notes included in the Company’s September 30, 2005 Form 10-K.

The operating results for the three months and six months ended March 31, 2006 are not necessarily indicative of the results to be expected for the September 30, 2006 year end.

Certain reclassifications have been made to the prior condensed consolidated financial statements to conform to the current presentation.

Note 2. Receivables

Accounts and other receivables as of March 31, 2006 and September 30, 2005 consisted of:


	March 31, 2006			September 30, 2005

Trade receivables	$	17,799,326		$	10,186,232
Receivable from contract manufacturers		12,182,972			5,491,524
GST and VAT taxes receivables		1,073,753			567,820
Allowances and reserves		(3,257,000	)		(3,257,000	)
Other		62,423			59,500

	$	27,861,474		$	13,048,076

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 3. Derivative Financial Instruments

As of March 31, 2006, the Company had foreign currency contracts outstanding of approximately $2,911,400 against the delivery of the Euro. The contracts expire from April 2006 through June 2006. The Company’s accounting policies for these instruments designate such instruments as cash flow hedging transactions. The Company does not enter into such contracts for speculative purposes. The Company records all derivative gains and losses on the balance sheet as a component of stockholders’ equity under the caption “Accumulated other comprehensive income (loss)”. The Company recorded a loss of $143,666 for the six months ended March 31, 2006 on its statement of other comprehensive income. As of March 31, 2006, a deferred loss of $7,248, reflecting the cumulative mark to market losses of the Company’s derivatives, was recorded on the Company’s balance sheet as a component of accumulated other comprehensive income (loss) in our equity section.

The Company uses the average monthly forward contract exchange rate to translate our Euro denominated sales into the Company’s U.S. dollar reporting currency. For the three and six months ended March 31, 2006, the use of the monthly average spot rate instead of the average monthly forward contract exchange rate to value Euro denominated sales would have resulted in a decrease in sales of $219,496 and $848,735, respectively. These sales increases are related to contracts that closed during these periods and the changes in the fair value of our derivative contracts. For the three and six months ended March 31, 2005, the use of the monthly average spot rate instead of the average monthly forward contract exchange rate to value Euro denominated sales would have resulted in an increase of sales of $337,699 and $978,484, respectively.

Note 4. Inventories

Inventories have been valued at the lower of average cost or market on a first in first out basis. The components of inventory consist of:


	March 31, 2006		September 30, 2005


Component Parts	$	5,237,539	$	4,131,732
Finished Goods		7,515,394		5,675,053

	$	12,752,933	$	9,806,785

Note 5. Net Income Per Share

Basic net income per share includes no dilution and is computed by dividing net income by the weighted average number of shares of common stock outstanding for the period. Diluted net income per share reflects, in the periods in which they have a dilutive effect, the dilution which would occur upon the exercise of stock options. A reconciliation of the shares used in calculating basic and diluted net income per share is as follows:

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 5. Net Income Per Share-continued


	Three Months Ended				Six months Ended
	March 31,				March 31,
	2006		2005		2006		2005

Weighted average shares outstanding-basic		9,576,522		9,460,702		9,541,935		9,368,428
Number of shares issued on the assumed exercise of stock options		481,063		640,468		447,764		630,977

Weighted average shares outstanding-diluted		10,057,585		10,101,170		9,989,699		9,999,405

Options to purchase 173,111 and 88,109 shares of common stock, at prices ranging $3.19 to $ 8.75 and $5.25 to $10.06, were outstanding for the three months ended March 31, 2006 and 2005, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

Options to purchase 218,173 and 91,878 shares of common stock, at prices ranging $3.19 to $ 8.75 and $5.25 to $10.06, were outstanding for the six months ended March 31, 2006 and 2005, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

Note 6. Accumulated other comprehensive income

As of March 31, 2006, appearing in the equity section under “Accumulated other comprehensive income (loss)” was a loss of $379,818, which consisted of a deferred translation loss of $372,570 and a deferred loss of $7,248 due to the mark to market losses on the difference between the value of the Company’s open forward exchange contracts at the contract rates versus the same contracts valued at the period ending forward rate.

Accumulated other comprehensive income (loss) consists of two components: translation gains and losses and FAS 133 mark to market gains and losses on our open foreign exchange contracts. The table below details the gains and losses that make up the accumulated other comprehensive loss of $379,818 recorded on our balance sheet as of March 31, 2006:


Accumulated Other Comprehensive Income (Loss)	Balance as of		Oct 05 to Mar 06			Balance as of
Fiscal 2006 activity	Sept 30 2005		(losses)			March 31 2006

Translation gains and losses	$	546,352	$	(918,922	)	$	(372,570	)
FAS 133 mark to market adjustment		136,418		(143,666	)		(7,248	)

	$	682,770	$	(1,062,588	)	$	(379,818	)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 7. Revenue Recognition

The Company sells through a sales channel which consist of retailers, distributors and original equipment manufacturers (OEM’s). The Company’s prices are fixed consistently over the entire sales channel. The majority of the Company’s customers are granted lines of credit. The product is shipped on open account with the majority of the Company’s customers given 30 to 45 day payment terms. Those customers deemed as large credit risks either pay in advance or issue us a letter of credit.

The Company requires the customer to submit a purchase order to the Company. The price of the product and payment terms are fixed per the terms of the purchase order. Upon shipment of the order to the customer, the title to the goods is passed to the customer. The customer is legally obligated to pay for the order within the payment terms stated on the customer’s purchase order. The obligation to insure the products and the cost of any pilferage while in the customer’s possession is the responsibility of the customer. The Company sells analog, hybrid video recorders and digital computer boards that are stocked on the shelves of retailers, and are subject to the normal consumer traffic that retail stores attract. Aside from normal store promotions such as end-caps and advertisements in the store’s circular, the Company has no further obligation to assist in the resale of the product.

The Company offers its customers a right of return, but does not offer stock balancing. The Company’s accounting method complies with SFAS 48 as typically at the end of every quarter the Company, based on historical data, evaluates its sales reserve level based on the previous six months sales. Due to seasonal nature of the business coupled with the changing economic environment, management exercises some judgment with regard to the historical data to arrive at the reserve.

Note 8. Product segment and Geographic Information

The Company operates in one business segment, which is the development, marketing and manufacturing of analog and digital TV receiver products for the personal computer market. The products are similar in function and share commonality of component parts and manufacturing processes. The Company offers three primary types of analog products and four types of digital TV receivers. The Company’s products are either sold, or can be sold, by the same retailers and distributors in our marketing channel. The Company also sells product directly to OEM customers. The Company evaluates its product lines under the functional categories of analog and digital products. Sales by functional category are as follows:

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


	Three months ended March 31,				Six months ended March 31,
	2006		2005		2006		2005

Product line sales
Analog sales	$	19,491,041	$	16,362,392	$	34,948,073	$	34,753,380
Digital sales		7,194,352		3,999,901		16,782,310		8,969,356

	$	26,685,393	$	20,362,293	$	51,730,383	$	43,722,736

The Company sells its products through an international network of distributors and retailers. Sales percent by geographic region are as follows:


	Three months ended March 31,						Six months ended March 31,
	2006			2005			2006			2005

Sales percent by geographic region
United States		51	%		49	%		46	%		43	%
Europe		47	%		49	%		52	%		55	%
Asia		2	%		2	%		2	%		2	%

Total		100	%		100	%		100	%		100	%

Note 9. Stock-Based Compensation

Prior to October 1, 2005, the Company accounted for employee stock option plans based on the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations and had adopted the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No.123). Accordingly, compensation cost for stock options was measured as the excess, if any, of the quoted market price of the Company’s stock at the grant date over the amount an employee must pay to acquire the stock. The Company granted stock options with exercise prices equal to the market price of the underlying stock on the date of grant, therefore, the Company did not record stock-based compensation expense under APB Opinion No. 25.

Effective October 1, 2005, the Company adopted SFAS No. 123R, “Share-Based Payments” using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. Therefore, prior period financial statements have not been restated. The fair value of stock options were determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for stock options in footnote disclosures required under SFAS No. 123. Such fair value is recognized as expense over the service period, net of estimated forfeitures. The adoption of SFAS No.123R resulted in an immaterial cumulative change in accounting as of the date of adoption.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 9. Stock-Based Compensation-continued

The Company had as of March 31, 2006 options issued from four incentive option plans and one non qualified option plan. These options typically vest over a period of four to five years. Options granted subsequent to the Company’s October 1, 2005 adoption of SFAS 123R, have a contract term of 10 years and 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 based on historical data of the Company’s stock:


	•	Risk free interest rate-4.25%

	•	Expected volatility-50%

	•	Expected dividend yield-0%

	•	Weighted average expected life-5 to7 years, determined via the “simplified” method detailed in Staff Accounting Bulletin No. 107

Stock option activity for the six months ended March 31, 2006 is as follows:


	Options			Weighted average exercise price		Weighted average remaining contract term (years)		Aggregate intrinsic Value

Outstanding as of October 1, 2005		1,432,094		$	3.12		4.95	$	4,470,396
Options granted		146,000			3.32		9.50		485,120
Options exercised		(88,647	)		1.66		—		(147,375	)
Options forfeited		(13,253	)		1.46		—		(19,381	)

Options outstanding as of March 31, 2006		1,476,194		$	3.24		4.73	$	4,788,760

Options exercisable as of March 31, 2006		1,014,944		$	2.77		4.18	$	2,810,784

For the non vested options outstanding that were granted prior to the Company’s October 1, 2005 adoption of SFAS 123R, the fair value for these options was estimated using a Black-Scholes option pricing model on the date of grant. Options granted prior to October 1, 2005 were accounted for based on the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, “ Accounting for Stock Issued to Employees,” and related Interpretations. Additionally, the Company had adopted the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No.123).

Presented in the table below are the options granted, weighted average fair value using a Black Sholes pricing model and total compensation charges, net of estimated forfeitures.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 9. Stock-Based Compensation-continued


	Options Granted		Weighted Average Black Scholes Value		Compensation Charge

Options granted subsequent to adoption of SFAS 123R		146,000	$	2.1505	$	313,975
Non vested options granted prior to adoption of SFAS 123R		393,690		1.8412		724,874

Total		539,690	$	1.9249	$	1,038,849

Unrecognized stock compensation charges, weighted average stock compensation amortization and stock compensation expenses charged to operations for the quarter and six months ended March 31, 2006 are as follows:


	•	$1,038,849 of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested share-based compensation arrangements and options granted subsequent to the October 1, 2005 adoption of SFAS 123R, was outstanding prior to the recognition of $187,824 of compensation charges in the six months ended March 31, 2006.

	•	Compensation cost is expected to be recognized over a weighted-average period of 3.75 years

	•	Compensation costs charged to operations for the second quarter ended March 31, 2006 was $86,946, consisting of $20,945 for options granted during fiscal 2006 and $66,001 for non vested options granted prior to October 1, 2005 and has been recorded in SG&A and R&D expense. Expensing stock compensation costs against operations resulted in a $0.01 reduction in basic and diluted net income per share for the quarter

	•	Compensation costs charged to operations for the six months ended March 31, 2006 was $187,824, consisting of $41,890 for options granted during fiscal 2006 and $145,934 for non vested options granted prior to October 1, 2005 and has been recorded in SG&A and R&D expense. Expensing stock compensation costs against operations resulted in a $0.02 reduction in basic and diluted net income per share for the six months ended March 31, 2006

In recognition that stock compensation is a non cash expense, the effect of expensing options had no affect on the Company’s cash flow. However, it was reflected in the Company’s cash flow statement as a non-cash add back in the determination of cash flows from operating activities.

A summary of our non-vested shares as of March 31, 2006 and changes during the six months ended March 31, 2006 is presented below:

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 9. Stock-Based Compensation-continued


	Shares			Weighted average Grant date fair value

Non-vested as of October 1, 2005		393,690			1.8412
Granted		146,000			3.32
Vested		(77,252	)		0.765
Forfeited		(1,188	)		0.43

Non-vested as of March 31, 2006		461,250			2.494

The following table illustrates the effect on net income and net income per share for the three and six months ended March 31, 2005 as if the Company has consistently measured the compensation cost for the Company’s stock option programs under the fair value method adopted on October 1, 2005:


	Three months ended March 31, 2005			Six months ended March 31, 2005

Net income as reported	$	827,465		$	2,091,155
Deduct: Total stock-based employee compensation expense determined under fair value method, net of related taxes		(8,924	)		(17,848	)

Pro forma net income	$	818,541		$	2,073,307

Net income per share - as reported:
Basic	$	0.09		$	0.22

Diluted	$	0.08		$	0.21

Net income per share - pro forma:
Basic	$	0.09		$	0.22

Diluted	$	0.08		$	0.21

Note 10. Arrangements with Off-Balance Sheet Risk - Guarantees

The Company occupies a facility located in Hauppauge New York which is used for its executive offices and for the testing, storage and shipping of the Company’s products. The Company leases this facility from a real estate partnership which is principally owned by Kenneth Plotkin, the Company’s Chairman of the Board, Chief Executive Officer, President, Chief Operating Officer and Vice President of Marketing and the holder of approximately 8.8% of the Company’s Common Stock as of March 31, 2006, Dorothy Plotkin, the wife of Kenneth Plotkin, holder of approximately 5.9% of the Company’s Common Stock as of March 31, 2006, and Laura Aupperle, believed by the Company to be the holder of approximately 10.5% of the Company’s Common Stock, including Common Stock attributed to the Estate of Kenneth R. Aupperle.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 10. Arrangements with Off-Balance Sheet Risk – Guarantees-continued

On February 17, 2004, HCW and Ladokk terminated the 1990 Lease and HCW entered into a new lease agreement with Ladokk Realty Co., LLC (the “2004 Lease”). The 2004 Lease is for five years and terminates on February 16, 2009. Annual rent under the 2004 Lease is $360,000, payable monthly. Concurrently with the new lease, Ladokk completed a refinancing of its mortgages, and the new lender did not require HCW to sign a guarantee. Accordingly, the Company no longer guarantees the landlord’s mortgages. The 2004 Lease replaced a 1990 Lease which was due to expire on January 31, 2006. The execution of the 2004 Lease provided an annual reduction in rent of nearly $100,000 and released the Company from its guarantee of the mortgages of the landlord.

The Audit Committee, under applicable laws, rules and regulations, is required to review and approve the 2004 Lease because the landlord is affiliated with (although not under the exclusive control of) the Company’s Chief Executive Officer. Shortly following the execution and delivery of the 2004 Lease, the Audit Committee engaged the services of an independent law firm and an independent real estate appraiser to ascertain if the 2004 Lease was within the current market range in our geographic area for the building the Company occupies.

The real estate appraiser determined that the rent provided in the 2004 Lease was somewhat above market value without giving effect to, among other things, the costs and potential disruption of the Company’s operations that would be associated with any move to a new facility. The Company and the landlord are negotiating the terms of a new lease to replace the 2004 lease. Although there can be no assurances, the Company’s expectation is that the 2004 Lease will be replaced with such new lease before the end of our fiscal third quarter.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Three Month Period ended March 31, 2006 Compared to March 31, 2005

Results of operations for the three months ended March 31, 2006 compared to March 31, 2005 are as follows:


	Three Months Ended 3/31/06			Three Months Ended 3/31/05

										Percentage of sales
							Variance $			2006			2005			Variance %


Net sales	$	26,685,393		$	20,362,293		$	6,323,100			100.00	%		100.00	%		—
Cost of sales		21,503,859			15,542,399			5,961,460			80.58	%		76.33	%		4.25	%

Gross profit		5,181,534			4,819,894			361,640			19.42	%		23.67	%		-4.25	%
Gross profit%		19.42	%		23.67	%		-4.25	%

Expenses:
Sales & marketing		2,315,414			2,350,422			(35,008	)		8.68	%		11.54	%		-2.86	%
Technical support		154,771			124,417			30,354			0.57	%		0.61	%		-0.04	%
General & administrative		901,419			851,975			49,444			3.38	%		4.18	%		-0.80	%
SG&A stock compensation expense		58,254			—			58,254			0.23	%		0.00	%		0.23	%

Total selling, general and administrative expenses		3,429,858			3,326,814			103,044			12.86	%		16.33	%		-3.47	%
Research & development		740,140			631,437			108,703			2.77	%		3.10	%		-0.33	%
Research and development stock compensation expense		28,692			—			28,692			0.11	%		0.00	%		0.11	%

Total operating expenses		4,198,690			3,958,251			240,439			15.74	%		19.43	%		-3.69	%

Net operating income		982,844			861,643			121,201			3.68	%		4.24	%		-0.56	%
Other income
Interest income		6,275			3,150			3,125			0.02	%		0.02	%		0.00	%
Foreign currency		13,487			7,672			5,815			0.05	%		0.04	%		0.01	%

Total other income (loss)		19,762			10,822			8,940			0.07	%		0.06	%		0.01	%

Income before taxes		1,002,606			872,465			130,141			3.75	%		4.30	%		-0.55	%
Taxes on income		44,728			45,000			(272	)		0.17	%		0.22	%		-0.05	%

Net income	$	957,878		$	827,465		$	130,413			3.58	%		4.08	%		-0.50	%

Net sales for the three months ended March 31, 2006 increased $6,323,100 over the three months ended March 31, 2005 as shown in the table below.


	Three Months Ended 3/31/06		Three Months Ended 3/31/05		Increase (Decrease) Dollar Variance		Increase (Decrease) Variance %			Sales by Geographic region
										Sales by Geographic region
Location										2006			2005

Domestic	$	13,477,731	$	10,031,697	$	3,446,034		34	%		51	%		49	%
Europe		12,682,887		9,908,999		2,773,888		28	%		47	%		49	%
Asia		524,775		421,597		103,178		24	%		2	%		2	%

Total	$	26,685,393	$	20,362,293	$	6,323,100		31	%		100	%		100	%

The primary factors contributing to the sales increase were:


•	Sales of WinTV OEM products

•	Sales of the new WinTV-HVR hybrid video recorders

•	Sales of the new WinTV-HVR-3000 hybrid satellite receivers

Offsetting some of the sales increases were:


•	Decrease in WinTV-NOVA series of digital TV receivers

•	Decrease in Digital entertainment center (DEC) products

Net sales to domestic customers were 51% of net sales for the three months ended March 31, 2006 compared to 49% for the three months ended March 31, 2005. Net sales to European customers were 47% of net sales compared to 49% for the same period of last year. Net sales to Asian customers were 2% for the three months ended March 31, 2006 and March 31, 2005.

Gross profit increased $361,640 for the three months ended March 31, 2006 compared to the prior year’s second quarter.

The increases and (decreases) in the gross profit are detailed below:


	Increase (decrease)

Increased sales	$	2,019,386
Lower gross profit on retail sales mix		(467,124	)
Effect on gross profit due to sales mix of OEM sales		(633,568	)
Due to increases in production costs		(557,054	)

Total decrease in gross profit	$	361,640

Gross profit percentage for the three months ended March 31, 2006 was 19.42% compared to 23.67% for the three months ended March 31, 2005, a decrease of 4.25%.

The increase (decreases) in the gross profit percent are detailed below:


	Increase (decrease)

Lower gross profit on retail sales mix		(1.61	)%
Effect on gross profit due to sales mix of OEM sales		(2.51	)%
Production costs		(0.13	)%

Net decrease in gross profit %		(4.25	)%

The decrease in the gross profit percent of 4.25 % for the three months ended March 31, 2006 compared to the three months ended March 31, 2005 was primarily due to:


•	Lower gross profit OEM sales contributed to a 2.51% decrease in gross profit. OEM sales require less sales, advertising and product support than retail sales, but the gross profit for OEM sales is lower than our retail products

•	A higher percentage of lower gross profit margin retail products contributed to a 1.61% decrease in gross profit

•	Production and shipping increases contributed to a 0.13% decrease in gross profit percent compared to three months ended March 31, 2005. The increase in net sales was about 31% while the increase in production costs was about 33%

The chart below illustrates the components of selling, general and administrative expenses:


	Three months ended March 31,

	Dollar Costs							Percentage of Sales

	2006		2005		Increase (Decrease)			2005			2004			Increase (Decrease)

Sales and marketing	$	2,315,414	$	2,350,422	$	(35,008	)		8.68	%		11.54	%		-2.86	%
Technical support		154,771		124,417		30,354			0.57	%		0.61	%		-0.04	%
General and administrative		901,419		851,975		49,444			3.38	%		4.18	%		-0.80	%
SG&A stock compensation expense		58,254		—		58,254			0.23	%		0.00	%		0.23	%

Total	$	3,429,858	$	3,326,814	$	103,044			12.86	%		16.33	%		-3.47	%

Selling, general and administrative expenses increased $103,044 from the prior year’s second quarter. As a percentage of sales, selling, general and administrative expenses decreased by 3.47% when compared to the three months ended March 31, 2005.

The decrease in sales and marketing expense of $35,008, was mainly due to:


•	Lower advertising and promotional expenses of $175,203


	•	Increased compensation expenses of 118,725 due to higher sales commissions and mid year incentives

The increase in technical support expenses of $30,354 was primarily due to:


	•	Increased personnel required to handle increased phone volume due expanding sales

The increase in general and administrative expenses of $49, 444 was primarily due to:


	•	Compensation increases of $60,769 for additional managerial staff

	•	Lower legal fees of $33,481 as a result of lower non recurring fees

Reflected selling, general and administrative expenses for the three months ended March 31, 2006 was $58,254 in stock compensation expenses related to the issuance of stock options.

Research and development expenses increased $108,703. The increase was mainly due to:


	•	Higher compensation costs of $76,627 due to the hiring of additional engineering management and staff personnel

	•	Increased program development costs of $20,733 due to higher volume of new product and product enhancement programs

Reflected in research and development expenses for the three months ended March 31, 2006 was $28,692 in stock compensation expenses related to the issuance of stock options.

Other income (expense)

Net other income for the three months ended March 31, 2006 was $19,762 compared to net other income of $10,822 for the three months ended March 31, 2005 as detailed below:


	Three months ended March 31,

	2006		2005

Interest income		6,275		3,150
Foreign currency transaction gains (losses)		13,487		7,672

Total other income (expense)	$	19,762	$	10,822

Tax provision

Our net tax provision for the three months ended March 31, 2006 and 2005 is as follows:


	Three months ended March 31,

	2006		2005

AMT Tax attributable to U.S operations	$	20,000	$	10,000
Tax expense European operations		19,728		30,000
State taxes		5,000		5,000

Net tax provision	$	44,728	$	45,000

For four out of the last five fiscal years, our domestic operation has incurred losses. With the close of our fiscal first quarter of 2006, we analyzed the future realization of our deferred tax assets as of March 31, 2006, and although our domestic operation reported a profit for the three months ended March 31, 2006, due to the seasonal nature of the business it is uncertain at this time whether our domestic operation will have a profit for the full year. In light of this, we did not make any adjustments to our valuation allowance for the quarter ended March 31, 2006.

As a result of all of the above items mentioned in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we recorded net income of $957,878, for the three months ended March 31, 2006, which resulted in basic and diluted net income per share of $0.10 on weighted average basic and diluted shares of 9,576,522 and 10,057,585, respectively, compared to a net income of $827,465 for the three months ended March 31, 2005, which resulted in basic net income per share of $0.09 and diluted net income per share of $0.08 on weighted average basic and diluted shares of 9,460,702 and 10,101,170, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Six Month Period ended March 31, 2006 Compared to March 31, 2005

Results of operations for the six months ended March 31, 2006 compared to March 31, 2005 are as follows:


	Six			Six
	Months			Months
	Ended			Ended			Variance			Percentage of sales
	3/31/06			3/31/05			$			2006			2005			Variance


Net sales	$	51,730,383		$	43,722,736		$	8,007,647			100.00	%		100.00	%		—
Cost of sales		41,317,065			33,591,477			7,725,588			79.87	%		76.83	%		3.04	%

Gross profit		10,413,318			10,131,259			282,059			20.13	%		23.17	%		-3.04	%
Gross profit %		20.13	%		23.17	%		-3.04	%

Expenses:
Sales & marketing		4,671,985			4,782,013			(110,028	)		9.03	%		10.94	%		-1.91	%
Technical support		286,850			244,742			42,108			0.55	%		0.56	%		-0.01	%
General & administrative		1,726,236			1,727,115			(879	)		3.34	%		3.95	%		-0.61	%
SG&A stock compensation expense		125,855			—			125,855			0.24	%		0.00	%		0.24	%

Total selling, general and administrative expenses		6,810,926			6,753,870			57,056			13.16	%		15.45	%		-2.29	%
Research & development		1,500,864			1,188,967			311,897			2.90	%		2.72	%		0.18	%
Research and development stock compensation expense		61,969			—			61,969			0.12	%		0.00	%		0.12	%

Total operating expenses		8,373,759			7,942,837			430,922			16.18	%		18.17	%		-1.99	%

Net operating income		2,039,559			2,188,422			(148,863	)		3.95	%		5.00	%		-1.05	%
Other income
Interest income		11,481			4,661			6,820			0.02	%		0.01	%		0.01	%
Foreign currency		14,451			(928	)		15,379			0.03	%		0.00	%		0.03	%

Total other income (loss)		25,932			3,733			22,199			0.05	%		0.01	%		0.04	%

Income before taxes		2,065,491			2,192,155			(126,664	)		4.00	%		5.01	%		-1.01	%
Taxes on income		87,139			101,000			(13,861	)		0.17	%		0.23	%		-0.06	%

Net income	$	1,978,352		$	2,091,155		$	(112,803	)		3.83	%		4.78	%		-0.95	%

Net sales for the six months ended March 31, 2006 increased $8,007,647 over the six months ended March 31, 2005 as shown in the table below.


							Increase			Sales by Geographic
	Six Months		Six Months		Increase (Decrease)		(Decrease)			region
Location	Ended 3/31/06		Ended 3/31/05		Dollar Variance		Variance %			2006			2005

Domestic		23,682,666		18,885,272		4,797,394		25	%		46	%		43	%
Europe		26,859,813		24,058,482		2,801,331		12	%		52	%		55	%
Asia		1,187,904		778,982		408,922		52	%		2	%		2	%

Total	$	51,730,383	$	43,722,736	$	8,007,647		18	%		100	%		100	%

The primary factors contributing to the sales increase were:


•	Sales of the new WinTV-HVR hybrid video recorders

•	Sales of WinTV OEM products

•	Sales of the new WinTV-HVR-3000 hybrid satellite receivers

Offsetting some of the sales increases were:


•	Decrease in WinTV-NOVA series of digital TV receivers

•	Decrease in Digital entertainment center (DEC) products

•	Decrease in WinTV series of analog TV receivers

•	Decrease in WinTV personal video recorder products

Net sales to domestic customers were 46% of net sales for the six months ended March 31, 2006 compared to 43% for the six months ended March 31, 2005. Net sales to European customers were 52% of net sales compared to 55% for the same period of last year. Net sales to Asian customers were 2% for the six months ended March 31, 2006 and March 31, 2005.

Gross profit decreased $282,059 for the six months ended March 31, 2006 compared to the prior year.

The increases and (decreases) in the gross profit are detailed below:


	Increase
	(decrease)

Increased sales	$	2,458,922
Lower gross profit on retail sales mix		(264,835	)
Effect on gross profit due to sales mix of OEM sales		(1,092,771	)
Due to increases in production costs		(819,257	)

Total decrease in gross profit	$	282,059

Gross profit percentage for the six months ended March 31, 2006 was 20.13% compared to 23.17% for the prior year, a decrease of 3.04%.

The increases and (decreases) in the gross profit percent are detailed below:


	Increase
	(decrease)

Lower gross profit on retail sales mix		(0.46	)%
Effect on gross profit due to sales mix of OEM sales		(2.17	)%
Due to increases in production costs		(0.41	)%

Net decrease in gross profit %		(3.04	)%

The decrease in the gross profit percent of 3.04 % for the six months ended March 31, 2006 compared to the six months ended March 31, 2005 was primarily due to:


	•	Lower gross profit OEM sales contributed to a 2.17% decrease in gross profit. OEM sales require less sales, advertising and product support than retail sales, but the gross profit for OEM sales is lower than our retail products

	•	A higher percentage of lower gross profit margin retail products contributed to a 0.46% decrease in gross profit

	•	Production and shipping increases contributed to a 0.41% decrease in gross profit percent compared to six months ended March 31, 2005. The increase in net sales was about 18% while the increase in production costs was about 25%

The chart below illustrates the components of selling, general and administrative expenses:


	Six months ended March 31,

	Dollar Costs							Percentage of Sales

					Increase									Increase
	2006		2005		(Decrease)			2006			2005			(Decrease)

Sales and marketing	$	4,671,985	$	4,782,013	$	(110,028	)		9.03	%		10.94	%		-1.91	%
Technical support		286,850		244,742		42,108			0.55	%		0.56	%		-0.01	%
General and administrative		1,726,236		1,727,115		(879	)		3.34	%		3.95	%		-0.61	%
SG&A stock compensation expense		125,855		—		125,855			0.24	%		0.00	%		0.24	%

Total	$	6,810,926	$	6,753,870	$	57,056			13.16	%		15.45	%		-2.29	%

Selling, general and administrative expenses increased $57,056 from the prior year. As a percentage of sales, selling, general and administrative expenses decreased by 2.29% when compared to the six months ended March 31, 2005.

The decrease in sales and marketing expense of $110,028, was mainly due to:


	•	Lower advertising and promotional expenses of $282,584

	•	Increased compensation expenses of 159,951 due to higher sales commissions and mid year incentives

The increase in technical support expenses of $42,108 was primarily due to:


	•	Increased personnel required to handle increased phone volume due expanding sales

The increase in general and administrative decrease of $ 879 was primarily due to:


	•	Compensation increases of for additional managerial staff offset by lower legal fees of as a result of lower non recurring fees

Reflected selling, general and administrative expenses for the six months ended March 31, 2006 was $125,855 in stock compensation expenses related to the issuance of stock options.

Research and development expenses increased $311,897. The increase was mainly due to:


	•	Higher compensation costs of $155,184 due to the hiring of additional engineering management and staff personnel

	•	Increased program development costs of $141,471 due to higher volume of new product and product enhancement programs

Reflected in research and development expenses for the six months ended March 31, 2006 was $61,969 in stock compensation expenses related to the issuance of stock options.

Other income (expense)

Net other income for the six months ended March 31, 2006 was $25,932 compared to net other income of $3,733 for the three months ended March 31, 2005 as detailed below:


	Six months ended March 31,

	2006		2005

Interest income		11,481		4,661
Foreign currency transaction gains (losses)		14,451		(928	)

Total other income (expense)	$	25,932	$	3,733

Accumulated other comprehensive income (loss)

to market loss on the difference between the value of the Company’s open forward exchange contracts at the contract rates versus the same contracts valued at the period ending forward rate.

Accumulated other comprehensive income (loss) consists of two components translation gains and losses and FAS 133 mark to market gains and losses on our open foreign exchange contracts. The table below details the gains and losses that make up the accumulated other comprehensive loss of $379,818 recorded on our balance sheet as of March 31, 2006:


Accumulated Other Comprehensive Income (Loss) Fiscal 2006 activity	Balance as of Sept 30 2005		Oct 05 to Mar 06 (losses)			Balance as of March 31 2006

Translation gains and losses	$	546,352	$	(918,922	)	$	(372,570	)
FAS 133 mark to market adjustment		136,418		(143,666	)		(7,248	)

	$	682,770	$	(1,062,588	)	$	(379,818	)

Tax provision

Our net tax provision for the six months ended March 31, 2006 and 2005 is as follows:


	Six months ended March 31,

	2006		2005

AMT Tax attributable to U.S operations	$	30,000	$	20,000
Tax expense European operations		47,139		71,000
State taxes		10,000		10,000

Net tax provision	$	87,139	$	101,000

For four out of the last five fiscal years, our domestic operation has incurred losses. With the close of our fiscal first quarter of 2006, we analyzed the future realization of our deferred tax assets as of March 31, 2006, and although our domestic operation reported a profit for the six months ended March 31, 2006, due to the seasonal nature of the business it is uncertain at this time whether our domestic operation will have a profit for the full year. In light of this, we did not make any adjustments to our valuation allowance for the six months ended March 31, 2006.

As a result of all of the above items mentioned in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we recorded net income of $1,978,352, for the six months ended March 31, 2006, which resulted in basic net income per share of $0.21 and diluted net income per share of $0.20 on weighted average basic and diluted shares of 9,541,935 and 9,989,699, respectively, compared to a net income of $2,091,155 for the six months ended March 31, 2005, which resulted in basic net income per share of $0.22 and diluted net income per share of $0.21 on weighted average basic and diluted shares of 9,368,428 and 9,999,405, respectively.

Seasonality

As our sales are primarily to the consumer market, we have experienced certain seasonal revenue trends. Our peak sales quarter, due to holiday season sales of computer equipment, is our first fiscal quarter (October to December), followed by

our fourth fiscal quarter (July to September). In addition, our international sales, mostly in the European, market, were 54%, 66% and 68 % of sales for the years ended September 30, 2005, 2004 and 2003, respectively. Our fiscal fourth quarter sales (July to September) can be potentially impacted by the reduction of activity experienced in Europe during the July and August summer holiday period.

To offset the above cycles, we target a wide range of customer types in order to moderate the seasonal nature of our retail sales.

Liquidity and Capital Resources

Our cash, working capital and stockholders’ equity position as of March 31, 2006 and September 30, 2005 is set forth below:


	March 31, 2006		September 30, 2005

Cash	$	4,555,518	$	7,567,393
Working Capital		16,624,979		15,334,855
Stockholders’ Equity		17,250,388		15,941,492

We had cash and cash equivalents as of March 31, 2006 of $4,555,518, a decrease of $3,111,875 from September 30, 2005.

The decrease in cash was due to:


Sources of cash:
Net income adjusted for non cash items	$	2,255,074
Increase in accounts payable and accrued expenses		13,408,296
Proceeds from employee stock purchases		205,308
Less cash used for:
Increase in account receivables		(14,813,398	)
Increase in inventories		(2,946,148	)
Effect of exchange rates on cash		(1,062,588	)
Increase in prepaid expenses and other current assets		(50,749	)
Capital equipment purchases		(107,670	)

Net cash decrease	$	(3,111 875	)

Net cash of $2,146,925 used in operating activities was primarily due to a increases in accounts receivable and inventory of $14,813,398 and $2,946,148, respectively, required to fund the 49% increase in sales between the last six months of fiscal 2005 and the first six months of fiscal 2006 in addition to increases in prepaid expenses and other current assets of

$50,749. These uses of cash were offset by increases in accounts payable and accrued expenses of $13,408,296, primarily used to finance the growth in accounts receivable and inventory to fund the increase in sales. Net income adjusted for non cash items of $2,255,074 provided another source of cash.

Cash of $107,670 was used to purchase fixed assets. Proceeds from the stock purchased by employees through the exercise of options and the employee stock purchase plan provided cash of $205,308 and the effect of exchange rate changes used cash of $1,062,588.

On November 8, 1996, we approved a stock repurchase program. The program, as amended, authorizes us to repurchase up to 850,000 shares of our own stock. We intend to use the repurchased shares for certain employee benefit programs. On December 17, 1997, the stock repurchase program was extended by a resolution of our Board of Directors. As of March 31, 2006, we held 607,547 treasury shares purchased for $1,757,951 at an average purchase price of approximately $2.89 per share.

Line of Credit

On December 1, 2005, Hauppauge Computer Works, Inc. (“HCW”), a wholly-owned subsidiary of Hauppauge Digital, Inc. (the “Company”), entered into a $3,000,000 line of credit borrowing facility with the JP Morgan Chase Bank, N.A. (the “Bank”). The line of credit is subject to renewal on March 31, 2006. On March 17, 2006, the bank renewed our line of credit through March 31, 2007. The Company, at its option, may borrow money at the Prime Rate minus one percent (1.0%) or the adjusted Eurodollar Rate plus one and 85/100 percent (1.85%). In accordance with the terms of the line, the Company has entered into a Guaranty with the Bank and has entered into a Share Pledge Agreement among the Company, the Bank and Hauppauge Digital Europe S.àr.l., a wholly owned subsidiary of the Company.

Pursuant to the Guaranty, the Company guarantees to the Bank the payment of all liabilities of HCW to the Bank, secured by a continuing lien and right of set-off for the amount of the liabilities of HCW to the Bank upon any and all monies, securities, property, deposits and credits of the Company with the Bank, J.P. Morgan Securities Inc. or any other affiliate of the Bank.

Pursuant to the Share Pledge Agreement, the Company granted a first priority right of pledge on approximately two-thirds of the outstanding capital shares of Hauppauge Digital Europe in favor of the Bank as security for the payment under the Note or the Share Pledge Agreement.

There were no borrowings outstanding as of the filing date of this Quarterly Report on Form 10-Q.

We believe that our cash and cash equivalents as of March 31, 2006, our internally generated cash flow and the line of credit we entered into on December 1, 2005 will provide us with sufficient liquidity to meet our currently foreseeable short-term and long-term capital needs.

Future Contractual Obligations

The following table shows our contractual obligations related to lease obligations as of March 31, 2006:


	Payments due by period
	Total		Less than 1 year		1-3 years		3 to 5 years

Operating lease obligations	$	1,471,044	$	519,516	$	906,528	$	45,000

Inflation

While inflation has not had a material effect on our operations in the past, there can be no assurance that we will be able to continue to offset the effects of inflation on the costs of our products or services through price increases to our customers without experiencing a reduction in the demand for our products; or that inflation will not have an overall effect on the computer equipment market that would have a material affect on us.

Item 3. Quantitative and Qualitative Disclosures about Market Risks

Sales for the Company’s European subsidiary are primarily invoiced and collected in Euros. On the supply side the Company predominantly deals with North American and Asian suppliers and contract manufacturers. Due to this, a large percentage of the inventory required to support the Company’s European sales are purchased and paid in U.S. Dollars.
The combination of sales billed in Euros supported by inventory purchased in U.S. dollars results in an absence of a natural local currency hedge, subjecting the Company to market risks resulting from the fluctuations in the Euro to U.S. Dollar exchange rates. The Company attempts to reduce the risks by entering into foreign exchange forward contracts with financial institutions. The purpose of these forward contracts is to hedge the foreign currency market exposures underlying the Company’s U.S. Dollar denominated inventory purchases.

As of March 31, 2006, the Company had foreign currency contracts outstanding of approximately $2,911,400 against the delivery of the Euro. The contracts expire from April 2006 through June 2006. The Company’s accounting policies for these instruments designate such instruments as cash flow hedging transactions. The Company does not enter into such contracts for speculative purposes. The Company records all derivative gains and losses on the balance sheet as a component of stockholders’ equity under the caption “Accumulated other comprehensive income (loss)”. The Company recorded a loss of $143,666 for the six months ended March 31, 2006 on its statement of other comprehensive income. As of March 31, 2006, a deferred loss of $7,248 reflecting the cumulative mark to market losses of the Company’s derivatives, was recorded on the Company’s balance sheet as a component of accumulated other comprehensive income (loss) in our equity section.

Item 4. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2006 in alerting them in a timely manner to material information required to be included in our SEC reports. In addition, no change in our internal control over financial reporting occurred during the fiscal quarter ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Special Note Regarding Forward Looking Statements

This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipated,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences (including, but not limited to, those set forth in our Annual Report on Form 10-K for the year ended September 30, 2005), many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. All cautionary statements made in this Annual Report should be read as being applicable to all related forward-looking statements wherever they appear.

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On November 8, 1996, we approved a stock repurchase program. The program authorizes us to repurchase up to 850,000 shares of our own stock. The stock repurchase program was extended by a resolution of our Board of Directors on December 17, 1997.

The Company did not repurchase any of its common stock our stock repurchase program during the quarter ended March 31, 2006.

Item 6. Exhibits

(c) Exhibits

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HAUPPAUGE DIGITAL INC.
Registrant


Date: May 12, 2006	By	/s/ Kenneth Plotkin

	KENNETH PLOTKIN
		Chief Executive Officer, Chairman of the Board, Vice President of Marketing (Principal Executive Officer) and Director

Date: May 12, 2006	By	/s/ Gerald Tucciarone

		GERALD TUCCIARONE
		Treasurer, Chief Financial Officer, (Principal Accounting officer) and Secretary

EX-31 2 ex31-1.htm EXHIBIT 31.1

Exhibit 31.1

CERTIFICATION

I, Kenneth Plotkin, certify that:

1. I have reviewed this Form 10-Q of Hauppauge Digital, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

4. The issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15-(e)) for the issuer and have:


	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)	Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

5. The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):


	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.


Date: May 12, 2006	/s/ Kenneth Plotkin

	Kenneth Plotkin,
	Chief Executive Officer

EX-31 3 ex31-2.htm EXHIBIT 31.2

Exhibit 31.2

CERTIFICATION

I, Gerald Tucciarone, certify that:

1. I have reviewed this Form 10-Q of Hauppauge Digital, Inc.;


	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)	Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the issuer’s most recent fiscal quarter (the issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and


	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.


Date: May 12, 2006	/s/ Gerald Tucciarone

	Gerald Tucciarone,
	Chief Financial Officer,
	Treasurer and Secretary

EX-32 4 ex32.htm EXHIBIT 32

Exhibit 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, pursuant to, and as required by, 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Hauppauge Digital, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.


Dated: May 12, 2006	/s/ Kenneth Plotkin

	Kenneth Plotkin
	Chief Executive Officer

	/s/ Gerald Tucciarone

	Gerald Tucciarone
	Chief Financial Officer, Treasurer
	and Secretary

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Delaware

11-3227864

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)