10-Q 1 a42569.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 June 30, 2006

OR

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)


	Delaware		11-3227864

	(State or other jurisdiction of		(I.R.S. Employer
	incorporation or organization)		Identification No.)

91 Cabot Court, Hauppauge, New York 11788

(Address of principal executive offices)

(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 July 31, 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 – June 30, 2006 (unaudited) and September 30, 2005		3

Condensed Consolidated Statements of Income - Three Months ended June 30, 2006 (unaudited) and 2005 (unaudited)		4

Condensed Consolidated Statements of Income - Nine months ended June 30, 2006 (unaudited) and 2005 (unaudited)		5

Condensed Consolidated Statements of Other Comprehensive Income - Three and nine months ended June 30, 2006 (unaudited) and 2005 (unaudited)		6

Condensed Consolidated Statements of Cash Flows - Nine Months ended June 30 , 2006 (unaudited) and 2005 (unaudited)		7

Notes to Condensed Consolidated Financial Statements		8-14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15-24

Item 3. Quantitative and Qualitative Disclosures about Market Risk		24

Item 4. Controls and Procedures		24

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		26

Item 6. Exhibits		26

Signatures		27

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30, 2006 (unaudited)			September 30, 2005

Assets:

Cash and cash equivalents	$	7,339,775		$	7,567,393
Receivables, net of various allowances		19,162,544			13,048,076
Inventories		12,661,114			9,806,785
Prepaid expenses and other current assets		920,508			1,087,453

Total current assets		40,083,941			31,509,707

Property, plant and equipment, net		564,797			525,108
Security deposits and other non current assets		83,239			81,529

Total assets	$	40,731,977		$	32,116,344


Liabilities and Stockholders’ Equity :

Current Liabilities:
Accounts payable	$	16,681,672		$	10,750,560
Accrued expenses - fees		5,196,310			4,126,506
Accrued expenses		849,938			1,121,842
Income taxes payable		189,546			175,944

Total current liabilities		22,917,466			16,174,852

Stockholders’ Equity:

Common stock $.01 par value; 25,000,000 shares authorized, 10,254,019 and 10,107,936 issued, respectively		102,541			101,080
Additional paid-in capital		14,107,060			13,603,705
Retained earnings		5,670,580			3,311,888
Accumulated other comprehensive (loss) income		(307,719	)		682,770
Treasury Stock, at cost, 607,547 shares		(1,757,951	)		(1,757,951	)

Total stockholders’ equity		17,814,511			15,941,492

Total liabilities and stockholders’ equity	$	40,731,977		$	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 June 30,

	2006			2005


Net sales	$	23,775,992		$	19,372,783
Cost of sales		19,144,041			14,980,624

Gross profit		4,631,951			4,392,159

Selling, general and administrative expenses		3,433,560			3,582,726
Research & development expenses		747,973			655,588

Income from operations		450,418			153,845

Other income (expense):
Interest income		6,440			3,366
Foreign currency		(17,146	)		19,917

Other income (expense)		(10,706	)		23,283

Income before taxes on income		439,712			177,128
Tax provision		59,371			17,156

Net income	$	380,341		$	159,972


Net income per share:
Basic	$	0.04		$	0.02
Diluted	$	0.04		$	0.02

See accompanying notes to condensed consolidated financial statements

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


	Nine months ended June 30,

	2006			2005


Net sales	$	75,506,375		$	63,095,518
Cost of sales		60,461,107			48,572,102

Gross profit		15,045,268			14,523,416

Selling, general and administrative expenses		10,272,747			10,336,596
Research & development expenses		2,282,545			1,844,555

Income from operations		2,489,976			2,342,265

Other income (expense):
Interest income		17,921			15,699
Foreign currency		(2,695	)		11,317

Other income		15,226			27,016

Income before taxes on income		2,505,202			2,369,281
Tax provision		146,510			118,156

Net income	$	2,358,692		$	2,251,125


Net income per share:
Basic	$	0.25		$	0.24
Diluted	$	0.24		$	0.23

See accompanying notes to condensed consolidated financial statements

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


	Three months ended June 30,

	2006			2005

Net income	$	380,341		$	159,972
Foreign currency translation (loss) gain		120,891			(528,645	)
Forward exchange contracts marked to market		(48,792	)		182,258


Other comprehensive income	$	452,440		$	(186,415	)


	Nine months ended June 30,

	2006			2005

Net income	$	2,358,692		$	2,251,125
Foreign currency translation (loss)		(798,031	)		(181,845	)
Forward exchange contracts marked to market		(192,458	)		308,767


Other comprehensive income	$	1,368,203		$	2,378,047

See accompanying notes to condensed consolidated financial statements

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


	Nine months ended June 30,

	2006			2005

Net income	$	2,358,692		$	2,251,125

Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		136,780			163,362
Stock compensation expense		274,770			—
Other non cash items		(1,710	)		(2,399	)
Changes in current assets and liabilities:
Accounts receivable		(6,114,468	)		848,289
Inventories		(2,854,329	)		(3,106,657	)
Prepaid expenses and other current assets		166,945			(478,308	)
Accounts payable		5,931,112			(1,899,975	)
Accrued expenses and other current liabilities		811,502			609,275

Total adjustments		(1,649,398	)		(3,866,412	)

Net cash provided by (used in) operating activities		709,294			(1,615,288	)


Cash Flows From Investing Activities:
Purchases of property, plant and equipment		(176,469	)		(228,557	)

Net cash used in investing activities		(176,469	)		(228,557	)


Cash Flows From Financing Activities:
Proceeds: exercise of stock options and employee stock purchases		230,046			676,538
Purchase of treasury stock		—			(172,589	)

Net cash provided by financing activities		230,046			503,949

Effect of exchange rates on cash		(990,489	)		126,922
Net decrease in cash and cash equivalents		(227,618	)		(1,212,974	)
Cash and cash equivalents, beginning of period		7,567,393			8,661,589

Cash and cash equivalents, end of period	$	7,339,775		$	7,448,615

Supplemental disclosures:
Income taxes paid	$	94,421		$	171,027

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 nine months ended June 30, 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 June 30, 2006 and September 30, 2005 consisted of :


	June 30,			September 30,
	2006			2005

Trade receivables	$	16,261,826		$	10,186,232
Receivable from contract manufacturers		5,301,705			5,491,524
GST and VAT taxes receivables		807,795			567,820
Allowances and reserves		(3,257,000	)		(3,257,000	)
Other		48,218			59,500

	$	19,162,544		$	13,048,076

Note 3. Derivative Financial Instruments

As of June 30, 2006, the Company had foreign currency contracts outstanding of approximately $5,588,270 against the delivery of the Euro. The contracts expire from July 2006 through October 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 $192,458 for the nine months ended June 30, 2006 on its statement of other comprehensive income. As of June 30, 2006, a deferred loss of $56,040, 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.

Beginning with the Company’s third fiscal quarter ended June 30, 2006, the Company began using the average prevailing spot rate to translate Euro denominated sales into the Company’s U.S. dollar denominated sales. Prior to this, the Company used the average monthly forward contract exchange rate to translate our Euro

denominated sales into the Company’s U.S. dollar reporting currency. The change in this accounting treatment did not have a material effect on the Company’s financial statements.

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:


	June 30, 2006		September 30, 2005

Component Parts	$	6,430,757	$	4,131,732
Finished Goods		6,230,357		5,675,053

	$	12,661,114	$	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:

Three Months Ended
June 30,

Nine months Ended
June 30,

2006

2005

2006

2005

Weighted average shares outstanding-basic

9,636,912

9,489,843

9,573,594

9,408,827

Number of shares issued on the assumed exercise of stock options

420,567

477,669

430,385

581,228

Weighted average shares outstanding-diluted

10,057,479

9,967,512

10,003,979

9,990,055

Options to purchase 223,204 and 174,122 shares of common stock, at prices ranging $4.13 to $ 8.75 and $3.88 to $10.06, were outstanding for the three months ended June 30, 2006 and 2005, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

Options to purchase 208,391 and 112,026 shares of common stock, at prices ranging $4.13 to $ 8.75 and $4.62 to $10.06, were outstanding for the nine months ended June 30, 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 June 30, 2006, appearing in the equity section under “Accumulated other comprehensive income (loss)” was a loss of $307,719, which consisted of a deferred translation loss of $251,679 and a deferred loss of $56,040 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 $307,719 recorded on our balance sheet as of June 30, 2006:


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

Translation gains and losses	$	546,352	$	(798,031	)	$	(251,679	)
FAS 133 mark to market adjustment		136,418		(192,458	)		(56,040	)

	$	682,770	$	(990,489	)	$	(307,719	)

Note 7. Revenue Recognition

The Company sells through a sales channel which consists 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. The Company’s accounting method complies with Statement of Financial Accounting Standards No. 48, Revenue Recognition when Right of Return Exists 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’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:

Three months ended June 30,

Nine months ended June 30,

2006

2005

2006

2005

Product line sales

Analog sales

16,377,894

15,440,513

51,325,967

50,219,062

Digital sales

7,398,098

3,932,270

24,180,408

12,876,456

23,775,992

19,372,783

75,506,375

63,095,518

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


	Three months ended June 30,						Nine months ended June 30,
Sales percent by geographic region	2006			2005			2006			2005

United States		50	%		51	%		47	%		46	%
Europe		47	%		45	%		51	%		52	%
Asia		3	%		4	%		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.

The Company had as of June 30, 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 nine months ended June 30, 2006 is as follows:

Options

Weighted
average
exercise price

Weighted average
remaining contract
term (years)

Aggregate
intrinsic
Value

Outstanding as of October 1, 2005

1,427,094

3.12

Options granted

146,000

3.32

Options exercised

(105,397

)

1.56

Options forfeited

(13,253

)

1.46

—

Options outstanding as of June 30, 2006

1,454,444

3.27

4.48

4,757,290

Options exercisable as of June 30, 2006

1,000,304

2.80

3.97

2,797,754

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.


	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 nine months ended June 30, 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 $274,770 of compensation charges in the nine months ended June 30, 2006

	•	Compensation cost is expected to be recognized over a weighted-average period of 3.50 years

	•	Compensation costs charged to operations for the third quarter ended June 30, 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. These costs have 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 nine months ended June 30, 2006 was $274,770, consisting of $62,835 for options granted during fiscal 2006 and $211,935 for non vested options granted prior to October 1, 2005. These costs have been recorded in SG&A and R&D expense.


		Expensing stock compensation costs against operations resulted in a $0.03 reduction in basic and diluted net income per share for the nine months ended June 30, 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 June 30, 2006 and changes during the nine months ended June 30, 2006 is presented below:


	Shares			Weighted average Grant date fair value

Non-vested as of October 1, 2005		393,690		$	1.84
Granted		146,000			2.15
Vested		(80,550	)		0.63
Forfeited		(5,000	)		0.43


Non-vested as of June 30, 2006		454,140		$	2.16

The following table illustrates the effect on net income and net income per share for the three and nine months ended June 30, 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 June 30, 2005			Nine months ended June 30, 2005
Net income as reported	$	159,972		$	2,251,125
Deduct: Total stock-based employee compensation expense determined under fair value method, net of related taxes		(8,924	)		(26,772	)
Pro forma net income	$	151,048		$	2,224,353

Net income per share - as reported:
Basic	$	0.02		$	0.24
Diluted	$	0.02		$	0.23
Net income per share - pro forma:
Basic	$	0.02		$	0.23
Diluted	$	0.02		$	0.22

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. Hauppauge Computer Works, Inc. ("HCW"), a wholly owned subsidiary of Hauppauge Digital Inc., leases this facility from Ladokk Realty, LLC, ("LADOKK") the members of which are Kenneth Plotkin, the Company’s Chairman of the Board, Chief Executive Officer, President, Chief Operating Officer and Vice President of Marketing, Director and the holder of approximately 8.6% of the Company’s Common Stock as of June 30, 2006, Dorothy Plotkin, the wife of Kenneth Plotkin and holder of approximately 5.8% of the Company’s Common Stock as of June 30, 2006, and Laura Aupperle, believed by the Company to be the holder of approximately 10.4% of the Company’s Common Stock, including Common Stock attributed to the Estate of Kenneth R. Aupperle.

On February 17, 2004, HCW entered into a new lease agreement with Ladokk (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 the 1990 Lease between HCW and Ladokk Realty Co., to which Ladokk is the successor, was due to expire on January 31, 2006 (the “1990 lease”). The execution of the 2004 Lease provided an annual reduction in rent of nearly $100,000 compared to the 1990 lease 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 fourth quarter.

Note 11. Recent Accounting Prouncements

On July 13, 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED JUNE 30, 2006 COMPARED TO
JUNE 30, 2005

Results of operations for the three months ended June 30, 2006 compared to June 30, 2005 are as follows:

Three Months
Ended
6/30/06

Three Months
Ended
6/30/05

Percentage of sales

Variance $

2006

2005

Variance %

Net sales

23,775,992

19,372,783

4,403,209

100.00

—

Cost of sales

19,144,041

14,980,624

4,163,417

80.52

77.33

3.19

Gross profit

4,631,951

4,392,159

239,792

19.48

22.67

-3.19

Gross profit %

19.48

22.67

-3.19

Expenses:

Sales & marketing

2,320,786

2,606,705

(285,919

)

9.76

13.46

-3.70

Technical support

143,989

129,738

14,251

0.60

0.67

-0.07

General & administrative

910,966

846,283

64,683

3.83

4.37

-0.54

SG&A stock compensation expense

57,819

—

57,819

0.25

0.00

0.25

Total selling, general and administrative expenses

3,433,560

3,582,726

(149,166

)

14.44

18.50

-4.06

Research & development

718,846

655,588

63,258

3.02

3.38

-0.36

Research and development stock compensation expense

29,127

—

29,127

0.12

0.00

0.12

Total operating expenses

4,181,533

4,238,314

(56,781

)

17.58

21.88

-4.30

Net operating income

450,418

153,845

296,573

1.90

0.79

1.11

Other income (expense)

Interest income

6,440

3,366

3,074

0.03

0.02

0.01

Foreign currency

(17,146

)

19,917

(37,063

)

-0.07

0.10

-0.17

Total other income (expense)

(10,706

)

23,283

(33,989

)

-0.04

0.12

-0.16

Income before taxes

439,712

177,128

262,584

1.86

0.91

0.95

Taxes on income

59,371

17,156

42,215

0.25

0.09

0.16

Net income

380,341

159,972

220,369

1.61

0.82

0.79

Net sales for the three months ended June 30, 2006 increased $4,403,209 over the three months ended June 30, 2005 as shown in the table below.


								Increase (Decrease) Variance %			Sales by Geographic
	Three Months Ended 6/30/06		Three Months Ended 6/30/05		Increase (Decrease) Dollar Variance						region
Location	Three Months Ended 6/30/06		Three Months Ended 6/30/05		Increase (Decrease) Dollar Variance						2006			2005

Domestic	$	11,795,292	$	9,925,638	$	1,869,654			19	%		50	%		51	%
Europe		11,344,867		8,750,299		2,594,568			30	%		47	%		45	%
Asia		635,833		696,846		(61,013	)		-9	%		3	%		4	%

Total	$	23,775,992	$	19,372,783	$	4,403,209			23	%		100	%		100	%

Net sales to domestic customers were 50% of net sales for the three months ended June 30, 2006 compared to 51% for the three months ended June 30, 2005. Net sales to European customers were 47% of net sales compared to 45% for the same period of last year. Net sales to Asian customers were 3% for the three months ended June 30, 2006 as opposed to 4% for the three months ended June 30, 2005.

Gross profit increased $239,792 for the three months ended June 30, 2006 compared to the prior year’s third quarter. The components of increases and (decreases) in the gross profit are detailed below:


	Increase (decrease)

Due to increased sales	$	1,459,306
Due to lower gross profit on sales mix		(1,021,211	)
Due to increases in production costs		(198,303	)

Total increase in gross profit	$	239,792

Gross profit percentage for the three months ended June 30, 2006 was 19.48% compared to 22.67% for the three months ended June 30, 2005, a decrease of 3.19%. The components of increase (decreases) in the gross profit percent are detailed below:


	Increase (decrease)

Lower gross profit on sales mix		(3.92	)%
Production costs		0.73	%

Net decrease in gross profit %		(3.19	)%

The decrease in the gross profit percent of 3.19 % for the three months ended June 30, 2006 compared to the three months ended June 30, 2005 was primarily due to:


	•	A higher percentage in sales of lower gross profit margin products contributed to a 3.92% decrease in gross profit

	•	Production and shipping decreases contributed to a 0.73% increase in gross profit percent compared to three months ended June 30, 2005

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

Three months ended June 30,

Dollar Costs

Percentage of Sales

Increase

2006

2005

(Decrease)

2006

2005

(Decrease)

Sales and marketing

2,320,786

2,606,705

(285,919

)

9.76

13.46

-3.70

Technical support

143,989

129,738

14,251

0.60

0.67

-0.07

General and administrative

910,966

846,283

64,683

3.83

4.37

-0.54

SG&A stock compensation expense

57,819

—

57,819

0.25

0.00

0.25

Total

3,433,560

3,582,726

(149,166

)

14.44

18.50

-4.06

Selling, general and administrative expenses decreased $149,166 from the prior year’s third quarter. As a percentage of sales, selling, general and administrative expenses decreased by 4.06% when compared to the three months ended June 30, 2005. The decrease in sales and marketing expense of $285,919 was mainly due to lower advertising and promotional expenses. The increases in technical support expense of $14,251 was mainly due to compensation increases. The increase in general and administrative expenses of $64,683 was primarily due to compensation increases for additional managerial and support staff. Reflected in selling, general and administrative expenses for the three months ended June 30, 2006 was $57,819 in stock compensation expenses related to the issuance of stock options.

Research and development expenses increased $92,385. The increase was mainly due to the hiring of additional engineering management and staff personnel and increased program development costs due to a higher volume of new product and product enhancement programs. Reflected in research and development expenses for the three months ended June 30, 2006 was $29,127 in stock compensation expenses related to the issuance of stock options.

Other income (expense)

Net other expense for the three months ended June 30, 2006 was $10,706 compared to net other income of $23,283 for the three months ended June 30, 2005. The change was primarily driven by the foreign currency transaction gains and losses.

Tax provision

Our net tax provision for the three months ended June 30, 2006 and 2005 is as follows:


	Three months ended June 30,

		2006		2005

AMT Tax attributable to U.S operations	$	25,000	$	—
Tax expense European operations		29,371		12,156
State taxes		5,000		5,000

Net tax provision	$	59,371	$	17,156

The deferred tax assets and the offsetting tax valuation allowance is attributable to the Company’s domestic operations. For four out of the last five fiscal years, the Company’s domestic operation incurred tax losses. Fiscal 2005 was the first year out of the last five years in which the Company’s domestic operations had pre tax income. As of June 30, 2006, we evaluated the future realization of our deferred tax assets and the corresponding valuation allowance. The Company took into consideration:


	•	the tax losses incurred by our domestic operations in four out of the last five years

	•	the seasonal nature and cyclical nature of the business, which makes it difficult to predict the future realization of the deferred tax asset

	•	the dynamic market and technological changes that occur in our industry

After evaluating the circumstances listed above, it was the Company’s opinion that as of June 30, 2006, the valuation allowance was still applicable.

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 $380,341, for the three months ended June 30, 2006, which resulted in basic and diluted net income per share of $0.04 on weighted average basic and diluted shares of 9,636,912 and 10,057,479, respectively, compared to a net income of $159,972 for the three months ended June 30, 2005, which resulted in basic and diluted net income per share of $0.02, respectively, on weighted average basic and diluted shares of 9,489,843 and 9,967,512, respectively.

NINE MONTH PERIOD ENDED JUNE 30, 2006 COMPARED TO
JUNE 30, 2005

Results of operations for the nine months ended June 30, 2006 compared to June 30, 2005 are as follows:

Nine
Months
Ended

Variance

Percentage of sales

6/30/06

6/30/05

2006

2005

Variance

Net sales

75,506,375

63,095,518

12,410,857

100.00

—

Cost of sales

60,461,107

48,572,102

11,889,005

80.07

76.98

3.09

Gross profit

15,045,268

14,523,416

521,852

19.93

23.02

-3.09

Gross profit%

19.93

23.02

-3.09

Expenses:

Sales & marketing

6,992,771

7,388,716

(395,945

)

9.26

11.71

-2.45

Technical support

430,839

374,480

56,359

0.57

0.59

-0.02

General & administrative

2,637,202

2,573,400

63,802

3.49

4.08

-0.59

SG&A stock compensation expense

211,935

—

211,935

0.28

0.00

0.28

Total selling, general and administrative expenses

10,272,747

10,336,596

(63,849

)

13.60

16.38

-2.78

Research & development

2,219,710

1,844,555

375,155

2.94

2.92

0.02

Research and development stock compensation expense

62,835

—

62,835

0.08

0.00

0.08

Total operating expenses

12,555,292

12,181,151

374,141

16.62

19.30

-2.68

Net operating income

2,489,976

2,342,265

147,711

3.31

3.72

-0.41

Other income (expense)

Interest income

17,921

15,699

2,222

0.02

0.00

Foreign currency

(2,695

)

11,317

(14,012

)

0.00

0.02

-0.02

Total other income (expense)

15,226

27,016

(11,790

)

0.02

0.04

-0.02

Income before taxes

2,505,202

2,369,281

135,921

3.33

3.76

-0.43

Taxes on income

146,510

118,156

28,354

0.20

0.19

0.01

Net income

2,358,692

2,251,125

107,567

3.13

3.57

-0.44

Net sales for the nine months ended June 30, 2006 increased $12,410,857 over the nine months ended June 30, 2005 as shown in the table below.


	Nine Months		Nine Months		Increase (Decrease)		Increase (Decrease)			Sales by Geographic region
Location	Ended 6/30/06		Ended 6/30/05		Dollar Variance		Variance %			2006			2005

Domestic		35,477,958		28,810,910		6,667,048		23	%		47	%		46	%
Europe		38,204,680		32,808,781		5,395,899		16	%		51	%		52	%
Asia		1,823,737		1,475,827		347,910		24	%		2	%		2	%

Total	$	75,506,375	$	63,095,518	$	12,410,857		20	%		100	%		100	%

Net sales to domestic customers were 47% of net sales for the nine months ended June 30, 2006 compared to 46% for the nine months ended June 30, 2005. Net sales to European customers were 51% of net sales compared to 52% for the same period of last year. Net sales to Asian customers were 2% for the nine months ended June 30, 2006 and June 30, 2005.

Gross profit increased $521,852 for the nine months ended June 30, 2006 compared to the prior year. The components of increases and (decreases) in the gross profit are detailed below:


	Increase
	(decrease)

Increased sales	$	3,915,147
Lower gross profit on sales mix		(2,375,735	)
Due to increases in production costs		(1,017,560	)

Total increase in gross profit	$	521,852

Gross profit percentage for the nine months ended June 30, 2006 was 19.93% compared to 23.02% for the prior year, a decrease of 3.09%.

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


	Increase
	(decrease)
Lower gross profit on sales mix		(3.02	)%
Due to increases in production costs		(0.07	)%

Net decrease in gross profit%		(3.09	)%

The decrease in the gross profit percent of 3.09 % for the nine months ended June 30, 2006 compared to the nine months ended June 30, 2005 was primarily due to:


	•	A higher percentage of lower gross profit margin products contributed to a 3.02% decrease in gross profit

	•	Production and shipping increases contributed to a 0.07% decrease in gross profit percent. The increase in net sales was about 20% while the increase in production costs was about 20%

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

Nine months ended June 30,

Dollar Costs

Percentage of Sales

Increase

2006

2005

(Decrease)

2006

2005

(Decrease)

Sales and marketing

6,992,771

7,388,716

(395,945

)

9.26

11.71

-2.45

Technical support

430,839

374,480

56,359

0.57

0.59

-0.02

General and administrative

2,637,202

2,573,400

63,802

3.49

4.08

-0.59

SG&A stock compensation expense

211,935

—

211,935

0.28

0.00

0.28

Total

10,272,747

10,336,596

(63,849

)

13.60

16.38

-2.78

Selling, general and administrative expenses deceased $63,849 from the prior year. As a percentage of sales, selling, general and administrative expenses decreased by 2.78% when compared to the nine months ended June 30, 2005. The decrease in sales and marketing expense of $395,945 was mainly due to lower advertising and promotional expenses offset by increased compensation expenses due to higher sales commissions and mid year incentives. The increase in technical support expenses of $56,359 was primarily due to increased personnel required to handle increased phone volume due to expanding sales. The increase in general and administrative expenses of $63,802 was primarily due to compensation increases for additional managerial

staff offset by lower legal fees of as a result of lower non recurring fees. Reflected in selling, general and administrative expenses for the nine months ended June 30, 2006 was $211,935 in stock compensation expenses related to the issuance of stock options.

Research and development expenses increased $437,990. The increase was mainly due to higher compensation costs of due to the hiring of additional engineering management and staff personnel and increased program development costs of due to higher volume of new product and product enhancement programs. Reflected in research and development expenses for the nine months ended June 30, 2006 was $62,835 in stock compensation expenses related to the issuance of stock options.

Other income (expense)

Net other income for the nine months ended June 30, 2006 was $15,226 compared to net other income of $27,016 for the nine months ended June 30, 2005. The change was primarily driven by the foreign currency transactions gains and losses.

Accumulated other comprehensive income (loss)


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

Translation gains and losses	$	546,352	$	(798,031	)	$	(251,679	)
FAS 133 mark to market adjustment		136,418		(192,458	)		(56,040	)

	$	682,770	$	(990,489	)	$	(307,719	)

Tax provision

Our net tax provision for the nine months ended June 30, 2006 and 2005 is as follows:


	Nine months ended June 30,

	2006		2005

AMT Tax attributable to U.S operations	$	55,000	$	20,000
Tax expense European operations		76,510		83,156
State taxes		15,000		15,000

Net tax provision	$	146,510	$	118,156


	•	the tax losses incurred by our domestic operations in four out of the last five years

	•	the seasonal nature and cyclical nature of the business, which makes it difficult to predict the future realization of the deferred tax asset

	•	the dynamic market and technological changes that occur in our industry

After evaluating the circumstances listed above, it was the Company’s opinion that as of June 30, 2006, the valuation allowance was still applicable.

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 $2,358,692 for the nine months ended June 30, 2006, which resulted in basic net income per share of $0.25 and diluted net income per share of $0.24 on weighted average basic and diluted shares of 9,573,594 and 10,003,979, respectively, compared to a net income of $2,251,125 for the nine months ended June 30, 2005, which resulted in basic net income per share of $0.24 and diluted net income per share of $0.23 on weighted average basic and diluted shares of 9,408,827 and 9,990,055, 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 June 30, 2006 and September 30, 2005 is set forth below:


	June 30, 2006		September 30, 2005

Cash	$	7,339,775	$	7,567,393
Working Capital		17,166,475		15,334,855
Stockholders’ Equity		17,814,511		15,941,492

We had cash and cash equivalents as of June 30, 2006 of $7,339,775, a decrease of $227,618 from September 30, 2005.

The decrease in cash was due to:


Sources of cash:
Net income adjusted for non cash items	$	2,768,532
Increase in accounts payable and accrued expenses		6,742,614
Proceeds from employee stock purchases		230,046
Decrease in prepaid expenses and other current assets		166,945
Less cash used for:
Increase in account receivables		(6,114,468	)
Increase in inventories		(2,854,329	)
Effect of exchange rates on cash		(990,489	)
Capital equipment purchases		(176,469	)


Net cash decrease	$	(227,618	)

Net cash of $709,294 provided by operating activities was primarily due to increases in accounts payable and accrued expenses of $6,742,614, as was used to finance the growth in accounts receivable and inventory to fund the increase in sales and a decrease in prepaid expenses and other current assets of $166,945. Net income adjusted for non cash items of $2,768,532 provided another source of cash. Somewhat offsetting these sources of cash were increases in accounts receivable and inventory of $6,114,468 and $2,854,329 respectively, required to fund the 54% increase in sales between the last quarter of fiscal 2005 and the third quarter of fiscal 2006.

Cash of $176,469 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 $230,046 and the effect of exchange rate changes used cash of $990,489.

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 June 30, 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 June 30, 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 June 30, 2006:

Payments due by period

Total

Less than 1 year

1-3 years

3 to 5 years

Operating lease obligations

1,595,086

573,423

898,466

123,197

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.

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 June 30, 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 June 30, 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 Quarterly 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 June 30, 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: August 14, 2006	By	/s/ Kenneth Plotkin

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


Date: August 14, 2006	By	/s/ Gerald Tucciarone

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