-----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, KHo7wVgGgX12/h6xK0mRvvi7ujfzQh/9LJbCgIG2ff4fLw4v5NxYW82ka9pNmDvT FhLlDYYw2XuerJYzNqazFg== 0001021771-01-000014.txt : 20010223 0001021771-01-000014.hdr.sgml : 20010223 ACCESSION NUMBER: 0001021771-01-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 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: SEC FILE NUMBER: 001-13550 FILM NUMBER: 1543044 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 0001.txt FORM 10-Q 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: December 31, 2000 -------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission file number 1-13550 ------- HAUPPAUGE DIGITAL, INC. ----------------------- (Exact Name of registrant as specified in its charter) Delaware 11-3227864 ------------------------------------------------------------------------------ (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 91 Cabot Court, Hauppauge, New York 11788 ----------------------------------------- (Address of principal executive offices) (631) 434-1600 -------------- (Issuer's telephone number) Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------------------ ------------------- As of January 22, 2001 8,885,152 shares of .01 par value Common Stock of the registrant were outstanding, not including treasury shares HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES ---------------------------------------- INDEX ----- PART I. FINANCIAL INFORMATION - ----------------------------- Item 1. Financial Statements Page No. Condensed Consolidated Balance Sheets- 3 December 31, 2000 (unaudited) and September 30, 2000 Condensed Consolidated Statements of Income- 4 Three Months ended December 31, 2000 and 1999 (unaudited) Condensed Consolidated Statements of Cash Flows- 5 Three Months ended December 31, 2000 and 1999 (unaudited) Notes to Condensed Consolidated Financial Statements 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-13 Item 3. Quantitative and Qualitative Disclosures about Market Risks 13 PART II. OTHER INFORMATION - -------------------------- Item 1. Legal proceedings 14 Item 6. Exhibits and Reports on form 8-K 15 SIGNATURES 16 - ---------- PART I. FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, ASSETS 2000 September 30, (Unaudited) 2000 ================= ================ CURRENT ASSETS: Cash and cash equivalents $ 4,351,121 $2,744,855 Accounts receivable, net of allowance for doubtful accounts of $175,000 and $165,000 6,522,977 6,172,993 Inventories 12,308,879 12,289,975 Prepaid expenses and other current assets 537,156 456,431 Income taxes receivable 1,496,045 1,496,045 Deferred tax assets 1,267,797 1,267,797 Forward foreign currency contracts receivable 6,539,431 - --------- ---------- Total current assets 33,023,406 24,428,096 Property, plant and equipment-net 943,597 977,030 Goodwill and intangible assets-net 797,969 824,519 Security deposits and other non current assets 85,228 85,228 ------ ------ $34,850,200 $26,314,873 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY : CURRENT LIABILITIES: Accounts payable $11,991,353 $10,481,714 Forward foreign currency contracts payable 6,600,777 - Accrued expenses 1,003,144 952,482 Loan payable 360,000 1,000,000 Income taxes payable 255,408 227,000 ------- ------- Total current liabilities 20,210,682 12,661,196 ---------- ---------- STOCKHOLDERS' EQUITY: Common stock $.01 par value; 25,000,000 shares authorized, 9,314,754 and 9,312,578 issued as of December 31 , 2000 and September 30, 2000 93,148 93,126 Additional paid-in capital 12,067,460 12,046,421 Retained earnings 3,812,974 2,848,194 Treasury Stock, at cost, 429,602 shares (1,334,064) (1,334,064) ---------- ---------- Total stockholders' equity 14,639,518 13,653,677 ---------- ---------- $ 34,850,200 $26,314,873 ============= ===========
See accompanying notes to condensed consolidated financial statements HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended December 31, 2000 1999 (Unaudited) (Unaudited) ================== ================= Net Sales $17,895,774 $ 22,043,649 Cost of Sales 13,925,603 16,948,408 ---------- ---------- Gross Profit 3,970,171 5,095,241 Selling, General and Administrative Expenses 2,845,848 2,870,518 Research and Development Expenses 393,260 402,970 ======= ======= Income from operations 731,063 1,821,753 Other Income (expense): Interest income 8,831 46,500 Interest expense (11,850) - Other, net (49,350) 37,902 ------- ------ Income before income tax (benefit) expense 678,694 1,906,155 Income tax (benefit) expense (82,086) 430,000 ------- ------- Income before cumulative effect of a change in accounting principle 760,780 1,476,155 Cumulative effect of a change in accounting principle, net of taxes of $115,000 204,000 - ------- --------- Net income $964,780 $1,476,155 ======== ========== Per share results-basic: Income before cumulative effect of a change in accounting principle $0.09 $0.17 Cumulative effect of a change in accounting principle $0.02 - ----- ----- Net income per share-basic $0.11 $0.17 ===== ===== Per share results-diluted: Income before cumulative effect of a change in accounting principle $0.08 $0.15 Cumulative effect of a change in accounting principle $0.02 - ----- ----- Net income per share-diluted $0.10 $0.15 ===== =====
See accompanying notes to condensed consolidated financial statements HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Three Months Ended December, 31 2000 1999 (Unaudited) (Unaudited) ================== ================ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $964,780 $1,476,155 -------- ---------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 97,032 58,676 Provision for uncollectible accounts receivable 10,000 15,000 Deferred tax benefits - 19,321 Unrealized gain on forward foreign currency contracts (44,049) - Other non cash items 9,501 9,504 Changes in current assets and liabilities: Accounts receivable (254,589) (2,898,387) Inventories (18,904) 179,629 Prepaid expenses and other current assets (80,725) (153,765) Accounts payable and other current liabilities 1,588,709 562,720 --------- ------- 1,306,975 (2,207,302) --------- ---------- Net cash provided by (used in) operating activities 2,271,755 (731,147) --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (37,049) (174,724) Other - (14,780) --------- ------- Net cash used in investing activities (37,049) (189,504) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from employee stock purchase plan 11,560 22,500 Loan repayments (640,000) - -------- ------- Net cash (used in) provided by financing activities (628,440) 22,500 -------- ------ Net increase (decrease) in cash and cash equivalents 1,606,266 (898,151) Cash and Cash Equivalents, beginning of period 2,744,855 6,122,922 --------- --------- Cash and Cash Equivalents, end of period $ 4,351,121 $5,224,771 =========== ========== SUPPLEMENTAL DISCLOSURES: Interest paid $13,681 - Income taxes paid 4,506 $414,677 ===== ======== Supplemental disclosure of non cash financing activities: Forward foreign currency contracts 6,539,431 _ ========= ========
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 financial position, results of operations and cash flows for the three month period ended December 31, 2000 have been included. It is suggested that these interim statements be read in conjunction with the financial statements and related notes included in the Company's September 30, 2000 Form 10-K. The Company has adopted the classification requirements for shipping and handling fees and costs as required under EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Accordingly, shipping and handling fees and costs, which historically were included in Selling, General and Administrative expenses, are recorded in Cost of Sales. Prior periods have been restated to conform with this presentation. The operating results for the three month period ended December 31, 2000 are not necessarily indicative of the results to be expected for the September 30, 2001 year end. DERIVATIVE FINANCIAL INSTRUMENTS On October 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative instruments and Hedging Activities", which requires that all derivatives be recorded on the balance sheet at fair value. Changes in the fair value of the derivatives are recognized currently in earnings. The Company has reflected the impact from the adoption of SFAS 133 as a cumulative effect of a change in accounting principle, net of the related tax expense. The Company uses derivatives to moderate the financial market risks of its foreign business operations. Derivative products, such as forward exchange contracts, are used to hedge the foreign currency market exposures underlying certain forecasted transactions with customers. An instrument is designated as a hedge based in part on its effectiveness in risk reduction and matching of derivative instruments to forecasted foreign sales. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to changes in the fair value of the forward contract attributable to changes in the U.S. dollar to Euro spot rate), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period. For derivative instruments not designed as hedging instruments, HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) changes in their fair values are recognized in earnings in the current period. NOTE 2. INVENTORIES Inventories have been valued at the lower of average cost or market. The components of inventory consist of: December 31, September 30, 2000 2000 ---- ---- Component Parts $ 6,156,527 $ 6,059,247 Work in Progress 80,530 111,446 Finished Goods 6,071,822 6,119,282 --------- --------- $ 12,308,879 $12,289,975 ============ =========== NOTE 3. 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 common shares 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 earnings per share follows: Three Months Ended December 31, 2000 1999 ---- ---- Weighted average shares outstanding-basic 8,885,010 8,693,178 Number of shares issued on the assumed exercise of stock options 420,748 1,090,662 ------- --------- Weighted average shares outstanding-diluted 9,305,758 9,783,840 --------- --------- On February 10, 2000 the Company's Board of Directors authorized a two for one stock split effected as a 100% common stock dividend, which was effective as of March 27, 2000. All prior periods have retroactively restated to reflect the stock split. Options to purchase 271,444 shares of common stock, ranging in prices from $3.94 to $10.00, were outstanding as of December 31, 2000, but were not included in the computation of diluted earnings per share because they were anti-dilutive. HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 4 . BUSINESS ACQUISITION On June 1, 2000 the Company acquired certain assets of EsKape Labs Inc. ("EsKape"), a California based company specializing in designing and manufacturing television and video products for Apple Macintosh computers. The purchased assets expands and complements the Company's product line into the Macintosh market. The cash price for the acquisition, which was accounted for under the purchase method, was approximately $900,000, including legal and accounting acquisition costs and a restrictive covenant totaling $50,000 . The excess of the acquisition cost over the fair value of identifiable assets acquired is being amortized on a straight line basis over 10 years, and the restrictive covenant on a straight line basis over 2 years. In addition to the price paid for the acquired assets, the purchase agreement also calls for contingent additional consideration, which if earned will be treated as additional purchase price, as follows: - - For the twelve months commencing June 1, 2000, the purchaser shall pay to the seller an earn out equal to 16.25% of net sales of such product, as defined in the purchase agreement, which are in excess of $4,000,000. - - In no event shall an earn out be paid if the net sales for such period are $4,000,000 or less - - In no event shall the additional consideration exceed $2,600,000 - - Any additional consideration due the seller shall be paid in Hauppauge Stock, valued at $11.50 and subject to customary adjustments for stock splits, stock dividends and the like. If the issuance of shares in payment of the additional consideration results in the seller or its authorized successors owing more than 5% of the issued and outstanding shares of Hauppauge, the purchaser may, at its sole discretion, substitute cash for any portion of the additional consideration which would result in the seller being the holder of more that 5% of the then outstanding shares of Hauppauge stock. The supplemental information below summarizes, on a pro forma basis, the companies results for the three months ended December 31, 1999 had the companies combined at the beginning of the period presented. Three months ended December 31, 1999 Net sales $22,191,683 Net income 958,584 Earnings per share Basic $0.11 Diluted $0.10 Pro forma net income (loss) may not be indicative of actual results, primarily because the HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) pro forma results are historical results of the acquired entity and do not reflect any cost savings that may be obtained from the integration and elimination of redundant functions. NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS The Company has significant international sales in foreign currencies and continues its policy of hedging forecasted and actual foreign currency risk with forward contracts that expire within six months. These derivative instruments are employed to eliminate or minimize certain foreign currency exposures that can be confidently identified and quantified. In accordance with SFAS 133, hedges related to anticipated transactions are designated and documented at the inception of the respective hedge as cash flow hedges and evaluated for effectiveness quarterly. The Company assesses hedge effectiveness by comparing the value of the forward contracts at contracted rates at the inception of the contract and during the term of the hedge to the value of the forward contracts calculated by using the applicable exchange rate at the measurement date, with the respective gain or loss on the derivative instrument reported in earnings. During the quarter ended December 31, 2000, the company recorded a loss of $ 61,346 which is included in Other, net, relating to the changes in fair value of its Euro contracts based on the U.S. dollar to Euro spot rate at December 31, 2000. NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No.101 (SAB101), "Revenue Recognition in financial Statements". SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In October 2000, the SEC issued additional written guidance to further supplement SAB 101. Based on the SEC's latest timeline for implementing SAB 101, the Company would be required to comply with the guidelines in the fourth quarter of fiscal 2001. The adoption of this bulletin is not expected to have an effect on the consolidated financial statements. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- Results of Operations - --------------------- Three Month Period ended December 31, 2000 versus December 31, 1999 - ------------------------------------------------------------------- Sales for the three months ended December 31, 2000 were $17,895,774 compared to $22,043,649 for the prior year's first fiscal quarter, a decrease of $4,147,875 or 19%, comprised of a 43% decrease in domestic sales, a 14% decrease in European sales and a 203% increase in Asian sales. ITEM 2. Management's Discussion and Analysis (continued) - ------- ------------------------------------------------ The primary forces causing the decrease were: - - Lower domestic and European seasonal sales volume - - Lower average Euro to dollar exchange rate compared to the first quarter fiscal 2000 Unit sales for the three months ended December 31, 2000 decreased about 7% to approximately 286,000 as compared to approximately 309,000 for the prior year. Sales to domestic customers for this year's first fiscal quarter were 21% of net sales compared to 31% for the prior year's first fiscal quarter. Sales to European customers were 71% of net sales for the first fiscal quarter compared to 67% for the comparable quarter of the prior fiscal year. Sales to Asian customers were 8% for the quarter ended December 31, 2000 compared to 2% for the prior years first fiscal quarter. Gross profit for the quarter was $3,970,171 as compared to $5,095,241 for the prior fiscal year's first quarter. The gross profit percentage was 22.2% for the three months ended December 31, 2000 compared to 23.1% for the three months ended December 31, 1999. Factors in the decrease in margins include: - - Larger sales mix of lower margin product - - Decline in the Euro exchange rate compared to the first quarter of fiscal 2000. - - Fixed overhead absorbed over lower sales volume The chart below illustrates the components of selling, general and administrative expenses:
Three months ended December 31, Dollar Costs Percentage of Sales Increase Increase/ 2000 1999 (Decrease) 2000 1999 (Decrease) ---- ---- ----------- ---- ---- -------- Sales & Promotional $1,896,794 2,031,614 $(134,820) 10.6% 9.2% 1.4% Customer Support 99,432 126,533 (27,101) .6% .6% -% General & Admin 849,622 712,371 137,251 4.7% 3.2% 1.5% ------- ------- ------- --- --- --- Total $2,845,848 $2,870,518 $ (24,670) 15.9% 13.0% 2.9%
Represented in dollars, Selling General and Administrative expenses decreased $24,670 from the comparable quarter of the prior fiscal year. As a percentage of sales, Selling, General and Administrative expenses for the three months ended December 31, 2000 increased by 2.9% when compared to the first quarter of the prior fiscal year The decrease in sales and promotional expense of $134,820 was mainly due to: - - Lower commission payments - - Lower marketing costs in the UK and France sales offices Customer Support costs decreased $27,101 due to lower compensation expense. The increase in General and Administrative expenses of $ 137,251 was primarily due to : ITEM 2. Management's Discussion and Analysis (continued) - ------- ------------------------------------------------ - - The hiring of Corporate in house counsel and a Director of MIS operations during the second half of fiscal 2000 - - Compensation costs related Eskape Labs administrative personnel - - Amortization of goodwill and intangible assets related to the Eskape acquisition - - Contractual salary increases for senior executives - - Increased rent costs due to expanded office space for Eskape operations Research and development expenses decreased $9,710 or approximately 2.4%. The decrease was due to lower compensation costs at the Company's Singapore office. The Company had net other expense for the three months ended December 31, 2000 of $52,369 compared to net other income for the prior years first fiscal quarter of $84,402. The decrease in net other income was primarily due to less interest earned, lower foreign currency gains due to the decline of the Euro, which included a loss of $61,346 relating to changes in the fair value of outstanding Euro contracts and interest expense on borrowings outstanding during the first quarter of fiscal 2001. The Company recorded an income tax benefit of $82,086 for the quarter ended December 31, 2000 compared to a tax provision of $430,000 for the three months ended December, 31 1999. Effective October 1, 1999, the Company restructured its foreign operations. The result of the restructuring eliminated the foreign sales corporation and established a new Luxembourg corporation, which functions as the entity that services the Company's European customers. The company's tax benefit for the three months ended December 31, 2000 resulted from the tax liability attributed to the Company's European operation offset by the higher income tax benefit attributed to the Company's United States operations due to the higher U.S. effective tax rate. The adoption of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative instruments and Hedging Activities", resulted in a $204,000 gain, net of taxes of $115,000, due to the cumulative effect of a change in accounting principle. As a result of the above, the Company recorded net income for the three months ended December 31, 2000 of $964,780, which resulted in basic and diluted income per share of $0.11 and $0.10 on weighted average basic and diluted shares of 8,885,010 and 9,305,758, respectively, compared to net income of $1,476,155 for the three months ended December 31, 1999, which resulted in basic and diluted earnings per share of $0.17 and $0.15, on weighted average shares of 8,693,178 and 9,783,840, respectively. Options to purchase 264,748 shares of common stock, ranging in prices from $5.25 to $10.06, were outstanding as of December 31, 2000, but were not included in the computation of diluted earnings per share because they were anti-dilutive. On February 10, 2000 the Company's Board of Directors authorized a two for one stock split effected as a 100% common stock dividend. The stock split was effective as of March 27, 2000. All prior periods have been retroactively restated to reflect the stock split. Since the company sells primarily to the consumer market, the Company has experienced certain revenue trends. The Company has historically recorded stronger sales results during the ITEM 2. Management's Discussion and Analysis (continued) - ------- ------------------------------------------------ Company's first fiscal quarter (October to December), which due to the holiday season, is a strong quarter for computer equipment sales. The Company experienced this trend in each of the fiscal years ended September 30, 2000 and September 30, 1999. In addition, the Company's international sales, mostly in the European market, were 71%, 73% and 72% of sales for the years ended 2000, 1999 and 1999, respectively. Due to this, the Company's sales for its fourth fiscal quarter (July to September) can be potentially impacted by the reduction of activity experienced with Europe during the July and August summer holiday period. To offset the above cycles, the Company continues to target a wide a range of customer types in order to moderate the seasonality of retail sales. Liquidity and Capital Resources - ------------------------------- The Company's cash, working capital and stockholders' equity position is disclosed below: December 31, 2000 September 30, 2000 ----------------- ------------------ Cash $ 4,351,121 $ 2,744,855 Working capital 12,812,724 11,766,900 Stockholders' equity 14,639,518 13,653,677 The significant items of cash provided by and cash (consumed) for the three month period ended December 31, 2000 are detailed below:
Net income (adjusted for non cash items), excluding deferred tax benefits $ 1,037,264 Loan repayments (640,000) Increase in current liabilities-net 1,588,709 Increase in investment for current assets (354,218) Purchase of Property, Plant & Equipment (37,049) Other 11,560
Net cash of $ 2,271,755 provided by operating activities was primarily due to net income adjusted for non cash items of $1,037,264 and the increase in net current liabilities of $1,588,709 offset by an increase in current assets of $354,218. Other items of cash consumption included $640,000 in loan repayments and $37,049 used to purchase fixed assets. On July 12, 2000 the Company has signed an agreement with Chase Manhattan Bank, providing the Company with a $6,500,000 credit facility. The facility allows the Company, at its option, to borrow at the prime rate or 1.25% above the London Interbank Offered Rate "LIBOR". The facility is secured by the assets of the company and expires on March 31, 2001. As of December 31, 2000, $360,000 was outstanding under this line of credit. On November 8, 1996, the Company approved a stock repurchase program for the repurchase of up to 600,000 shares of its own Common Stock. The repurchased shares will be used by the Company for certain employee benefit programs. As of December 31 2000, 429,602 treasury shares valued at $1,334,064 at an average price of $ 3.11 were held by the Company as treasury shares. ITEM 2. Management's Discussion and Analysis (continued) - ------- ------------------------------------------------ The Company believes that its current cash position, its internally generated cash flow and its line of credit will be sufficient to satisfy the Company's anticipated operating needs for at least the ensuing twelve months. Inflation - --------- While inflation has not had a material effect on the Company's operations in the past, there can be no assurance that the Company will be able to continue to offset the effects of inflation on the costs of its products or services through price increases to its customers without experiencing a reduction in the demand for its products; or that inflation will not have an overall effect on the computer equipment market that would have a material affect on the Company. Effect of New Accounting Pronouncements - --------------------------------------- In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No.101 (SAB101), "Revenue Recognition in financial Statements". SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In October 2000, the SEC issued additional written guidance to further supplement SAB 101. Based on the SEC's latest timeline for implementing SAB 101, the Company would be required to comply with the guidelines in the fourth quarter of fiscal 2001. The adoption of this bulletin is not expected to have an effect on the consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures about Market Risks - ------- ----------------------------------------------------------- Due to extensive sales to European customers denominated in local currencies, the Company is a net receiver of currencies other than the U.S. dollar and as such benefits from a weak dollar and is adversely affected by a strong dollar relative to the major worldwide currencies, especially the Euro and British Pound Sterling. Consequently, changes in exchange rates expose the Company to market risks resulting from the fluctuations in the foreign currency exchange rates to the U.S. dollar. The Company attempts to reduce these risks by entering into foreign exchange forward contracts with financial institutions to protect against currency exchange risks associated with its foreign denominated accounts receivable. The strength or weakness of the U.S. dollar against the value of the Euro and British Pound Sterling impact the Company's financial results. Changes in exchange rates may positively or negatively affect the Company's revenues, gross margins, operating income and retained earnings (which are expressed in U.S. dollars). Where it deems prudent, the Company engages in hedging programs aimed at limiting, in part, the impact of currency fluctuations. Primarily selling foreign currencies through forward window contracts, the Company attempts to hedge its foreign sales against currency fluctuations. These hedging activities provide only limited protection against currency exchange risks. Factors that could impact the effectiveness of the Company's programs include volatility of the currency markets and availability of hedging instruments. The contracts the Company procures are specifically entered into to as a hedge against existing or anticipated exposure. The Company does not enter into contracts for speculative purposes. Although the Company maintains these programs to reduce the impact of changes in currency exchange rates, when the U.S. dollar Item 3. Quantitative and Qualitative Disclosures about Market Risks (continued) - ------- ---------------------------------------------------------------------- sustains a strengthening position against the currencies in which the Company sells it products, the Company's revenues can be adversely affected. Special Note Regarding Forward Looking Statements - ------------------------------------------------- Certain statements in this Release constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those described in the Company's filings with the Securities and Exchange Commission, including but not limited to the Company's Annual Report in Form 10-K for the fiscal year ended September 30, 2000. PART II. OTHER INFORMATION - -------- ----------------- Item 1 Legal Proceedings - ------ ----------------- In January 1998, Advanced Interactive Incorporated ("AII") contacted the Company and attempted to induce the Company to enter into a patent license or joint venture agreement with AII relative to certain of the Company's products. AII alleged that such products infringe U.S. Patent No. 4, 426, 698 (the "AII Patent"). At such time, the Company's engineering staff analyzed the AII Patent and determined that the Company's products did not infringe any such patent. Accordingly, the Company rejected AII's offer. On October 6, 1998, the Company received notice that AII had commenced an action against it and multiple other defendants in the United States District Court for the Northern District of Illinois (the "District Court"), alleging that the certain of the Company's products infringed on certain patent rights allegedly owned by the plaintiff (the "Complaint"). The Complaint sought unspecified compensatory and statutory damages with interest. The Company denied such allegations and vigorously defended this action. On December 22, 1998, the Company filed its answer (the "Answer"). Among other things, pursuant to the Answer, the Company denied that its products infringed AII's patent rights and asserted certain affirmative defenses. In addition, the Answer included a counterclaim challenging the validity of AII's alleged patent rights. On March 5, 1999, the Company joined a Motion for Partial Adjudication of Claim Construction Issues, filed by one of the multiple defendants. The Motion provided the defendants' interpretation of certain limitations of the claims at issue. On February 17, 2000, the District Court granted the Motion en toto. On June 20, 2000, AII and the Company, inter alia, entered into an Agreed Motion to Entry of Judgment, where AII stipulated that based on the District Court's claim construction, certain claim elements in the claims at issue were not present in the Company's accused products. On June 26, 2000, the District Court granted the Agreed Motion and directed a Final Judgment of Non- infringement as to the Company. On July 25, 2000, AII filed a Notice of Appeal with the U.S. Court of Appeals for the Federal Circuit, appealing the District Court's Order granting the Motion for Partial Adjudication of Claim Construction Issues and Order entering Final Judgment of Non infringement. AII filed its Brief for Plaintiff-Appellant on October 13, 2000, while the Company joined the Brief for Defendents-Appellees, filed on December 22, 2000. As with the prior action in the District Court, the Company intends to defend this action vigorously. Notwithstanding the foregoing, because of the uncertainties of litigation, no assurances can be given as to the outcome of AII's appeal. It is possible that the U.S. Court of Appeals for the Federal Circuit may reverse the District's Court's rulings and remand the case back to the District Court. In such an event, and if the Company were not to prevail in the remanded litigation, the Company could be required to pay significant damages to AII and could be enjoined from further use of such technology as it presently exists. Although a negative outcome in the AII litigation would have a material adverse affect on the Company, including, but not limited to, its operations and financial condition, the Company believes that, if it is held that the Company's products infringe AII's patent rights, the Company would attempt to design components to replace the infringing components or would attempt to negotiate with AII to utilize its system, although no assurances can be given that the Company would be successful in these attempts. At the present time, the Company can not assess the possible cost of designing and implementing a new system or obtaining rights from AII. Item 6 Exhibits and Reports on Form 8-K - ------ -------------------------------- (a) Exhibits -------- None (b) Reports on form 8-K ------------------- None SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HAUPPAUGE DIGITAL, INC. ----------------------- Registrant Date: February, 12 2001 By /s/ Kenneth Plotkin ------------------- -------------------- KENNETH PLOTKIN Vice President and Chief Executive Officer Date: February 12, 2001 By /s/ Gerald Tucciarone ------------------- --------------------- GERALD TUCCIARONE Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----