-----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, CkpLTQVDdf7NwIsYWUT6glGXbjV3h8AIE1vpnlFGgsDow8Z8L+pvAVYvFQR8yZzn VIJ2Mh/rZxy2fdlqIbgFBA== 0001021771-01-500010.txt : 20010516 0001021771-01-500010.hdr.sgml : 20010516 ACCESSION NUMBER: 0001021771-01-500010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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: 1639511 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 marchq.txt FORM 10-Q FOR PERIOD ENDED MARCH 31, 2001 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, 2001 --------------- 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 May 7, 2001, 8,896,152 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- March 31, 2001 (unaudited) and September 30, 2000 3 Condensed Consolidated Statements of Income- Six Months ended March 31, 2001 (unaudited) and 2000 (unaudited) 4 Condensed Consolidated Statements of Income- Three Months ended March 31, 2001 (unaudited) and 2000 (unaudited) 5 Condensed Consolidated Statements of Cash Flows- Six Months ended March 31, 2001 (unaudited) and 2000 (unaudited) 6 Notes to Condensed Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition 11-17 and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risks 18 PART II. OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings 18 Item 6. Exhibits and Reports on form 8-K 19 SIGNATURES 20 - ---------- 2 PART I. FINANCIAL INFORMATION - ----------------------------- Item 1. Financial Statements HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, ASSETS 2001 September 30, (Unaudited) 2000 --------------- ------------------- CURRENT ASSETS: Cash and cash equivalents $ 2,988,016 $ 2,744,855 Accounts receivable, net of allowance for doubtful accounts of $215,000 and $165,000 5,438,096 6,172,993 Inventories 13,112,653 12,289,975 Prepaid expenses and other current assets 1,439,002 456,431 Income taxes receivable 1,496,045 1,496,045 Deferred tax assets 1,267,797 1,267,797 --------- --------- Total current assets 25,741,609 24,428,096 Property, plant and equipment-net 952,416 977,030 Goodwill and intangible assets-net 771,419 824,519 Security deposits and other non current assets 85,228 85,228 ------ ------ $27,550,672 $26,314,873 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY : CURRENT LIABILITIES: Accounts payable $10,646,019 $10,481,714 Accrued expenses 1,428,224 952,482 Loan payable 360,000 1,000,000 Income taxes payable 114,687 227,000 ------- ------- Total current liabilities 12,548,930 12,661,196 ========== ========== STOCKHOLDERS' EQUITY: Common stock $.01 par value; 25,000,000 shares authorized, 9,325,754 and 9,312,578 issued as of March 31 , 2001 and September 30, 2000 93,258 93,126 Additional paid-in capital 12,092,673 12,046,421 Retained earnings 4,112,690 2,848,194 Accumulated other comprehensive income 37,185 - Treasury Stock, at cost, 429,602 shares (1,334,064) (1,334,064) ---------- ---------- Total stockholders' equity 15,001,742 13,653,677 ---------- ---------- $27,550,672 $26,314,873 =========== ===========
See accompanying notes to condensed consolidated financial statements 3 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended March 31, 2001 2000 (Unaudited) (Unaudited) ----------- ----------- Net Sales $ 32,390,983 $ 41,568,846 Cost of Sales 25,216,671 32,667,695 ---------- ---------- Gross Profit 7,174,312 8,901,151 --------- --------- Selling, General and Administrative Expenses 5,463,890 5,866,136 Research and Development Expenses 741,028 762,825 ------- ------- Income from operations 969,394 2,272,190 Other Income (expense): Interest income 18,546 72,703 Interest expense (19,720) - Other, net (120,024) (96,274) -------- ------- Income before income tax (benefit) expense 848,196 2,248,619 Income tax (benefit) expense (212,300) 515,000 -------- ------- Income before cumulative effect of a change in accounting principle 1,060,496 1,733,619 Cumulative effect of a change in accounting principle, net of taxes of $115,000 204,000 - ------- --------- Net income $1,264,496 $ 1,733,619 ========== =========== Per share results-basic: Income before cumulative effect of a change in accounting principle $0.12 $0.20 Cumulative effect of a change in accounting principle $0.02 - ---------- ----------- Net income per share-basic $0.14 $0.20 ========== =========== Per share results-diluted: Income before cumulative effect of a change in accounting principle $0.11 $0.18 Cumulative effect of a change in accounting principle $0.02 - ---------- ----------- Net income per share-diluted $0.13 $0.18 ========== ===========
See accompanying notes to condensed consolidated financial statements 4 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2001 2000 (Unaudited) (Unaudited) ----------- ----------- Net Sales $ 14,495,209 $ 19,525,197 Cost of Sales 11,291,068 15,719,289 ---------- ---------- Gross Profit 3,204,141 3,805,908 Selling, General and Administrative Expenses 2,618,042 2,995,618 Research and Development Expenses 347,768 359,855 ------- ------- Income from operations 238,331 450,435 Other Income (expense): Interest income 9,715 26,203 Interest expense (7,870) - Other, net (70,674) (134,174) ------- -------- Income before income tax (benefit) expense 169,502 342,464 Income tax (benefit) expense (130,214) 85,000 -------- ------ Net income $ 299,716 $ 257,464 =========== ============ Per share results: Basic $0.03 $0.03 Diluted $0.03 $0.03 =========== ============
See accompanying notes to condensed consolidated financial statements 5 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Six Months Ended March , 31 2001 2000 (Unaudited) (Unaudited) ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,264,496 $ 1,733,619 ------------ ------------ Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 198,052 115,459 Provision for uncollectible accounts receivable 10,000 30,000 Deferred tax benefits - 11,195 Other non cash items 19,002 41,008 Changes in current assets and liabilities: Accounts receivable 724,897 (2,373,205) Inventories (822,678) (631,191) Prepaid expenses and other current assets (767,683) (287,410) Other assets - (414,358) Accounts payable and other current liabilities 350,031 (899,068) ------- -------- (288,379) (4,407,570) -------- ---------- Net cash provided by (used in) operating activities 976,117 (2,673,951) ------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (120,338) (289,350) -------- -------- Net cash used in investing activities (120,338) (289,350) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from employee stock purchases 27,382 383,999 Loan repayments (640,000) - --------- -------- Net cash (used in) provided by financing activities (612,618) 383,999 --------- -------- Net increase (decrease) in cash and cash equivalents 243,161 (2,579,302) Cash and Cash Equivalents, beginning of period 2,744,855 6,122,922 --------- --------- Cash and Cash Equivalents, end of period $ 2,988,016 $ 3,543,620 =========== =========== SUPPLEMENTAL DISCLOSURES: Interest paid $ 13,681 - Income taxes paid 4,506 $414,677 ===== ========
See accompanying notes to condensed consolidated financial statements 6 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 and six month period ended March 31, 2001 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. On October 1, 2001, 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 and six month period ended March 31, 2001 are not necessarily indicative of the results to be expected for the September 30, 2001 year end. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivatives to reduce its exposure to fluctuations in foreign currencies. Derivative products, such as foreign currency forward contracts, are used to hedge the foreign currency market exposures underlying certain forecasted transactions with customers. The Company's accounting policies for these instruments are based on its designation of such instruments as hedging transactions. The Company does not enter into such contracts for speculative purposes. The Company records all derivatives on the balance sheet at fair value. For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), 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 that are designated and qualify as a cash flow hedge (i.e., hedging the exposure of variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of Accumulated Comprehensive Income (a component of stockholders' equity) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument, if any (i.e the ineffective portion and any portion of the derivative excluded from the assessment of effectiveness) is recognized in earnings in the current period. For derivative instruments not designated as hedging instruments, changes in their fair values are recognized in earnings in the current period. 7 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOREIGN CURRENCY TRANSLATION TRANSACTIONS An Asian subsidiary of the Company reports its financial position and results of operations in the reporting currency of the Company. The financial position and results of operations of the Company's European subsidiaries are determined using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included in the accumulated other comprehensive income account in stockholders' equity. Gains and losses resulting from foreign currency transactions are included in earnings. ACCUMULATED OTHER COMPREHENSIVE INCOME Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are excluded from net income as these amounts are recorded directly as an adjustment to shareholders' equity. Accumulated other comprehensive income is comprised of the cumulative effects of foreign currency translation. NOTE 2. INVENTORIES Inventories have been valued at the lower of average cost or market. The components of inventory consist of: March 31, September 30, 2001 2000 ---- ---- Component Parts $ 5,536,654 $ 6,059,247 Work in Progress 50,530 111,446 Finished Goods 7,525,469 6,119,282 ----------- ------------ $13,112,653 $ 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 March 31, 2001 2000 ---- ---- Weighted average shares outstanding-basic 8,887,719 8,819,900 Number of shares issued on the assumed Exercise of stock options 353,100 1,112,433 --------- --------- Weighted average shares outstanding-diluted 9,240,819 9,932,333 --------- --------- 8 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Six Months Ended March 31, 2001 2000 ---- ---- Weighted average shares outstanding-basic 8,886,349 8,796,541 Number of shares issued on the assumed Exercise of stock options 384,791 1,067,585 --------- --------- Weighted average shares outstanding-diluted 9,271,140 9,864,126 --------- --------- 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 been retroactively restated to reflect the stock split. Options to purchase 366,410 and 317,461 shares of common stock, ranging in prices from $3.94 to $10.06, were outstanding for the three month and six month period ended March 31, 2001, but were not included in the computation of diluted earnings per share because they were anti-dilutive. 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 $100,000 for direct transaction 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: o 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. o In no event shall an earn out be paid if the net sales for such period are $4,000,000 or less o In no event shall the additional consideration exceed $2,600,000 o 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 owning 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 than 5% of the then outstanding shares of Hauppauge stock. Upon determination that the earn out has been achieved, the Company will use the current fair value of the Company's stock in valuing the shares issued. 9 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The supplemental information below summarizes, on a pro forma basis, the companies results for the six months ended March 31, 2000 had the companies combined at the beginning of the period presented. Three months ended Six months ended March 31, 2000 March 31, 2000 -------------- -------------- Net sales $ 19,632,542 $ 41,824,225 Net income 220,595 1,179,179 Earnings per share Basic $0.03 $0.13 Diluted $0.02 $0.12 Pro forma net income (loss) may not be indicative of actual results, primarily because the pro forma results are historical results of Hauppauge Digital Inc. and 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 On October 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities", as amended and interpreted, which requires that all derivatives be recorded on the balance sheet at fair value. 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 has significant international sales in foreign currencies and continues its policy of hedging forecasted sales with foreign currency forward contracts that expire within six months. These derivative instruments are employed, based on management's judgement concerning the trade off between risk and cost, in an attempt to eliminate or minimize certain foreign currency exposures that can be identified and quantified. For the three and six months ended March 31, 2001, the Company recorded approximately $66,000 and $788,000 as an increase to net sales related to changes in the fair value of its derivative contracts. 10 HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 6. OTHER COMPREHENSIVE INCOME Net comprehensive income for the three months and six months ended March 31, 2001 and March 30, 2000 is as follows:
Three months ended Six months ended March 31, March 31, March 31, March 31, 2001 2000 2001 2000 ---- ---- ---- ---- Net income $299,716 $257,464 $1,264,496 $1,733,619 Foreign currency translation adjustments 37,185 - 37,185 - -------- -------- ---------- ---------- Net comprehensive income $336,901 $257,464 $1,301,681 $1,733,619 ======== ======== ========== ==========
NOTE 7. 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 a material effect on the consolidated financial statements. In April 2001, the Emerging Issues Task Force ("EITF") issued EITF No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products," which addresses whether consideration from a vendor to a reseller of the vendor's products is (a) an adjustment of the selling prices of the vendor's products and, therefore, should be deducted from revenue when recognized in the vendor's income statement or (b) a cost incurred by the vendor for assets or services received from the reseller and, therefore, should be included as a cost or an expense when recognized in the vendor's income statement EITF 00-25 should be applied no later than in annual or interim financial statements for periods beginning after December 15, 2001. The Company is currently evaluating the impact that EITF 00-25 will have on its results of operations and cash flows. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ------------------------- Results of Operations - --------------------- Six Month Period ended March 31, 2001 versus March 31, 2000 - ----------------------------------------------------------- Sales for the six months ended March 31, 2001 were $32,390,983 compared to $41,568,846 for the prior year, a decrease of $9,177,863 or 22%, comprised of a 47% decrease in domestic sales, a 17% decrease in European sales and a 115% increase in Asian sales. 11 Item 2. Management's Discussion and Analysis-continued - ------------------------------------------------------ The primary forces causing the decrease were: o Reduction in analog board sales o Slower rollout of the personal video recorder product o Lower average Euro to dollar exchange rates Unit sales for the six months ended March 31, 2001 decreased about 18% to approximately 495,000 as compared to approximately 604,000 for the prior year. Sales to domestic customers were 19% of net sales compared to 28% for the prior year. Sales to European customers were 73% of net sales compared to 69% for the same period of the prior year. Sales to Asian customers were 8% compared to 3% for the prior year. Gross profit for the six month period ended March 31, 2001 was $7,174,312 as compared to $8,901,149, a decrease of $1,726,837, comprised of a $1,964,980 decrease due to lower sales and a $238,143 increase due an increase in the gross profit percentage. The gross profit percentage was 22.15% for the six months ended March 31, 2001 compared to 21.41 % for the prior year. The increase in the gross margin percentage was mainly due to: o Cost savings obtained from the shifting of product pack out from an outside third party to the Company's distribution center in Ireland o Larger sales mix of higher gross margin product The chart below illustrates the components of selling, general and administrative expenses:
Six months ended March 31, ---------------------- --- Dollar Costs Percentage of Sales ------------ ------------------- Increase Increase/ 2001 2000 (Decrease) 2001 2000 (Decrease) ---- ---- ----------- ---- ---- --------- Sales and Promotional $ 3,581,356 4,119,276 $ (537,920) 11.1% 9.9% 1.2% Customer Support 194,327 252,564 (58,237) .6% .6% -% General and Admin 1,688,207 1,494,296 193,911 5.2% 3.6% 1.6% ----------- ---------- ----------- ---- ----- ---- Total $ 5,463,890 $5,866,136 $ (402,246) 16.9% 14.1% 2.8%
Selling General and Administrative expenses decreased $402,246 from the comparable quarter of the prior year. As a percentage of sales, Selling, General and Administrative expenses for the six months ended March 31, 2001 increased by 2.8% when compared to the comparable period in the prior year. The decrease in sales and promotional expense of $537,920 was mainly due to : o Lower advertising costs of $238,245 due to lower co-operative advertising o Reduced European sales office costs of $228,313 o Lower commission payments of $178,426 due to lower sales o Increased compensation costs of $ 77,882 due to the addition of Eskape personnel 12 Item 2. Management's Discussion and Analysis-continued - ------------------------------------------------------ Customer Support costs decreased $58,237 mainly due to lower compensation expense of $44,642 The increase in General and Administrative expenses of $193,911 was primarily due to : o Increase in compensation costs of $ 184,252 related to the hiring of an MIS Director and an in house attorney, compensation costs related to the addition of Eskape Labs administrative personnel and contractual increases o Increased amortization costs of $82,593 mainly due to the amortization of goodwill and intangible assets related to the Eskape acquisition o Decreased professional fees of $115,025 related to termination of outside consulting agreements and lower legal costs relating to legal fees incurred for the start up of the Company's Luxembourg operation during fiscal 2000. o Increased communication costs of $15,300 for additional phone lines required for Eskape personnel o Increased rent costs of $17,400 due to expanded office space for Eskape operations Research and development expenses decreased $21,797 or approximately 2.9`%. The decrease was due to lower compensation costs at the Company's Singapore office. The Company had net other expense for the six months ended March 31, 2001 of $121,198 compared to net other expense for the prior year of $23,569. The increase in net other expense was primarily due to foreign currency transaction losses plus interest expense on borrowings outstanding and lower interest income. The Company recorded an income tax benefit of $212,300, for the six months ended March 31, 2001 compared to a tax provision of $515,000 for prior year. 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 net tax benefit for the six months ended March 31, 2001 is as follows: Tax (benefit) attributable to U.S operations $ (369,000) Tax expense to European operations 156,700 ------- Net tax (benefit) $ (212,300) Due to the higher U.S. effective tax rate, the tax benefit on the loss attributable to the Company's U.S. operations of $369,000 offset the tax liability of $ 156,700 attributable to the Company's European operations. 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 six months ended March 31, 2001 of $1,264,496, which resulted in basic and diluted income per share of $0.14 and $0.13 on weighted average basic and diluted shares of 8,886,349 and 9,271,140, respectively, compared to net income of $1,733,619 for the six months ended March 31, 2000, which resulted in basic and diluted earnings per share of $0.20 and $0.18, on weighted average shares of 8,796,541 and 9,864,126, respectively. Options to purchase 317,461 shares of common stock, ranging in prices from $3.94 to $10.06, were outstanding as of March 31, 2001, but were not included in the computation of diluted earnings per share because they were anti-dilutive. 13 Item 2. Management's Discussion and Analysis-continued - ------------------------------------------------------ Three Month Period ended March 31, 2001 versus March 31, 2000 - ------------------------------ --------------- ----- -------- Sales for the three months ended March 31, 2001 were $14,495,209 compared to $19,525,197 for the prior year's second quarter, a decrease of $5,029,988 or 26%, comprised of a 53% decrease in domestic sales, a 21% decrease in European sales and a 58% increase in Asian sales. The primary forces causing the decrease were: o Reduction in analog board sales o Slower rollout of the personal video recorder product o Lower average Euro to dollar exchange rates Unit sales for the three months ended March 31, 2001 decreased about 29% to approximately 209,000 as compared to approximately 295,000 for the prior year. Sales to domestic customers for second quarter were 15% of net sales compared to 24% for the prior year's second quarter. Sales to European customers were 77% of net sales for the second quarter compared to 72% for the comparable quarter of the prior year. Sales to Asian customers were 8% for the quarter ended March 31, 2001 compared to 4% for the prior year's second quarter. Gross profit for the three month period ended March 31, 2001 was $3,204,141 as compared to $3,805,908 a decrease of $ 601,767, comprised of a $980,345 decrease due to lower sales and a $378,578 increase due an increase in the gross profit percentage. The gross profit percentage was 22.10% for the three months ended March 31, 2001 compared to 19.49 % for the prior year's second quarter. The increase in the gross margin percentage was mainly due to : o Cost savings obtained from the shifting of product pack out from an outside third party to the Company's distribution center in Ireland o Larger sales mix of higher gross margin product The chart below illustrates the components of selling, general and administrative expenses:
Three months ended March 31, ---------------------------- Dollar Costs Percentage of Sales ------------ ------------------- Increase Increase/ 2001 2000 (Decrease) 2001 2000 (Decrease) ---- ---- --------- ---- ---- ---------- Sales and Promotional $1,684,562 2,087,662 $(403,100) 11.6% 10.6% 1.0% Customer Support 94,895 126,031 (31,136) .7% .7% -% General and Admin 838,585 781,925 56,660 5.8% 3.9% 1.9% ---------- --------- ---------- ----- ---- ---- Total $2,618,042 $2,995,618 $(377,576) 18.1% 15.2% 2.9%
Selling General and Administrative expenses decreased $377,576 from the comparable quarter of the prior fiscal year. As a percentage of sales, Selling, General and Administrative expenses for the three months ended March 31, 2001 increased by 2.9% from the comparable quarter of the prior year. 14 Item 2. Management's Discussion and Analysis-continued - ------------------------------------------------------ The decrease in sales and promotional expense of $403,100 was mainly due to : o Lower advertising cost of $271,608 due to lower co-op advertising o Reduced European sales office costs of $151,142 o Lower commission payments of $40,900 due to lower sales o Increased compensation costs of $43,492 due to the addition of Eskape Lab personnel and higher European sales rep compensation Customer Support costs decreased $31,136 mainly due to lower compensation costs of $23,230. The increase in General and Administrative expenses of $ 56,660 was primarily due to : o Increase in compensation costs of $ 72,145 related to the hiring of an MIS Director and an in house attorney, compensation costs related to the Eskape Labs administrative personnel and contractual increases o Increased amortization costs of $44,237 mainly due to the amortization of goodwill and intangible assets related to the Eskape acquisition o Decreased professional fees cost of $80,446 related to termination of outside consulting agreements and lower legal costs relating to legal fees incurred for the start up of the Company's Luxembourg operation during fiscal 2000 o Increased rent costs of $8,700 due to expanded office space for Eskape operations o Increased communications costs of $ 5,994 for additional phone lines required for Eskape personnel Research and development expenses decreased $12,087 or approximately 3.4%. The decrease was due to lower compensation costs at the Company's Singapore office and less parts consumed for development stage products. The Company had net other expense for the three months ended March 31, 2001 of $68,829 compared to net other expense for the prior year's second quarter of $107,971. The decrease in net other expense was primarily due to lower foreign currency transactions losses plus interest expense on borrowings outstanding and lower interest income. The Company recorded an income tax benefit of $130,214 for the quarter ended March 31, 2001 compared to a tax provision of $85,000 for the three months ended March 31,2000. 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 net tax benefit for the three months ended March 31, 2001 is as follows: Tax (benefit) attributable to U.S operations $ (190,214) Tax expense to European operations 60,000 ------ Net tax (benefit) $ (130,214) Due to the higher U.S. effective tax rate, the tax benefit on the loss attributable to the Company's U.S. operations of $190,214 offset the tax liability of $ 60,000 attributable to the Company's European operations. 15 Item 2. Management's Discussion and Analysis-continued - ------------------------------------------------------ As a result of the above, the Company recorded net income for the three months ended March 31, 2001 of $299,716, which resulted in basic and diluted income per share of $0.03 on weighted average basic and diluted shares of 8,887,719 and 9,240,819, respectively, compared to net income of $257,464 for the three months ended March 31, 2000, which resulted in basic and diluted earnings per share of $0.03 on weighted average shares of 8,796,541 and 9,864,126, respectively. Options to purchase 366,210 shares of common stock, ranging in prices from $3.94 to $10.06, were outstanding as of March 31, 2001, but were not included in the computation of diluted earnings per share because they were anti-dilutive. 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 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 1998, respectively. Due to this, the Company's sales for its fourth fiscal quarter (July to September) can be potentially impacted by the reduction of activity experienced with Europe during the July and August summer holiday period. To offset the above cycles, the Company continues to target a wide a range of customer types in order to moderate the seasonality of retail sales. Liquidity and Capital Resources - ------------------------------- The Company's cash, working capital and stockholders' equity position is disclosed below: March 31, 2001 September 30, 2000 --------------- ------------------ Cash $ 2,988,016 $ 2,744,855 Working capital 13,192,679 11,766,900 Stockholders' equity 15,001,742 13,653,677 The significant items of cash provided by and cash (used by) for the six month period ended March 31, 2001 are detailed below:
Net income (adjusted for non cash items), excluding deferred tax benefits $ 1,491,550 Loan repayments (640,000) Increase in current liabilities-net 350,031 Increase in investment for current assets (865,464) Purchase of Property, Plant & Equipment (120,338) Other 27,382
Net cash of $976,117 provided by operating activities was primarily due to net income adjusted for non cash items of $1,491,550 and the increase in net current liabilities of $350,031 offset by an increase in current assets of $865,464. Other items of cash consumption included $640,000 in loan repayments and $120,338 used to purchase fixed assets. On July 12, 2000, the Company 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 on April 5, 2001, the line of credit was renewed by Chase for another year, expiring on March 31, 2002. As of March 31, 2001, $360,000 was outstanding under this line of credit. 16 Liquidity and Capital Resources-continued - ----------------------------------------- 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 March 31, 2001, 429,602 treasury shares valued at $1,334,064 at an average price of $ 3.11 were held by the Company as treasury shares. 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. In January, Ken Aupperle, the Company's President passed away unexpectedly. The Company had previously obtained life insurance policies on its two senior executives. The policies relating to Mr. Aupperle, for which the Company is the beneficiary, total $2,000,000. The Company is currently in the process of obtaining the required information necessary to file the claims. At such time that the Company is reasonably assured that the insurance proceeds will be received, the Company will record a one-time non-operating income item for the insurance proceeds. 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. In April 2001, the Emerging Issues Task Force ("EITF") issued EITF No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products," which addresses whether consideration from a vendor to a reseller of the vendor's products is (a) an adjustment of the selling prices of the vendor's products and, therefore, should be deducted from revenue when recognized in the vendor's income statement or (b) a cost incurred by the vendor for assets or services received from the reseller and, therefore, should be included as a cost or an expense when recognized in the vendor's income statement. EITF 00-25 should be applied no later than in annual or interim financial statements for periods beginning after December 15, 2001. The Company is currently evaluating the impact that EITF 00-25 will have on its results of operations and cash flows. 17 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 currency 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 revenues and 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 as a hedge against existing or anticipated exposure based on forecasted sales. The Company does not enter into contracts for speculative purposes. Although the Company maintains these programs to reduce the impact of changes in currency exchange rates, when the U.S. dollar sustains a strengthening position against the currencies in which the Company sells it products, the Company's revenues can be adversely affected. 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"). 18 Legal Proceedings-continued - --------------------------- 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 Defendants-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 19 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: May 15, 2001 By:/s/ Kenneth Plotkin ------------ -------------------- KENNETH PLOTKIN President and Chief Executive Officer Date: May 15, 2001 By:/s/ Gerald Tucciarone ------------ ---------------------- GERALD TUCCIARONE Treasurer and Chief Financial Officer 20 -----END PRIVACY-ENHANCED MESSAGE-----