-----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, Kn3cEdMwAC6mixxqQIfP4YqnijkfjsKdCZ4YLCvbXmAgG00zF0KA+4zfhUwybbM0 3n/bdJM7Ls4GEBxkz3mzGg== 0001021771-02-000009.txt : 20020414 0001021771-02-000009.hdr.sgml : 20020414 ACCESSION NUMBER: 0001021771-02-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAUPPAUGE DIGITAL INC CENTRAL INDEX KEY: 0000930803 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 113227864 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13550 FILM NUMBER: 02540704 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 q101201.txt FORM 10-Q 12/31/01 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, 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 January 30, 2002, 8,894,819 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, 2001 (unaudited) and September 30, 2001 Condensed Consolidated Statements of Income- Three Months ended December 31, 2001 (unaudited) and 2000 (unaudited) 4 Condensed Consolidated Statements of Comprehensive Income - Three Months ended December 31, 2001 (unaudited) and 2000 (unaudited) 5 Condensed Consolidated Statements of Cash Flow- Three Months ended December 31 , 2001 (unaudited) and 2000 (unaudited) 6 Notes to Condensed Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition 9-13 and Results of Operations Item 3. Quantitiative and Qualitative Disclosures about Market Risks 14 PART II. OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings 14-15 Item 4. Submission of Matters To a Vote of Security Holders 15-16 Item 6. Exhibits and Reports on form 8-K 16 SIGNATURES 17 - ----------
PART I. FINANCIAL INFORMATION - ----------------------------- Item 1. Financial Statements HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2001 September 30, (Unaudited) 2001 --------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 4,637,768 $ 4,422,239 Accounts receivable, net of various allowances of $2,877,000 and $2,867,000 5,402,078 4,243,594 Income taxes receivable 501,000 501,000 Inventories 6,999,784 8,171,567 Prepaid expenses and other current assets 412,217 518,265 ------- ------- Total current assets 17,952,847 17,856,665 Property, plant and equipment, net 770,983 825,847 Other intangible assets-net 10,100 16,400 Security deposits and other non current assets 81,281 85,228 ------ ------ $18,815,211 $18,784,140 =========== =========== Liabilities and Stockholders' Equity : Current Liabilities: Accounts payable $ 5,736,054 $ 5,732,971 Accrued expenses 1,300,933 1,585,023 Income taxes payable 332,288 280,528 ------- ------- Total current liabilities 7,369,275 7,598,522 Stockholders' Equity Common stock $.01 par value; 25,000,000 shares authorized, 9,374,368 and 9,364,359 issued, respectively 93,744 93,644 Additional paid-in capital 12,182,577 12,164,243 Retained earnings 850,479 566,497 Accumulated other comprehensive income ( loss) (272,221) (267,204) Treasury Stock, at cost, 486,688, and 465,086 shares, respectively (1,408,643) (1,371,562) ---------- ---------- Total stockholders' equity 11,445,936 11,185,618 ---------- ---------- $18,815,211 $18,784,140 =========== ===========
See accompanying notes to consolidated financial statements 3 HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended December 31, ------------------------------- 2001 2000 ------------------------------- Net Sales $12,062,800 $17,895,774 Cost of Sales 9,143,774 13,925,603 --------- ---------- Gross Profit 2,919,026 3,970,171 Selling, General and Administrative Expenses 2,166,759 2,845,848 Research & Development Expenses 359,024 393,260 ------- ------- Income from operations 393,243 731,063 Other Income (expense): Interest income 9,290 8,831 Interest expense - (11,850) - Foreign currency 7,581 (49,350) Non operational USD to Euro currency re-measurement (103,632) - -------- ------- Other Income (expense) (86,761) (52,369) ------- ------- Income before taxes on income 306,482 678,694 Taxes provision (benefit) 22,500 (82,086) ------ ------- Income before cumulative effect of a change in accounting principle 283,982 760,780 Cumulative effect of a change in accounting principle, net of taxes of $115,000 - 204,000 ------- ------- Net income $ 283,982 $ 964,780 ========== ========== Per share results-basic: Income before cumulative effect of a change in accounting principle $0.03 $0.09 Cumulative effect of a change in accounting principle $0.00 $0.02 ----- ----- Net income per share-basic $0.03 $0.11 ===== ===== Per share results-diluted Income before cumulative effect of a change in accounting principle $0.03 $0.08 Cumulative effect of a change in accounting principle $0.00 $0.02 ----- ----- Net income per share-basic $0.03 $0.10 ===== =====
See accompanying notes to consolidated financial statements 4 HAUPPAUGE DIGITAL INC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
Three months ended December 31, 2001 2000 ---- ---- Other comprehensive income: Net income $ 283,982 $ 964,780 Change in accumulated other comprehensive income (loss) (5,017) - ------ ------- Other comprehensive income $ 278,965 $ 964,780 ========= =========
See accompanying notes to consolidated financial statements 5 HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended December 31, 2001 2000 ------------------------------- Cash Flows From Operating Activities: Net income $ 283,982 $ 964,780 ---------- ---------- Adjustments to reconcile net income to net cash Provided by (used in) operating activities: Depreciation and amortization 83,614 97,032 Provision for uncollectible accounts receivable 10,000 10,000 Other non cash items 13,451 (34,548) Changes in current assets and liabilities: Accounts receivable (1,168,484) (254,589) Inventories 1,171,783 (18,904) Prepaid expenses and other current assets 106,048 (80,725) Accounts payable and other current liabilities (229,247) 1,588,709 -------- --------- Total adjustments (12,835) 1,306,975 ------- --------- Net cash provided by operating activities 271,147 2,271,755 ------- --------- Cash Flows From Investing Activities: Purchases of property, plant and equipment (22,453) (37,049) ------- ------- Net cash used in investing activities (22,453) (37,049) ------- ------- Cash Flows From Financing Activities: Loan repayments - (640,000) Proceeds from employee stock purchases 8,933 11,560 Purchase of treasury stock (37,081) - ------- ------- Net cash used in financing activities (28,148) (628,440) ------- -------- Net increase in cash and cash equivalents 220,546 1,606,266 Change in accumulated other comprehensive income (loss) (5,017) - ------ --------- Cash and cash equivalents, beginning of period 4,422,239 2,744,855 --------- --------- Cash and cash equivalents, end of period $4,637,768 $4,351,121 ========== ========== Supplemental disclosures: Interest paid $ - $ 13,681 Income taxes paid $ 14,660 $ 4,506 ========== ==========
See accompanying notes to 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 month period ended December 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, 2001 Form 10-K. The operating results for the three month period ended December 31, 2001 are not necessarily indicative of the results to be expected for the September 30, 2002 year end. Note 2. 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 forecasted Euro sales 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 use derivative instruments for purposes other than hedging. The Company records all derivatives on the balance sheet at fair value. As of December 31, 2001, a current liability of $40,240 reflecting the fair value of the Company's outstanding foreign currency forward contracts was recorded on the balance sheet. The Company recognizes gains and losses on derivative contracts as an adjustment to net sales. For the three months ended December 31, 2001 and 2000, the Company recorded as an increase to net sales of approximately $ 34,700 and $723,000, respectively. To date, none of the Company's derivatives qualify for hedge accounting. The effect of implementing SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities", which was adopted on October 1, 2000, is presented in this form 10-Q as a cumulative effect of a change in accounting principle for the three months ended December 31, 2000. Note 3. Inventories Inventories have been valued at the lower of average cost or market. The components of inventory consist of: December 31, September 30, 2001 2001 ---- ---- Component Parts $ 2,260,483 $ 2,421,420 Work in Progress 27,501 92,070 Finished Goods 4,711,800 5,658,077 --------- --------- $ 6,999,784 $ 8,171,567 ============= ============ 7 HAUPPAUGE DIGITAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 4. 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 net income per share is as follows:
Three Months Ended December 31, 2001 2000 ---- ---- Weighted average shares outstanding-basic 8,886,472 8,885,010 Number of shares issued on the assumed exercise of stock options 218,987 420,748 ------- ------- Weighted average shares outstanding-diluted 9,105,459 9,305,758 --------- ---------
Options to purchase 820,681 and 271,444 shares of common stock at prices ranging $2.31 to $ 10.06 and $3.94 and $10.06, respectively, were outstanding as of December 31, 2001 and 2000, respectively but were not included in the computation of diluted earnings per share because they were anti-dilutive. Note 5. Recent Accounting Pronouncements 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 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 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 majority of vendor consideration granted by the Company relates to co-op advertising agreements with the Company's retail customers. Based on the requirements of EITF 00-25, the Company has properly included these costs as a component of selling, general and administrative expenses for all periods presented. In the opinion of management, it appears that the effect of all other vendor consideration arrangements would not have a material effect on the statement of operations based on the requirements of the pronouncement. 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ------------------------- Results of Operations --------------------- Three Month Period ended December 31, 2001 compared to December 31, 2000 - ------------------------------------------------------------------------- Sales decreased $5,832,974 for the three months ended December 31, 2001 compared to the same quarter of the prior fiscal year as detailed geographically in the table below: Three months ended December 31, Percent 2001 2000 (Decrease) (Decrease) -------------------------------------------------------------- Domestic $ 2,558,572 $ 4,357,092 $(1,798,520) (41)% Europe 9,211,685 12,175,473 (2,963,788) (24)% Asia 292,543 1,363,209 (1,070,666) (79)% ------- --------- ---------- --- Total $ 12,062,800 $17,895,774 $(5,832,974) (33)% ============ =========== =========== === The primary forces causing the decrease were: o Sluggish worldwide economic conditions o Reduction in analog board sales o Lower OEM sales activity o Lower Asian sales Unit sales for the three months ended December 31, 2001 decreased about 36% to approximately 184,000 as compared to approximately 286,000 for the prior year's first fiscal quarter. Sales to domestic customers were 21% of net sales compared to 24% for the same period last year. Sales to European customers were 76% of net sales compared to 68% for the same period of last year. Sales to Asian customers were 3% compared to 8% for the same period last year. Gross margins decreased $ 1,051,145 for the three months ended December 31, 2001. Gross margin percentage for the three months ended December 31, 2001 was 24.20% compared to 22.18% for the three months ended December 31, 2000. The components of the margin decrease are detailed below: Increase (decrease) ---------- Decrease due to lower sales $ (1,662,507) Increase due to higher margins on assembled boards 340,204 Increase due to decrease in labor related and other costs 271,158 ------- Total (decrease) in margins $ (1,051,145) The increase in gross margin percentage of 2.02% for the three months ended December 31, 2001 compared to the first quarter of fiscal 2001 is as follows Increase (decrease) ---------- Increase in margin on assembled boards 2.82% Labor related and other costs as a larger percent of sales (0.80%) ----- Net increase 2.02% ===== 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued ----------------------------------------------------------------- The improved margin percentage on assembled boards was primarily derived from unit price reductions from our subcontractors and larger sales mix of higher gross margin product. The reduction in the margin percentage attributable to labor and related costs was due to the percentage decrease in sales for the first quarter of fiscal 2002 compared to the first quarter of fiscal 2001 being greater than the percentage decrease in labor and other related costs for the same time periods. The chart below illustrates the components of selling, general and administrative expenses:
Three months ended December 31, Dollar Costs Percentage of Sales ------------------------------------------------------------------------ 2001 2000 (Decrease) 2001 2000 Increase ---- ---- ---- ---- -------- Sales and Promotional $1,378,019 $ 1,896,794 $ (518,775) 11.4% 10.6% 0.8% Customer Support 97,235 99,432 (2,197) 0.8% 0.6% 0.2% General and Administrative 691,505 849,622 (158,117) 5.8% 4.7% 1.1% ------- ------- -------- --- --- --- Total $2,166,759 $2,845,848 $ (679,089) 18.0% 15.9% 2.1% ========== ========== ========== ==== ==== ===
Selling General and Administrative expenses decreased $679,089 from the prior year's first fiscal quarter. As a percentage of sales, Selling, General and Administrative expenses for the three months ended December 31, 2001 increased by 2.1% when compared to three months ended December 31, 2000. The decrease in sales and promotional expense of $518,775 was mainly due to : o Lower advertising costs of $383,431 due to lower co-operative advertising and reduced special promotions o Reduced European sales office costs of $14,724 o Lower commission payments of $51,628 due to lower sales o Decreased compensation costs of $50,636 due to personnel reductions Customer Support costs decreased $2,197 mainly due to lower compensation costs. The decrease in General and Administrative expenses of $ 158,117 was primarily due to: o Decrease in compensation costs of $ 96,189 due to personnel reductions for Eskape Labs administrative personnel coupled with corporate personnel reductions o Decreased amortization costs of $13,418 mainly due to the write off of goodwill during the fourth quarter of fiscal 2001 o Lower rent costs of $ 13,530 due to the consolidation of the Eskape Labs office in California into the Hauppauge office o Lower communication costs of $ 7,698 due to the consolidation of the Eskape Labs office in California into the Hauppauge office Research and development expenses decreased $34,236 or approximately 9.0%. The decrease was due to lower worldwide compensation costs and less material and contract services consumed. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued ----------------------------------------------------------------- Other income (expense) We had net other expense for the three months ended December 31, 2001, of $86,761 compared to net other expense of $52,369 for the prior year's first fiscal quarter as detailed below:
Three months ended December 31, 2001 2000 ---- ---- Interest income $ 9,290 $ 8,831 Interest expense - (11,850) Foreign currency transaction gains (losses) 7,581 (49,350) Non operational USD to Euro currency re-measurement (103,632) - -------- ------- Total other (expense) $ (86,761) $ (52,369) ========= =========
The increase in "Total other (expense)" was primarily due to a loss from "Non operational USD to Euro currency re-measurement". "Non operational USD to Euro currency re-measurement" results from the revaluing from U.S. dollars to Euros any U.S. dollar denominated assets and liabilities on the books of our Luxembourg based subsidiary, Hauppauge Digital Europe SARL. Since the functional currency of Hauppauge Digital Europe SARL is the Euro, assets, liabilities and equity accounts which are invested in or purchased by Hauppauge Digital Europe SARL using U.S. dollars need to be revalued into Euros at the end of each quarter. This revaluation of U.S. dollar denominated accounts into Euros results in a non transactional re-measurement gain or loss, which we have classified as " Non operational USD to Euro currency re-measurement." Tax provision (benefit) Our net tax provision (benefit) for the three months ended December 31, 2001 and 2000 is as follows: Three months ended December 31, 2001 2000 ---- ---- Tax (benefit) attributable to U.S operations $ (229,000) $(178,786) Tax expense Asian operations - 44,200 Tax expense European operations 22,500 52,500 Deferred tax asset valuation allowance 229,000 - ------- --------- Net tax provision (benefit) $ 22,500 $ (82,086) ========== ========= Effective October 1, 1999, we restructured our foreign operations. The result of the restructuring eliminated the foreign sales corporation and established a new Luxembourg corporation, which functions as the entity which services our European customers. The new structure created separate domestic and foreign tax entities, with the new Luxembourg entity paying a 7% license fee to our domestic operation for use of the Hauppauge name. For the last two fiscal years, our domestic operation has incurred losses. We analyzed the future realization of our deferred tax assets as of December 31, 2001 and we concluded that under the present circumstances, it would be appropriate for us to record a valuation allowance against the increase in the deferred tax asset attributable to the current quarter's loss from domestic operations. The adoption of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities", on October 1, 2000 resulted in a $204,000 gain, net of taxes of $115,000, due to the cumulative effect of a change in accounting principle. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued ----------------------------------------------------------- As a result of the above, we recorded net income of $283,982 for the quarter ended December 31 , 2001, which resulted in basic and diluted net income per share of $0.03 on weighted average basic and diluted shares of 8,886,472 and 9,105,459, respectively, compared to a net income of $964,780 for the three months ended December 31, 2000, which resulted in basic and diluted net 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. Options to purchase 820,681 and 271,444 shares of common stock at prices ranging $2.31 to $ 10.06 and $3.94 and $10.06, respectively, were outstanding as of December 31, 2001 and 2000, respectively but were not included in the computation of diluted earnings per share because they were anti-dilutive. 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 77%, 71% and 73 % of sales for the years ended September 30, 2001, 2000 and 1999, 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 seasonality of retail sales. Liquidity and Capital Resources - ------------------------------- Our cash, working capital and stockholders' equity position is disclosed below: December 31, September 30, 2001 2001 ---- ---- Cash $ 4,637,768 $ 4.422,239 Working Capital 10,583,572 10,258,143 Stockholders' Equity 11,445,936 11,185,618 The significant items of cash provided by and cash (used in) business activities for the three months ended December 31, 2001 are detailed below:
Net income (adjusted for non cash items) $ 391,047 Decrease in accounts receivable, inventory and other prepaid assets 109,347 Decrease in accounts payable and accrued expenses (229,247) Change in accumulated other comprehensive income (loss) (5,017) Purchase of property, plant & equipment (22,453) Proceeds from option exercises and employee stock purchase plan 8,933 Purchase of treasury stock (37,081) ------ Net increase in cash $ 215,529 =======
Net cash of $ 271,147 provided by operating activities was primarily due to a decrease in accounts receivable, inventory and prepaid assets of $109,347 and net income adjusted for non cash items of $391,047, offset partially by cash used to fund the net decrease in accounts payable and accrued liabilities of $229,247. 12 Liquidity and Capital Resources-continued - ----------------------------------------- Cash of $22,453 and $37,081 was used to purchase fixed assets and purchase treasury stock. Proceeds from the exercise of stock options and stock purchased by employees from the employee stock purchase plan provided additional cash of $8,933. The change in accumulated other comprehensive loss decreased cash by $5,017. On April 5, 2001 we extended our agreement with Chase Manhattan Bank, to provide us with a $6,500,000 credit facility. The facility allows us, at our option, to borrow at prime rate, which was 4.75% as of December 31, 2001 or 1.25% above the London Interbank Offered Rate. The facility is secured by our assets, and expires on March 31, 2002. As of December 31, 2001, we had no borrowings outstanding under this line of credit. On January 25, 2002, Chase Manhattan Bank, citing the current economic conditions in the technology sector coupled with our two years of non profitability, verbally informed us that our line of credit has been terminated. It is our intention to replace the terminated line with a new credit facility. On November 8, 1996, we approved a stock repurchase program for the repurchase of up to 600,000 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 December 31, 2001, we held 486,688 treasury shares purchased for $1,408,643 at an average purchase price of approximately $2.89 per share. We believe that our current cash position will be sufficient to satisfy our 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 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 Vendors Products, which addresses whether consideration from a vendor to a reseller of the vendors products is (a) an adjustment of the selling prices of the vendors products and, therefore, should be deducted from revenue recognized in the vendors 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 expense when recognized in the vendors 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 majority of vendor consideration granted by the Company relates to co-op advertising agreements with the Company's retail customers. Based on the requirements of EITF 00-25, the Company has properly included these costs as a component of selling, general and administrative expenses for all periods presented. In the opinion of management, it appears that the effect of all other vendor consideration arrangements would not have a material effect on the statement of operations based on the requirements of the pronouncement. 13 Item 3. Quantitative and Qualitative Disclosures about Market Risks ----------------------------------------------------------- Due to extensive sales to European customers with payment made to us in those local currencies and limited expenses paid in local currencies, we are a net receiver of currencies other than the U.S. dollar. As such, we benefit from a weak dollar and are negatively affected by a strong dollar relative to the major worldwide currencies, especially the Euro and British Pound Sterling. Consequently, changes in exchange rates expose us to market risks resulting from the fluctuations in the foreign currency exchange rates to the U.S. dollar. We attempt to reduce these risks by entering into foreign exchange forward contracts with financial institutions to protect against currency exchange risks associated with our foreign denominated sales. The strength or weakness of the U.S. dollar against the Euro and British Pound Sterling impacts our financial results. Changes in exchange rates may positively or negatively affect our revenues, gross margins, operating income and retained earnings (which are all expressed in U.S. dollars). We engage in hedging programs aimed at limiting, in part, the impact of currency fluctuations. By selling foreign currency forward, we fix the rate of exchange at the time we enter into the contract. We deliver these currencies to the financial institutions at a later date when we actually receive the foreign currency. As of December 31, 2001, we had foreign currency forward contracts outstanding of approximately $4,154,700 against delivery of the Euro. The contracts expire through March 2002. Although we do not try to hedge against all possible foreign currency exposures because we can not fully estimate the size of our exposure, the contracts we procure are specifically entered into to as a hedge against existing or anticipated foreign currency exposure. We do not enter into contracts for speculative purposes. Although we maintain these programs to reduce the short term impact of changes in currency exchange rates, when the U.S. dollar sustains a long term strengthening position against the foreign currencies in countries where we sell our products, our revenues, gross margins, operating income and retained earnings can be adversely affected. Factors that could impact the effectiveness of our hedging program include volatility of the currency markets and availability of hedging instruments. For the three months ended December 31, 2001 and 2000, we recorded approximately $34,700 and $723,000, respectively, as an increase to net sales related to the changes in the fair value of our derivative contracts. 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, 2001. 14 PART II. OTHER INFORMATION - --------------------------- Item 1 Legal Proceedings ----------------- In January 1998, Advanced Interactive Incorporated ("AII") contacted us and attempted to induce us into entering a patent license or joint venture agreement with AII relative to certain of our products. AII alleged that such products infringe U.S. Patent No. 4,426,698 (the "AII Patent"). At such time, our engineering staff analyzed the AII Patent and determined that our products did not infringe any such patent. Accordingly, we rejected AII's offer. On October 6, 1998, we received notice that AII had commenced an action against us and multiple other defendants in the United States District Court for the Northern District of Illinois (the "District Court"), alleging that certain of our products infringed on certain patent rights allegedly owned by the plaintiff (the "Complaint"). The Complaint sought unspecified compensatory and statutory damages with interest. We denied such allegations and vigorously defended this action. On December 22, 1998, we filed our answer (the "Answer"). We denied that our products infringed AII's patent rights and asserted certain affirmative defenses. On June 26, 2000, the District Court granted the Defendant's Motion for Partial Adjudication of Claim Constructions Issues and entered a Final Judgment of Non-infringement to us. 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. On July 16, 2001, the Federal Circuit entered a Circuit Rule 36 Judgment of Affirmance Without Opinion. Accordingly, the Federal Circuit affirmed the District Court's finding of non-infringement. As of December 13, 2001, the time limit permitting AII to file a petition with the U.S. Supreme Court for a Writ of Certiorari to review the Federal Circuit judgment has lapsed. This litigation is now over without the possibility of further appeals. We have been informed by counsel for the estate of the late Mr. Kenneth Aupperle ("Estate") that they have filed a Demand for Arbitration with the American Arbitration Association claiming property rights and interest in the Company, certain amounts due and owing to the Estate based on various corporate agreements with Mr. Aupperle and certain insurance policies, such amount to be no less than $2,500,000. As of the date of filing, we have not received a formal acknowledgement from the American Arbitration Association of the said Demand for Arbitration. Management is unable to comment on the merits of the claim without more information from the Estate and/or its counsel. However, based on the preliminary information presented to us, management believes that the claim is without merit and will vigorously defend it. Item 4. Submission of Matters To a Vote of Security Holders ---------------------------------------------------- The following proposals were submitted to the stockholders for approval at the Annual Meeting of stockholders held on November 2, 2001 at our offices: Proposal No. 1: Election of Directors The following directors were elected by the votes indicated 15 Item 4. Submission of Matters To a Vote of Security Holders-continued -------------------------------------------------------------- Proposal No. 1: Election of Directors The following directors were elected by the votes indicated: For Withheld --- -------- Kenneth Plotkin 8,379,484 315,137 Bernard Herman 8,379,344 315,277 Clive R. Holmes 8,379,744 314,877 Steven J. Kuperschmid 8,374,194 320,427 Proposal No. 2: Amendment of the Certificate of Incorporation to authorize the classification of the Board of Directors into three classes with staggered terms and to provide for a supermajority voting requirement to amend any provision in the Certificate of Incorporation relating to such classified Board of Directors. The proposed amendment to the Certificate of Incorporation to authorize the classification of the Board of Directors into three classes with staggered terms and to provide for a supermajority voting requirement to amend any provision in the Certificate of Incorporation relating to such classified Board of Directors was not approved because there were insufficient votes cast: For Against Abstain --- ------- ------- 3,204,409 422,021 21,268 Proposal No. 3: Amendment of the Certificate of Incorporation to authorize a class of preferred stock. The proposed amendment to the Certificate of Incorporation to authorize a class of preferred stock was not approved because there were insufficient votes cast: For Against Abstain --- ------- ------- 3,179,709 450,919 16,710 Proposal No. 4: Amendment of the Certificate of Incorporation to require unanimous, rather than majority, written consent of stockholders in lieu of meeting under certain circumstances. The proposed amendment to the Certificate of Incorporation to require unanimous, rather than majority, written consent of stockholders in lieu of a meeting under certain circumstances was not approved because there were insufficient votes cast: For Against Abstain --- ------- ------- 3,169,685 455,538 22,115 Item 6 Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits None (b) Reports on form 8-K None 16 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 13, 2002 By: /s/ Kenneth Plotkin ----------------- ---------------------------- KENNETH PLOTKIN President and Chief Executive Officer Date: February 13, 2002 By: /s/ Gerald Tucciarone ----------------- ---------------------------- GERALD TUCCIARONE Treasurer and Chief Financial Officer 17 -----END PRIVACY-ENHANCED MESSAGE-----