Unassociated Document

10-Q 1 v083619_10q.htm Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

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

For the transition period from _______ to ________

Commission file number 1-13550

HAUPPAUGE DIGITAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	11-3227864
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

91 Cabot Court, Hauppauge, New York 11788

(Address of principal executive offices)

(631) 434-1600

(Registrant’s telephone number, including area code)

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

x YES o NO

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

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

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

o YES x NO

As of July 23, 2007, 9,979,455 shares of .01 par value Common Stock of the issuer were outstanding.

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements	Page no.

Condensed Consolidated Balance Sheets -		5
June 30, 2007 (unaudited) and September 30, 2006

Condensed Consolidated Statements of Income -		6
Three Months ended June 30, 2007 (unaudited) and 2006 (unaudited)

Condensed Consolidated Statements of Income -		7
Nine Months ended June 30, 2007 (unaudited) and 2006 (unaudited)
		8
Condensed Consolidated Statements of Other Comprehensive Income-Three and
Nine months ended June, 2007 (unaudited) and 2006 (unaudited)

Condensed Consolidated Statements of Cash Flows-Nine months ended June 30,
2007 (unaudited) and 2006 (unaudited)

Notes to Condensed Consolidated Financial Statements		10 -14

Item 2. Management's Discussion and Analysis of Financial Condition and Results		15 -23
of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risks		23-24

Item 4. Controls and Procedures		24

PART II. OTHER INFORMATION

Item 1A. Risk Factors			25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			25

Item 6. Exhibits			25

Signatures			26

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2007 (unaudited)			September 30, 2006
Assets:
Cash and cash equivalents	$	12,351,072		$	9,020,941
Receivables, net of various allowances		22,043,107			16,132,928
Inventories		10,097,397			9,905,746
Prepaid expenses and other current assets		896,522			895,223
Total current assets		45,388,098			35,954,838

Property, plant and equipment, net		731,707			612,311
Security deposits and other non current assets		83,825			83,239
Total assets	$	46,203,630		$	36,650,388

Liabilities and Stockholders’ Equity:

Current Liabilities:
Accounts payable	$	16,908,093		$	12,011,232
Accrued expenses - licensing fees		6,391,170			5,481,005
Accrued expenses - other		967,867			1,174,323
Income taxes payable		151,392			204,103
Total current liabilities		24,418,522			18,870,663

Stockholders' Equity:
Common stock, $.01 par value; 25,000,000 shares authorized, 10,592,813 and 10,260,464 issued, respectively		105,928			102,605
Additional paid-in capital		15,339,539			14,222,890
Retained earnings		9,382,621			5,721,500
Accumulated other comprehensive (loss)		(1,231,631	)		(509,319	)
Treasury Stock, at cost, 617,547 and 607,547 shares		(1,811,349	)		(1,757,951	)
Total stockholders' equity		21,785,108			17,779,725
Total liabilities and stockholders' equity	$	46,203,630		$	36,650,388

See accompanying notes to condensed consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three months ended June 30,
	2007			2006

Net sales	$	23,540,149		$	23,775,992
Cost of sales		18,932,180			19,144,041
Gross profit		4,607,969			4,631,951

Selling, general and administrative expenses		3,516,244			3,433,560
Research and development expenses		876,697			747,973
Income from operations		215,028			450,418

Other income (expense):
Interest income		10,250			6,440
Foreign currency		(38	)		(17,146	)
Other income (expense)		10,212			(10,706	)
Income before taxes on income		225,240			439,712
Tax provision		43,788			59,371
Net income	$	181,452		$	380,341

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

See accompanying notes to condensed consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Nine months ended June 30,
	2007			2006

Net sales	$	83,351,123		$	75,506,375
Cost of sales		66,282,026			60,461,107
Gross profit		17,069,097			15,045,268

Selling, general and administrative expenses		10,868,706			10,272,747
Research and development expenses		2,379,969			2,282,545
Income from operations		3,820,422			2,489,976

Other income (expense):
Interest income		31,988			17,921
Foreign currency		(6,256	)		(2,695	)
Other income (expense)		25,732			15,226
Income before taxes on income		3,846,154			2,505,202
Tax provision		185,033			146,510
Net income	$	3,661,121		$	2,358,692

Net income per share:
Basic	$	0.37		$	0.25
Diluted	$	0.35		$	0.24

See accompanying notes to condensed consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

(UNAUDITED)

	Three months ended June 30,
	2007			2006
Net income	$	181,452		$	380,341
Foreign currency translation (loss) gain		(103,215	)		120,891
Forward exchange contracts marked to market		22,147			(48,792	)
Other comprehensive income	$	100,384		$	452,440

	Nine months ended June 30,
	2007			2006
Net income	$	3,661,121		$	2,358,692
Foreign currency translation loss		(691,165	)		(798,031	)
Forward exchange contracts marked to market		(31,147	)		(192,458	)
Other comprehensive income	$	2,938,809		$	1,368,203

See accompanying notes to condensed consolidated financial statements

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine months ended June 30,
	2007			2006
Net income	$	3,661,121		$	2,358,692
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		157,990			136,780
Stock compensation expense		361,216			274,770
Other non cash items		(586	)		(1,710	)
Changes in current assets and liabilities:
Accounts receivable		(5,910,179	)		(6,114,468	)
Inventories		(191,651	)		(2,854,329	)
Prepaid expenses and other current assets		(1,299	)		166,945
Accounts payable		4,896,861			5,931,112
Accrued expenses and other current liabilities		650,998			811,502
Total adjustments		(36,650	)		(1,649,398	)
Net cash provided by operating activities		3,624,471			709,294

Cash Flows From Investing Activities:
Purchases of property, plant and equipment		(277,386	)		(176,469	)
Net cash used in investing activities		(277,386	)		(176,469	)

Cash Flows From Financing Activities:
Purchase of treasury stock		(53,398	)		-
Proceeds from the exercise of stock options and employee stock purchases		758,756			230,046
Net cash provided by financing activities		705,358			230,046
Effect of exchange rates on cash		(722,312	)		(990,489	)
Net increase (decrease) in cash and cash equivalents		3,330,131			(227,618	)
Cash and cash equivalents, beginning of period		9,020,941			7,567,393
Cash and cash equivalents, end of period	$	12,351,072		$	7,339,775
Supplemental disclosures:
Income taxes paid	$	168,915		$	94,421

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 for Hauppauge Digital Inc. (the “Company”) included herein have been prepared in accordance with generally accepted accounting principles for interim period reporting in conjunction with the instructions to Form 10-Q. Accordingly, these statements do not include all of the information required by generally accepted accounting principles for annual financial statements. In the opinion of management, all known adjustments (consisting of normal recurring accruals and reserves) necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows as of and for the interim periods have been included. It is suggested that these interim statements be read in conjunction with the financial statements and related notes included in the Company's September 30, 2006 Form 10-K.

The operating results for the three months and nine months ended June 30, 2007 are not necessarily indicative of the results to be expected for the September 30, 2007 year end.

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

Note 2. Receivables

Accounts and other receivables as of June 30, 2007 and September 30, 2006 consisted of :

		June 30,			September 30,
		2007			2006
Trade receivables	$	15,413,993		$	13,910,101
Receivable from contract manufacturers		8,127,277			4,916,402
GST and VAT taxes receivables		2,146,475			616,119
Allowances and reserves		(3,729,524	)		(3,377,000	)
Other		84,886			67,306
	$	22,043,107		$	16,132,928

Note 3. Foreign currency translations and transactions

The Company’s Asian subsidiary 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 Euros as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each period end. Income statement accounts are translated at the prevailing average spot rate. For periods prior to April 2006, the Company translated sales amounts at the average forward exchange contract rate. The change in this accounting treatment was immaterial to the Company’s current and prior financial statements. Translation adjustments arising from the translation to U.S. dollars at differing exchange rates are included in the accumulated other comprehensive income (loss) account in stockholders’ equity. Gains and losses resulting from transactions that are denominated in currencies other than Euros are included in earnings as a component of other income. The Company had a translation loss of $531,289 recorded on the balance sheet as of September 30, 2006. For the nine months ended June 30, 2007, the Company recorded on the balance sheet a deferred translation loss of $691,165, resulting in a translation loss of $1,222,454 recorded as a component of accumulated other comprehensive loss as of June 30, 2007.

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 4. Inventories

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

		June 30,		September 30,
		2007		2006
Component parts	$	4,304,257	$	4,868,483
Finished goods		5,793,140		5,037,263
	$	10,097,397	$	9,905,746

Note 5. Net income per share

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

	Three months ended				Nine months ended
	June 30,				June		30,
	2007		2006		2007		2006
Weighted average shares outstanding-basic		9,968,686		9,636,912		9,843,568		9,573,594
Number of shares issued on the assumed exercise of stock options		479,094		420,567		557,893		430,385
Weighted average shares outstanding-diluted		10,447,780		10,057,479		10,401,461		10,003,979

Options to purchase 171,377 and 223,204 shares of common stock, at prices of $7.45 and $8.75 and ranging from $4.13 to $8.75, were outstanding for the three months ended June 30, 2007 and 2006, respectively, but were not included in the computation of diluted earnings per share because they were anti-dilutive.

Options to purchase 124,701 and 208,391 shares of common stock, at prices of $7.45 and $8.75 and ranging from $4.13 to $8.75, were outstanding for the nine months ended June 30, 2007 and 2006, respectively, 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 6. Accumulated other comprehensive income (loss)

Accumulated other comprehensive income (loss) consists of two components: translation gains and losses and FAS 133 mark to market gains and losses on the Company’s open foreign exchange contracts. As of June 30, 2007, appearing in the equity section under “ Accumulated other comprehensive income (loss)” was a loss of $1,231,631, which consisted of a deferred translation loss of $1,222,454 and a deferred loss of $9,177 due to the mark to market differences between the value of the Company’s open forward exchange contracts at the contract rates versus the same contracts valued at the period ending forward rate.

The table below details the gains and losses that make up the accumulated other comprehensive loss of $1,231,631 recorded the Company’s balance sheet as of June 30, 2007:

Accumulated other comprehensive income (loss)	Balance as of			Oct 06 to June			Balance as of
Fiscal 2007 activity	Sept 30, 2006			07 losses			June 30, 2007
Translation gains and losses	$	(531,289	)	$	(691,165	)	$	(1,222,454	)
FAS 133 mark to market adjustment		21,970			(31,147	)		(9,177	)
	$	(509,319	)	$	(722,312	)	$	(1,231,631	)

Note 7. Revenue recognition

The Company sells through a sales channel which consist of retailers, PC manufacturers and distributors. The majority of the Company’s customers are granted lines of credit. The product is shipped on account with the majority of customers primarily given 30 to 60 day payment terms. Those customers deemed as large credit risks either pay in advance or issue us a letter of credit.

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

The Company offers some of its customers a right of return. The Company’s accounting complies with SFAS 48 Revenue Recognition when Right of Return Exists, as typically at the end of every quarter the Company, based on historical data, evaluates its sales reserve level based on the previous six months sales. Due to seasonal nature of the business coupled with the changing economic environment, management exercises some judgment with regard to the historical data to arrive at the reserve.

The Company offers mail-in rebates on certain products at certain times as determined by the Company. The rebates are recorded as a reduction to sales. The Company also participates in limited cooperative advertising programs with retailers and distributors and accounts for these in accordance with EITF 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)”.

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 8. Product segment and geographic information

The Company operates in one business segment, which is the development, marketing and manufacturing of analog and digital TV receiver products for the personal computer market. The products are similar in function and share commonality of component parts and manufacturing processes. The Company’s products are either

sold, or can be sold, by the same retailers and distributors in the Company’s marketing channel. The Company also sells product directly to PC manufacturers. The Company evaluates its product lines under the functional categories of analog TV receivers, digital TV receivers and other non-TV tuner products.

The Company’s products fall under three product categories:

Analog TV receivers

Digital TV receivers

Other non-TV receiver products

The Company’s analog TV receiver products enable, among other things, a PC user to watch and record analog cable TV in a resizable window on a PC.

The Company’s digital TV receiver products enable, among other things, a PC user to watch and record digital TV in a resizable window on a PC.

The Company’s other non-TV receiver products enable, among other things, a PC user to video conference, watch and listen to PC based videos, music and pictures on a TV set through a home network, and record TV shows on a PC for playback on portable video players.

Sales by functional category are as follows:

		Three months ended June 30,				Nine months ended June 30,
		2007		2006		2007		2006
Product line sales
Analog sales	$	7,974,677	$	15,862,344	$	33,318,167	$	50,233,007
Digital sales		15,174,370		7,209,149		49,215,324		23,638,912
Other non-TV tuners products		391,102		704,499		817,631		1,634,456
Total sales	$	23,540,149	$	23,775,992	$	83,351,122	$	75,506,375

The Company sells its products through a North American and international network of distributors and retailers. It maintains sales offices in both Europe and Asia. Sales percent by geographic region are as follows:

	Three months ended June 30,				Nine months ended June 30,
Geographic region	2007		2006		2007		2006
The Americas	67	%	50	%	55	%	47	%
Europe	30	%	48	%	43	%	51	%
Asia	3	%	2	%	2	%	2	%
Total	100	%	100	%	100	%	100	%

HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 9. Stock-based compensation

Effective October 1, 2005, the Company adopted SFAS No. 123R, “Share-Based Payments” using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options are determined using the Black-Scholes valuation model, which is consistent with the Company’s valuation techniques previously utilized for stock options in footnote disclosures required under SFAS No. 123. Such fair value is recognized as expense over the service period, net of estimated forfeitures. The stock compensation charges recorded for the vested options during the three and nine month periods ended June 30, 2007 and 2006 are $124,632 and $86,946 , and $361,216 and $274,770, respectively.

Note 10. Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or the FASB, issued SFAS No. 157, “Fair Value Measurements” or SFAS No. 157. SFAS No. 157 establishes a common definition for fair value to be applied to general accepted accounting principle guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of implementation of SFAS No. 157 on the Company’s consolidated financial statements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” or SFAS 159. SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of implementation of SFAS No. 159 on the Company’s consolidated financial statements.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THREE MONTH PERIOD ENDED JUNE 30, 2007 COMPARED TO THREE MONTH PERIOD ENDED JUNE 30, 2006

Results of operations for the three months ended June 30, 2007 compared to June 30, 2006 are as follows:

		Three			Three
		Months			Months
		Ended			Ended			Variance		Percentage of sales
		6/30/07			6/30/06			$		2007		2006		Variance
Net sales	$	23,540,149		$	23,775,992		$	(235,843	)	100.00	%	100.00	%	-
Cost of sales		18,932,180			19,144,041			(211,861	)	80.43	%	80.52	%	-0.09	%
Gross profit		4,607,969			4,631,951			(23,982	)	19.57	%	19.48	%	0.09	%
Gross profit %		19.57	%		19.48	%		0.09	%
Selling , general and administrative expenses:
Sales and marketing		2,419,401			2,320,786			98,615		10.28	%	9.76	%	0.52	%
Technical support		156,137			143,989			12,148		0.66	%	0.61	%	0.05	%
General and administrative		861,782			910,966			(49,184	)	3.66	%	3.83	%	-0.17	%
Stock compensation expense		78,924			57,819			21,105		0.34	%	0.24	%	0.10	%
Total selling, general and administrative expense		3,516,244			3,433,560			82,684		14.94	%	14.44	%	0.50	%
Research and development expenses		830,989			718,846			112,143		3.53	%	3.02	%	0.51	%
Research & development stock compensation expense		45,708			29,127			16,581		0.19	%	0.12	%	0.07	%
Total expenses		4,392,941			4,181,533			211,408		18.66	%	17.58	%	1.08	%
Net operating income		215,028			450,418			(235,390	)	0.91	%	1.90	%	-0.99	%

Other income (expense) :
Interest income		10,250			6,440			3,810		0.04	%	0.03	%	0.01	%
Foreign currency		(38	)		(17,146	)		17,108		0.00	%	-0.07	%	0.07	%
Total other income (expense)		10,212			(10,706	)		20,918		0.04	%	-0.04	%	0.08	%
Income before taxes on income		225,240			439,712			(214,472	)	0.95	%	1.86	%	-0.91	%
Taxes on income		43,788			59,371			(15,583	)	0.19	%	0.25	%	-0.06	%
Net income	$	181,452		$	380,341		$	(198,889	)	0.76	%	1.61	%	-0.85	%

Net sales for the three months ended June 30, 2007 decreased $235,843 compared to the three months ended June 30, 2006 as shown in the table below.

	Three		Three		(decrease)			Increase			Percentage of sales by geographic
	Months		Months		dollar			(decrease)			region
Location	ended 6/30/07		ended 6/30/06		variance			variance %			2007			2006
The Americas	$	15,626,282	$	11,795,292	$	3,830,990			32	%		67	%		50	%
Europe		7,253,426		11,344,867		(4,091,441	)		-36	%		30	%		48	%
Asia		660,441		635,833		24,608			4	%		3	%		2	%
Total	$	23,540,149	$	23,775,992	$	(235,843	)		-1	%		100	%		100	%

Net sales to customers in North and South America were 67% and 50% of net sales for the three months ended June 30, 2007 and 2006, respectively. Net sales to customers in Europe was 30% and 48% of net sales for the three months ended June 30, 2007 and 2006, respectively. Net sales to customers in Asia were 3% and 2% of net sales for the three months ended June 30, 2007 and 2006, respectively. We experienced an increase in unit sales of about 0.07% while the dynamics of new production and changes in sales mix lowered the average sales price by about 1.06%.

Gross profit

Gross profit decreased $23,982 for the three months ended June 30, 2007 compared to the three months ended June 30, 2006.

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

		Increase
		(decrease)
Decreased sales	$	(63,638	)
Lower gross profit on sales mix		(22,150	)
Production and production related expenses		61,806
Total decrease in gross profit	$	(23,982	)

Gross profit percentage for the three months ended June 30, 2007 was 19.57% compared to 19.48% for the three months ended June 30, 2006, an increase of 0.09%.

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

	(decrease)
Lower gross profit on sales mix		(0.10	%)
Production and production related expenses		0.19	%
Net increase in gross profit percent		0.09	%

The increase in the gross profit percent of 0.09 % for the three months ended June 30, 2007 compared to the three months ended June 30, 2006 was primarily due to:

·	A higher sales percentage of lower gross profit margin products contributed to a 0.10% decrease in gross profit

·	Production and shipping expenses declined as a percentage of sales which contributed to a 0.19% increase in the gross profit percent. The decline of 3.47% in production and shipping expenses exceeded the decline in net sales of 0.99%.

Selling, general and administrative expenses

The chart below illustrates the components of Selling, general and administrative expense.

	Three months ended June 30, Dollar Costs							Percentage of Sales
					Increase									Increase
	2007		2006		(decrease)			2007			2006			(decrease)
Sales and marketing	$	2,419,401	$	2,320,786	$	98,615			10.28	%		9.76	%		0.52	%
Technical support		156,137		143,989		12,148			0.66	%		0.61	%		0.05	%
General and administrative		861,782		910,966		(49,184	)		3.66	%		3.83	%		-0.17	%
Stock compensation expense		78,924		57,819		21,105			0.34	%		0.24	%		0.10	%
Total	$	3,516,244	$	3,433,560	$	82,684			14.94	%		14.44	%		0.50	%

Selling, general and administrative expenses increased $82,684 from the prior year’s third quarter. As a percentage of sales, Selling, general and administrative expenses increased 0.50% when compared to the three months ended June 30, 2006. The increase in sales and marketing expense of $98,615 was mainly due to higher compensation expenses and higher sales office expenses. The increase in technical support expenses of $12,148 was primarily due to compensation related costs. The decrease in general and administrative expenses of $49,184 was primarily due to lower rent and building overhead expenses in addition to lower professional fees. The increase in stock compensation expense was due to the associated expense of new stock option grants.

Research and development expenses

Research and development expenses increased $128,724. A higher volume of development programs and an increase in stock compensation expense were the forces driving the increase. The increase in stock compensation expense was due to the associated expense of new stock option grants.

Other income (expense)

Net other income for the three months ended June 30, 2007 was $10,212 compared to net other expense of $10,706 for the three months ended June 30, 2006. The change was primarily driven by higher interest income and lower foreign currency transaction losses.

Tax provision

Our net tax provision for the three months ended June 30, 2007 and 2006 is as follows:

	Three months ended June 30,
	2007		2006
AMT Tax attributable to U.S operations	$	20,000	$	25,000
Tax expense European operations		18,788		29,371
State taxes		5,000		5,000
Net tax provision	$	43,788	$	59,371

The deferred tax assets and the offsetting tax valuation allowance is attributable to our domestic operations. For three out of the last five fiscal years, our domestic operations incurred tax losses. Fiscal 2005 was the first year out of the last five years in which our domestic operations had pre-tax income. As of June 30, 2007, we evaluated the future realization of our deferred tax assets and the corresponding valuation allowance. We took into consideration:

·	the tax losses incurred by our domestic operations in three out of the last five years

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

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

After evaluating the circumstances listed above, it was our opinion that, as of June 30, 2007, the valuation allowance was still applicable.

We recorded net income of $181,452, for the three months ended June 30, 2007, which resulted in basic and diluted net income per share of $0.02 on weighted average basic and diluted shares of 9,968,686 and 10,447,780, respectively, compared to a net income of $380,341 for the three months ended June 30, 2006, which resulted in basic and diluted net income per share of $0.04 on weighted average basic and diluted shares of 9,636,912 and 10,057,479, respectively.

NINE MONTH PERIOD ENDED JUNE 30, 2007 COMPARED TO

NINE MONTH PERIOD ENDED JUNE 30, 2006

Results of operations for the nine months ended June 30, 2007 compared to June 30, 2006 are as follows:

										Percentage of sales
	Nine Months Ended 6/30/07			Nine Months Ended 6/30/06			Variance $			2007			2006			Variance
Net sales	$	83,351,123		$	75,506,375		$	7,844,748			100.00	%		100.00	%		-
Cost of sales		66,282,026			60,461,107			5,820,919			79.52	%		80.07	%		-0.55	%
Gross profit		17,069,097			15,045,268			2,023,829			20.48	%		19.93	%		0.55	%
Gross profit %		20.48	%		19.93	%		0.55	%
Selling , general and administrative expenses:
Sales and marketing		7,555,426			6,992,771			562,655			9.06	%		9.26	%		-0.20	%
Technical support		439,112			430,839			8,273			0.53	%		0.57	%		-0.04	%
General and administrative		2,646,944			2,637,202			9,742			3.18	%		3.49	%		-0.31	%
Stock compensation expense		227,224			211,935			15,289			0.27	%		0.28	%		-0.01	%
Total selling, general and administrative expense		10,868,706			10,272,747			595,959			13.04	%		13.60	%		-0.56	%
Research and development		2,245,977			2,219,710			26,267			2.69	%		2.94	%		-0.25	%
Research & development stock compensation expense		133,992			62,835			71,157			0.16	%		0.08	%		0.08	%
Total expenses		13,248,675			12,555,292			693,383			15.89	%		16.62	%		-0.73	%
Net operating income		3,820,422			2,489,976			1,330,446			4.59	%		3.31	%		1.28	%

Other income :
Interest income		31,988			17,921			14,067			0.04	%		0.02	%		0.02	%
Foreign currency		(6,256	)		(2,695	)		(3,561	)		-0.01	%		0.00	%		-0.01	%
Total other income		25,732			15,226			10,506			0.03	%		0.02	%		0.01	%
Income before taxes on income		3,846,154			2,505,202			1,340,952			4.62	%		3.33	%		1.29	%
Taxes on income		185,033			146,510			38,523			0.22	%		0.19	%		0.03	%
Net income	$	3,661,121		$	2,358,692		$	1,302,429			4.40	%		3.14	%		1.26	%

Net sales for the nine months ended June 30, 2007 increased $7,844,748 compared to the nine months ended June 30, 2006 as shown in the table below.

					Increase						Percentage of sales by
					(decrease)			Increase			geographic
	Nine Months		Nine Months		Dollar			(decrease)			region
Location	ended 6/30/07		ended 6/30/06		variance			variance %			2007			2006
The Americas		46,026,127		35,477,958		10,548,169			30	%		55	%		47	%
Europe		35,752,969		38,204,680		(2,451,711	)		(6	%)		43	%		51	%
Asia		1,572,027		1,823,737		(251,710	)		(14	%)		2	%		2	%
Total	$	83,351,123	$	75,506,375	$	7,844,748			10	%		100	%		100	%

Net sales to customers in The Americas was 55% and 47% of net sales for the nine months ended June 30, 2007 and 2006, respectively. Net sales to customers in Europe was 43% and 51% of net sales for the nine months ended June 30, 2007 and 2006, respectively. Net sales to customers in Asian were 2% of net sales for the nine months ended June 30, 2007 and 2006, respectively. We experienced an increase in unit sales of about 17% while the dynamics of new production and changes in sales mix lowered the average sales price by about 6%.

Gross profit

Gross profit increased $2,023,829 for the nine months ended June 30, 2007 compared to the nine months ended June 30, 2006.

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

	Increase (decrease)
Increased sales	$	2,175,862
Lower gross profit on sales mix		(47,883	)
Production and production related costs		(104,150	)
Total increase in gross profit	$	2,023,829

Gross profit percentage for the nine months ended June 30, 2007 was 20.48% compared to 19.93% for the nine months ended June 30, 2006, an increase of 0.55%.

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

	Increase (decrease)
Lower gross profit on sales mix		(0.06	%)
Production and production related expenses		0.61	%
Net increase in gross profit percent		0.55	%

The increase in the gross profit percent of 0.55 % for the nine months ended June 30, 2007 compared to the nine months ended June 30, 2006 was primarily due to:

A higher sales percentage of lower gross profit margin products contributed to a 0.06% decrease in gross profit

Production and shipping expenses declined as a percentage of sales which contributed to a 0.61% increase in gross profit percent. The increase in net sales was about 10% while the increase in production and shipping expenses was about 2%

Selling, general and administrative expenses

The chart below illustrates the components of Selling, general and administrative expense.

	Nine months ended June 30,
	Dollar Costs						Percentage of Sales
					Increase								Increase
	2007		2006		(decrease)		2007			2006			(decrease)
Sales and marketing		7,555,426		6,992,771		562,655		9.06	%		9.26	%		-0.20	%
Technical support		439,112		430,839		8,273		0.53	%		0.57	%		-0.04	%
General and administrative		2,646,944		2,637,202		9,742		3.18	%		3.49	%		-0.31	%
Stock compensation expense		227,224		211,935		15,289		0.27	%		0.28	%		-0.01	%
Total		10,868,706		10,272,747		595,959		13.04	%		13.60	%		-0.56	%

Selling, general and administrative expenses increased $595,959 from the prior year. As a percentage of sales, Selling, general and administrative expenses decreased by 0.56% when compared to the nine months ended June 30, 2006. The increase in sales and marketing expense of $562,655 was mainly due to higher compensation expenses and higher sales office expenses. The increase in general and administrative expenses of $9,742 was primarily due to compensation increases for additional managerial and support staff and incentive related expenses. The increase in stock compensation expense was due to the associated expense of new stock option grants.

Research and development expenses

Research and development expenses increased $97,424. A higher volume of development programs and an increase in stock compensation expense were the forces driving the increase. The increase in stock compensation expense was due to the associated expense of new stock option grants.

Other income

Net other income for the nine months ended June 30, 2007 was $25,732 compared to net other income of $15,226 for the nine months ended June 30, 2006. The change was primarily driven by higher interest income offset by foreign currency transaction losses.

Tax provision

Our net tax provision for the nine months ended June 30, 2007 and 2006 is as follows:

	Nine months ended June 30,
	2007		2006
AMT Tax attributable to U.S operations	$	72,000	$	55,000
Tax expense European operations		98,033		76,510
State taxes		15,000		15,000
Net tax provision	$	185,033	$	146,510

The deferred tax assets and the offsetting tax valuation allowance is attributable to our domestic operations. For three out of the last five fiscal years, our domestic operation incurred tax losses. Fiscal 2005 was the first year out of the last five years in which our domestic operations had income before taxes on income. As of June 30, 2007, we evaluated the future realization of our deferred tax assets and the corresponding valuation allowance. We took into consideration:

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

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

the dynamic market and technological changes that occur in our industry

After evaluating the circumstances listed above, it was our opinion that, as of June 30, 2007, the valuation allowance was still applicable.

We recorded net income of $3,661,121 for the nine months ended June 30, 2007, which resulted in basic net income per share of $0.37 and diluted net income per share of $0.35 on weighted average basic and diluted shares of 9,843,568 and 10,401,461, respectively, compared to a net income of $2,358,692 for the nine months ended June 30, 2006, which resulted in basic net income per share of $0.25 and diluted net income per share of $0.24, respectively, on weighted average basic and diluted shares of 9,573,594 and 10,003,979, respectively.

Seasonality

As our sales are primarily to the consumer market, we have experienced certain seasonal revenue trends. Our peak sales quarter due to holiday season sales of computer equipment is our first fiscal quarter (October to December), followed by our second fiscal quarter (January to March). In addition, our international sales, mostly in the European market, were 54%, 54% and 66% of sales for the years ended September 30, 2006, 2005 and 2004, respectively. Parts of our third and fourth quarters ( April through June and July to September) can be potentially impacted by the reduction of activity experienced in Europe during the summer holiday period.

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

Liquidity and capital resources

Our cash, working capital and stockholders’ equity position as of June 30, 2007 and September 30, 2006 is set forth below:

	June 30, 2007		September 30, 2006
Cash	$	12,351,072	$	9,020,941
Working Capital		20,969,576		17,084,175
Stockholders’ Equity		21,785,108		17,779,725

We had cash and cash equivalents as of June 30, 2007 of $12,351,072, an increase of $3,330,131 from September 30, 2006.

The increase in cash was due to :

Sources of cash:
Net income adjusted for non cash items	$	4,179,741
Increase in accounts payable and accrued expenses		5,547,859
Proceeds from employee stock purchases		758,756
Less cash used for:
Increase in account receivables		(5,910,179	)
Increase in inventories		(191,651	)
Increase in prepaid expenses and other current assets		(1,299	)
Effect of exchange rates on cash		(722,312	)
Capital equipment purchases		(277,386	)
Purchase of treasury stock		(53,398	)
Net cash increase	$	3,330,131

Net cash of $3,624,471 provided by operating activities was primarily due to net income adjusted for non cash items of $4,179,741 and increases in accounts payable and accrued expenses of $5,547,859. Offsetting these increases in cash were increases in accounts receivable of $5,910,179, due primarily to higher sales for the six month period from January through June 2007 compared to the same period of fiscal 2006, increases in inventory of $191,651 and an increase in prepaid expenses and other current assets of $1,299.

Cash of $277,386 was used to purchase fixed assets. Proceeds from stock purchased by employees through the purchase of options and through the employee stock purchase plan provided additional cash of $758,756. The purchase of treasury stock used cash of $53,398 and the effect of changes in foreign exchange rates used cash of $ 722,312 .

We believe that our cash and cash equivalents as of June 30, 2007, our internally generated cash flow and our $5,000,000 bank line of credit will provide us with sufficient liquidity to meet our currently foreseeable short-term and long-term capital needs.

Future contractual obligations

The following table shows our contractual obligations related to lease obligations as of June 30, 2007:

	Payments due by period
	Total		Less than 1 year		1-3 years		3 to 5 years
Operating lease obligations	$	2,059,114	$	541,236	$	1,404,714	$	113,164

Inflation

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

Item 3. Quantitative and qualitative disclosures about market risks

For each of the past three fiscal years, at least 50 % of our sales were generated by our European subsidiary and were invoiced and collected in local currency, which was primarily the Euro. On the supply side, since we predominantly deal with North American and Asian suppliers and contract manufacturers, approximately 90% of our inventory required to support our European sales are purchased and paid in U.S. Dollars.

The combination of sales billed in Euros supported by inventory purchased in U.S. dollars results in an absence of a natural local currency hedge. Consequently, our financial results are subject to market risks resulting from the fluctuations in the Euro to U.S. Dollar exchange rates.

We attempt to reduce these risks by entering into foreign exchange forward contracts with financial institutions. The purpose of these forward contracts is to hedge the foreign currency market exposures underlying the U.S. Dollar denominated inventory purchases required to support our European sales.

We do not try to hedge against all possible foreign currency exposures because of the inherent difficulty in estimating the volatility of the Euro, the contracts we procure are specifically entered into to as a hedge against forecasted or existing 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, long term strengthening or weakening of the U.S. dollar against the Euro impacts our sales, gross profit, operating income and retained earnings. Factors that could impact the effectiveness of our hedging program are:

volatility of the currency markets

availability of hedging instruments

accuracy of our inventory forecasts

Additionally, there is the risk that foreign exchange fluctuations will make our products less competitive in foreign markets, which would substantially reduce our sales.

As of June 30, 2007, we had foreign currency contracts outstanding of approximately $1,075,000 against the delivery of the Euro. These contracts expired in July 2007. Our accounting policies for these instruments designate such instruments as cash flow hedging transactions. We do not enter into such contracts for speculative purposes. We record all derivative gains and losses on the balance sheet as a component of stockholders’ equity under the caption “Accumulated other comprehensive income (loss)”. We recorded a deferred loss of $31,147 for the nine months ended June 30 2007. As of June 30, 2007, a deferred loss of $9,177 reflecting the cumulative mark to market gains of our derivatives, was recorded on our balance sheet as a component of accumulated other comprehensive income in our equity section.

Item 4. Controls and procedures

Our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2007 in alerting them in a timely manner to material information required to be included in our SEC reports. In addition, no change in our internal control over financial reporting occurred during our quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting .

Special note regarding forward looking statements

This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipated,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences (including, but not limited to, those set forth in our Annual Report on Form 10-K for the year ended September 30, 2006), many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. All cautionary statements made in this Quarterly Report should be read as being applicable to all related forward-looking statements wherever they appear.

PART II. OTHER INFORMATION

Item 1A. Risk factors

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

Item 2. Unregistered sales of equity securities and use of proceeds

On November 8, 1996, we approved a stock repurchase program. The program authorizes us to repurchase up to 850,000 shares of our own stock. The stock repurchase program was extended by a resolution of our Board of Directors on December 17, 1997. At the Company’s August 3, 2007 Board Meeting, the Company’s Board of Directors approved an increase in the number of shares which can be repurchased under the plan to 1,200,000.

The table below summarized repurchases of our common stock under our stock repurchase program:

Maximum

Total Number

Number

Total

Average

of Shares

Number

Price

Purchased as

that May Yet

of Shares

Paid per

Part of Publicly

Be Purchased

Period

Purchased

Announced Plan

Under the Plan

Purchases as of September 30, 2006

607,547

2.89

607,547

592,453

June 1 to June 30, 2007

10,000

5.34

10,000

582,453

Purchases as of June 30, 2007

617,547

2.93

617,547

582,453

Item 6. Exhibits

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

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

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

SIGNATURES

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


	HAUPPAUGE DIGITAL INC. Registrant

Date: August 9, 2007	By	/s/ Kenneth Plotkin
		KENNETH PLOTKIN Chief Executive Officer, Chairman of the Board, President (Principal Executive Officer) and Director



Date: August 9, 2007	By	/s/ Gerald Tucciarone
		GERALD TUCCIARONE Treasurer, Chief Financial Officer, (Principal Accounting officer) and Secretary