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, 2002
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 July 22, 2002, 8,888,047 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
June 30, 2002 (unaudited) and September 30, 2001
Condensed Consolidated Statements of Income-
Nine Months ended June 30, 2002 (unaudited) and 2001 (unaudited) 4
Condensed Consolidated Statements of Income-
Three Months ended June 30, 2002 (unaudited) and 2001 (unaudited) 5
Condensed Consolidated Statements of Comprehensive Income -
Three and nine months ended June 30, 2002 (unaudited) and 2001 (unaudited) 6
Condensed Consolidated Statements of Cash Flow-
Nine Months ended June 30 , 2002 (unaudited) and 2001 (unaudited) 7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-22
Item 3. Quantitative and Qualitative Disclosures about Market Risks 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on form 8-K 23
SIGNATURES
24
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
2002 September 30,
(Unaudited) 2001
-------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,472,658 $ 4,422,239
Accounts receivable, net of various allowances of
$2,887,000 and $2,867,000 4,363,797 4,243,594
Income taxes receivable 501,000 501,000
Inventories 6,746,802 8,171,567
Prepaid expenses and other current assets 680,416 518,265
------- -------
Total current assets 17,764,673 17,856,665
Property, plant and equipment, net 657,355 825,847
Other intangible assets-net - 16,400
Security deposits and other non current assets 83,822 85,228
------ ------
$ 18,505,850 $ 18,784,140
============ =============
Liabilities and Stockholders' Equity :
Current Liabilities:
Accounts payable $ 4,755,001 $ 5,732,971
Accrued expenses 1,453,959 1,585,023
Income taxes payable 302,704 280,528
------- -------
Total current liabilities 6,511,664 7,598,522
Stockholders' Equity
Common stock $.01 par value; 25,000,000 shares authorized, 9,386,525
and 9,364,359 issued, respectively 93,865 93,644
Additional paid-in capital 12,215,291 12,164,243
Retained earnings 1,093,559 566,497
Accumulated other comprehensive income ( loss) 34,300 (267,204)
Treasury Stock, at cost, 504,117 and 465,086 shares, respectively (1,442,829) (1,371,562)
---------- ----------
Total stockholders' equity 11,994,186 11,185,618
---------- ----------
$ 18,505,850 $ 18,784,140
============ =============
See accompanying notes to consolidated financial statements
3
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Nine months ended June 30,
2002 2001
----- ----
Net Sales $ 32,924,368 $ 41,773,593
Cost of Sales 24,512,946 32,866,647
---------- ----------
Gross Profit 8,411,422 8,906,946
Selling, General and Administrative Expenses 6,650,857 7,849,728
Research & Development Expenses 1,128,266 1,094,832
Litigation settlement - 212,500
--------- -------
Income (loss) from operations 632,299 (250,114)
Other Income (expense):
Interest income 28,085 26,811
Interest expense - (26,546)
Foreign currency 2,318 (112,824)
Non operational USD to Euro currency re-measurement (82,143) 109,895
Insurance proceeds - 1,000,000
--------- ---------
Other income (expense) (51,740) 997,336
------- -------
Income before taxes on income 580,559 747,222
Taxes provision (benefit) 53,497 (508,300)
------ --------
Income before cumulative effect of a change in accounting principle 527,062 1,255,522
Cumulative effect of a change in accounting principle, net of taxes - 204,000
------- -------
Net income $ 527,062 $ 1,459,522
============ =============
Net income per share-basic:
Income before cumulative effect of a change in accounting principle $ 0.06 $ 0.14
Cumulative effect of a change in accounting principle $ 0.00 $ 0.02
------------ -------------
Net income per share-basic $ 0.06 $ 0.16
------------ -------------
Net income per share-diluted
Income before cumulative effect of a change in accounting principle $ 0.06 $ 0.14
Cumulative effect of a change in accounting principle $ 0.00 $ 0.02
------------ -------------
Net income per share-basic $ 0.06 $ 0.16
============ =============
See accompanying notes to consolidated financial statements
4
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended June 30,
--------------------------------------
2002 2001
--------------------------------------
Net Sales $ 10,113,135 $ 9,382,610
Cost of Sales 7,444,435 7,649,976
--------- ---------
Gross Profit 2,668,700 1,732,634
Selling, General and Administrative Expenses 2,189,484 2,385,838
Research & Development Expenses 404,829 353,804
Litigation settlement - 212,500
--------- -------
Income (loss) from operations 74,387 (1,219,508)
Other Income (expense):
Interest income 6,457 8,265
Interest expense - (6,826)
Foreign currency (15,718) 7,200
Non operational USD to Euro currency re-measurement (28,003) 109,895
Insurance proceeds - 1,000,000
------- ---------
Other income (expense) (37,264) 1,118,534
------- ---------
Income before taxes on income 37,123 (100,974)
Taxes provision (benefit) 10,997 (296,000)
------ --------
Net income $ 26,126 $ 195,026
============ =============
Net income per shares:
Basic $ 0.00 $ 0.02
Diluted $ 0.00 $ 0.02
============ =============
See accompanying notes to consolidated financial statements
5
HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
Three months ended June 30, Nine months ended June 30,
---------------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Other comprehensive income:
- ---------------------------
Net income $ 26,126 $ 195,026 $ 527,062 $ 1,459,522
Foreign currency translation gain (loss) 411,902 (297,392) 301,504 (260,207)
--------------------------------------------------------------------------
Other comprehensive income $438,028 $ (102,366) $ 828,566 $ 1,199,315
==========================================================================
See accompanying notes to consolidated financial statements
6
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Nine months ended June 30,
-------------------------------
Net income $ 527,062 $ 1,459,522
---------- -----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 248,067 303,865
Provision for uncollectible accounts receivable 20,000 10,000
Deferred tax benefits - (180,136)
Other non cash items 29,507 28,503
Changes in current assets and liabilities:
Accounts receivable (140,203) 3,462,401
Inventories 1,424,765 (311,613)
Income taxes receivable - 67,974
Insurance proceeds - (1,000,000)
Prepaid expenses and other current assets (162,151) (403,747)
Accounts payable and other current liabilities (1,086,858) (1,828,385)
---------- ----------
Total adjustments 333,127 148,862
------- -------
Net cash provided by operating activities 860,189 1,608,384
------- ---------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment (62,775) (151,259)
------- --------
Net cash used in investing activities (62,775) (151,259)
------- --------
Cash Flows From Financing Activities:
Loan repayments-net of borrowings - (340,000)
Proceeds from employee stock purchases 22,768 62,655
Purchase of treasury stock (71,267) -
------- --------
Net cash used in financing activities (48,499) (277,345)
------- --------
Net increase in cash and cash equivalents 748,915 1,179,780
Effect of exchange rate changes on cash and cash equivalents 301,504 (260,207)
Cash and cash equivalents, beginning of period 4,422,239 2,744,855
--------- ---------
Cash and cash equivalents, end of period $5,472,658 $ 3,664,428
========== ===========
Supplemental disclosures:
Interest paid $ - $ 24,546
Income taxes paid $ 25,386 $ 4,506
========== ===========
See accompanying notes to consolidated financial statements
7
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 nine
month period ended June 30, 2002 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 and nine month period ended June 30, 2002
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 June 30, 2002, a liability of $453,162, 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 and nine month periods
ended June 30, 2002, the Company recorded a decrease to net sales of $ 750,000
and $653,000. For the three and nine month periods ended June 30, 2001, the
Company recorded an increase to net sales of $ 226,000 and $1,014,000,
respectively.
As of June 30, 2002 , 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 nine months ended June 30, 2001.
Note 3. Inventories
Inventories have been valued at the lower of average cost or market. The
components of inventory consist of:
June 30, September 30,
2002 2001
---- ----
Component Parts $ 2,390,370 $2,421,420
Work in Progress 11,750 92,070
Finished Goods 4,344,682 5,658,077
--------- ---------
$ 6,746,802 $8,171,567
=========== ==========
8
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 Nine Months Ended
June 30 June 30 ,
2002 2001 2002 2001
---- ---- ---- ----
Weighted average shares outstanding-basic 8,886,755 8,920,504 8,888,926 8,903,812
Number of shares issued on the assumed exercise of stock options 155,816 243,992 168,476 367,683
------- ------- ------- -------
Weighted average shares outstanding-diluted 9,042,571 9,164,496 9,057,402 9,271,495
========= ========= ========= =========
Options to purchase 1,025,822 and 590,222 shares of common stock at prices
ranging $2.07 to $ 10.06 and $3.94 and $10.06, respectively, were outstanding
for the three month period ending June 30, 2002 and 2001, respectively, but were
not included in the computation of diluted earnings per share because they were
anti-dilutive.
Options to purchase 1,025,822 and 530,222 shares of common stock at prices
ranging $2.07 to $ 10.06 and $3.94 and $10.06, respectively, were outstanding
for the nine month period ending June 30, 2002 and 2001, respectively, but were
not included in the computation of diluted earnings per share because they were
anti-dilutive.
Note 5. Accumulated other comprehensive income ( loss)
The Euro is the functional currency of the Company's European subsidiary,
Hauppauge Digital Europe SARL. Assets and liabilities of this subsidiary are
translated to U.S. dollars at the exchange rate in effect at end of each
reporting period, while equity accounts are translated to U.S. dollars at the
historical rate in effect at the date of the contribution. Operating results are
translated to U.S. dollars at the average prevailing exchange rate for the
period, with the exception of sales which are translated to U.S. dollars at the
average monthly forward exchange contract rate. The use of differing exchange
rates results in foreign currency translation gains or losses, which are shown
as a component of stockholders' equity under the caption "accumulated other
comprehensive income (loss)".
As of June 30, 2002, "Accumulated other comprehensive income (loss)" under
stockholders' equity was a translation gain of $34,300, compared to a
translation loss of $267,204 at September 30, 2001. The translation gain of
$34,300 was primarily due to the strengthening of the Euro to the US dollar
during the quarter ended June 30, 2002.
The Company's Asian subsidiary reports its financial position and results of
operations in the reporting currency of the Company.
9
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6. 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 was later codified along with other similar
issues, into EITF 01-09, "Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor's Products" ("EITF 01-09"). EITF 01-09
clarifies the income statement classification of costs incurred by a vendor in
connection with the reseller's purchase or promotion of the vendor's products,
resulting in certain cooperative advertising and product placement costs. EITF
01-09 became effective for the Company in the quarter ended March 31, 2002.
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 01-09, 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.
10
ITEM 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Nine Month Period ended June 30, 2002 compared to June 30, 2001
- ------------------------------------------------- -------------
Results for the nine month period ended June 30, 2002 are detailed in the table
below:
Nine Months Nine Months
Ended Ended Variance Percentage of sales
6/30/02 6/30/01 $ 2002 2001 Variance
------- ------- - ---- ---- --------
Sales $ 32,924,368 $41,773,593 $(8,849,225) 100.0% 100.0% 0%
Cost of sales 24,512,946 32,866,647 (8,353,701) 74.5% 78.7% (4.2%)
---------- ---------- ---------- ---- ---- ----
Gross Profit 8,411,422 8,906,946 (495,524) 25.5% 21.3% 4.2%
Gross Profit % 25.5% 21.3% 4.2%
Selling, General and Administrative expenses:
Sales & Marketing 4,204,455 4,996,234 (791,779) 12.8% 12.0% 0.8%
Technical Support 287,999 292,476 (4,477) 0.9% 0.7% 0.2%
General & Administrative 2,158,403 2,561,018 (402,615) 6.5% 6.1% 0.4%
--------- --------- -------- --- --- ---
Selling, General and Administrative expenses 6,650,857 7,849,728 (1,198,871) 20.2% 18.8% 1.4%
Research & Development expenses 1,128,266 1,094,832 33,434 3.4% 2.6% 0.8%
Litigation settlement - 212,500 (212,500) 0% 0.5% (0.5%)
--------- ------- -------- - --- ----
Total expenses 7,779,123 9,157,060 (1,377,937) 23.6% 21.9% 1.7%
--------- --------- ---------- ---- ---- ---
Income (loss) from operations 632,299 (250,114) 882,413 1.9% (0.6%) 2.5%
Other income (expense)
Interest income 28,085 26,811 1,274 0.1% 0.1% 0.0%
Interest expense - (26,546) 26,546 0.0% (0.1%) 0.1%
Foreign currency 2,318 (112,824) 115,142 0.0% (0.3%) 0.3%
Non operational USD to Euro re-measurement gain (loss) (82,143) 109,895 (192,038) (0.3%) 0.3% (0.6%)
Insurance proceeds - 1,000,000 (1,000,000) 0.0% 2.4% (2.4%)
-------- --------- ---------- --- --- ----
Other income (expense) (51,740) 997,336 (1,049,076) (0.2%) 2.4% (2.6%)
------- ------- ---------- ---- --- ----
Income before taxes on income 580,559 747,222 (166,663) 1.7% 1.8% (0.1%)
Tax provision (benefit) 53,497 (508,300) 561,797 0.1% (1.2%) (1.3%)
------ -------- ------- --- ---- ----
Income before cumulative effect of change in
accounting principle 527,062 1,255,522 (728,460) 1.6% 3.0% (1.4%)
Cumulative effect of a change in accounting principle,
net of taxes - 204,000 (204,000) 0.0% 0.5% (0.5%)
------- ------- -------- --- --- ----
Net income $ 527,062 $ 1,459,522 $(932,460) 1.6% 3.5% (1.9%)
=========== =========== ========= === === ====
Sales decreased $ 8,849,225 for the nine months ended June 30, 2002 compared to
the same period of the prior fiscal year as detailed in the table below:
Percentage of sales by
Nine months ended June 30, Dollar Percent by geographic region
2002 2001 (Decrease) (Decrease) 2002 2001
----------------------------------------------------------------------------------
Domestic $ 7,814,106 $ 9,436,542 $ (1,622,436) (17%) 24% 23%
Europe 24,344,373 29,189,274 (4,844,901) (17%) 74% 70%
Asia 765,889 3,147,777 (2,381,888) (76%) 2% 7%
------- --------- ---------- --- --- ---
Total $ 32,924,368 $ 41,773,593 $ (8,849,225) (21%) 100% 100%
============ ============ ============ === === ===
11
Item 2. Management's Discussion and Analysis of Financial Condition and
-----------------------------------------------------------------
Results of Operations- continued
--------------------------------
The primary forces causing the sales decrease were:
o Sluggish worldwide economic conditions
o Reduction in analog board sales
o Lower OEM sales activity
o Lower Asian sales
Sales to domestic customers were 24% of net sales for the nine month periods
ending June 30, 2002 compared to 23% for the nine months ended June 30, 2001.
Sales to European customers were 74% of net sales compared to 70% for the same
period of last year. Sales to Asian customers were 2% compared to 7% for the
same period last year.
Gross margins decreased $ 495,524 for the nine months ended June 30, 2002. Gross
margin percentage for the nine months ended June 30, 2002 was 25.5% compared to
21.3% for the nine months ended June 30, 2001. The components of the margin
decrease are detailed below:
Increase
(decrease)
----------
Decrease due to lower sales $ (2,565,914)
Increase due to higher margins on assembled boards 1,432,142
Increase due to decrease in labor and other related costs 638,248
-------
Total decrease in margins $ (495,524)
============
The increase in gross margin percentage of 4.23% for the nine months ended June
30, 2002 compared to the same period of fiscal 2001 is as follows:
Increase
(decrease)
Increase in margin on assembled boards 4.35%
Labor and other related costs as a larger percent of sales (0.12%)
------
Net increase 4.23%
=====
The improved margin percentage on assembled boards was primarily derived from
unit price reductions from our suppliers and subcontractors coupled with a
larger sales mix of higher gross margin product. The decrease in the margin
percentage attributable to labor and related costs was due to the percentage
decrease in sales of 20.2% for the nine month period of fiscal 2002 being
greater than the percentage decrease in labor and other related costs of 19.9%.
The chart below illustrates the components of selling, general and
administrative expenses:
Nine months ended June 30,
Dollar Costs Percentage of Sales
--------------------------------------------------------------------------- -----------------
Increase Increase
2002 2001 (Decrease) 2002 2001 (Decrease)
---- ---- ---------- ---- ---- ----------
Sales and Promotional $ 4,204,455 $4,996,234 $ (791,779) 12.8% 12.0% 0.8%
Customer Support 287,999 292,476 (4,477) 0.9% 0.7% 0.2%
General and Administrative 2,158,403 2,561,018 (402,615) 6.5% 6.1% 0.4%
--------- --------- -------- --- --- ---
Total $ 6,650,857 $7,849,728 $(1,198,871) 20.2% 18.8% 1.4%
12
Item 2. Management's Discussion and Analysis of Financial Condition and
-----------------------------------------------------------------
Results of Operations- continued
--------------------------------
Selling General and Administrative expenses decreased $1,198,871 from the prior
year. As a percentage of sales, Selling, General and Administrative expenses for
the nine months ended June 30, 2002 increased by 1.4% when compared to the nine
months ended June 30, 2001.
The decrease in sales and promotional expense of $791,779 was mainly due to :
o Lower advertising costs of $558,524 due to lower co-operative
advertising and reduced special promotions
o Lower commission payments of $ 98,907 due to lower sales
o Decreased compensation costs of $ 82,042 due to personnel
reductions
The decrease in General and Administrative expenses of $ 402,615 was primarily
due to:
o Decrease in compensation costs of $ 221,757 due to personnel
reductions for administrative personnel
o Decreased amortization costs of $55,798 mainly due to the write
off of goodwill during the fourth quarter of fiscal 2001
o Lower rent costs of $ 39,946 and lower communication costs of
$28,511 due to the consolidation of the Eskape Labs office in
California into the Hauppauge California office
Research and development increased $33,434 or approximately 3.4%. The increase
was mainly due to higher compensation and increased material and contract
services cost.
Litigation settlement
During the third fiscal quarter ended June 30, 2001, the Company paid $212,500
to settle a claim pursuant to a copyright infringement dispute.
Other income (expense)
Net other expense for the nine months ended June 30, 2002 was $51,740 compared
to net other income of $997,336 for the prior year's nine months ended June 30,
2001 as detailed below:
Nine months ended June 30,
2002 2001
---- ----
Interest income $ 28,085 $ 26,811
Interest expense - (26,546)
Foreign currency transaction gains (losses) 2,318 (112,824)
Non operational USD to Euro currency re-measurement (82,143) 109,895
Life insurance proceeds - 1,000,000
-------- ---------
Total other income (expense) $(51,740) $ 997,336
The decrease in total other income (expense) was due to the receipt of insurance
proceeds during fiscal 2001 pursuant to a key man life insurance on the
Company's deceased former President and losses in fiscal 2002 resulting from the
"Non operational USD to Euro currency re-measurements" offset by foreign
currency transaction gains for fiscal 2002.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
-----------------------------------------------------------------
Results of Operations- continued
--------------------------------
"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, any
asset, liability or equity accounts which are invested in or purchased using
U.S. dollars by Hauppauge Digital Europe SARL need to be revalued into Euros at
the end of each reporting period. 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 nine months ended June 30, 2002 and 2001
is as follows:
Nine months ended June 30,
2002 2001
------ ------
Tax (benefit) attributable to U.S operations $ (640,000) $(665,000)
Tax expense Asian operations - 44,200
Tax expense European operations 53,497 112,500
Deferred tax asset valuation allowance 640,000 -
------- ---------
Net tax provision (benefit) $ 53,497 $(508,300)
========== =========
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 Luxembourg entity paying a 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 June 30, 2002 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.
As a result of the above, we recorded net income of $527,062 for the nine months
ended June 30 , 2002, which resulted in basic and diluted net income per share
of $0.06 on weighted average basic and diluted shares of 8,888,926 and
9,057,402, respectively, compared to a net income of $1,459,522 for the nine
months ended June 30, 2001, which resulted in basic and diluted net income per
share of $0.16 on weighted average basic and diluted shares of 8,903,812 and
9,271,495 respectively. Options to purchase 1,025,822 and 530,222 shares of
common stock at prices ranging $2.07 to $ 10.06 and $3.94 and $10.06,
respectively, were outstanding for the nine month period ending June 30, 2002
and 2001, respectively, but were not included in the computation of diluted
earnings per share because they were anti-dilutive
14
Item 2. Management's Discussion and Analysis of Financial Condition and
-----------------------------------------------------------------
Results of Operations- continued
--------------------------------
Three Month Period ended June 30, 2002 compared to June 30, 2001
- ----------------------------------------------------------------
Results for the three month period ended June 30, 2002 are detailed in the table
below:
Three Months Three Months
Ended Ended Variance Percentage of sales
6/30/02 6/30/01 $ 2002 2001 Variance
------- ------- - ---- ---- --------
Sales $10,113,135 $9,382,610 $730,525 100.0% 100.0% -
Cost of sales 7,444,435 7,649,976 (205,541) 73.6% 81.5% (7.9%)
--------- --------- -------- ---- ---- ----
Gross Profit 2,668,700 1,732,634 936,066 26.4% 18.5% 7.9%
Gross Profit % 26.4% 18.5% 7.9%
Selling, General and Administrative expenses:
Sales & Marketing 1,332,194 1,414,878 (82,684) 13.2% 15.1% (1.9%)
Technical Support 96,656 98,149 (1,493) 1.0% 1.0% 0%
General & Administrative expenses 760,634 872,811 (112,177) 7.5% 9.3% (1.8%)
------- ------- -------- --- ---- ---
Selling, General and Administrative expenses 2,189,484 2,385,838 (196,354) 21.7% 25.4% (3.7%)
Research & Development expenses 404,829 353,804 51,025 4.0% 3.8% 0.2%
Litigation settlement - 212,500 (212,500) - 2.3% (2.3%)
--------- ------- -------- ---- --- ----
Total Selling, General and Administrative
expenses 2,594,313 2,952,142 (357,829) 25.7% 31.5% (5.8%)
--------- --------- -------- ---- ---- ----
Income from operations 74,387 (1,219,508) 1,293,895 0.7% (13.0%) 13.7%
Other income (expense)
Interest income 6,457 8,265 (1,808) 0.1% 0.1% 0.0%
Interest expense - (6,826) 6,826 0.0% (0.1%) (0.1%)
Foreign currency (15,718) 7,200 (22,918) (0.1%) 0.1% 0.0%
Non operational USD to Euro re-measurement gain
(loss) (28,003) 109,895 (137,898) (0.3%) 1.1% (1.4%)
Insurance settlement - 1,000,000 (1,000,000) - 10.7% (10.7%)
-------- --------- ---------- ---- ---- -----
Other income (expense) (37,264) 1,118,534 (1,155,798) (0.3%) 11.9% (12.2%)
------- --------- ---------- ---- ---- -----
Income before taxes on income 37,123 (100,974) 138,097 0.4% (1.1%) 1.5%
Tax provision (benefit) 10,997 (296,000) 306,997 0.1% (3.2%) 3.3%
------ -------- ------- --- ---- ---
Net income $ 26,126 $ 195,026 $ (168,900) 0.3% 2.1% (1.8%)
========= =========== ========== ==== ==== ===
Sales increased $ 730,525 for the three months ended June 30, 2002 compared to
the same quarter of the prior fiscal year as detailed geographically in the
table below:
Percent Percentage of sales
Three months ended June 30, Increase Increase by geographic region
2002 2001 (Decrease) (Decrease) 2002 2001
--------------------------------------------------------------------------------------
Domestic $ 3,006,789 $ 2,843,066 $ 163,723 6 % 30% 30%
Europe 6,862,348 5,878,339 984,009 17 % 68% 63%
Asia 243,998 661,205 (417,207) (63)% 2% 7%
------- ------- -------- --- - -
Total $10,113,135 $ 9,382,610 $ 730,525 8 % 100% 100%
The primary forces causing the sales increase were:
o Strong digital satellite product sales in Europe
o Increased sales of personal video recorder products
15
Item 2. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations-continued
-------------------------------
Sales to domestic customers were 30% of net sales for the three months ended
June 30, 2002 and 2001. Sales to European customers were 68% of net sales
compared to 63% for the same period of last year. Sales to Asian customers were
2% compared to 7% for the same period last year.
Gross margins increased $ 936,066 for the three months ended June 30, 2002.
Gross margin percentage for the three months ended June 30, 2002 was 26.4%
compared to 18.5% for the three months ended June 30, 2001. The components of
the margin increase are detailed below:
Increase
(decrease)
----------
Increase due to higher sales $ 211,984
Increase due to higher margins on assembled boards 590,630
Increase due to decrease in labor and other related costs 133,452
-------
Total (decrease) in margins $936,066
========
The increase in gross margin percentage of 7.92% for the three months ended June
30, 2002 compared to the third quarter of fiscal 2001 is as follows:
Increase
(decrease)
----------
Increase in margin on assembled boards 5.84%
Labor and other related costs as a lower percent of sales 2.08%
-----
Net increase 7.92%
=====
The improved margin percentage on assembled boards was primarily derived from
unit price reductions from our suppliers and subcontractors and a larger sales
mix of higher gross margin product. The increase in the margin percentage
attributable to labor and related costs was due to the combination of sales
increasing by 7.8% and while labor related and other costs decreased by 13.5%.
The chart below illustrates the components of selling, general and
administrative expenses:
Three months ended June 30,
Dollar Costs Percentage of Sales
Increase Increase
2002 2001 (Decrease) 2002 2001 (Decrease)
---- ---- ---------- ---- ---- ----------
Sales and Promotional $ 1,332,194 $ 1,414,878 $ (82,684) 13.2% 15.1% (1.9%)
Customer Support 96,656 98,149 (1,493) 1.0% 1.0 0%
General and Administrative 760,634 872,811 (112,177) 7.5% 9.3% (1.8%)
------- ------- -------- --- --- ----
Total $ 2,189,484 $ 2,385,838 $ (196,354) 21.7% 25.4% (3.7%)
Selling General and Administrative expenses decreased $196,354 from the prior
year's third fiscal quarter. As a percentage of sales, Selling, General and
Administrative expenses for the three months ended June 30, 2002 decreased by
3.7% when compared to three months ended June 30, 2001
16
Item 2. Management's Discussion and Analysis of Financial Condition and
-----------------------------------------------------------------
Results of Operations - continued
--------------------------------
The decrease in sales and promotional expense of $82,684 was mainly due to :
o Lower advertising costs of $41,520 due to reduced special promotions
o Lower trade show costs $28,576 due to size and frequency
o Decreased compensation costs of $14,784 due to personnel reductions
The decrease in General and Administrative expenses of $ 112,177 was primarily
due to:
o Lower legal costs of $40,446 due to prior year legal fees related to
the litigation settlement
o Decrease in compensation costs of $ 24,904 due to personnel
reductions
o Decreased amortization costs of $24,907 mainly due to the write off
of goodwill during the fourth quarter of fiscal 2001
o Lower rent costs of $ 12,584 and lower communication costs of $8,690
due to the consolidation of the Eskape Labs office in California
into the Hauppauge California office
Research and development expenses increased $51,025 or approximately 14.4%. The
increase was due to increased compensation costs and increased material and
contract services consumed.
Litigation settlement
During the third fiscal quarter ended June 30, 2001, the Company paid $212,500
to settle a claim pursuant to a copyright infringement dispute.
Other income (expense)
Net other expense for the three months ended June 30, 2002 was $37,264 compared
to net other income of $ 1,118,534 for the prior year's third fiscal quarter as
detailed below:
Three months ended June 30,
2002 2001
---- ----
Interest income $ 6,457 $ 8,265
Interest expense - (6,826)
Foreign currency transaction gains (losses) (15,718) 7,200
Non operational USD to Euro currency re-measurement (28,003) 109,895
Insurance proceeds - 1,000,000
-------- ---------
Total other income (expense) $(37,264) $1,118,534
======== ==========
The decrease in total other income (expense) was due to the receipt of insurance
proceeds during fiscal 2001 pursuant to a key man life insurance on the
Company's deceased former President, losses in fiscal 2002 resulting from the
"Non operational USD to Euro currency re-measurements" in addition to foreign
currency transaction losses incurred during the third quarter of fiscal 2002.
"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, any
asset, liability or equity accounts which are invested in or purchased using
U.S. dollars by
17
Item 2. Management's Discussion and Analysis of Financial Condition and
-----------------------------------------------------------------
Results of Operations- continued
--------------------------------
Hauppauge Digital Europe SARL need to be revalued into Euros at the end of each
reporting period. 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 June 30, 2002 and
2001 is as follows:
Three months ended June 30,
2002 2001
---- ----
Tax (benefit) attributable to U.S operations $ (163,000) $(296,000)
Tax expense European operations 10,997 -
Deferred tax asset valuation allowance 163,000 -
---------- ---------
Net tax provision (benefit) $ 10,997 $(296,000)
========== ==========
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 Luxembourg entity paying a 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 June 30, 2002 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.
As a result of the above, we recorded net income of $26,126 for the quarter
ended June 30 , 2002, which resulted in break even basic and diluted net income
per share on weighted average basic and diluted shares of 8,886,755 and
9,042,571, respectively, compared to a net income of $195,026 for the three
months ended June 30, 2001, which resulted in basic and diluted net income per
share of $0.02 on weighted average basic and diluted shares of 8,890,504 and
9,164,496 respectively. Options to purchase 1,025,822 and 590,222 shares of
common stock at prices ranging $2.07 to $ 10.06 and $3.94 and $10.06,
respectively, were outstanding for the three month period ending June 30, 2002
and 2001, 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.
18
Liquidity and Capital Resources
- -------------------------------
Our cash, working capital and stockholders' equity position is disclosed below:
June 30, September 30,
2002 2001
------- ----
Cash $ 5,472,658 $ 4,422,239
Working Capital 11,253,009 10,258,143
Stockholders' Equity 11,994,186 11,185,618
The Company had cash and cash equivalents as of June 30, 2002 of $5,472,658, an
increase of $1,050,419 over September 30, 2001.
The increase was due to :
Net income adjusted for non cash items $ 824,636
Decrease in inventories 1,424,765
Effect of exchange rate changes on cash and cash equivalents 301,504
Proceeds from employee stock purchases 22,768
Less cash used for:
Increase in accounts receivable (140,203)
Decrease in accounts payable and accrued expenses (1,086,858)
Increase in prepaid and other current assets (162,151)
Purchases of fixed assets (62,775)
Purchase of treasury stock (71,267)
--------
Net increase in cash $ 1,050,419
===========
Net cash of $860,189 provided by operating activities was primarily due to a
decrease in inventory of $1,424,765 and net income adjusted for non cash items
of $824,636, offset somewhat by cash used to fund increases in accounts
receivable of $140,203, prepaid expenses and other current assets of $162,151
and a decrease in accounts payable and accrued expenses of $1,086,858.
Cash of $62,775 and $71,267 was used to purchase fixed assets and purchase
treasury stock. Proceeds from the stock purchased by employees through the
employee stock purchase plan provided additional cash of $22,768. The effect of
exchange rate changes on cash and cash equivalents increased cash by $301,504.
On April 5, 2001 we extended our agreement with Chase Manhattan Bank, to provide
us with a $6,500,000 credit facility. The facility is secured by our assets, and
expired on March 31, 2002. On January 25, 2002, Chase Manhattan Bank, citing the
current economic conditions in the technology sector coupled with our two years
of non profitability, informed us that our line of credit had been terminated.
No amounts were outstanding under the credit facility on January 25, 2002. It is
the intention of the Company to procure a new credit facility on terms
acceptable to the Company .
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
June 30, 2002, we held 504,117 treasury shares purchased for $1,442,829 at an
average purchase price of approximately $2.86 per share.
We believe that our cash and cash equivalents as of June 30, 2002 and our
internally generated cash flow will provide us with sufficient liquidity to meet
our currently foreseeable short-term and long-term capital needs.
Critical Accounting Policies and Estimates
- ------------------------------------------
19
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements.
We believe the following critical accounting policies affect the significant
judgments and estimates used in the preparation of the our financial statements:
o Revenue Recognition
o Management's estimates
o Hedging program for sales denominated in a foreign currency
o Translation of assets and liabilities denominated in non functional
currencies on our European financial statements
Revenue Recognition
- -------------------
Our revenues are primarily derived from the sale of computer boards which enable
you to view television programs on your personal computer. Sales of computer
boards are commonly classified as computer hardware. Our sales are primarily to
retailers, distributors and original equipment manufacturers. Sales to our
customers are documented by a purchase order which describes the conditions of
sale. Sales are recorded when products are shipped to our customers. The product
price is fixed and determinable, collection of the resulting receivable is
probable and product returns are reasonably estimable. Revenue from freight
charged to customers is recognized when products are shipped. Provisions for
customer returns and other adjustments are provided for in the period the
related sales are recorded based upon historical data.
Management's Estimates
- ----------------------
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities
and related disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts for revenues and
expenses during the reporting period. On an ongoing basis, management evaluates
estimates, including those related to sales provisions, as described above,
income taxes, bad debts, inventory reserves and contingencies. We base our
estimates on historical data, when available, experience, and on various other
assumptions that are believed to be reasonable under the circumstances, the
combined results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
Hedging program for sales denominated in a foreign currency
- -------------------------------------------------------------
Our European subsidiary accounts for approximately 70% to 75 % of our net sales.
All of our European sales are denominated in local currencies, primarily the
Euro. As a result of this, we are a net receiver of currencies other than the
U.S dollar. Changes in the exchange rate subject us to market risks resulting
from the fluctuation of the Euro to the U.S. dollar. In an attempt to minimize
these risks, we enter into forward exchange contracts with financial
institutions.
20
Hedging program for sales denominated in a foreign currency-continued
We do not enter into contracts for speculative purposes. We enter into monthly
window contracts covering an average period of six months based on existing or
anticipated future sales. Although we enter into these contracts to reduce the
short term impact of currency rate changes, the following risks are still
inherent in hedging the Euro sales.
o Actual sales may fluctuate from our estimates, resulting in contracts in
excess of collections
o Short term volatility of currency markets has the potential to reduce the
effectiveness of our hedging program
o Historical volatility of the Euro has the potential to impact our revenues,
gross margins and operating income
o The magnitude of the success of our hedging program is dependent upon
movements in the Euro exchange rates. These movements are difficult to
predict over an extended period of time.
Translation of assets and liabilities denominated in non functional currencies
- -------------------------------------------------------------------------------
on our European financial statements
- -------------------------------------
The functional currency of our European subsidiary is the Euro. In preparing our
consolidated financial statements, we are required to translate assets and
liabilities denominated in a non functional currency, mainly U.S. dollars, to
Euros on the books of our European subsidiary. This process results in exchange
gains and losses depending on the changes in the Euro to U.S. dollar exchange
rate. Under the relevant accounting guidance, we are obligated to include these
gains and losses on our statement of operations, which we report in other income
or expense under the caption "Non operational USD to Euro currency
re-measurement".
The extent of these gains and losses can fluctuate greatly from month to month
depending on the change in the exchange rate, causing results to vary widely.
Due to the past volatility of the Euro, it is difficult to forecast the long
term trend of these gains and losses.
Future Contractual Obligations
- -------------------------------
The following table shows the Company's contractual obligations related to lease
obligations as of June 30, 2002:
Payments due by period
----------------------
Contractual obligations Total 1 year 1-3 years 4-5 years
Operating lease obligations $ 2,379,645 $ 654,538 $ 1,325,288 $ 399,819
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
- ---------------------------------------
21
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 was later codified along with other similar
issues, into EITF 01-09, "Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor's Products" ("EITF 01-09"). EITF 01-09
clarifies the income statement classification of costs incurred by a vendor in
connection with the reseller's purchase or promotion of the vendor's products,
resulting in certain cooperative advertising and product placement costs. EITF
01-09 became effective for the Company in the quarter ended March 31, 2002.
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 01-09, 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.
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 June 30, 2002, we had foreign currency forward contracts outstanding of
approximately $ 3,746,000 against delivery of the Euro. The contracts expire
through October 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 and nine month periods ended June 30, 2002, the Company recorded a
decrease to net sales of $750,000 and $653,000, respectively. For the three and
nine months ended June 30, 2001, the Company recorded an increase to sales of $
226,000 and $1,014,000, respectively.
Special Note Regarding Forward Looking Statements
- -------------------------------------------------
22
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.
PART II. OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings
- -------------------------
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 5 Other Information
-----------------
Effecitve May 1, 2002, the Company entered into an employment agreement with
Dean Cirielli, hiring Mr. Cirielli as the Company's President and Chief
Operating Officer. The employment agreement is filed with this report as exhibit
10.18.
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
10.18 Form of Employment agreement between Dean Cirielli and
Hauppauge Digital Inc.
(b) Reports on form 8-K
-------------------
None
23
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: August 14, 2002 By: /s/ Kenneth Plotkin
--------------------
KENNETH PLOTKIN
President and
Chief Executive Officer
Date: August 14, 2002 By: /s/ Gerald Tucciarone
----------------------
GERALD TUCCIARONE
Treasurer and Chief
Financial Officer
24