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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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 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.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes No X
As of January 31, 2003, 8,863,265 shares of .01 par value Common Stock of the
registrant were outstanding, not including treasury shares.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
Page No.
Condensed Consolidated Balance Sheets - 3
December 31, 2002 (unaudited) and September 30, 2002
Condensed Consolidated Statements of Income -
Three Months ended December 31, 2002 (unaudited) and 2001 (unaudited) 4
Condensed Consolidated Statements of Other Comprehensive Income -
Three months ended December 31, 2002 (unaudited) and 2001 (unaudited) 5
Condensed Consolidated Statements of Cash Flow-
Three Months ended December 31, 2002 (unaudited) and 2001 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17
Item 3. Quantitative and Qualitative Disclosures about Market Risks 18
Item 4. Control and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on form 8-K 19
SIGNATURES 20
CERTIFICATIONS 21-22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31,
2002 September 30,
(Unaudited) 2002
-----------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,297,777 4,964,522
Accounts receivable, net of various allowances of $2,887,000 8,234,513 5,182,738
Income taxes receivable 501,000 501,000
Inventories 11,091,471 8,091,495
Prepaid expenses and other current assets 592,753 416,734
-----------------------------------------
-----------------------------------------
Total current assets 25,717,514 19,156,489
Property, plant and equipment, net 592,716 611,054
Security deposits and other non current assets 78,376 78,616
-----------------------------------------
$ 26,388,606 $ 19,846,159
-----------------------------------------
-----------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable $ 11,630,005 6,105,588
Accrued expenses 2,171,257 1,442,475
Income taxes payable 352,539 331,484
-----------------------------------------
Total current liabilities 14,153,801 7,879,547
Stockholders' Equity
Common stock $.01 par value; 25,000,000 shares authorized, 9,397,960
and 9,392,164 issued, respectively 93,980 93,923
Additional paid-in capital 12,248,722 12,233,170
Retained earnings 1,570,491 914,019
Accumulated other comprehensive income ( loss) (181,172) 187,074
Treasury Stock, at cost, 542,067, and 514,317 shares, respectively (1,497,216) (1,461,574)
-----------------------------------------
Total stockholders' equity 12,234,805 11,966,612
-----------------------------------------
$ 26,388,606 $19,846,159
-----------------------------------------
-----------------------------------------
See accompanying notes to consolidated financial statements
3
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended December31,
----------------------------------
2002 2001
----------------------------------
Net Sales $ 15,520,486 $ 12,062,800
Cost of Sales 11,599,524 9,143,774
---------------------------------
Gross Profit 3,920,962 2,919,026
Selling, General and Administrative Expenses 2,706,302 2,166,759
Research & Development Expenses 493,073 359,024
---------------------------------
Income from operations 721,587 393,243
Other Income (expense):
Interest income 5,971 9,290
Foreign currency (12,347) 7,581
Non operational USD to Euro currency re-measurement (32,256) (103,632)
---------------------------------
Other income (expense) (38,632) (86,761)
---------------------------------
Income before taxes on income 682,955 306,482
Tax provision 26,483 22,500
---------------------------------
Net income $ 656,472 $ 283,982
---------------------------------
---------------------------------
Net income per shares:
Basic $0.07 $0.03
Diluted $0.07 $0.03
---------------------------------
---------------------------------
See accompanying notes to consolidated financial statements
4
HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
Three months ended December 31,
2002 2001
----- -----
Net income $ 656,472 $283,982
Forward exchange contracts marked to market (518,974) -
Foreign currency translation gain (loss) 150,728 (5,017)
-------------------------------
Other comprehensive income $288,226 $278,965
-------------------------------
-------------------------------
See accompanying notes to consolidated financial statements
5
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
Three months ended December 31,
2002 2001
------------------------------------
Net income $656,472 $283,982
------------------------------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 69,708 83,614
Provision for uncollectible accounts receivable - 10,000
Other non cash items 9,741 13,451
Changes in current assets and liabilities:
Accounts receivable (3,420,021) (1,173,501)
Inventories (2,999,976) 1,171,783
Prepaid expenses and other current assets (176,019) 106,048
Accounts payable and other current liabilities 6,274,254 (229,247)
------------------------------------
Total adjustments (242,313) (17,852)
------------------------------------
Net cash provided by operating activities 414,159 266,130
------------------------------------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment (51,370) (22,453)
------------------------------------
Net cash used in investing activities (51,370) (22,453)
------------------------------------
Cash Flows From Financing Activities:
Proceeds from employee stock purchases 6,108 8,933
Purchase of treasury stock (35,642) (37,081)
------------------------------------
Net cash used in financing activities (29,534) (28,148)
------------------------------------
Net increase in cash and cash equivalents 333,255 215,529
Cash and cash equivalents, beginning of period 4,964,522 4,422,239
------------------------------------
Cash and cash equivalents, end of period $ 5,297,777 $ 4,637,768
------------------------------------
------------------------------------
Supplemental disclosures:
Income taxes paid $ 4,945 $ 14,660
------------------------------------
------------------------------------
See accompanying notes to consolidated financial statements
6
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements included
herein have been prepared in accordance with generally accepted accounting
principles for interim period reporting in conjunction with the instructions to
Form 10-Q. Accordingly, these statements do not include all of the information
required by generally accepted accounting principles for annual financial
statements. In the opinion of management, all known adjustments (consisting of
normal recurring accruals and reserves) necessary to present fairly the
financial position, results of operations and cash flows for the three month
period ended December 31, 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, 2002 Form 10-K.
The operating results for the three month period ended December 31 , 2002 are
not necessarily indicative of the results to be expected for the September 30,
2003 year end.
Note 2. Derivative Financial Instruments
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 use derivatives to reduce
our exposure to fluctuations in foreign currencies. Foreign currency forward
contracts, are used to hedge the foreign currency market exposures underlying
forecasted sales transactions with customers. As of December 31, 2002, we had
foreign currency contracts outstanding of approximately $5,761,700 against the
delivery of the Euro. The contracts expire through April 2003. Our accounting
policies for these instruments are based on its designation of 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)". As of December 31, 2002, a deferred loss of
$328,055, reflecting the net mark to market loss of our derivatives was recorded
on the balance sheet.
For the three months ended December 31, 2002 and 2001, we recorded approximately
$ 549,600 as a decrease to net sales and $34,700 as an increase to net sales
related to our contracts that closed during these periods and the changes in the
fair value of our derivative contracts.
Note 3. Inventories
Inventories have been valued at the lower of average cost or market. The
components of inventory consist of:
December 31, September 30,
2002 2002
---- ----
Component Parts $ 4,883,341 $2,842,460
Work in Progress - 42,616
Finished Goods 6,208,130 5,206,419
--------- ---------
$11,091,471 $8,091,495
=========== ==========
7
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Net Income Per Share
Basic net income per share includes no dilution and is computed by dividing net
income by the weighted average number of common shares outstanding for the
period. Diluted net income per share reflects, in the periods in which they have
a dilutive effect, the dilution which would occur upon the exercise of stock
options. A reconciliation of the shares used in calculating basic and diluted
net income per share is as follows: Three Months Ended
December 31,
-------------
2002 2001
---- -----
Weighted average shares outstanding-basic 8,858,431 8,886,472
Number of shares issued on the assumed exercise of stock options 19,750 218,987
--------- ---------
Weighted average shares outstanding-diluted 8,878,181 9,105,459
========= =========
Options to purchase 1,462,826 and 820,681 shares of common stock at prices
ranging $1.35 to $ 10.06 and $2.31 and $10.06, respectively, were outstanding
for the three month period ending December 31, 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 S.a.r.l. 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. These translation
gains losses are recorded on the balance sheet under accumulated other
comprehensive income.
The company uses forward exchange contracts to reduce our exposure to
fluctuations in foreign currencies. Mark to market gains and losses on these
open contracts result from the difference between the USD value of our open
foreign currency forward contracts at the average contract rate as opposed to
the same contracts translated at the month end spot rate. The Company qualifies
for cash flow hedge accounting as prescribed under FAS 133, which allows the
Company to record the mark to market gains and losses in the equity section of
our balance sheet under accumulated other comprehensive income.
As of December 31, 2002, appearing in the equity section under " Accumulated
other comprehensive income (loss)" was a deferred loss of $181,172, which
consisted of a deferred translation gain of $146,883 and a deferred loss of
$328,055 on the difference between the value of our open forward exchange
contracts at the contract rates versus the same contracts valued at the period
ending spot rate.
The Company's Asian subsidiary reports its financial position and results of
operations in the reporting currency of the Company.
8
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6. Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections" (SFAS NO.
145"). SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to classification of debt extinguishments are
effective for fiscal years beginning after May 15, 2002. Earlier application is
encouraged. The adoption of SFAS No. 145 is not expected to have a material
impact on the financial positions or results of operation of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
evaluating the impact, if any, of SFAS NO. 146 on its consolidated financial
statements.
In December 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards Board ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123 ." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect on the method used on reported results. The
disclosure requirements apply to all companies for fiscal years ending after
December 15, 2002. Due to the recent release of this pronouncement, management
has not yet determined whether the Company will adopt this voluntary change.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------------------
Results of Operations Three Month Period ended December 31, 2002 compared to
- ----------------------------------------------------------------------------
December 31, 2001
- -----------------
Three Three
Months Months
Ended Ended Variance Percentage of sales
12/31/02 12/31/01 $ 2002 2001 Variance
---------- ---------- --- ---- ---- --------
Net Sales $ 15,520,486 12,062,800 3,457,686 100.0% 100.0% 0
Cost of sales 11,599,524 9,143,774 2,455,750 74.7% 75.8% -1.1%
----------- ---------- ---------- ----- ----- -----
Gross Profit 3,920,962 2,919,026 1,001,936 25.3% 24.2% 1.1%
Gross Profit % 25.3% 24.2% 1.1%
Costs:
Sales & Marketing 1,863,012 1,378,019 484,993 12.0% 11.4% 0.6%
Technical Support 98,360 97,235 1,125 0.6% 0.8% -0.2%
General & Administrative 744,930 691,505 53,425 4.8% 5.7% -0.9%
---------- -------- ------- ---- ---- -----
Total Selling General and Administrative costs 2,706,302 2,166,759 539,543 17.4% 17.9% -0.5%
Research & Development 493,073 359,024 134,049 3.2% 3.0% 0.2%
---------- -------- -------- ---- ---- ----
Total Costs 3,199,375 2,525,783 673,592 20.6% 20.9% -0.3%
---------- ---------- -------- ----- ----- -----
Net operating income 721,587 393,243 328,344 4.7% 3.3% 1.4%
Other income (expense)
- ----------------------
Interest income 5,971 9,290 (3,319) 0.0% 0.1% -0.1%
Foreign currency (12,347) 7,581 (19,928) -0.1% 0.1% -0.2%
Non operational USD to Euro re-measurement (loss) (32,256) (103,632) 71,376 -0.2% -0.9% 0.7%
--------- --------- ------- ----- ----- ----
Total other income (expense) (38,632) (86,761) 48,129 -0.3% -0.7% 0.4%
-------- -------- ------- ----- ----- ----
Income before taxes 682,955 306,482 376,473 4.4% 2.6% 1.8%
Taxes on income 26,483 22,500 3,983 0.2% 0.2% 0.0%
--------- ------- ------ ---- ---- ----
Net income $ 656,472 $ 283,982 $ 372,490 4.2% 2.4% 1.8%
=========== =========== ========== ==== ==== ====
Net sales for the three months ended December 31, 2002 increased $3,457,686
compared to December 2001. Domestic and European sales increased by $1,921,556
and $1,643,014 while Asian sales decreased $106,884 as follows:
Increase
(decrease) Increase Percentage of sales
Location Three Months Three Months Dollar (decrease) geographic region
- -------- ended 12/31/02 ended 12/31/01 Variance Variance % 2002 2001
-------------- -------------- -------- ---------- ----- ----
Domestic $ 4,480,128 $ 2,558,572 $ 1,921,556 75% 29% 21%
Europe 10,854,699 9,211,685 1,643,014 18% 70% 76%
Asia 185,659 292,543 (106,884) -37% 1% 3%
-------- -------- --------- ---- --- ---
Total $ 15,520,486 $ 12,062,800 $ 3,457,686 29% 100% 100%
============== ============= ============= === ==== ====
The primary forces contributing to the sales increase were:
o Introduction of Digital Entertainment Center product in Europe
o Sales of new generation personal video recorder product
o Sales of Digital Video Satellite products in Europe
o Analog and personal video recorder OEM sales
o Strong sales of our USB external TV tuner boards
10
Results of operations December 31, 2002 and December 31, 2001-continued
- -----------------------------------------------------------------------
Net sales to domestic customers were 29% of net sales for the quarter ended
December 31, 2002 compared to 21% for the quarter ended December 31, 2001. Net
sales to European customers were 70% of net sales compared to 76% for the same
quarter of last year. Net sales to Asian customers were 1% compared to 3%.
Gross profit increased $1,001,936 for the three months ended December 31, 2002.
Gross profit percentage for the three months ended December 31, 2002 was 25.36%
compared to 24.20% for the prior year's first quarter.
The increases and (decreases) in the gross profit are detailed below:
Increase
(decrease)
----------
Due to increased sales $ 1,083,015
Due to lower margins on assembled boards (20,192)
Due to increases in labor related and other costs (60,887)
--------
Total increase in margins $1,001,936
==========
The increase in gross profit percentage of 1.06% for the three months ended
December 31, 2002 compared to the three months ended December 31, 2001:
Increase
(decrease)
----------
Decrease in margin on assembled boards (0.13)%
Labor related and other costs as a lower percent of sales 1.19%
----
Net increase 1.06%
=====
Items contributing to the decrease in margin on assembled boards were:
o A higher percentage of OEM sales during the first quarter of fiscal 2003.
OEM sales during the first quarter of fiscal 2002 were minor
o Product mix of sales with lower margins
For the three months ended December 31, 2002, the increase in the gross profit
percent of 1.19% related to labor related and other costs was due to the
percentage increase in sales of 28.66% being in excess of the percentage
increase in labor related and other costs of 7.09%, resulting in a decline in
labor related and other costs as a percentage of net sales
The chart below illustrates the components of Selling, General and
Administrative expenses:
Three months ended December 31,
-------------------------------
Dollar Costs Percentage of Sales
----------------------------------------------------------------------------------------
Increase Increase
2002 2001 (Decrease) 2002 2001 (Decrease)
---- ---- ---------- ----- ---- ----------
Sales and Marketing $1,863,012 $1,378,019 $484,993 12.0% 11.4% 0.6%
Technical Support 98,360 97,235 1,125 0.6% 0.8% -0.2%
General and Administrative 744,930 691,505 53,425 4.8% 5.7% -0.9%
-------- -------- ------ ---- ----- -----
Total $2,706,302 $2,166,759 $ 539,543 17.4% 17.9% -0.5%
========== ========== ========= ====== ====== ======
Results of operations December 31, 2002 and 2001-continued
Selling General and Administrative expenses increased $539,543 from the prior
year's first quarter. As a percentage of sales, Selling, General and
Administrative expenses decreased by 0.5% when compared to the three months
ended December 31, 2001.
The increase in Sales and Promotional expense of $484,993, which accounted for
about 90% of the total increase in Selling, General and Administrative expenses,
was mainly due to:
o Higher advertising costs of $353,047 due to higher sales based co-operative
advertising, higher customer rebate realization and increased special
promotions
o Higher commissions payments of $69,997 due to increased sales
o Increased European sales office costs of $124,557
o Lower trade show costs of $67,137 due to smaller show presence and
frequency
The increase in General and Administrative expenses of $53,425 was primarily due
to:
o Addition of senior executive officer $43,927
o Higher legal costs of $20,056
o Decreased amortization costs of $13,906 due to amortization in full of an
intangible asset during fiscal 2002
Research and Development expenses increased $134,049 or approximately 38%. The
increase was mainly due to higher compensation costs attributable to additional
staff and increased material and contract services cost for current development
projects.
Other income (expense)
Net other expense for the three months ended December 31, 2002 was $38,632
compared to net other expense of $86,761 for the three months ended December 31,
2001 as detailed below:
Three months ended December 31,
2002 2001
---- ----
Interest income $ 5,971 $ 9,290
Foreign currency transaction gains (losses) (12,347) 7,581
Non operational USD to Euro currency re-measurement (32,256) (103,632)
--------- ---------
Total other income (expense) $(38,632) $ (86,761)
========= ==========
The decrease in total other expense was due to the lower losses resulting from
the Non Operational USD to Euro Currency Re-measurements offset by lower
interest income due to lower investment yields.
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 S.a.r.l..
Since the functional currency of Hauppauge Digital Europe S.a.r.l. is the Euro,
any asset, liability or equity accounts which are invested in or purchased using
U.S. dollars by Hauppauge Digital Europe S.a.r.l. 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."
12
Results of operations December 31, 2002 and 2001-continued
- ------------------------------------------------------------
Tax provision (benefit)
Our net tax provision for the three months ended December 31, 2002 and 2001 is
as follows:
Three months ended December 31,
2002 2001
------ ------
Tax (benefit) attributable to U.S operations $(56,700) $ (229,000)
Tax expense European operations 26,483 22,500
Deferred tax asset valuation allowance 56,700 229,000
------- --------
Net tax provision $ 26,483 $ 22,500
====== =========
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 three fiscal years, our
domestic operation has incurred losses. We analyzed the future realization of
our deferred tax assets as of December 31, 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.
Accumulated other comprehensive income (loss)
The Euro is the functional currency of the Company's European subsidiary, HDE
Sarl. Assets and liabilities of this subsidiary are translated to U.S. dollars
at the exchange rate in effect at the 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. These translation gains losses are recorded on the
balance sheet under accumulated other comprehensive income
The Company uses forward exchange contracts to reduce our exposure to
fluctuations in foreign currencies. Mark to market gains and losses on these
open contracts result from the difference between the USD value of our open
foreign currency forward contracts at the average contract rate as opposed to
the same contracts translated at the month end forward rate. The Company
qualifies for cash flow hedge accounting as prescribed under FAS 133, which
allows the Company to record the mark to market gains and losses in the equity
section of our balance sheet under accumulated other comprehensive income
As of December 31, 2002, appearing in the equity section under " Accumulated
other comprehensive income (loss)" was a deferred loss of $181,172, which
consisted of a deferred translation gain of $146,883 and a deferred loss of
$328,055 on the difference between the value of our open forward exchange
contracts at the contract rates versus the same contracts valued at the period
ending spot rate.
The components of accumulated other comprehensive income (loss) as of December
31, 2002 are shown below:
October-December Ending
Beginning Balance Other balance
As of comprehensive As of
9/30/02 income (loss) 12/31/02
----------------- --------------- --------
Translation gains (loss) on Hauppauge Digital Europe S.a.r.l Euro accounts $ ( 3,845) $ 150,728 $ 146,883
translated to USD
Mark to market gains (loss) per FAS 133 on open foreign currency contracts 190,919 (518,974) (328,055)
------- --------- ----------
Accumulated other comprehensive income (loss) $ 187,074 $ (368,246) $ (181,172)
========= =========== ===========
13
Results of operations December 31, 2002 and 2001-continued
- -------------------------------------------------------------
As a result of all of the above items mentioned in the Management's Discussion
and Analysis of Financial Condition and Results of Operations, we recorded net
income of $656,472 for the three months ended December 31, 2002, which resulted
in basic and diluted net income per share of $0.07 on weighted average basic and
diluted shares of 8,858,431 and 8,878,181, respectively, compared to a net
income of $283,982 for the three months ended December 31, 2001, which resulted
in basic and diluted net loss per share of $0.03 on weighted average basic and
diluted shares of 8,886,472 and 9,105,459, respectively. Options to purchase
1,462,826 and 820,681 shares of common stock at prices ranging from $1.35 to $
10.06 and from $2.31 to $10.06, respectively, were outstanding for the three
month period ending December 31, 2002 and 2001, respectively, but were not
included in the computation of diluted net income or net loss 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 73%, 77% and 71 % of sales for the
years ended September 30, 2002, 2001 and 2000, respectively. Our fiscal fourth
quarter sales (July to September) can be potentially impacted by the reduction
of activity experienced in Europe during the July and August summer holiday
period.
To offset the above cycles, we target a wide range of customer types in order to
moderate the seasonality of retail sales.
Liquidity and Capital Resources
Our cash, working capital and stockholders' equity position is disclosed below:
December 31 September 30
2002 2002
------- ----
Cash $ 5,297,777 $ 4,964,522
Working Capital 11,563,713 11,276,942
Stockholders' Equity 12,234,805 11,966,612
We had cash and cash equivalents as of December 31, 2002 of $5,297,777, an
increase of $333,255 over September 30, 2002.
The increase was due to:
Net income adjusted for non cash items $735,921
Increase in accounts payable and other current liabilities 6,274,254
Proceeds from employee stock purchases 6,108
Less cash used for:
Increase in accounts receivable (3,420,021)
Increase in inventories (2,999,976)
Increase in prepaid expenses and other current assets (176,019)
Purchases of fixed assets (51,370)
Purchase of treasury stock (35,642)
--------
Net increase in cash $333,255
========
Net cash of $414,159 provided by operating activities was primarily due an
increase in accounts payable and other current liabilities of $6,274,254 and net
income adjusted for non cash items of $735,921, offset somewhat by cash used to
fund increases in accounts receivable of $3,420,021, increase in inventory of
$2,999,976 and increases in prepaid assets and other current assets of $176,019.
The increase in accounts receivable was the result of an increase in sales of
$3,457,686 for the three months ended December 31, 2002 over the three months
ended December 31, 2001.
14
Liquidity and Capital Resources-continued
- -----------------------------------------
Cash of $51,370 and $35,642 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 $6,108.
On April 5, 2001 the Company extended its agreement with Chase Manhattan Bank,
to provide it with a $6,500,000 credit facility. The facility is secured by our
assets, and expired in fiscal 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. The program, as
amended, authorizes the Company to repurchase up to 850,000 shares of our own
stock. We intend to use the repurchased shares for certain employee benefit
programs. On December 17, 1997, the stock repurchase program was extended by a
resolution of our Board of Directors. As of December 31, 2002, we held 542,067
treasury shares purchased for $1,497,216 at an average purchase price of
approximately $2.76 per share.
We believe that our cash and cash equivalents as of December 31, 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.
Future Contractual Obligations
- -----------------------------
The following table shows the Company's contractual obligations related to lease
obligations as of December 31, 2002:
Payments due by period
Contractual obligations Total 1 year 1-3 years
Operating lease obligations $ 2,257,425 $ 664,677 $ 1,592,748
Critical Accounting Policies and Estimates
- ------------------------------------------
Financial Reporting Release No. 60, 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.
15
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
Critical Accounting Policies and Estimates-continued
- ----------------------------------------------------
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.
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.
16
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
Euro
- ----
On January 1, 1999, the Euro was adopted in Europe as the common legal currency
among 11 of the 15 member countries of the European Community. On that date, the
participating countries established fixed Euro conversion rates (i.e. the
conversion exchange rate between their existing currencies and the Euro). The
Euro now trades on currency exchanges and is available for non-cash
transactions. A new European Central Bank was established to direct monetary
policy for the participating countries.
Prior to the adoption of the Euro, we billed our European customers in German
Marks or British Pounds, depending upon which currency the customer preferred to
be billed in. Effective January 1, 1999, we began invoicing our customers who
are located in the eleven member countries in Euros. We continue to bill
customers located in the United Kingdom in British Pounds. The benefits to
billing customers in Euros were twofold:
o Our foreign currency hedging program was streamlined to the Euro and the
British Pound
o The pricing from country to country was harmonized, eliminating price
differences between countries due to the fluctuating local currencies
We handled the conversion to the Euro without any material disruptions to our
operations. See Item 7A- Market Risks.
Recent Accounting Pronouncements
- --------------------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections" (SFAS NO.
145"). SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to classification of debt extinguishments are
effective for fiscal years beginning after May 15, 2002. Earlier application is
encouraged. The adoption of SFAS No. 145 is not expected to have a material
impact on the financial positions or results of operation of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
evaluating the impact, if any, of SFAS NO. 146 on its consolidated financial
statements.
In December 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards Board ("SFAS") No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123 ." SFAS No. 148 amends SFAS No. 123,
17
Recent Accounting Pronouncements-continued
- -------------------------------------------
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect on the method used on reported
results. The disclosure requirements apply to all companies for fiscal years
ending after December 15, 2002. Due to the recent release of this pronouncement,
management has not yet determined whether the Company will adopt this voluntary
change.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
- --------------------------------------------------------------------
Derivatives and Hedging Activities
- ----------------------------------
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.
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.
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 use derivatives to reduce
our exposure to fluctuations in foreign currencies. Foreign currency forward
contracts, are used to hedge the foreign currency market exposures underlying
forecasted sales transactions with customers. As of December 31, 2002, we had
foreign currency contracts outstanding of approximately $5,761,700 against the
delivery of the Euro. The contracts expire through April 2003. Our accounting
policies for these instruments are based on its designation of 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)". As of December 31, 2002, a deferred loss of
$328,055 reflecting the net mark to market loss of our derivatives was recorded
on the balance sheet.
For the three months ended December 31, 2002 and 2001, we recorded approximately
$ 549,600 as a decrease to net sales and $34,700 as an increase to net sales
related to the changes in the fair value of our derivative contracts.
18
Item 4. Controls and Procedures
- --------------------------------
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation as of a date within 90 days prior to the
filing date of this report, that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by the Company in such reports
is accumulated and communicated to the Company's management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
such evaluation including any corrective actions with regard to significant
deficiencies and material weaknesses.
Special Note Regarding Forward Looking Statements
- -------------------------------------------------
Certain statements in this Release constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, those
described in the Company's filings with the Securities and Exchange Commission,
including but not limited to the Company's Annual Report in Form 10-K for the
fiscal year ended September 30, 2002.
PART II. OTHER INFORMATION
- ---------------------------
Item 1 Legal Proceedings
-----------------
Reference is made to our Annual Report on Form 10-K for the fiscal year ended
September 30, 2002 for a discussion of certain legal proceedings.
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
None
(b) Reports on form 8-K
-------------------
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAUPPAUGE DIGITAL, INC.
----------------------
Registrant
Date: February 13, 2003 By: /s/ Kenneth Plotkin
----------------- ----------------------
KENNETH PLOTKIN
President and
Chief Executive Officer
Date: February 13, 2003 By:/s/ Gerald Tucciarone
----------------- ------------------------
GERALD TUCCIARONE
Treasurer and Chief
Financial Officer
20
CERTIFICATIONS
--------------
I, KENNETH PLOTKIN, certify that:
1. I have reviewed this quarterly report on Form 10-Q of HAUPPAUGE DIGITAL,
INC.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/Kenneth Plotkin Date: February 13, 2003
------------------ -----------------
KENNETH PLOTKIN
Chief Executive Officer and Director
I, GERALD TUCCIARONE, certify that:
1. I have reviewed this quarterly report on Form 10-Q of HAUPPAUGE DIGITAL,
INC.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By:/s/Gerald Tucciarone Date: February 13, 2003
-------------------- -----------------
GERALD TUCCIARONE
Treasurer and Chief Financial Officer