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, 2004
------------------
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
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HAUPPAUGE DIGITAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3227864
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
91 Cabot Court, Hauppauge, New York 11788
-----------------------------------------
(Address of principal executive offices)
(631) 434-1600
--------------
(Registrant's telephone number, including area code)
1
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, 2005, 9,465,829 shares of .01 par value Common Stock of the
registrant were outstanding, not including treasury shares.
2
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
----------------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1.Financial Statements Page No.
--------
Condensed Consolidated Balance Sheets - December 31, 2004 5
(unaudited) and September 30, 2004 (audited)
Condensed Consolidated Statements of Income - Three Months ended 6
December 31 2004 (unaudited) and 2003 (unaudited)
Condensed Consolidated Statements of Other Comprehensive Income 7
- - Three months ended December 31, 2004 (unaudited) and 2003
(unaudited)
Condensed Consolidated Statements of Cash Flows - Three Months 8
ended December 31, 2004 (unaudited) and 2003 (unaudited)
Notes to Condensed Consolidated Financial Statements 9-16
Item 2. Management's Discussion and Analysis of Financial Condition 17-28
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risks 28-29
Item 4. Controls and Procedures 29
3
PART II. OTHER INFORMATION
- ---------------------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 6. Exhibits and Reports on form 8-K 31
SIGNATURES 32
4
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2004 September 30, 2004
(unaudited) (audited)
--------------------------------------------------
Assets:
Current Assets:
Cash and cash equivalents $8,427,585 $8,661,589
Receivables, net of various allowances 15,206,815 13,593,907
Inventories 10,750,491 8,477,254
Prepaid expenses and other current assets 782,410 770,745
--------------------------------------------------
Total current assets 35,167,301 31,503,495
Property, plant and equipment, net 517,769 489,370
Security deposits and other non current assets 77,934 77,934
--------------------------------------------------
$35,763,004 $32,070,799
==================================================
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable $14,694,814 $13,243,966
Accrued expenses 4,721,926 4,256,970
Income taxes payable 268,769 242,438
--------------------------------------------------
Total current liabilities 19,685,509 17,743,374
Stockholders' Equity
Common stock $.01 par value; 25,000,000 shares
authorized, 9,875,666 and 9,759,465 issued, respectively 98,757 97,595
Additional paid-in capital 13,111,694 12,913,497
Retained earnings 3,188,824 1,925,135
Accumulated other comprehensive income 1,279,981 975,511
Treasury Stock, at cost, 572,067 and 567,067 shares (1,601,761) (1,584,313)
--------------------------------------------------
Total stockholders' equity 16,077,495 14,327,425
--------------------------------------------------
$35,763,004 $32,070,799
==================================================
See accompanying notes to condensed consolidated financial statements
5
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended December 31,
--------------------------------------------
2004 2003
--------------------------------------------
Net sales $23,360,442 $18,230,298
Cost of sales 18,049,079 13,648,675
--------------------------------------------
Gross profit 5,311,363 4,581,623
Selling, general and administrative Expenses 3,427,055 3,120,616
Research & development expenses 557,530 410,274
--------------------------------------------
Income from operations 1,326,778 1,050,733
Other Income (expense):
Interest income 1,511 1,739
Foreign currency (8,600) (11,333)
--------------------------------------------
Other (expense) (7,089) (9,594)
--------------------------------------------
Income before taxes on income 1,319,689 1,041,139
Tax provision 56,000 48,279
--------------------------------------------
Net income $1,263,689 $992,860
============================================
Net income per share:
Basic $0.14 $0.11
Diluted $0.13 $0.11
--------------------------------------------
See accompanying notes to condensed consolidated financial statements
6
HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended December 31,
2003 2004
---- ----
Net income $1,263,689 $ 992,860
Forward exchange contracts marked to market (279,791) 204,461
Foreign currency translation gain 584,261 849,969
-----------------------------------
Other comprehensive income $1,568,159 $2,047,290
========== ==========
See accompanying notes to condensed consolidated financial statements
7
HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended December 31,
2004 2003
--------------------------------------------------
Net income $ 1,263,689 $ 992,860
--------------------------------------------------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 54,324 60,309
Other non cash items - 10,079
Changes in current assets and liabilities:
Accounts receivable (1,308,438) (3,562,789)
Inventories (2,273,237) (4,474,774)
Prepaid expenses and other current assets (11,665) (153,055)
Accounts payable and other current liabilities 1,942,135 6,506,655
-------------------------------------------------
Total adjustments (1,596,681) (1,613,575)
--------------------------------------------------
Net cash used in operating activities (333,192) (620,715)
--------------------------------------------------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment (82,723) (20,574)
--------------------------------------------------
Net cash used in investing activities (82,723) (20,574)
--------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from employee stock purchases 199,359 6,987
Purchase of treasury stock (17,448) -
--------------------------------------------------
Net cash provided by financing activities 181,911 6,987
--------------------------------------------------
Net (decrease) in cash and cash equivalents (234,004) (634,302)
Cash and cash equivalents, beginning of period 8,661,589 5,838,160
--------------------------------------------------
Cash and cash equivalents, end of period $ 8,427,585 $ 5,203,858
==================================================
Supplemental disclosures:
Income taxes paid $ 38,863 $ 67,802
==================================================
See accompanying notes to condensed consolidated financial statements
8
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, 2004 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, 2004 Form 10-K.
The operating results for the three month period ended December 31, 2004 are not
necessarily indicative of the results to be expected for the September 30, 2005
year end.
Note 2. Receivables
Accounts and other receivables for the consisted of:
December 31, September 30,
2004 2004
---- ----
Trade receivables $ 11,486,260 $ 9,584,650
Receivable from contract manufacturers 6,350,272 6,568,968
GST and VAT taxes receivables 655,879 575,750
Allowances and reserves (3,421,000) (3,254,940)
Other 135,404 119,479
------- ----------
$ 15,206,815 $13,593,907
============ ===========
Note 3. Derivative Financial Instruments
For each of the past three fiscal years, over 60% of the Company's sales were
generated by our European subsidiary and were:
o Invoiced in local currency-primarily the Euro
o Collected in local currency-primarily the Euro
On the supply side, since we predominantly deal with North American and Asian
suppliers and contract manufacturers, approximately 75% of our inventory
required to support our European sales are purchased and paid in U.S. Dollars.
9
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The combination of sales billed in Euros supported by inventory purchased in
U.S. dollars results in an absence of a natural local currency hedge.
Consequently, our financial results are subject to market risks resulting from
the fluctuations in the Euro to U.S. Dollar exchange rates.
We attempt to reduce these risks by entering into foreign exchange forward
contracts with financial institutions. The purpose of these forward contracts is
to hedge the foreign currency market exposures underlying the U.S. Dollar
denominated inventory purchases required to support our European sales.
We do not try to hedge against all possible foreign currency exposures because
of the inherent difficulty in estimating the volatility of the Euro. The
contracts we procure are specifically entered into to as a hedge against
forecasted or existing or foreign currency exposure. We do not enter into
contracts for speculative purposes. Although we maintain these programs to
reduce the short term impact of changes in currency exchange rates, long term
strengthening or weakening of the U.S. dollar against the Euro impacts our
sales, our gross profit, operating income and retained earnings. Factors that
could impact the effectiveness of our hedging program are:
o volatility of the currency markets
o availability of hedging instruments
o accuracy of our inventory forecasts
Additionally, there is the risk that foreign exchange fluctuations will make our
products less competitive in foreign markets, which would substantially reduce
our sales.
As of December 31, 2004, we had foreign currency contracts outstanding of
approximately $5,316,000 against the delivery of the Euro. The contracts expire
through May 2005. Our accounting policies for these instruments designate such
instruments as cash flow hedging transactions. We do not enter into such
contracts for speculative purposes. We record all derivative gains and losses on
the balance sheet as a component of stockholders' equity under the caption
"Accumulated other comprehensive income (loss)". The Company recorded a deferred
loss of $279,791 for the three months ended December 31, 2004. As of December
31, 2004, a deferred loss of $379,190 reflecting the cumulative mark to market
loss of our derivatives, was recorded on our balance sheet as a component of
accumulated other comprehensive income in our equity section.
10
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We use the average monthly forward contract exchange rate to translate our Euro
denominated sales into our U.S. dollar reporting currency. For the three month
period ended December 31, 2004, the use of the monthly average spot rate instead
of the average monthly forward contract exchange rate to value Euro denominated
sales would have resulted in an increase in sales of $640,815. This sales
increase is related to our contracts that closed during these periods and the
changes in the fair value of our derivative contracts. For the three month
period ending December 31, 2003, the use of the monthly average spot rate
instead of the average monthly forward contract exchange rate to value Euro
denominated sales would have resulted in a sales increase of $805,553.
Note 4. Inventories
Inventories have been valued at the lower of average cost or market on a first
in first out basis. The components of inventory consist of:
December 31, September 30,
2004 2004
---- ----
Component Parts $ 4,542,686 $3,522,974
Finished Goods 6,207,805 4,954,280
----------- ----------
$10,750,491 $8,477,254
=========== ==========
Note 5. Net Income Per Share
Basic net income per share includes no dilution and is computed by dividing net
income by the weighted average number of shares of common stock outstanding for
the period. Diluted net income per share reflects, in the periods in which they
have a dilutive effect, the dilution which would occur upon the exercise of
stock options. A reconciliation of the shares used in calculating basic and
diluted net income per share is as follows:
Three Months Ended
December 31,
2004 2003
---- ----
Weighted average shares outstanding-basic 9,277,944 8,880,651
Number of shares issued on the assumed exercise of stock options 671,437 489,430
--------- ---------
Weighted average shares outstanding-diluted 9,949,381 9,370,081
========= =========
11
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited
Options to purchase 98,757 and 485,337 shares of common stock at prices ranging
$5.25 to $ 10.06 and $2.81 and $10.06, respectively, were outstanding for the
three month periods ending December 31, 2004 and 2003, respectively, but were
not included in the computation of diluted earnings per share because they were
anti-dilutive.
Note 6. Accumulated other comprehensive income
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 spot 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 translating accounts
at the spot, historical and average exchange rates results in foreign currency
translation gains or losses. These translation gains or 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, 2004, appearing in the equity section under "Accumulated
other comprehensive income" was a deferred gain of $1,279,981, which consisted
of a deferred translation gain of $1,659,171 and a deferred loss of $379,190 due
to the mark to market losses 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 forward rate.
The Company's Asian subsidiary reports its financial position and results of
operations in the reporting currency of the Company.
12
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7. Revenue Recognition
The Company sells through a sales channel which consist of retailers ,
distributors and original equipment manufacturers (OEM's). Our prices are fixed
consistently over the entire sales channel. The product is shipped on open
account with the majority of our customers given 30 day payment terms. Those
customers deemed as large credit risks either pay in advance or issue us a
letter of credit.
The Company requires the customer to submit a purchase order to the Company. The
price of the product and payment terms are fixed per the terms of the purchase
order. Upon shipment of the order to the customer, the title to the goods is
passed to the customer. The customer is legally obligated to pay for the order
within the payment terms stated on the customer's purchase order. The obligation
to insure the products and the cost of any pilferage while in the customer's
possession is the responsibility of the customer. Our retail products are
typically stocked on the shelves of retailers, and is subject to the normal
consumer traffic that retail stores attract. Aside from normal store promotions
such as end-caps and advertisements in the store's circular, the Company has no
further obligation to assist in the resale of the product.
The Company offers it customers a right of return, but does not offer stock
balancing. Our accounting complies with SFAS 48 as typically at the end of every
quarter the Company, based on historical data, evaluates its sales reserve level
based on the previous six months sales. Due to seasonal nature of our business
coupled with the changing economic environment, management exercises some
judgement with regard to the historical data to arrive at the reserve.
Note 8. Product segment and Geographic Information
The Company offers several types of analog products. Our WinTV(R) analog TV
receivers allow PC users to watch television on their PC screen in a resizable
window, and also enable recording of TV shows to a hard disk. Our WinTV(R)-PVR
TV personal video recorder products include hardware MPEG encoders, which
improve the performance of TV recording and add instant replay and program pause
functions, plus also enable the `burning' of TV recordings onto DVD or CD media.
Our Eskape(TM) Labs products allow users of Apple(R)Macintosh(R) computers to
watch television on their computer screen.
The Company offers three types of digital TV receivers. Our WinTV(R) digital
receivers can receive digital TV transmissions and display the digital TV show
in a re-sizeable window on a user's PC screen. Our Digital Entertainment Center
products ("DEC") allow users to receive digital TV broadcasts and display the
digital TV on either a TV set or a PC.
13
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Product segment and Geographic Information-continued
screen. Our MediaMVP(TM) product was designed to allow PC users to play digital
media such as digital music, digital pictures and digital videos on a TV set via
a home network.
Our products are either sold, or can be sold, by the same retailers and
distributors in our marketing channel. We also sell product directly to OEM
customers. The Company evaluates its product lines under the functional
categories of analog and digital products. Sales by functional category are as
follows:
Three months ended December 31,
2004 2003
---- ----
Product line sales
- ------------------
Analog sales $18,401,809 $ 14,429,228
Digital sales 4,958,633 3,801,070
----------- ------------
$23,360,442 $ 18,230,298
=========== ============
The Company sells its products through an international network of distributors
and retailers. European sales accounted for 60% and 75% of sales for the three
moths ended December 31, 2004 and 2003. Sales percent by geographic region are
as follows:
Three months ended December 31 ,
2003 2004
---- ----
Sales percent by geographic region
- ----------------------------------
United States 38% 24%
Europe 60% 75%
Asia 2% 1%
---- ----
Total 100% 100%
==== ====
Note 9. Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", ("APB 25"), and related interpretations in
accounting for its employee stock options. Under APB 25, no compensation expense
is recorded so long as the quoted market price of the stock at the date of the
grant is equal to the exercise price.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of Financial Accounting Standards Board Statement No. 123
"Accounting for Stock-Based Compensation", ("FAS 123"). The weighted average
fair value of options outstanding
14
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
during the three months ended December 31, 2004 and December, 31 2003 was $1.15
to $1.39 and $0.43, respectively. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions for the three months ended December 31,
2004 and December 31, 2003: risk-free interest rates of 4.25%, volatility factor
of the expected market price of the Company's Common Stock of 35%, assumed
dividend yield of 0%, and a weighted-average expected life of the option of 5
years.
Under the accounting provisions of FAS 123, the Company's net income and net
income per share would have been adjusted to the pro forma amounts indicated
below:
December 31, December 31,
2004 2003
----------- ---------
Net income as reported....................... $ 1,263,689 $ 992,860
Deduct: Total stock-based employee compensation expense
determined under fair value method, net of related taxes ... (8,924) (24,788)
----------- ---------
Pro forma net income.......................... $ 1,254,765 $ 968,072
=========== =========
Net income per share - as reported:
Basic......................................... $ 0.14 $ 0.11
=========== =========
Diluted....................................... $ 0.13 $ 0.11
=========== =========
Net income per share - pro forma:
Basic......................................... $ 0.14 $ 0.11
=========== =========
Diluted....................................... $ 0.13 $ 0.10
=========== =========
Note 10. Arrangements with Off-Balance Sheet Risk - Guarantees
FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness
of Others, clarified the requirements of SFAS No. 5, Accounting for
Contingencies, relating to a guarantor's accounting for and disclosures of
certain guarantees issued. FIN 45 requires enhanced disclosures for certain
guarantees. It also requires certain guarantees that are issued or modified
after December 31, 2002, including certain third-party guarantees, to be
initially recorded on the balance sheet at fair value. For guarantees issued on
or before December 31, 2002, liabilities are recorded when and if payments
become probable and estimable. FIN 45 has the general effect of delaying
recognition for a portion of the revenue for product sales that are accompanied
by certain third-party guarantees. The financial statement recognition
provisions became effective prospectively beginning January 1, 2003. The Company
has not entered into any new guarantees and the Company has been released from
the one guarantee it was subject to prior to February 17, 2004.
15
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company occupies a facility located in Hauppauge New York which is used for
its executive offices and for the testing, storage and shipping of our products.
In February 1990, Hauppauge Computer Works, Inc., a wholly-owned subsidiary of
ours ("HCW"), entered into a lease (the "1990 Lease"), with Ladokk Realty Co., a
real estate partnership which is principally owned by Kenneth Plotkin, our
Chairman of the Board, Chief Executive Officer, President, Chief Operating
Officer and Vice President of Marketing and the holder of approximately 9.4% of
our Common Shares as of December 31, 2004, Dorothy Plotkin, the wife of Kenneth
Plotkin, holder of approximately 6.1% of our Common Shares as of December 31,
2004 and Laura Aupperle, believed by us to be the holder of approximately 12.8%
of our Common Shares, including Common Shares attributed to the Estate of
Kenneth R. Aupperle. Ladokk Realty Co., LLC is the successor to Ladokk Realty
Co. As of February 2004, the 1990 Lease provided for annual rent of
approximately $454,000, payable monthly, and subject to 5% annual increases
effective February 1st of each year. We were also obligated to pay real estate
taxes and operating costs of maintaining the premises subject to the 1990 Lease.
Until February 17, 2004, the premises subject to such lease were subject to two
mortgages guaranteed by us.
On February 17, 2004, HCW and Ladokk terminated the 1990 Lease and HCW entered
into a new lease agreement with Ladokk Realty Co., LLC (the "2004 Lease"). The
2004 Lease term is for five years and terminates on February 16, 2009. The
annual rent under the 2004 Lease is $360,000, payable monthly. We are also
obligated to pay real estate taxes and operating costs of maintaining the
premises subject to such lease. Concurrently with the new lease, Ladokk
completed a refinancing of its mortgages, and the new lender did not require HCW
to sign a guarantee. Accordingly, we no longer guarantee the landlord's
mortgages.
Our Audit Committee is in the process of evaluating the 2004 Lease.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Month Period ended December 31, 2004 Compared to December 31, 2003
- ------------------------------------------------------------------------
Results of operations for the three months ended December 31, 2004 compared to
December 31, 2003 are as follows:
Three Three
Months Months
Ended Ended Variance Percentage of sales
12/31/04 12/31/03 $ 2004 2003 Variance
-------- ----------- - ---- ---- --------
Net Sales $ 23,360,442 $18,230,298 $5,130,144 100.0% 100.0% 0
Cost of sales 18,049,079 13,648,675 4,400,404 77.26% 74.87% 2.39%
------------ ----------- ---------- ------ ------ -----
Gross Profit 5,311,363 4,581,623 729,740 22.74% 25.13% -2.39%
Gross Profit % 22.74% 25.13% -2.39%
Costs:
Sales & Marketing 2,431,591 2,125,709 305,882 10.41% 11.66% -1.25%
Technical Support 120,324 108,455 11,869 0.51% 0.59% -0.08%
General & Administrative 875,140 886,452 (11,312) 3.75% 4.87% -1.12%
------------ --------- ---------- ------ ------ -----
Total Selling, General and
Administrative costs 3,427,055 3,120,616 306,439 14.67% 17.12% -2.45%
Research & Development 557,530 410,274 147,256 2.39% 2.25% 0.14%
------------ --------- ---------- ------ ------ -----
Total operating costs 3,984,585 3,530,890 453,695 17.06% 19.37% -2.31%
------------ --------- ---------- ------ ------ -----
Net operating income 1,326,778 1,050,733 276,045 5.68% 5.76% -0.08%
Other income (expense)
- ----------------------
Interest income 1,511 1,739 (228) 0.01% 0.01% 0.00%
Foreign currency (8,600) (11,333) 2,733 -0.04% -0.06% 0.02%
------------ --------- ---------- ------ ----- -----
Total other income (expense) (7,089) (9,594) 2,505 -0.03% -0.05% 0.02%
------------ --------- ---------- ------ ----- -----
Income before taxes 1,319,689 1,041,139 278,550 5.65% 5.71% -0.06%
Taxes on income 56,000 48,279 7,721 0.24% 0.26% -0.02%
------------ --------- ---------- ------ ----- -----
Net income $ 1,263,689 $ 992,860 $ 270,829 5.41% 5.45% -0.04%
============ =========== ========== ===== ===== ======
Net sales for the three months ended December 31, 2004 increased $5,130,144
compared to the three months ended December 31, 2003 as shown on the table
below.
Increase
Three Months Three Months Increase (Decrease) (Decrease) Geographic region
Location Ended 12/31/04 Ended 12/31/03 Dollar Variance Variance % 2004 2003
- -------- -------------- -------------- ------------------ ---------- ---- ----
Domestic $ 8,853,575 $4,352,730 $4,500,845 103% 38% 24%
Europe 14,149,483 13,626,714 522,769 4% 60% 75%
Asia 357,384 250,854 106,530 42% 1% 1%
------- ------- ------- --- ---- ----
Total $23,360,442 $18,230,298 $5,130,144 28% 100% 100%
=========== =========== ========== === ==== ====
17
Results of operations-three month period ended December 31, 2004 compared to
December 31,2003-continued
- --------------------------
The primary factors contributing the sales increase were:
o Increased volume of WinTV-PVR-150 (Amity2) OEM sales due to increased
program volume
o Stronger demand for retail WinTV-PVR-150/350 products
o Increased DEC sales to UK and German customers for promotional rollout
of terrestrial product and conversion to digital broadcasts
o Increased WinTV-PVR-USB2 sales due to introduction of lower cost model
o Higher WinTV-USB analog TV tuner sales for the laptop market
o Introduction of Portable MediaMVP portable media player in Europe
o Increase in our average Euro to USD contract rate of about 10.9%
(1.2199 versus 1.1002) for the three months ended December 31, 2004
compared to the three months ended December 31, 2003, which yielded
higher converted Euro to USD sales
The sales increases were offset by the following negative trends:
o Decrease in MediaMVP sales compared with the year ago period which
included the initial product rollout shipments to retailers and
distributors
o Decrease in WinTV PCI board analog product sales
o Decrease in DVB satellite (DVB-S) sales in Europe
Net sales to domestic customers were 38% of net sales for the three months ended
December 31, 2004 compared to 24% for the three months ended December 31, 2003.
Net sales to European customers were 60% of net sales compared to 75% for the
same period of last year. Net sales to Asian customers were 2% and 1% for the
three months ended December 1, 2004 and 2003.
Gross profit increased $729,740 for the three months ended December 31, 2004
compared to the prior year's first quarter.
The increases and (decreases) in the gross profit are detailed below:
Increase
(decrease)
----------
Due to increased sales $1,676,725
Gross profit changes due to product sales mix (495,742)
Effect on gross profit due to lower margin OEM sales (216,333)
Due to increases in labor related and other costs (234,910)
--------
Total increase in gross profit $729,740
========
18
Results of operations-three month period ended December 31, 2004 compared to
December 31,2003-continued
- --------------------------
Gross profit percentage for the three months ended December 31, 2004 was 22.74%
compared to 25.13% for the three months ended December 31, 2003, a decrease of
2.39%.
The increases and (decreases) in the gross profit percent are detailed below:
Increase
(decrease)
---------
Gross profit changes due to product sales mix (2.11)%
Effect on gross profit due to lower margin OEM sales (0.93)%
Labor related and other costs 0.65 %
-----
Net decrease in gross profit % (2.39)%
======
The decrease in the gross profit percent of 2.39% for the three months ended
December 31, 2004 compared to the three months ended December 31, 2003 was
primarily due to:
o Sales growth of OEM product sales: Gross profit for OEM products is
lower than our retail products, but do not require the sales,
promotion and customer support required of our retail sales.
o Digital Entertainment Center sales "DEC": Due to the transition in
some parts of Europe to digital broadcasts, certain DEC products were
promotionally priced to coincide with the marketing opportunities that
surfaced during the transition. DEC products were priced with low
profit margins to support these retail promotions.
o Labor related and other costs contributed to a 0.65% increase in gross
profit percent compared to three months ended December 31, 2003. The
increase in sales of 28.14% over last the three months ended December
31, 2003 coupled with a smaller increase in labor related and other
costs of 17.06% compared to the prior year was the driving force in
the 0.65% increase.
The chart below illustrates the components of Selling, General and
Administrative expenses:
Three months ended December 31,
Dollar Costs Percentage of Sales
------------------------------------------------------------------------------------
Increase Increase
(Decrease) 2004 2003 (Decrease)
2004 2003 -------- ---- ---- --------
---- ----
Sales and Marketing $2,431,591 $2,125,709 $ 305,882 10.41% 11.66% -1.25%
Technical Support 120,324 108,455 11,869 0.51% 0.59% -0.08%
General and Administrative 875,140 886,452 (11,312) 3.75% 4.87% -1.12%
--------- ---------- ---------- ----- ----- ------
Total $3,427,055 $3,120,616 $ 306,439 14.67% 17.12% -2.45%
========== ========== ========== ====== ====== ======
19
Results of operations-three month period ended December 31, 2004 compared to
December 31,2003-continued
- --------------------------
Selling, General and Administrative expenses increased $306,439 from the prior
year's first quarter. As a percentage of sales, Selling, General and
Administrative expenses decreased by 2.45% when compared to the three months
ended December 31, 2003.
The increase in Sales and Marketing expense of $305,882, which accounted for
approximately 99.8% of the total increase in Selling, General and Administrative
expenses, was mainly due to:
o Increases caused by the strengthening of the Euro to the U.S dollar of
$132,173, which accounted for about 43.2% of the total increase. The
average Euro to USD conversion rate was $1.2967 for the three months
ended December 31, 2004 compared to $1.1909 for the three months ended
December 31, 2003
o Higher advertising epxenses of $105,552 due to higher sales based
co-operative advertising
o Increased commission expense of $78,111 due to higher sales
The decrease in General and Administrative expenses of $11,312 was primarily due
to:
o Lower executive compensation of $45,000, mainly due to vacant
Officer's position
o Lower legal fees as a result of completion of arbitration and
litigation of $33,778
o Higher Directors fees of $28,323
o Higher consulting fees of $31,000 due to start of 404 Compliance work
and Transfer Price study
Research and Development expenses increased $147,256. The increase was mainly
due to
o Higher compensation $41,215 attributable to the research and
development facility in Taiwan, which began operations during March
2004
o Higher compensation costs of $55,136 due to additional engineers
o Increased prototype production costs of $20,956 due to higher volume
of new product and product enhancement programs
Other income (expense)
Net other expense for the three months ended December 31, 2004 was $7,089
compared to net other expense of $9,594 for the three months ended December 31,
2003 as detailed below:
Three months ended December 31,
2003 2004
---- ----
Interest income $ 1,511 $ 1,739
Foreign currency transaction gains (losses) (8,600) (11,333)
--------- --------
Total other income (expense) $ (7,089) $ (9,594)
========= ========
20
Results of operations-three month period ended December 31, 2004 compared to
December 31,2003-continued
- --------------------------
Re-measurement of accounts denominated in currencies other than the Euro We
follow the rules prescribed in paragraph 16 of SFAS 52 "Foreign Currency
Translation", which states that accounts denominated in a currency other than an
entity's functional currency, excluding inter-company accounts which are long
term in nature, need to be re-measured into the entity's functional currency,
and any gain or loss from this re-measurement are included in the determination
of net income and are booked as a component of other income (loss) under the
description "foreign currency".
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. Since the Euro denominated accounts on HDE Sarl's
books result in a net asset position (total Euro assets are in excess of Euro
liabilities), an increase in the Euro value results in a deferred gain for the
translation of Euro accounts to U.S. Dollars. The Company had a translation gain
of $1,074,910 recorded on the balance sheet as of September 30, 2004. For the
three months ended December 31 2004, the Company recorded on the balance sheet
deferred translation gains $584,261 resulting in a translation gain of
$1,659,171 recorded as a component of accumulated other comprehensive income as
of December 31, 2004.
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 SFAS 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. The
Company had mark to market losses of $99,399 recorded on the balance sheet as of
September 30, 2004. For the three months ended December 31, 2004, the Company
recorded, as component of other comprehensive income, a mark to market loss of
$279,791, resulting in a mark to market loss of $379,190 for contracts open as
of December 31, 2004.
As stated above, accumulated other comprehensive income (loss) consists of two
components:
o Translations gains and losses
o FAS 133 mark to market gains and losses on our open foreign exchange
contracts
21
Results of operations-three month period ended December 31, 2004 compared to
December 31,2003-continued
- --------------------------
The table below details the gains and losses recorded for the components that
make up accumulated other comprehensive income (loss):
Balance as October to December Balance as of
Accumulated other comprehensive income
- -------------------------------------- of Sept. 30, 2004 2004 Gains (losses) December 31, 2004
----------------- ------------------- -----------------
Translation gains $1,074,910 $584,261 $1,659,171
FAS 133 mark to market adjustments (99,399) (279,791) (379,190)
------ ------- -------
$975,511 $304,470 $1,279,981
========== ======== ==========
Tax provision
Our net tax provision for the three months ended December 31, 2004 and 2003 is
as follows:
Three months ended December 31,
2004 2003
------ ------
Tax attributable to U.S operations $ 127,000 $ (73,300)
Tax expense European operations 41,000 40,779
State taxes 15,000 7,500
Net operating loss utilization (127,000) 73,300
--------- ---------
Net tax provision $ 56,000 $ 48,279
========= =========
For the last five fiscal years, our domestic operation has incurred losses. We
analyzed the future realization of our deferred tax assets as of December 31,
2004, and although our domestic operation reported a profit for the three months
ended December 31, 2004, due to the seasonal nature of the business it is
uncertain at this time whether our domestic operation will have a profit for the
full year. It light of this, we did not make any adjustments to our valuation
allowance for the quarter ended December 31, 2004.
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 $1,263,689, for the three months ended December 31, 2004, which
resulted in basic net income per share of $0.14 and diluted net income per share
of $0.13 on weighted average basic and diluted shares of 9,277,944 and
9,949,381, respectively, compared to a net income of $992,860 for the three
months ended December 31, 2003, which resulted in basic and diluted net income
per share of $0.11 on weighted average basic and diluted shares of 8,880,651 and
9,370,081, respectively.
Options to purchase 98,757 and 485,337 shares of common stock at prices ranging
$5.25 to $10.06 and $2.81 and $10.06, respectively, were outstanding for the
three month periods ending December 31, 2004 and 2003, respectively, but were
not included in the computation of diluted earnings per share because they were
anti-dilutive.
22
Results of operations-three month period ended December 31, 2004 compared to
December 31,2003-continued
- --------------------------
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 65%, 68% and 73 % of sales for the
years ended September 30, 2004, 2003 and 2002, 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 seasonal nature of our retail sales.
Liquidity and Capital Resources
Our cash, working capital and stockholders' equity position is disclosed below:
December 31, 2004 September 30, 2004
----------------- ------------------
Cash $8,427,585 $8,661,589
Working Capital 15,481,792 13,760,121
Stockholders' Equity 16,077,495 14,327,425
The Company had cash and cash equivalents as of December 31, 2004 of $8,427,585,
a decrease of $234,004 from September 30, 2004.
The decrease in cash was due to:
Sources of cash:
Net income adjusted for non cash items $1,318,013
Increase in accounts payable other current liabilities 1,942,135
Proceeds from employee stock purchases 199,359
Less cash used for:
Increase in accounts receivable (1,308,438)
Increase in inventories (2,273,237)
Capital equipment purchases (82,723)
Purchase of treasury stock (17,448)
Increase in prepaid expenses and other current assets (11,665)
---------
Net cash decrease
$(234 004)
==========
23
Results of operations-three month period ended December 31, 2004 compared to
December 31,2003-continued
- --------------------------
Net cash of $333,192 used in operating activities was primarily due to a
increases in accounts receivable, inventory and prepaid expenses and other
current assets of $1,308,438 , $2,273,237 and $11,665 respectively, and reflect
increases required to support the seasonal high of our first fiscal quarter
sales. These uses of cash was offset by net income adjusted for non cash items
of $1,318,013 and increases in accounts payable and other current liabilities of
$1,942,135.
Cash of $82,723 and $17,448 was used to purchase fixed assets and repurchase
treasury stock. Proceeds from the stock purchased by employees through the
employee stock purchase plan provided additional cash of $199,359.
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, 2004, we held 572,067
treasury shares purchased for $1,601,761 at an average purchase price of
approximately $2.80 per share.
We believe that our cash and cash equivalents as of December 31, 2004 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 , 2004:
Payments due by period
Contractual obligations Total Less than 1 year 1-3 years 3 to 5 years
- ----------------------- ----- ---------------- ---------- ------------
Operating lease obligations $ 1,631,875 $ 406,967 $ 1,179,908 $ 45,000
=========== ========= =========== ========
Critical Accounting Policies and Estimates
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
24
Results of operations-three month period ended December 31, 2004 compared to
December 31,2003-continued
- --------------------------
Critical Accounting Policies and Estimates-continued
o Hedging program for European subsidiary inventory purchases
denominated in U.S. dollars
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 approximately 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
For each of the past three fiscal years, over 60% of the Company's sales were
generated by our European subsidiary and were:
o Invoiced in local currency-primarily the Euro
o Collected in local currency-primarily the Euro
25
Results of operations-three month period ended December 31, 2004 compared to
December 31,2003-continued
- --------------------------
Critical Accounting Policies and Estimates-continued On the supply side, since
we predominantly deal with North American and Asian suppliers and contract
manufacturers, approximately 75% of our inventory required to support our
European sales are purchased and paid in U.S. Dollars.
The combination of sales billed in Euros supported by inventory purchased in
U.S. dollars results in an absence of a natural local currency hedge.
Consequently, our financial results are subject to market risks resulting from
the fluctuations in the Euro to U.S. Dollar exchange rates.
We attempt to reduce these risks by entering into foreign exchange forward
contracts with financial institutions. The purpose of these forward contracts is
to hedge the foreign currency market exposures underlying the U.S. Dollar
denominated inventory purchases required to support our European sales.
We do not try to hedge against all possible foreign currency exposures because
of the inherent difficulty in estimating the volatility of the Euro. The
contracts we procure are specifically entered into to as a hedge against
forecasted or existing or foreign currency exposure. We do not enter into
contracts for speculative purposes. Although we maintain these programs to
reduce the short term impact of changes in currency exchange rates, long term
strengthening or weakening of the U.S. dollar against the Euro impacts our
sales, our gross profit, operating income and retained earnings. Factors that
could impact the effectiveness of our hedging program are:
o volatility of the currency markets
o availability of hedging instruments
o accuracy of our inventory forecasts
Additionally, there is the risk that foreign exchange fluctuations will make our
products less competitive in foreign markets, which would substantially reduce
our sales.
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, with the exception of gains and
losses that are attributable to inter-company accounts which are long term in
nature, we are obligated to include these gains and losses on our statement of
operations, which we report in other income or expense under the description
"foreign currency".
26
Results of operations-three month period ended December 31, 2004 compared to
December 31,2003-continued
- --------------------------
Critical Accounting Policies and Estimates-continued
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.
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.
Recent Accounting Pronouncements
- --------------------------------
On December 15, 2004 , the Financial Accounting Standards Board ("FASB") issued
a revised SFAS No. 123R "Share Based Payment" This statement requires the
company to measure all employee stock based compensation, such as the options
granted under the Company's stock options plans, using a fair value method and
to recognize such expense in our
27
Recent Accounting Pronouncements-continued
- ------------------------------------------
consolidated financial statements. The adoption of SFAS No. 123R will reduce the
Company's net income, but will not affect the Company's cash flows. The
statement is effective for interim or annual periods beginning after June 15,
2005.
The Company is evaluating the effect this statement will have on its operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
- -------------------------------------------------------------------
For each of the past three fiscal years, over 60 % of the Company's sales were
generated by our European subsidiary and were:
o Invoiced in local currency-primarily the Euro
o Collected in local currency-primarily the Euro
On the supply side, since we predominantly deal with North American and Asian
suppliers and contract manufacturers, approximately 75% of our inventory
required to support our European sales are purchased and paid in U.S. Dollars.
The combination of sales billed in Euros supported by inventory purchased in
U.S. dollars results in an absence of a natural local currency hedge.
Consequently, our financial results are subject to market risks resulting from
the fluctuations in the Euro to U.S. Dollar exchange rates.
We attempt to reduce these risks by entering into foreign exchange forward
contracts with financial institutions. The purpose of these forward contracts is
to hedge the foreign currency market exposures underlying the U.S. Dollar
denominated inventory purchases required to support our European sales.
We do not try to hedge against all possible foreign currency exposures because
of the inherent difficulty in estimating the volatility of the Euro. The
contracts we procure are specifically entered into to as a hedge against
forecasted or existing or foreign currency exposure. We do not enter into
contracts for speculative purposes. Although we maintain these programs to
reduce the short term impact of changes in currency exchange rates, long term
strengthening or weakening of the U.S. dollar against the Euro impacts our
sales, our gross profit, operating income and retained earnings. Factors that
could impact the effectiveness of our hedging program are:
28
Item 3. Quantitative and Qualitative Disclosures about Market Risks-continued
- -----------------------------------------------------------------------------
Derivatives and Hedging Activities-continued
o volatility of the currency markets
o availability of hedging instruments
o accuracy of our inventory forecasts
Additionally, there is the risk that foreign exchange fluctuations will make our
products less competitive in foreign markets, which would substantially reduce
our sales.
As of December 31, 2004, we had foreign currency contracts outstanding of
approximately $5,316,000 against the delivery of the Euro. The contracts expire
through May 2005. Our accounting policies for these instruments designate such
instruments as cash flow hedging transactions. We do not enter into such
contracts for speculative purposes. We record all derivative gains and losses on
the balance sheet as a component of stockholders' equity under the caption
"Accumulated other comprehensive income (loss)". The Company recorded a deferred
loss of $279,791 for the three months ended December 31, 2004. As of December
31, 2004, a deferred loss of $379,190, reflecting the cumulative mark to market
loss of our derivatives, was recorded on our balance sheet as a component of
accumulated other comprehensive income in our equity section.
We use the average monthly forward contract exchange rate to translate our Euro
denominated sales into our U.S. dollar reporting currency. For the three month
period ending December 31, 2004, the use of the monthly average spot rate
instead of the average monthly forward contract exchange rate to value Euro
denominated sales would have resulted in an increase in sales of $640,815. This
sales increase is related to our contracts that closed during these periods and
the changes in the fair value of our derivative contracts. For the three month
period ending December 31, 2003, the use of the monthly average spot rate
instead of the average monthly forward contract exchange rate to value Euro
denominated sales would have resulted in a sales increase of $805,553.
Item 4. Controls and Procedures
- -------------------------------
Our Chief Executive Officer and Chief Financial Officer conducted an evaluation
of the effectiveness of our disclosure controls and procedures. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of December 31,
2004 in alerting them in a timely manner to material information required to be
included in our SEC reports. In addition, no change in our internal control over
financial reporting occurred during the fiscal quarter ended December 31, 2004
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
29
Special Note Regarding Forward Looking Statements
This Quarterly Report contains forward-looking statements as that term is
defined in the federal securities laws. The events described in forward-looking
statements contained in this Quarterly Report may not occur. Generally these
statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of our plans or strategies, projected or
anticipated benefits from acquisitions to be made by us, or projections
involving anticipated revenues, earnings or other aspects of our operating
results. The words "may," "will," "expect," "believe," "anticipate," "project,"
"plan," "intend," "estimate," and "continue," and their opposites and similar
expressions are intended to identify forward-looking statements. We caution you
that these statements are not guarantees of future performance or events and are
subject to a number of uncertainties, risks and other influences (including, but
not limited to, those set forth in our Annual Report on Form 10-K for the year
ended September 30, 2004), many of which are beyond our control, that may
influence the accuracy of the statements and the projections upon which the
statements are based. Any one or more of these uncertainties, risks and other
influences could materially affect our results of operations and whether forward
looking statements made by us ultimately prove to be accurate. Our actual
results, performance and achievements could differ materially from those
expressed or implied in these forward-looking statements. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
from new information, future events or otherwise.
PART II. OTHER INFORMATION
- ----------------------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below summarized repurchases of our common stock under our stock
repurchase program:
Maximum
Total Number Number
Total Average of Shares of Shares
Number Price Purchased as that May Yet
of Shares Paid per Part of Publicly Be Purchased
Period Purchased Share Announced Plan Under the Plan
------ --------- ----- -------------- --------------
Purchases as of September 30, 2004 567,067 $ 2.79 567,067 282,933
October 1 to October 31 5,000 3.49 5,000 277,933
----- ---- ----- -------
Purchases as of December 31, 2004 572,067 $ 2.80 572,067 277,933
On November 8, 1996, we approved a stock repurchase program. The program
authorizes the Company to repurchase up to 850,000 shares of our own stock. The
stock repurchase program was extended by a resolution of our Board of Directors
on December 17, 1997.
30
Item 6. Exhibits and Reports on Form 8-K
Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on form 8-K
None
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAUPPAUGE DIGITAL, INC.
Registrant
Date: February 14, 2005 By /s/ Kenneth Plotkin
------------------ -------------------------------------
KENNETH PLOTKIN
Chief Executive Officer and Director
Date: February 14, 2005 By /s/ Gerald Tucciarone
----------------- -------------------------------------
GERALD TUCCIARONE
Treasurer and Chief
Financial Officer
32