SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(x) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002
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( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 1-13550
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HAUPPAUGE DIGITAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 11-3227864
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
91 Cabot Court, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (631) 434-1600
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Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
$.01 par value Common Stock
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act of 1934 during the past twelve (12)
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to the filing requirements for the past
ninety (90) days. YES X NO
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ ]
State registrant's revenues for its most recent fiscal year: $42,796,726
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 19, 2002 was approximately $7,361,431. Non-affiliates
include all stockholders other than officers, directors and 5% stockholders of
the Company. Market value is based upon the price of the Common Stock as of the
close of business on December 19, 2002 which was $1.15 per share as reported by
NASDAQ.
As of December 11, 2002, the number of shares of Common Stock outstanding was
8,854,758 (exclusive of treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Part III which includes Item 10 (Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the Exchange Act), Item 11
(Executive Compensation), Item 12 (Security Ownership of Certain Beneficial
Owners and Management), and Item 13 (Certain Relationships and Related
Transactions) will be incorporated in our Proxy Statement to be filed within 120
days of September 30, 2002 and are incorporated herein by reference.
PART I
Special Note Regarding Forward Looking Statements
Certain statements in this Report 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 our actual results, performance or achievements,
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 others, those discussed under the
subsection entitled "Risk Factors" under Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations. In addition to
statements which explicitly describe such risks and uncertainties, readers are
urged to consider statements including the terms "believes," "belief,"
"expects," "plans," "anticipates," "feel", or "intends," and derivations thereof
and similar words to be uncertain and forward-looking. All cautionary statements
made in this Form 10-K should be read as being applicable to all related
forward-looking statements wherever they appear.
Item 1. BUSINESS
All references herein to "us", "we" or "the Company" include Hauppauge Digital,
Inc., our wholly-owned subsidiaries and their subsidiaries, unless otherwise
indicated or the context otherwise requires.
We engineer, develop, subcontract for manufacture, market and sell products for
the personal computer ("PC") market and the Apple(R) Macintosh(R) market. We
have three primary product lines, which are sold under the WinTV(R) name: analog
TV receivers, digital TV receivers and personal video recorders.
Our analog TV receiver product line allows PC users to watch cable TV on their
PC screen in a resizable window. Our WinTV digital TV receivers can receive
digital TV transmissions and display the digital TV show
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in a window on the user's PC screen. Our PC-based personal video recording
("PVR") products allow PC users to watch and record TV shows with instant replay
and program pause functions, and to burn their TV recordings onto CD or DVD
media.
We believe the most compelling reason for using our products is to watch TV
shows while performing other tasks on a PC. For example, stockbrokers may watch
a financial TV program in a small window on their PC monitor while viewing stock
quotes or accessing customer accounts. With a single click of the mouse, the TV
program window may be enlarged for full screen viewing. The home user, while
surfing the Internet, doing school work, composing E-mails, or performing any
multitude of other PC activities, may simultaneously watch music videos with our
WinTV(R) products. In addition, our WinTV(R) products can also receive certain
data that may be transmitted along with the TV signal, called "Data
Broadcasting".
In fiscal 2002, we shipped our 3.5 millionth WinTV(R) product.
We sell our products through computer and electronic retailers, computer
products distributors and original equipment manufacturers ("OEMs"). Computer
and electronics retailers sell our products to end users for use with their PCs
or Apple(R) Macintosh(R) computers. Distributors typically sell our products to
smaller retail chains and retail stores, through catalogs and to value added
resellers ("VAR"). OEMs typically bundle our products in their own products for
sale to end users.
Our Strategy
Since our entry into the PC video market in 1991, management believes that we
have become the world leader in bringing TV content to PCs by focusing on four
primary strategic fronts:
o innovating and diversifying our products
o introducing new and desirable features in our products
o expanding our worldwide sales and distribution channels
o forging strategic relationships with key industry players
As more people are looking to their PCs for a total entertainment experience, we
believe that our products will enhance the capabilities of the multimedia PC to
become a one-stop complete integrated entertainment system. We feel our current
and future products have the potential to be the most ubiquitous feature in the
PC based home entertainment network.
Our current product line includes a wide range of analog, digital and PVR
products covering multiple price points. In addition, different versions of our
products incorporate the unique requirements of various national and regional TV
standards and the various methods of receiving TV transmissions. Many of our
products also allow users to enjoy:
o personal video teleconferencing
o creating and editing video for the internet and videography
o FM radio
o an overall user friendly software architecture
o digital TV programs on an existing analog TV set
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Our engineering group is continually working on updating our current models to
add new and innovative features that the marketplace seeks while remaining
vigilant in keeping our products compatible with new operating systems. This
work is done in addition to our research and development efforts in designing,
planning and building new products.
We believe that strategic relationships with key suppliers, OEMs, broadcasters,
internet and e-commerce solutions providers give us important advantages in
developing new technologies and marketing our products. By jointly working and
sharing our engineering expertise with a variety of other companies, we are able
to leverage our investment in research and development and minimize time to
market.
Our international sales and marketing team cultivates a variety of distribution
channels comprising retail stores, distributors, resellers, OEMs, web stores and
third-party catalogs. We work closely with our retailers to enhance sales
through joint advertising campaigns and promotions. We believe that rapidly
developing and growing our international presence give us an important strategic
position and allows us to benefit many times over from investments in product
development, and more firmly establishes the WinTV(R) brand name in the
international marketplace.
We seek to maintain and improve our profit margins by, among other things,
outsourcing our production to contract manufacturers best suited for the type
and volume of our needs. We also leverage worldwide supplier relationships to
assist us in receiving competitive prices for the component parts we buy. We
believe this two-tiered approach allows us to be the lowest cost / highest
quality producer in our marketplace. Successfully engineering products to have
low production costs, commonality of parts and the use of one platform for
multiple models are other important ways that we believe our technology
leadership contributes to the bottom line.
Products
WinTV(R) Products
Our analog, digital and PVR WinTV(R) products enable a PC user to watch TV in a
resizable window on a PC. Our software control functions such as channel change,
volume adjustment, freeze frame, and channel scan. All required functions, such
as video digitizing, windowing, color space conversion and chroma keying, are
performed on the WinTV(R) board, in the external WinTV(R)-USB, or in the
operating software. Our products include audio functions so that sound can be
heard while watching TV or video. The audio can be connected to speakers or to a
PC's sound card. We also have a line of products that allows you to capture and
edit video.
Our WinTV(R) products fall into the following categories:
o Analog TV Receivers
o Digital TV Receivers
o Personal Video Recording products for PCs
These products are either internally plugged into one of the computer's unused
expansion slots on the motherboard (internal boards) or attached to the computer
externally through the USB port. We further tailor our products to the various
international standards for video transmission including, NTSC, PAL I, PAL B/G
and Secam.
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1. Analog TV Receiver Products
Our analog products include a 125 channel cable ready TV tuner with automatic
channel scan and a video digitizer which allows the user to capture still and
motion video images. Some of our analog products allow the user to listen to FM
radio, video-conference over the internet, enjoy the benefits of stereo surround
sound with Dolby(TM)-Pro Logic and control these functions with a handheld
remote control. In Europe, our WinTV(R) products can be used to receive teletext
data broadcasts, which allows the reception of digital data that is transmitted
along with the "live" TV signal.
The WinTV(R)-GO is our low-cost, single slot internal board. Apart from allowing
users to watch TV on their PC, it enables users to snap still and motion video
images and videoconference over the internet with the addition of a camera or
camcorder. Step up models from the WinTV(R)-GO add features such as FM radio and
a remote control.
Our premium analog product is the WinTV(R)-Theater. In addition to allowing
users to watch TV on their PC, the Theater board allows users to enjoy
Dolby(TM)-Pro Logic surround sound over up to 5 speakers plus Virtual Dolby(TM)
surround sound, listen to FM stereo and snap still and motion video images and
videoconference over the internet. Included with the board is a remote control
for both TV and FM stereo.
Some WinTV(R) analog products are available as external devices which connect to
the PC through the USB port. The board included in the USB models is encased in
an attractive plastic shell making USB models freely portable from PC to PC and
from one laptop or notebook computer to another.
2. Digital TV Receiver Products
Destination Digital TV, a publication of the National Association of
Broadcasters, recently reported in its October 2002 and November 2002 issues
(http://www.nab.org/newsroom/issues/digitaltv/DDTV/) that a survey conducted by
the National Association of Broadcasters amongst stations found that 62% of US
television households are now in markets where local broadcasters are delivering
5 or more digital TV signals with 601 digital TV stations on air in 615 markets
that include 94% of television households. In the past year, 386 stations went
digital. In addition to the digital signal broadcast by the local stations, the
major networks are committed to providing more high-definition TV ("HDTV")
programming in the near future. HDTV programming increased 50% within the last
year and there are 2,000 hours of prime-time shows, sporting events and movies
scheduled to be broadcasted in HDTV in the current 2002 - 2003 season.
We have foreseen this trend and currently offer both digital and High Definition
Digital TV products ("HDTV Receiver Products"), which fully exploit their
super-crisp images, superior sound and several other benefits.
Digital TV Receivers for the U.S. and North America
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Our internal WinTV(R)-D board allows users to watch digital TV or cable TV in a
re-sizeable window on their PC. It receives all 18 U.S. digital TV formats and
includes a super video ("S-Video") output to watch digital TV on a large screen
TV set, a 5-channel Dolby(TM) Digital surround sound (AC3) decoder and a remote
control. The WinTV(R)-D can also receive analog TV from cable TV or a TV
antenna.
Our WinTV(R)-HD has similar features of the WinTV(R)-D except that it provides
the user with video in a high definition format. This product enables users to
experience high definition TV viewing quality without purchasing a costly high
definition TV. The WinTV-HD can display high definition television on a computer
monitor or a plasma or other high definition TV monitor.
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Digital TV Receivers for the International Market
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Our WinTV(R)-DVB-s is designed for receiving, decoding and displaying digital
satellite broadcasts on a PC. Used with a modem, it can facilitate connection to
a satellite ISP (Internet Service Provider) to obtain high speed internet
access. Our WinTV(R)-DVB-s product can receive free channels without the need
for any specialized additional equipment. However, to receive 'subscriber' or
'pay per view' channels, an optional common interface module that we sell is
required together with a decryption card that is available for a fee from the
provider of these channels. By contrast, the WinTV(R)-DVB-t has all the features
of the WinTV(R)-DVB-s except that it receives its signal from a terrestrial
source. These products are very popular in Europe and are available in the form
of external devices or internal boards. In fiscal 2002, we began shipping
internationally our WinTV(R)-Nova-CI, a lower cost European satellite receiver
and the common interface module which enables pay TV channels to be received and
decoded.
3. Personal Video Recorder Products for PCs
Our WinTV(R)-PVR products include all of the features of our analog products and
contain both an internal and external TV receiver which adds the ability to
record TV shows or any video to a PC's hard disk. The recording uses a high
quality hardware MPEG 2 encoding built onto the WinTV(R)-PVR device. This
technology allows a typical desktop computer system, to record tens to hundreds
of hours of video.
The WinTV(R)-PVR user can record a TV show to the hard disk using a TV
scheduler, and then play it back, and also edit and record it onto CD-ROM or
DVD-ROM using a CD or DVD writer for playback on a home DVD player or on a PC.
The user can re-size the window either during viewing, recording or playback.
Our WinTV(R)-PVR products also provides for instant replay and is available in
both an internal and external USB models.
In fiscal 2002, we introduced several new PVR models with new price points and
feature sets. The WinTV(R)-PVR-250 provides better quality video and audio at a
lower price point and the WinTV(R)-PVR-350 adds a video-out feature to allow the
recorded content to be played back directly to a TV or video cassette recorder.
An added feature to the WinTV(R)-PVR-250 is that it supports the Windows(R) XP
Media Center Edition. The Windows(R) XP Media Center Edition integrates digital
entertainment experiences including "live" television, PVR, digital music,
digital video, DVDs and pictures. Users can pause, jump forward or watch their
"live" TV, record a program or a whole series, and manage all their digital
music, home movies, videos, photos and DVDs. Users can also access and control
this new entertainment device from anywhere in the room with a large,
easy-to-use-on-screen menus and the Media Center Remote Control.
The WinTV(R)-PVR-250's high-quality hardware MPEG encoder enables Windows(R) XP
Media Center Edition to record TV shows to the PC's hard disk. At the best
quality setting, about one hour of television can be recorded in 2 Gigabytes of
disk space. Windows(R) XP Media Center Edition includes an Electronic Program
Guide so that users can schedule their TV recording automatically with the
WinTV(R)-PVR-250.
Video Capture Products
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Our primary video capture product, the DV-Wizard Pro, allows users to capture
and edit digital videos on their PC. This product also allows users to connect
their digital camcorder to their PC through a firewire connection, convert
digital movies into compressed form thus saving hard disk space, edit digital
movies, add voice narrations and music, record their digital movies onto a
CD-ROM and play them back on a home DVD player or on a PC and output edited
videos back to their camcorder.
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The DV-Wizard Pro was designed to edit and add flair to home videos. It can also
be used by corporate marketing communication departments, training video
developers, trade show demonstration creators, video hobbyists, CD-ROM title
producers and creators of corporate product literature on CD-ROM.
Our Impact Video Capture Board ("ImpactVCB") is a low cost PCI board for high
performance access to digitized video. Designed for PC-based video conferencing
and video capturing in industrial applications, the ImpactVCB features "live"
video-in-a-window, still image capture and a Microsoft(TM) video for Windows(TM)
compatible motion video capture driver.
Our USB Live is an easy way to watch video, grab images and video conference on
the PC with the addition of a camera. It plugs into the PC's USB port for easy
installation and brings video into users' PCs from their camcorder or VCR. Users
can create video movies, save still and motion video images onto their hard disk
with our software and video conference over the internet with the addition of a
camera.
Eskape(TM) Labs Product Line
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Our Eskape(TM) Labs product line is a leader in delivering high quality video
for the Apple(R) Macintosh(R). The video is sent to the PC through the USB port
and as such, there is no complicated installation process. This line is
available to all Apple(R) Macintosh(R) users from the on-the-go iBooks(TM) to
G4(TM) power users. All our products accept both analog and digital input and
are QuickTime(R) compatible. Our Eskape(TM) products are uniquely identified by
having the word "My" prominently displayed and included in the product name.
MyTV2GO and MyTV2GO-FM are the lower priced models of the "My" line. They allow
users to bring TV into their iMacs(TM), PowerBooks(TM) and G3(TM) and G4(TM)
Macintosh(R) models through USB ports. Our Eskape(TM) products also include a
125-channel cable ready TV tuner and the capability to "grab" picture files and
short movie files from the users' TV, video cassette recorder or camcorder and
save these files. The additional attraction of MyTV2GO-FM over the MyTV2GO is
that it allows users to listen to and record FM radio.
MyTV and MyTV-FM are similar to MyTV2GO and MyTV2Go-FM respectively except that
the MyTV2GO products include full-frame rate Motion JPEG video capture functions
for superior video compression, video quality and lip synchronization.
MyView gives iBook(TM) users the ability to make presentations directly from
their iBooks as MyView uses our new video mirroring concept and does not require
a VGA connection and a video port. MyView outputs video images in overscan or
underscan modes from the hard drive to composite and S-Video devices such as
video projectors, monitors and video cassette recorders.
MyCapture II allows users to capture video on their iMac(TM), iBook(TM),
PowerBook(TM)or G3(TM)/G4(TM) Macintosh(R) without opening their computer.
Unlike many other USB video solutions, MyCapture II delivers smooth, full frame
rate video capture. To achieve the highest quality video capture over USB,
MyCapture II utilizes the same state-of-the-art Motion JPEG hardware compression
of more expensive professional solutions. It supports NTSC and PAL video sources
from S-video and composite video connections. MyCapture II is ideal for
QuickTime(R)-enabled websites and for web publishers.
MyVideo essentially combines the features of MyCapture and MyView in one
convenient package. It allows full frame rate video capture and video playback
over USB. The video playback is compatible with both video cassette recorders
and video monitors.
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Digital Entertainment Center
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Our Digital Entertainment Center ("DEC") products, introduced during fiscal 2002
in Europe, are set top boxes that enable analog TV sets to receive digital
satellite and digital terrestrial broadcasts, thus enhancing a person's viewing
pleasure. An owner of an analog TV set can enjoy the benefits of digital
broadcasts, such as a greater choice of channels, clearer picture quality and
superior audio quality. The multi-purpose DEC set top box displays new digital
channels while continuing to allow a TV to display analog programs. DEC set top
boxes have the ability to receive, decode and display wide screen broadcasts,
and can re-format the wide screen broadcast to fit older analog TV models.
Digital radio, interactive television services and digital teletext are other
features that the DEC set top boxes deliver. We hope to develop future product
generations that could enable a user to connect to a PC or Notebook computer and
record digital TV programs to the computer's hard drive, permitting the user to
record and later playback the recorded video in full digital quality on the
user's TV screen or computer monitor.
Product Distribution
The WinTV(R) products sold through the computer retail market are essentially
the same as those available to the OEM market. The differences are in the
packaging and in the sophistication of the operating software. Our WinTV(R)
boards and DEC set top boxes are primarily sold to the retail market and to
OEMs. DV Wizard Pro is sold primarily in the retail market, and our video
capture boards are primarily sold in the OEM market. Our Eskape(TM) Labs
products are sold primarily through catalogs.
Technology
Hauppauge Digital has developed five generations of WinTV(R) products since
their initial introduction in 1991. The first generation of WinTV(R) products
put the TV image on the PC screen using chroma keying, requiring a dedicated
"feature connector cable" between the WinTV(R) and the VGA (video) board.
Despite issues with screen resolution, a PC user could watch TV in a resizable
window on their PC. Our initial customers were mostly professional PC users,
such as financial market professionals who needed to be able to see stock market
related TV shows while spending many hours on their PCs, who found having TV in
a window on their desktop useful and entertaining. Video clip capture and
teletext capabilities, valued features in today's models, can also trace their
origins to our first WinTV(R) products.
In 1993, we invented a technique called "smartlock", which eliminated the need
for the "feature connector cable." In 1994, we introduced the
"WinTV(R)-Celebrity" generation of TV tuner boards based on this "smartlock"
technology, greatly improving customer satisfaction. At the time, our CinemaPro
series of WinTV(R) boards then used smartlock and other techniques to further
reduce cost and improve performance.
In June of 1996, we introduced the WinTV(R)-PCI line of TV tuner boards for PCs.
These boards were developed to eliminate the relatively expensive "smartlock"
circuitry and memory used on the WinTV(R)-Celebrity and CinemaPro products. The
WinTV(R)-PCI used a technique called "PCI Push" and was designed to be used in
the then emerging Intel(R) Pentium(R) market. These Pentium(R)-based PCs had a
new type of system expansion "bus", called the PCI bus, which allowed data to be
moved at a much higher rate than the older ISA bus, which the previous WinTV(R)
generations used. The "PCI Push" technique moves the video image 30 times per
second (in Europe the image is moved 25 times a second) over the PCI bus. In
addition to being less expensive to manufacture, the WinTV(R)-PCI had higher
digital video movie capture performance than the previous generations, capturing
video at up to 30 quarter screen frames per second. With this higher performance
capture capability, the WinTV(R)-PCI found new uses in video conferencing, video
surveillance and internet streaming video applications.
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The fourth generations of our WinTV(R) boards, introduced in 1999, are digital
TV receivers. Our WinTV(R)-D board, developed during the 1999 fiscal year and
delivered to the market in the beginning of fiscal 2000, is the first digital TV
receiver for the U.S. market which allows PCs to receive, display and record
digital TV signals, in addition to watching conventional analog TV. The software
to control the digital TV reception is based on our "WinTV(R)-2000" software,
which was developed during fiscal 1999. In fiscal 1999, we also introduced the
WinTV(R)-DVB board for the European market. This board brings digital TV to PCs,
and is based on the European Digital Video Broadcast standard. Both the
WinTV(R)-D and the WinTV(R)-DVB have the ability to receive special data
broadcasts which some broadcasters may send along with the digital TV signal, in
addition to displaying digital TV in a resizable window. Data broadcasts on
digital TV are transmitted at several million bits per second. Our proprietary
software can decode and display some of these special data broadcasts. We intend
to work on standardized reception and display software, if such broadcasts
become standardized.
The fifth generations of WinTV(R) products are the PVR models, developed during
fiscal 2000 and introduced to the market in early fiscal 2001. The WinTV(R)-PVRs
include both internal and external TV receiver products which are designed to
add the ability to record TV shows to a PC's hard disk.
Research and Development
Our development efforts are currently focused on extending the range and
features of the PVR products, additional externally attached TV products, and
high-definition digital TV products. We are also developing more highly
integrated versions of hardware products to further improve performance and cost
points, and new versions of software to add features, improve ease of use, and
provide support for new operating systems. We are developing additional
capabilities in the data broadcasting field, in the e-commerce area, and
enhancing the capabilities of our products in the Apple(R) Macintosh(R) market.
We currently have two Research and Development operations: one based in our
Hauppauge, New York headquarters and one based in Pleasanton, California. The
Pleasanton, California R&D operation develops the Eskape(TM) Labs products,
while the New York R&D operation is aimed at the digital receiver market, the
PVR models, user interface software and low level drivers for all PC products.
The technology underlying our products and certain other products in the
computer industry, in general, is subject to rapid change, including the
potential introduction of new types of products and technologies, which may have
a material adverse impact upon our business. We maintain an ongoing R & D
program. Our future success, of which there can be no assurances, will depend in
part on our ability to respond quickly to technological advances by developing
and introducing new products, successfully incorporating such advances in
existing products, and obtaining licenses, patents, or other proprietary
technologies to be used in connection with new or existing products. We continue
to invest heavily in our research and development. We spent approximately
$1,592,000, $1,510,000 and $1,666,000 for research and development expenses for
the years ended September 30, 2002, 2001, and 2000 respectively. There can be no
assurance that our future research and development will be successful or that we
will be able to foresee and respond to such advances in technological
developments and to successfully develop other products. Additionally, there can
be no assurances that the development of technologies and products by
competitors will not render our products or technologies non-competitive or
obsolete. See Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors."
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Product Production and Suppliers
We design the hardware for the WinTV(R) and Eskape(TM) Labs products and also
write the operating software to be used in conjunction with many versions of the
popular Microsoft(R) Windows(TM) and Apple(R) Macintosh(R) operating system,
including Windows(R) XP, Windows(R)98, Windows(R)Me, Windows(R)NT and
Windows(R)2000. We subcontract the manufacturing and assembly of our products to
independent third parties at facilities in various countries. We monitor and
test the quality of the completed products at our facilities in the United
States (Hauppauge, New York), Singapore, and Ireland before packaging the
products and shipping them to our customers.
Certain component parts like TV tuners, video decoder chips and software
compression chips that are essential to our business are available from a single
source or limited sources. Other essential component parts which are generally
available from multiple sources may be obtained by us from only a single source
or limited sources because of pricing concerns.
Components are subject to industry wide availability and pricing pressures. Any
availability limitations, interruption in supplies, or price increases could
have a material adverse effect on our business, operating results and financial
condition. In addition, our new products may initially utilize custom components
obtained from only one source. We typically evaluate and qualify additional
suppliers for these components.
Where a product utilizes a new component, initial capacity constraints of the
supplier of that component may exist until such time as the supplier's yields
have matured.
Components are normally acquired through purchase orders, either issued by us or
by our contract manufacturers, typically covering our requirements for a 60-120
day period from the date of issue.
If the supply of a key component were to be delayed or curtailed or in the event
a key manufacturing vendor delays shipment of completed products to us or our
contract manufacturer, our ability to ship products in desired quantities and in
a timely manner will be adversely affected. Our business and financial
performance will likely be adversely affected, depending on the time required to
obtain sufficient quantities from the original source or, if possible, to
identify and obtain sufficient quantities from an alternative source. We attempt
to mitigate these potential risks by working closely with our key suppliers on
product introduction plans, strategic inventories, coordinated product
introductions, and internal and external manufacturing schedules and levels.
We have, from time to time, experienced significant price increases and limited
availability of certain components that are available from multiple sources.
Similar occurrences in the future could have a material adverse effect on our
business, operating results and financial condition.
Manufacturing is performed by three unrelated contract manufacturers, one in
Europe, which primarily handles European products and two in Asia, which
primarily handle products for our domestic and Asian markets. Product design
specifications are provided to insure proper assembly. Contract manufacturing is
primarily done on a consignment basis, in which we provide all the significant
component parts and we pay for assembly charges and for certain parts for each
board produced. Some boards are purchased on a turnkey basis, in which all
components and labor are provided by the manufacturer, and the manufacturing
price includes parts and assembly costs. We continuously monitor the quality of
the finished product produced by our contract manufacturers. We have qualified
five contract manufacturers who are capable of producing our products to our
standards, but utilize three out of the five contract manufacturers. During
fiscal 2002, these three contract manufacturers handled all
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our worldwide production. If demand were to increase dramatically, we believe
additional production could be absorbed by these and the other qualified
contract manufacturers. We also buy finished products that we have not designed
but that we sell under our name on an OEM basis from others parties who are not
our contract manufacturers.
We produce a majority of our European sales through a contract manufacturer in
Austria. The production is done on a consignment basis with assembly, testing
and reworks being handled there. The packaging and shipping of the product to
customers is done at our Ireland facility. By shifting the production of boards
sold in Europe to a European facility, we save on shipping costs and duties on
boards entering Europe. Our Asian contract manufacturers assemble products we
sell in the U.S., Asia and internationally.
Customers and Markets
We primarily market our products to the consumer market. To reach this market,
we sell to a network of computer retailers in the U.S., Europe and Asia and
through computer products distributors. To attract new users to our products, we
run special promotions and participate in cooperative advertising with computer
retailers. We actively participate in trade shows to educate and train key
computer retail marketing personnel. Most of our sales and marketing budget is
aimed at the consumer market.
Apart from the typical home user, we also target business users. One example of
a business application is in the securities brokerage industry where our product
is primarily used to display financial TV shows in a window on a broker's PC
while continuing to receive financial information. We have sold our WinTV(R)
products on an OEM basis to two large financial services information providers
for incorporation into their workstations, and several independent financial
institutions. This market segment is typically project-based.
We also offer our products to PC OEMs that either embed a WinTV(R) product in a
PC that they sell, or sell the WinTV(R) as an accessory to the PC.
Distribution to the Retail Market
During fiscal 2002, net sales to distributors and retailers totaled
approximately $41,458,000 or 97% of our net sales compared to approximately
$47,365,000 or 93% and $60,214,000 or 91% for the years ended September 30, 2001
and 2000 respectively. We have no exclusive distributor or retailer and sell
through a multitude of retailers and distributors, no one of which accounted for
more than 10% of our net sales.
Sales to Original Equipment Manufacturers
The OEM business is one where a PC manufacturer incorporates our products into
an item sold under the OEM's label. Factors which could impact the expansion of
our OEM business include the ability to successfully negotiate and implement new
agreements with OEMs.
Our sales to OEMs totaled approximately $1,338,000, $3,546,000 and $6,079,000
for the years ended September 30, 2002, 2001 and 2000 respectively. We sold our
products to a variety of OEM customers, none of which accounted for more than
10% of total sales in any of the three years. Sales to OEM customers accounted
for approximately 3%, 7% and 9% of our net sales for 2002, 2001 and 2000,
respectively.
11
Marketing and Sales
We market our products both domestically and internationally through our sales
offices in the United States (New York and California), Germany, the United
Kingdom, France and Singapore, plus through independent sales representative
offices in the Netherlands, Spain, and Italy. For the fiscal years ended
September 30, 2002, 2001 and 2000, approximately 27%, 23% and 29% of our net
sales were made within the United States, respectively, while approximately 73%,
77% and 71% were outside the United States (predominately in Germany, the United
Kingdom, France, Italy and Asia), respectively.
More information on our geographic segments can be obtained from "Management's
Discussion and Analysis of Financial Condition and Results of Operations," in
Item 7 and "Notes To Consolidated Financial Statements".
We advertise our products in a number of PC magazines. We also participate in
retailers' market promotion programs, such as store circulars and promotions and
retail store displays. These in-store promotional programs, magazine
advertisements plus a public relations program aimed at editors of key PC
computer magazines and an active web site on the internet, are the principal
means of getting our product introduced to end users. Our sales in computer
retail stores are closely related to the effectiveness of these programs, along
with the technical capabilities of the products. We also list our products in
catalogs of various mail order companies and attend worldwide trade shows.
We currently have 9 sales persons located in Europe, 1 sales person in the Far
East and 3 sales persons in the United States, located in New York and
California. We also utilize the services of 5 manufacturer representatives
retained by us on a non-exclusive basis, who work with customers in certain
domestic geographic areas.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" with reference to a discussion on the impact seasonality has on our
sales.
Foreign Currency Fluctuations
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, primarily 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, and
may positively or negatively affect our revenues, gross margins, operating
income and retained earnings (which are all expressed in U.S. dollars). We
attempt to reduce these risks by engaging in hedging programs. We enter into
foreign exchange forward contracts with financial institutions to protect
against currency exchange risks associated with our foreign denominated sales.
By selling foreign currency futures, we fix the rate of exchange at the time we
enter into the contract. We deliver these currencies to the financial
institutions at a later date when we actually receive the foreign currency.
As of September 30, 2002, we had foreign currency forward contracts outstanding
of approximately $6,072,000 against delivery of the Euro. The contracts expire
through February, 2003.
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 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
12
hedging instruments.
For the year ended September 30, 2002 and 2001, we recorded approximately
$408,000 as a decrease to net sales and $1,119,000 as an increase to net sales
related to the changes in the fair value of our derivative contracts.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" with reference to the impact of foreign currency exchange
fluctuations.
Competition
Our business is subject to significant competition. Competition exists from
larger and smaller companies that might possess substantially greater technical,
financial, human, sales and marketing resources than we have. The dynamics of
competition in this market involve short product life cycles, declining selling
prices, evolving industry standards and frequent new product introductions. We
compete in this emerging market against companies such as ATI Technologies Inc.
and Pinnacle Systems, Inc. We believe that competition from new entrants will
increase as the market for digital video in a PC expands. There can be no
assurances that we will not experience increased competition in the future. Such
increased competition may have a material adverse effect on us.
Though management believes that the delivery of TV via the internet will become
more popular in the future, we believe that TV delivered to the PC via cable,
broadcast or satellite will continue to dominate. As our products connect
directly to cable, broadcast and satellite receivers, and deliver a higher
quality image, we view our products as the preferred way to watch TV on the PC
versus the delivery of TV via the internet.
Patents, Copyrights and Trademarks
With the proliferation of new products and rapidly changing technology, there is
a significant volume of patents and other intellectual property rights held by
third parties. There are a number of companies that hold patents for various
aspects of the technologies incorporated in some of the PC and TV industries'
standards. Given the nature of our products and development efforts, there are
risks that claims associated with such patents or intellectual property rights
could be asserted by third parties against us. We expect that parties seeking to
gain competitive advantages will increase their efforts to enforce any patent or
intellectual property rights that they may have. The holders of patents from
which we may have not obtained licenses may take the position that it is
required to obtain a license from them.
If a patent holder refuses to offer such a license or offers such a license on
terms unacceptable to us, there is a risk of incurring substantial litigation or
settlement costs regardless of the merits of the allegations, regardless of
which party eventually prevails. If we do not prevail in a litigation suit, we
may be required to pay significant damages and/or to cease sales and production
of infringing products and accordingly, may incur significant defense costs.
Additionally, we may need to attempt to design around a given technology,
although there can be no assurances that this would be possible or economical.
We currently use technology licensed from third parties in certain products. Our
business, financial condition and operating results could be adversely affected
by a number of factors relating to these third-party technologies, including:
o failure by a licensor to accurately develop, timely introduce, promote
or support the technology
o delays in shipment of products
o excess customer support or product return costs due to problems with
licensed technology and
o termination of our relationship with such licensors.
13
We may not be able to adequately protect our intellectual property through
patent, copyright, trademark and other means of protection. If we fail to
adequately protect our intellectual property, our intellectual property rights
may be misappropriated by others, invalidated or challenged, and our competitors
could duplicate our technology or may otherwise limit any competitive
technological advantage we may have. Due to the rapid pace of technological
change, we believe our success is likely to depend more upon continued
innovation, technical expertise, marketing skills and customer support and
service rather than upon legal protection of our proprietary rights. However, we
shall aggressively assert our intellectual property rights when necessary.
Even though we independently develop most of our products, our success will
depend, in a large part, on our ability to innovate, obtain or license patents,
protect trade secrets and operate without infringing on the proprietary rights
of others. We maintain copyrights on our designs and software programs, but
currently we have no patent on the WinTV(R) board as we believe that such
technology cannot be patented.
On December 27, 1994, our trademark, "WinTV(R)", was registered with the United
States Patent and Trademark Office. Our "Hauppauge(R)" name logo is also
registered.
See "Legal Proceedings" for a discussion of certain litigation and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Employees
As of September 30, 2002, we had 107 employees worldwide, including our
executive officers, all of which are full-time, none of which are represented by
a union.
Corporate Structure
Hauppauge Digital Inc. was incorporated in the state of Delaware on August 2,
1994 and has the following wholly-owned subsidiaries:
o Hauppauge Computer Works, Inc. (incorporated in New York, USA)
o HCW Distributing Corp. (incorporated in New York, USA)
o Eskape Acquisition Corp. (incorporated in Delaware, USA)
o Hauppauge Digital Europe S.a.r.l. (incorporated in Luxembourg)
Hauppauge Computer Works, Inc. is in turn the holding company of a foreign sales
corporation, Hauppauge Computer Works, Ltd (incorporated in the U.S. Virgin
Islands).
Hauppauge Digital Europe S.a.r.l. has the following wholly-owned subsidiaries:
o Hauppauge Digital Asia Pte Ltd (incorporated in Singapore)
o Hauppauge Computer Works, GmbH (incorporated in Germany)
o Hauppauge Computed Works Limited (incorporated in the United
Kingdom)
o Hauppauge Computer Works S.a.r.l. (incorporated in France)
In addition, Hauppauge Digital Europe S.a.r.l. has a branch office in
Blanchardstown, Ireland.
An internal restructuring of some of our international subsidiaries occurred in
fiscal 2000. The goal of the restructuring was twofold: (i) to subsume some of
our subsidiaries as wholly-owned subsidiaries of Hauppauge Digital Europe
S.a.r.l. and (ii) to set up a distribution center for Hauppauge Digital Europe
S.a.r.l. in Blanchardstown, Ireland. The purpose of the restructuring exercise
was to consolidate our international sales and marketing operations under
Hauppauge Digital Europe S.a.r.l. and provide a more cost-effective and
operationally efficient run distribution center for the European market.
14
Hauppauge Computer Works, GmbH (Germany) is responsible for directing and
overseeing European sales and marketing efforts while Hauppauge Computer Works
S.a.r.l. (France) handles the sales and marketing efforts in France. Hauppauge
Computer Works Limited (United Kingdom) is the English counterpart which directs
our sales and marketing efforts in the United Kingdom.
In 1999, we established a sales, warehousing and packing facility in Singapore.
This is the headquarters for Hauppauge Digital Asia Pte Ltd. The purpose of this
facility is to better provide sales and marketing support for the Asian market.
During fiscal 2000, Hauppauge Digital Europe S.a.r.l. (Luxembourg) established a
branch, which houses our European warehousing and packing facility just outside
of Dublin in Blanchardstown, Ireland. As mentioned above, this initiative was to
reduce our European operating costs and to take advantage of certain tax
benefits available to us.
Our executive offices are located at 91 Cabot Court, Hauppauge, New York 11788,
and our telephone number at that address is (631) 434-1600. Our internet address
is http://www.hauppauge.com.
Item 2 DESCRIPTION OF PROPERTY
-----------------------
We occupy approximately 25,000 square feet at a facility located at 91 Cabot
Court, Hauppauge, New York and use it as our executive offices and for the
testing, storage, and shipping of our products. We consider the premises to be
suitable for our needs at such location. The building is owned by a partnership
comprised of certain of our principal stockholders' and is leased to us under a
lease agreement expiring on January 31, 2006, which may be extended, at our
option, for an additional three years.
Rent is currently at the annual rate of approximately $411,000 per year and will
increase to approximately $432,000 per year on February 1, 2003. The rent is
payable in equal monthly installments and increases at a rate of 5% per year on
February 1 of each year thereafter including during the option period. The
premises are subject to two mortgages which have been guaranteed by us upon
which the outstanding principal amount due as of September 30, 2002 was
$830,852. We pay the taxes and operating costs of maintaining the premises.
Our subsidiary, Hauppauge Computer Works, Inc., occupies approximately 1,642
square feet in Pleasanton, California. We use the Californian office as our
western region sales office and for marketing our Eskape(TM)Labs product line.
The lease expires on June 15, 2004 and requires us to pay an annual rent of
approximately $35,000. Hauppauge Computer Works, Inc. is responsible for a
portion of common area maintenance charges based on the space it occupies.
Our German subsidiary, Hauppauge Computer Works GmbH, occupies approximately
6,000 square feet in Mochengladbach, Germany. It is used as our European sales
office and customer support center. It also has a product demonstration room and
a storage facility. Hauppauge Computer Works GmbH pays an annual rent of
approximately $44,000 for this facility pursuant to a rental agreement which
expires on October 31, 2006.
Our Singapore subsidiary, Hauppauge Digital Asia Pte. Ltd., occupies
approximately 3,400 square feet in Singapore, which it uses as a sales and
administration office and for the testing, storage and shipping of our products.
The lease, which expired on November 30, 2002 and was renewed on December 1,
2002, expires on November 30, 2005 and calls for an annual rent of approximately
$26,600. The rent includes an allocation for common area maintenance charges.
On May 1, 2001, Hauppauge Digital S.a.r.l. commenced a lease of a 15,642 square
foot building in Blanchardstown, Dublin, Ireland. The facility houses our
European warehousing and distribution center. The lease, which is for the
standard twenty-five year term in Ireland with the right to terminate on the
fifth and tenth year of the lease, calls for an annual rent of approximately
$127,200. The rent includes an allocation for common area maintenance charges.
15
Item 3. LEGAL PROCEEDINGS.
-----------------
In January 1998, Advanced Interactive Incorporated ("AII") contacted us and
attempted to induce us into entering a patent license or joint venture agreement
with AII relative to certain of our products. AII alleged that such products
infringe U.S. Patent No. 4,426,698 (the "AII Patent"). At such time, our
engineering staff analyzed the AII Patent and determined that our products did
not infringe any such patent. Accordingly, we rejected AII's offer.
On October 6, 1998, we received notice that AII had commenced an action against
us and multiple other defendants in the United States District Court for the
Northern District of Illinois (the "District Court"), alleging that certain of
our products infringed on certain patent rights allegedly owned by the plaintiff
(the "Complaint"). The Complaint sought unspecified compensatory and statutory
damages with interest. We denied such allegations and vigorously defended this
action.
On December 22, 1998, we filed our answer (the "Answer"). We denied that our
products infringed AII's patent rights and asserted certain affirmative
defenses.
On June 26, 2000, the District Court granted the Defendant's Motion for Partial
Adjudication of Claim Constructions Issues and entered a Final Judgment of
Non-infringement to us.
On July 25, 2000, AII filed a Notice of Appeal with the U.S. Court of Appeals
for the Federal Circuit, appealing the District Court's Order granting the
Motion for Partial Adjudication of Claim Construction Issues and Order entering
Final Judgment of Non infringement.
On July 16, 2001, the Federal Circuit entered a Circuit Rule 36 Judgment of
Affirmance Without Opinion. Accordingly, the Federal Circuit affirmed the
District Court's finding of non-infringement. As of December 13, 2001, the time
limit permitting AII to file a petition with the U.S. Supreme Court for a Writ
of Certiorari to review the Federal Circuit judgment has lapsed. This litigation
is now over without the possibility of further appeals.
We have been informed by counsel for the estate of the late Mr. Kenneth Aupperle
("Estate") that they have filed a Demand for Arbitration with the American
Arbitration Association claiming property rights and interest in the Company,
certain amounts due and owing to the Estate based on various corporate
agreements with Mr. Aupperle and certain insurance policies, such amount to be
no less than $2,500,000. We have recently received a formal acknowledgement from
the American Arbitration Association of the said Demand for Arbitration and have
obtained a temporary restraining order on the said arbitration proceedings.
Based on the preliminary information presented to us, management believes that
the claim and the basis for proceeding with arbitrating such claim is without
merit and will vigorously defend it.
In 1997, we licensed a file conversion library for use in its WinTV(R)
applications from Accusoft Corporation. On June 14, 2001, the Company received
notice that Accusoft Corporation had commenced an action against the Company in
the United States District Court for the District of Massachusetts (the
"District Court"), alleging that the Company:
o had infringed Accusoft's copyright in certain software in violation
of Title 17 of the United States Code
o had violated the terms of its software license by making excess
copies of the software without paying additional royalties
o used the software for unauthorized purposes
On July 31, 2001, the Company and Accusoft reached a settlement and release of
all claims against the Company in exchange for payment of the settlement amount
of $212,500.
16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
The following proposals were submitted to the stockholders for approval at the
Annual Meeting of stockholders held on September 6, 2002 at our offices:
Proposal No. 1: Election of Directors
The following directors were elected by the votes indicated:
For Withheld
--- --------
Kenneth Plotkin 8,025,963 1,010,848
Bernard Herman 8,030,773 1,015,658
Clive R. Holmes 8,044,793 996,828
Steven J. Kuperschmid 8,025,443 1,016,178
Proposal No. 2: Amendment of the Certificate of Incorporation to authorize the
classification of the Board of Directors into three classes with staggered terms
and to provide for a supermajority voting requirement to amend any provision in
the Certificate of Incorporation relating to such classified Board of Directors.
The proposed amendment to the Certificate of Incorporation to authorize the
classification of the Board of Directors into three classes with staggered terms
and to provide for a supermajority voting requirement to amend any provision in
the Certificate of Incorporation relating to such classified Board of Directors
was not approved because there were insufficient votes cast:
For Against Abstain
--- -------- -------
2,368,289 1,667,910 57,189
Proposal No. 3: Amendment of the Certificate of Incorporation to authorize a
class of preferred stock.
The proposed amendment to the Certificate of Incorporation to authorize a class
of preferred stock was not approved because there were insufficient votes cast:
For Against Abstain
--- -------- -------
3,341,032 641,253 111,103
Proposal No. 4: Amendment of the Certificate of Incorporation to require
unanimous, rather than majority, written consent of stockholders in lieu of
meeting under certain circumstances.
The proposed amendment to the Certificate of Incorporation to require unanimous,
rather than majority, written consent of stockholders in lieu of a meeting under
certain circumstances was not approved because there were insufficient votes
cast:
For Against Abstain
--- -------- -------
2,178,929 1,888,870 25,589
Proposal No. 5: Amendment to the Company's Employee Stock Purchase Plan to
increase the number of Common Shares available thereunder from 100,000 to
180,000 and provide for a termination date thereunder of December 31, 2004
The proposed amendment to the Company's Employee Stock Purchase Plan was
approved by the shareholders'.
For Against Abstain
--- -------- -------
8,137,203 381,051 19,250
Proposal No. 6: To transact such other business as may properly come before the
meeting.
For Against Abstain
--- -------- -------
8,358,408 644,318 38,445
The proposal to transact such other business as may properly come before the
meeting was approved by the shareholders'.
17
PART II
-------
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------
(a) The principal market on which our common stock (the "Common Stock") is
traded is the over-the counter market. The Common Stock is quoted on the NASDAQ
National Market and its symbol is HAUP. The table below sets forth the high and
low bid prices of our Common Stock as furnished by NASDAQ. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
Fiscal Year Ended
September 30, 2002 High Low
- ------------------- ----- ---
First Quarter 3.02 1.05
Second Quarter 2.40 1.59
Third Quarter 2.29 1.75
Fourth Quarter 2.04 1.24
Fiscal Year Ended
September 30, 2001 High Low
- ------------------- ---- ---
First Quarter 6.13 1.38
Second Quarter 5.03 1.38
Third Quarter 3.18 2.03
Fourth Quarter 2.25 1.05
(b) We have been advised by our transfer agent, North American Transfer Co. that
the approximate number of holders of record of our Common Stock as December 13,
2002 was 165. We believe there are in excess of 8,000 beneficial holders of our
Common Stock.
(c) No cash dividends have been paid during the past two years. We have no
present intention of paying any cash dividends in our foreseeable future and
intend to use our net income, if any, in our operations.
Equity Compensation Plan Information
Set forth in the table below is certain information regarding the number of
shares of common stock that may be issued under options, warrants and rights
under all of the Company's existing equity compensation plans as of September
30, 2002.
Number of Securities
remaining available for future
Number of securities to be Weighted average exercise issuance under equity compensation
issues upon exercise of price of outstanding plans (excluding securities
Plan Category outstanding options options reflected in column (a))
- -----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by 1,092,826 $ 2.90 629,500
stockholders
- -----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved by 230,000 $ 3.41 120,000
shareholders
- -----------------------------------------------------------------------------------------------------------------------------
Item 6. SELECTED FINANCIAL DATA
The following selected financial data with respect to our financial position and
our results of operations for each of the five years in the period ended
September 30, 2002 set forth below has been derived from our audited
consolidated financial statements. The selected financial information presented
below should be read in conjunction with the Consolidated Financial Statements
and related notes thereto in Item 8 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 included in this 10-K.
18
Consolidated Statement of Operations Data 2002 2001 2000 1999 1998
Years ended September 30, ------ ---- ---- ---- ----
(in thousands, except for per share amounts)
--------------------------------------------
Net Sales $ 42,797 $ 50,910 $ 66,292 $ 58,602 $ 38,757
Cost of sales 31,661 42,056 54,425 43,027 28,643
------ ------ ------ ------ ------
Gross Profit 11,136 8,854 11,867 15,575 10,114
Selling, general and administrative expenses 9,069 10,282 12,231 9,865 7,244
Research & development expenses 1,592 1,510 1,666 1,257 808
Write off of goodwill - 702 - - -
Litigation settlement - 213 - - -
----- ---- -- --- -----
Income (loss) from operations 475 (3,853) (2,030) 4,453 2,062
Other Income (Expense):
Interest income 35 42 104 201 236
Interest expense - (31) (15) - -
Life insurance proceeds - 2,000 - - -
Foreign currency 5 7 (243) (61) 184
Non operational USD to Euro re-measurement gain (loss) (98) (16)
Other, net - - 1 - -
---- ----- ----- ---- ------
Income (loss) before taxes 417 (1,851) (2,183) 4,593 2,482
Income tax (benefit) provision (911) (333) (1,184) 1,602 1,027
Increase (reduction) in deferred tax valuation allowance 980 1,083 - (127) (503)
--- ----- ----- ---- ----
Net tax provision (benefit) 69 750 (1,184) 1,475 524
-- --- ------ ----- ---
Income (loss) before cumulative effect of a change in
accounting principle 348 (2,601) (999) 3,118 1,958
Cumulative effect of a change in accounting principle - 319 - - -
--- ------ ------- ----- -----
Net income (loss) $ 348 $ (2,282) $ (999) $ 3,118 $ 1,958
========= ========= ========= ========= =========
Per share results-basic:
Income (loss) before cumulative effect of a change in
accounting principle $ 0.04 $ (0.29) $ (0.11) $ 0.36 $ 0.22
Cumulative effect of a change in accounting principle $ - $ 0.03 $ - $ - $ -
--------- --------- --------- --------- ---------
Net income (loss) per share-basic $ 0.04 $ (0.26) $ (0.11) $ 0.36 $ 0.22
========= ========= ========= ======== =========
Per share results-diluted:
Income (loss) before cumulative effect of a change in
accounting principle $ 0.04 $ (0.29) $ (0.11) $ 0.33 $ 0.21
Cumulative effect of a change in accounting principle $ - $ 0.03 $ - $ - $ -
--------- --------- --------- -------- ---------
Net income (loss) per share-diluted $ 0.04 (0.26) (0.11) 0.33 0.21
========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic 8,887 8,910 8,837 8,632 8,806
Diluted 9,037 8,910 8,837 9,480 9,354
Consolidated Balance Sheet Data (at period end):
Working capital $ 11,266 $ 10,258 $ 11,767 $ 12,533 $ 9,539
Total assets 19,846 18,784 26,315 27,728 22,897
Stockholders' equity 11,967 11,186 13,654 13,322 10,037
Note: All per share amounts and weighted average shares have been
retroactively restated to reflect a two for one stock split effective March
27, 2000.
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of operations
September 30, 2002 and 2001
Results for the fiscal years ended September 30, 2002 and 2001 are detailed
below:
Twelve Twelve
Months Months
Ended Ended Variance Percentage of sales
9/30/02 9/30/01 $ 2002 2001 Variance
------- ------- - ---- ---- --------
Sales $ 42,796,726 $ 50,910,463 $(8,113,737) 100.00% 100.00% 0.00%
Cost of sales 31,661,073 42,056,859 (10,395,786) 73.98% 82.61% -8.63%
---------- ---------- ----------- ----- ----- ----
Gross Margin 11,135,653 8,853,604 2,282,049 26.02% 17.39% 8.63%
Gross Margin % 26.02% 17.39% 8.63%
Costs:
Sales & Marketing 5,741,510 6,479,351 (737,841) 13.42% 12.73% 0.69%
Technical Support 379,592 380,488 (896) 0.89% 0.75% 0.14%
General & Administrative 2,947,943 3,422,635 (474,692) 6.89% 6.72% 0.17%
--------- --------- -------- ---- ---- ----
Total Selling General and Administrative costs 9,069,045 10,282,474 (1,213,429) 21.20% 20.20% 1.00%
Litigation settlement - 212,500 (212,500) 0.00% 0.42% -0.42%
Write of off Goodwill - 701,919 (701,919) 0.00% 1.37% -1.37%
R&D 1,591,551 1,510,092 81,459 3.72% 2.97% 0.75%
--------- --------- ------ ---- ---- ----
Total Costs 10,660,596 12,706,985 (2,046,389) 24.92% 24.96% -0.04%
---------- ---------- ---------- ----- ----- ----
Net operating income (loss) 475,057 (3,853,381) 4,328,438 1.10% -7.57% 8.67%
Other income (expense)
- ---------------------
Interest income 34,781 42,137 (7,356) 0.08% 0.08% 0.00%
Interest expense - (30,833) 30,833 0.00% -0.06% 0.06%
Foreign currency 4,750 6,740 (1,990) 0.01% 0.01% 0.00%
Non operational USD to Euro re-measurement (loss) (98,066) (15,863) (82,203) -0.23% -0.03% -0.20%
Insurance proceeds - 2,000,000 (2,000,000) 0.00% 3.93% -3.93%
------- --------- ---------- ---- ---- ----
Total other income (expense) (58,535) 2,002,181 (2,060,716) -0.14% 3.93% -4.07%
------- --------- ---------- ---- ---- ----
Income (loss) before taxes 416,522 (1,851,200) 2,267,722 0.96% -3.64% 4.60%
Taxes on income 69,000 749,497 (680,497) 0.16% 1.47% -1.31%
------ ------- -------- ---- ---- ----
Income (loss) before cumulative effect of a change in
accounting principle 347,522 (2,600,697) 2,948,219 0.80% -5.11% 5.91%
Cumulative effect of change in accounting principle - 319,000 (319,000) 0.00% 0.63% -0.63%
------- ------- -------- ---- ---- ----
Net income (loss) $ 347,522 $ (2,281,697) $2,629,219 0.80% -4.48% 5.28%
=========== ============ ========== ==== ==== ====
Sales for the twelve months ended September 30, 2002 decreased $8,113,737 when
compared to last year. Sales declined in all geographic locations as follows:
Increase Percentage of sales by
(decrease) Increase Geographic region
Twelve Months Twelve Months Dollar (decrease) 2002 2001
Location ended 9/30/02 ended 9/30/01 Variance Variance %
- -------- ------------- ------------- -------- ---------- ---- ----
Domestic $ 11,508,358 $ 11,888,839 $ (380,481) (3%) 27% 23%
Europe 30,365,681 35,624,555 (5,258,874) (15%) 71% 70%
Asia 922,687 3,397,069 (2,474,382) (73%) 2% 7%
------- --------- ---------- --- - -
Total $ 42,796,726 $ 50,910,463 $(8,113,737) (16%) 100% 100%
============ ============= =========== ==== === ===
20
Results of operations September 30, 2002 and September 30, 2001
The primary forces causing the sales decrease were:
o Sluggish economic conditions
o Reduction in analog board sales
o Lower OEM sales activity
o Lower Asian sales
Sales to domestic customers were 27% of net sales for the year ended September
30, 2002 compared to 23% for the year ended September 30, 2001. Sales to
European customers were 71% of net sales compared to 70% for the same period of
last year. Sales to Asian customers were 2% compared to 7% for the same period
last year.
Gross margins increased $2,282,049 for the twelve months ended September 30,
2002. Gross margin percentage for the twelve months ended September 30, 2002 was
26.02% compared to 17.39% for the same periods in the prior year.
The increases and (decreases) in the margins are detailed below:
Increase
(decrease)
Due to lower sales $ (2,352,411)
Due to higher margins on assembled boards 2,116,392
Due to decreases in labor related and other costs 655,302
Due to inventory obsolescence reserve booked during the fourth quarter of fiscal 2001 1,862,766
---------
Total increase in margins $ 2,282,049
============
The increase in gross margin percentage of 8.63% for the twelve months ended
September 30, 2002 compared to last year is as follows:
Increase
(decrease)
---------
Increase in margin on assembled boards 4.95%
Labor related and other costs as a larger percent of sales 0.03%
Due to inventory obsolescence reserve booked during the fourth quarter of fiscal 2001 3.65%
----
Net increase 8.63%
====
The improved margin percentage on assembled boards was primarily derived from
unit price reductions from our suppliers and subcontractors coupled with a
larger sales mix of higher gross margin product. The increase in the gross
margin percent of 0.03% due to labor related and other costs was due to the
decrease in labor related and other costs of 16.20% being in excess of the sales
decrease of 15.94%.
During the fourth quarter of fiscal 2001, in recognition of the sales decline
from fiscal 2000, slower sales of older product lines and engineering changes to
products, we reviewed the net realizable value of our inventory as of September
30, 2001. We deemed it necessary to increase our reserve for obsolete and slow
moving inventory. An additional reserve of $1,862,766 was recorded during the
fourth quarter of fiscal 2001 and charged to cost of sales. A similar provision
was not required in fiscal 2002, thus there was an improvement in margins of
3.65% for fiscal 2002.
The chart below illustrates the components of selling, general and
administrative expenses:
Twelve months ended September 30,
Dollar Costs Percentage of Sales
----------------------------------------------------------------------------------------------
Increase Increase
2002 2001 (Decrease) 2002 2001 (Decrease)
---- ---- ---------- ---- ---- ----------
Sales and Promotiona $ 5,741,510 $ 6,479,351 $ (737,841) 13.42% 12.73% 0.69%
Customer Support 379,592 380,488 (896) 0.89% 0.75% 0.14%
General and Administrative 2,947,943 3,422,635 (474,692) 6.89% 6.72% 0.17%
--------- --------- -------- ---- ---- ----
Total $ 9,069,045 $ 10,282,474 $(1,213,429) 21.20% 20.20% 1.00%
21
Results of operations September 30, 2002 and 2001-continued
Selling General and Administrative expenses decreased $1,213,429 from the prior
fiscal year. As a percentage of sales, Selling, General and Administrative
expenses for the twelve months ended September 30, 2002 increased by 1.00% when
compared to the twelve months ended September 30, 2001.
The decrease in sales and promotional expense of $737,841 was mainly due to :
o Lower advertising costs of $502,057 due to lower co-operative
advertising and reduced special promotions
o Lower trade show costs of $146,052 due to smaller size and frequency
of trade show attendance
o Lower commission payments of $31,355 due to lower sales
o Decreased compensation costs of $70,295 due to personnel reductions
for sales and marketing personnel
The decrease in General and Administrative expenses of $474,692 was primarily
due to:
o Decrease in compensation costs of $188,572 due to personnel reductions
for administrative personnel
o Lower legal costs of $80,553 due to less litigation activity during
fiscal 2002
o Decreased amortization costs of $81,637 mainly due to the write off of
goodwill during the fourth quarter of fiscal 2001
o Lower rent costs of $48,301 and lower communication costs of $32,211
due to the consolidation of the Eskape Labs office in California into
the Hauppauge California office
Research and development expenses increased $81,459 or approximately 3.7%. The
increase was mainly due to higher compensation and increased material and
contract services cost.
Litigation settlement
During the third quarter of fiscal 2001, we paid $212,500 to settle a claim
pursuant to a copyright infringement dispute.
Write off of goodwill
During fiscal 2000, we acquired certain assets of Eskape(TM) Labs, Inc. This
acquisition was accounted for using the purchase method. The fair value of the
consideration paid exceeded the fair value of the assets acquired and goodwill
of approximately $810,000 was recorded.
Due to changing conditions during fiscal 2001, the following events and
circumstances indicated to us that our goodwill asset had been impaired and was
not likely to be recovered:
o Eskape(TM)Labs was not profitable during fiscal 2001 and did not
contribute, nor is expected to contribute, any positive cash flow stream
o Eskape(TM) Labs did not fulfill its internal sales forecast for fiscal 2001
o The asset value was greater than the estimated future cash flows
o At the time of the acquisition, we hired approximately 10 of the
Eskape(TM) Labs employees, including three from senior management. Only
four employees remain
o Certain Eskape(TM)Labs products have been deemed by management as slow
moving products
In recognition of the above events, we recognized an impairment loss during the
fourth quarter of fiscal 2001 for the entire remaining goodwill balance of
$701,919. The loss was recorded as a component of other income (loss) from
operations.
22
Results of operations September 30, 2002 and 2001-continued
- ------------------------------------------------------------
Other income (expense)
Net other expense for the twelve months ended September 30, 2002 was $58,535
compared to net other income of $2,002,181 for the twelve months ended September
30, 2001 as detailed below:
Twelve months ended September 30,
2002 2001
---- ----
Interest income $ 34,781 $ 42,137
Interest expense - (30,833)
Foreign currency transaction gains (losses) 4,750 6,740
Non operational USD to Euro currency re-measurement (98,066) (15,863)
- 2,000,000
Life insurance proceeds --------- ---------
Total other income (expense) $ (58,535) $2,002,181
========= ==========
The decrease in total other income (expense) was due to the receipt of insurance
proceeds during fiscal 2001 pursuant to a key man life insurance on the
Company's deceased former President and losses in fiscal 2002 resulting from the
"Non operational USD to Euro currency re-measurements" offset by lower interest
expense during fiscal 2002.
"Non operational USD to Euro currency re-measurement" results from the revaluing
from U.S. dollars to Euros any U.S. dollar denominated assets and liabilities on
the books of our Luxembourg based subsidiary, Hauppauge Digital Europe 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."
Tax provision (benefit)
Our net tax provision for the twelve months ended September 30, 2002 and 2001 is
as follows:
Twelve months ended September 30,
2002 2001
------ ------
Tax (benefit) attributable to U.S operations $ (980,000) $ (501,000)
Tax expense Asian operations - 44,200
Tax expense European operations 69,000 123,500
Deferred tax asset valuation allowance 980,000 1,082,797
-------- ---------
Net tax provision $ 69,000 $ 749,497
========== ==========
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 September 30, 2002 and we concluded that under the
present circumstances, it would be appropriate for us to record a valuation
allowance against the increase in the deferred tax asset attributable to the
current year's loss from domestic operations.
23
Results of operations September 30, 2002 and 2001-continued
- -----------------------------------------------------------
Accumulated other comprehensive income (loss)
As of September 30, 2002, appearing in the equity section under " Accumulated
other comprehensive income (loss)" was a deferred gain of $187,074. Translation
gains and losses, which are the result of translating Euros to USD at the month
end exchange rate for current assets and liabilities, at historical rates for
fixed assets and paid in capital, and at average exchange rates for revenue and
expense items, resulted in a deferred loss of $3,845 as of September 30, 2002.
Mark to market gains and losses 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. Prior to
July 1, 2002, the Company did not qualify for cash flow hedge accounting under
FAS 133, therefore material gains or losses were recorded through operations. As
a result of our qualification for cash flow hedge accounting, effective July 1,
2002, gains aggregating to $190,919 on these contracts are shown in the equity
section under "Accumulated other comprehensive income."
The components of other comprehensive income (loss) as of September 30, 2002 are
shown below:
Fiscal 2002 Other
As of comprehensive As of
9/30/01 income (loss) 9/30/02
------- ------------- -------
Translation gains(loss) on HDE S.a.r.l Euro accounts translated to USD $ (218,987) $ 215,142 $ (3,845)
Mark to market gains (loss) per FAS 133 on open foreign currency contracts (48,217) 239,136 190,919
------- ------- -------
Other comprehensive income $ (267,204) $ 454,278 $ 187,074
========== ========= =========
The adoption of Financial Accounting Standards No. 133 (SFAS 133), "Accounting
for Derivative Instruments and Hedging Activities", on October 1, 2000 resulted
in a $319,000 net gain, due to the cumulative effect of a change in accounting
principle.
As a result of all of the above mentioned MD&A items, we recorded net income of
$347,522 for the twelve months ended September 30, 2002, which resulted in basic
and diluted net income per share of $0.04 on weighted average basic and diluted
shares of 8,887,107 and 9,002,150, respectively, compared to a net loss of
($2,281,697) for the twelve months ended September 30, 2001, which resulted in
basic and diluted net loss per share of ($0.26) on weighted average basic and
diluted shares of 8,910,117. Options to purchase 825,322 and 1,827,326 shares of
common stock at prices ranging from $2.07 to $10.06 and from $1.05 to $10.06,
respectively, were outstanding for the twelve month period ending September 30,
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.
24
Results of operations
September 30, 2001 and 2000
Sales decreased $15,382,028 for the fiscal year ended September 30, 2001
compared to the prior year as detailed geographically in the table below:
Percent Percent of sales by
Year ended September 30, Increase Increase geographic region
2001 2000 (decrease) (decrease) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Domestic $11,888,839 $ 19,504,372 $ (7,615,533) -39% 23% 30%
Europe 35,624,555 44,667,287 (9,042,732) -20% 70% 67%
Asia 3,397,069 2,120,832 1,276,237 60% 7% 3%
--------- --------- --------- -- - -
Total $50,910,463 $ 66,292,491 $(15,382,028) -23% 100% 100%
=========== ============ ============ == === ===
The primary forces causing the decrease were:
o Reduction in analog board sales
o Sluggish worldwide economic conditions
o Lower average Euro to dollar exchange rates
Unit sales for the fiscal year ended September 30, 2001 decreased about 23% to
approximately 744,000 as compared to approximately 969,000 for the prior year.
Sales to domestic customers were 23% of net sales compared to 29% for the prior
year. Sales to European customers were 70% of net sales compared to 68% for the
same period of the prior year. Sales to Asian customers were 7% compared to 3%
for the prior year.
Gross margins decreased $3,013,889 for the year ended September 30, 2001. Gross
margin as a percent of sales was 17.39% for the year ended September 30, 2001
compared to 17.90% for the year ended September 30, 2000. The components of the
margin decrease are detailed below:
Increase
(decrease)
----------
Decrease due to lower sales $ (3,844,481)
Increase due to improved material margins 2,036,221
Decrease due to labor related and other costs (342,853)
Inventory provision for obsolescence in excess of prior year's provision (862,776)
--------
Net decrease in margins $ (3,013,889)
The decrease of 0.51% in the gross margin percentage for the fiscal year ended
September 30, 2001 is as follows:
Increase
(decrease)
----------
Improved margin on assembled boards 4.00%
Increased labor related and other costs (2.36%)
Inventory reserve (2.15%)
-----
Net decrease (0.51%)
=====
The improved margins on assembled boards was primarily derived from:
o Cost savings obtained from the shifting of product pack out from an outside
third party to our distribution center in Ireland
o Larger sales mix of higher gross margin product
25
Results of operations September 30, 2001 and 2000-continued
- -----------------------------------------------------------
Increases in labor related and other costs was primarily due to the overhead,
labor and pack out material expenses of our Irish distribution center, which
commenced operations during the fourth quarter of fiscal 2000.
In recognition of the sales decline from fiscal 2000, slower sales of older
product lines and engineering changes to products, we reviewed the net
realizable value of our inventory as of September 30, 2001. We deemed it
necessary to increase our reserve for obsolete and slow moving inventory. An
additional reserve of $1,863,000 was recorded during the fourth quarter of
fiscal 2001 and charged to cost of sales. The additional reserve decreased
margins by 3.65% for fiscal 2001.
The chart below illustrates the components of selling, general and
administrative expenses:
Fiscal year ended September 30,
Increase Increase
2001 2000 (Decrease) 2001 2000 (Decrease)
---- ---- ---------- ---- ---- --------
Sales and Promotional $ 6,479,351 $ 8,159,606 $ (1,680,255) 12.8% 12.3% .5%
Customer Support 380,488 464,921 (84,433) .7% .7% -%
General and Administrative 3,422,635 3,607,086 (184,451) 6.7% 5.4 1.3%
--------- --------- -------- --- --- ---
Total $10,282,474 $12,231,613 $ (1,949,139) 20.2% 18.4% 1.8%
Selling General and Administrative expenses decreased $1,949,139 from the prior
year. As a percentage of sales, Selling, General and Administrative expenses for
the fiscal year ended September 30, 2001 increased by 1.8% when compared to the
prior year.
The decrease in sales and promotional expense of $1,680,255 was mainly due to:
o Lower advertising costs of $1,009,768 due to lower co-operative
advertising and reduced special promotions
o Reduced European sales office costs of $314,358
o Lower commission payments of $293,489 due to lower sales
o Decreased compensation costs of $21,513 due to personnel reductions
Customer Support costs decreased $84,433 mainly due to lower compensation costs.
The decrease in General and Administrative expenses of $184,451 was primarily
due to:
o Increase in compensation costs of $68,656 related to the
hiring of an MIS Director, an in house attorney, and the
compensation costs related to the addition of Eskape(TM) Labs
administrative personnel somewhat offset by personnel
reductions
o Increased amortization costs of $120,045 mainly due to the
amortization of goodwill and intangible assets related to the
Eskape(TM)Labs acquisition
o Decreased professional fees of $231,170 related to termination
of outside consulting agreements and lower legal costs
relating to legal fees incurred for a patent infringement suit
and legal costs associated to the start up of our Luxembourg
operation
o Lower rent costs of $25,035 due to the consolidation of the
Eskape(TM)Labs office in California into the Hauppauge office
26
Results of operations September 30, 2001 and 2000-continued
- --------------------------------------------------------------------------------
Research and development expenses decreased $155,508 or approximately 9.0%. The
decrease was due to lower worldwide compensation costs and less material and
contract services consumed.
Litigation settlement
In 1997, we licensed a file conversion library for use in our WinTV(R)
applications from Accusoft Corporation. On June 14, 2001, we received notice
that Accusoft Corporation ("Accusoft") had commenced an action against us in the
United States District Court for the District of Massachusetts (the "District
Court"), alleging that we:
o had infringed Accusoft's copyright in certain software in violation of
Title 17 of the United States Code
o had violated the terms of its software license by making excess copies
of the software without paying additional royalties
o used the software for unauthorized purposes
On July 31, 2001, we and Accusoft reached a settlement and release of all claims
against company in exchange for payment of the settlement amount of $212,500.
Write off of goodwill
During fiscal 2000, we acquired certain assets of Eskape(TM) Labs, Inc. This
acquisition was accounted for using the purchase method. The fair value of the
consideration paid exceeded the fair value of the assets acquired and goodwill
of approximately $810,000 was recorded.
Due to changing conditions during fiscal 2001, the following events and
circumstances indicated to us that our goodwill asset had been impaired and was
not likely to be recovered:
o Eskape(TM)Labs was not profitable during fiscal 2001 and did not
contribute, nor is expected to contribute, any positive cash flow
stream
o Eskape(TM) Labs did not fulfill its internal sales forecast for
fiscal 2001
o The asset value was greater than the estimated future cash flows
o At the time of the acquisition, we hired approximately 10 of the
Eskape(TM) Labs employees, including three from senior management.
Only four employees remain
o Certain Eskape(TM)Labs products have been deemed by management as slow
moving products
In recognition of the above events, we recognized an impairment loss during the
fourth quarter of fiscal 2001 for the entire remaining goodwill balance of
$701,919.
We have recorded the impairment loss as a component of income (loss) from
operations for fiscal 2001.
27
Results of operations September 30, 2001 and 2000-continued
- -----------------------------------------------------------
Other income (expense)
We had net other income for the year ended September 30, 2001 of $2,002,181
compared to net other expense for the prior year of $153,567 as detailed below:
Year Year
Ended 9/30/01 Ended 9/30/00
------------- -------------
Interest income $ 42,137 $ 104,485
Interest expense (30,833) (15,134)
Foreign currency transaction losses (15,863) (242,479)
Officer life insurance proceeds 2,000,000 -
Other 6,740 (439)
----- ----
Total other income $2,002,181 $(153,567)
========== =========
The increase in net other income was due to lower foreign currency transaction
losses and insurance proceeds collected from a key man life insurance policy on
the late Mr. Kenneth Aupperle, offset somewhat by interest expense on borrowings
outstanding. See "Legal Proceedings" for a discussion on certain pending
litigation on the said life insurance policy.
Tax provision (benefit)
Our net tax provision (benefit) for the year ended September 30, 2001 and 2000
is as follows:
2001 2000
---- ----
Tax (benefit) attributable to U.S operations $ (501,000) $(1,311,072)
Tax expense Asian operations 44,200 -
Tax expense European operations 123,500 127,000
Deferred tax asset valuation allowance 1,082,797 -
--------- ---------
Net tax provision (benefit) $ 749,497 $(1,184,072)
========== ===========
Effective October 1, 1999, we restructured our foreign operations. The result of
the restructuring eliminated the foreign sales corporation and established a new
Luxembourg corporation, which functions as the entity which services our
European customers. The new structure created separate domestic and foreign tax
entities, with the new Luxembourg entity paying a 7% license fee to our domestic
operation for use of the Hauppauge name. For the last two fiscal years, our
domestic operation has incurred losses. At September 30, 2000, our domestic
operation had a deferred tax benefit of $1,267,997. We analyzed the future
realization of the deferred tax asset during the fourth quarter of fiscal 2001
and we concluded that under the present circumstances, it would be appropriate
for us to record a valuation allowance against the deferred tax asset and reduce
certain income tax liabilities. The net result was a charge to our tax provision
for $1,082,797.
The adoption of Financial Accounting Standards No. 133 (SFAS 133), "Accounting
for Derivative Instruments and Hedging Activities", on October 1, 2000 resulted
in a $319,000 gain, due to the cumulative effect of a change in accounting
principle.
As a result of all of the above mentioned MD&A items, we recorded a net loss of
($2,281,697) for the year ended September 30, 2001, which resulted in basic and
diluted net loss per share of ($0.26) on weighted average basic and diluted
shares of 8,910,117, compared to a net loss of ($999,215) for the year ended
September 30, 2000, which resulted in basic and diluted net loss per share of
($0.11) on weighted average shares of 8,837,256. Options to purchase 1,827,326
and 1,610,226 shares of common stock at prices ranging $1.05 to $10.06 and $1.35
and $10.06 respectively were outstanding as of September 30, 2001 and 2000,
respectively but were not included in the computation of diluted net loss per
share because they were anti-dilutive.
28
Seasonality
As our sales are primarily to the consumer market, we have experienced certain
seasonal revenue trends. Our peak sales quarter, due to holiday season sales of
computer equipment, is our first fiscal quarter (October to December), followed
by our second fiscal quarter (January to March). In addition, our international
sales, mostly in the European market, were 73%, 77% and 70% 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:
As of September 30,
2002 2001 2000
----- ---- ----
Cash $ 4,964,522 $ 4,422,239 $ 2,744,855
Working Capital 11,276,942 10,258,143 11,766,900
Stockholders' Equity 11,966,612 11,185,618 13,653,677
We had cash and cash equivalents as of September 30, 2002 of $4,964,522, an
increase of $542,283 over September 30, 2001.
The increase was due to:
Net income adjusted for non cash items $ 344,126
Decrease in inventories 466,481
Decrease in prepaid expenses and other current assets 101,531
Increase in accounts payable other current liabilities 281,025
Proceeds from employee stock purchases 31,206
Less cash used for:
Increase in accounts receivable (504,866)
Purchases of fixed assets (87,208)
Purchase of treasury stock (90,012)
-------
Net increase in cash $ 542,283
========
Net cash of $688,297 provided by operating activities was primarily due to a
decrease in inventories of $466,481, prepaid expenses and other current assets
of $101,531, an increase in accounts payable and other current liabilities of
$281,025 and net income adjusted for non cash items of $344,126, offset somewhat
by cash used to fund increases in accounts receivable of $504,866. The increase
in accounts receivable was the result of an increase in sales of $735,488 for
the three months ended September 30, 2002 over the three months ended September
30, 2001.
Cash of $87,208 and $90,012 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 $31,206.
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.
29
Liquidity and Capital Resources-continued
- -----------------------------------------
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 September 30, 2002, we held 514,317
treasury shares purchased for $1,461,574 at an average purchase price of
approximately $2.84 per share.
On June 1, 2000 we acquired certain assets of Eskape(TM) Labs Inc. ("Eskape"), a
California based company specializing in designing and manufacturing TV and
video products for Apple(R)Macintosh(R) computers. The purchased assets expand
and complement our product line into the Apple(R)Macintosh(R) market. The cash
price for the acquisition, which was accounted for under the purchase method,
was approximately $900,000, which included $100,000 in direct transaction costs
and a restrictive covenant totaling $50,000. In addition to the price paid for
the acquired assets, the purchase agreement also provided for contingent
additional consideration, none of which was earned. See (Note 10) to
"Consolidated Financial Statements."
We believe that our cash and cash equivalents as of September 30, 2002 and our
internally generated cash flow will provide us with sufficient liquidity to meet
our currently foreseeable short-term and long-term capital needs.
Critical Accounting Policies and Estimates
- ------------------------------------------
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements.
We believe the following critical accounting policies affect the significant
judgments and estimates used in the preparation of the our financial statements:
o Revenue Recognition
o Management's estimates