UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission file number 1-13550
HAUPPAUGE DIGITAL, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3227864
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
91 Cabot Court, Hauppauge, New York 11788
(Address of principal executive offices)
(631) 434-1600
(Registrant's telephone number, including area code )
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes No X
--- ---
As of May 6, 2004, 9,027,331 shares of .01 par value Common Stock of the
registrant were outstanding, not including treasury shares.
1
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
----------------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1.Financial Statements Page No.
--------
Condensed Consolidated Balance Sheets-
March 31, 2004 (unaudited) and September 30, 2003 (audited) 3
Condensed Consolidated Statements of Income-
Six months ended March 31 2004 (unaudited) and 2003 (unaudited) 4
Condensed Consolidated Statements Income -
Three months ended March 31, 2004 (unaudited) and 2003 (unaudited) 5
Condensed Consolidated Statements of Other Comprehensive Income -
Three months and six months ended March 31, 2004 (unaudited) and 2003
(unaudited) 6
Condensed Consolidated Statements of Cash Flows-
Six Months ended March 31, 2004 (unaudited) and 2003 (unaudited) 7
Notes to Condensed Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 13-27
Item 3. Quantitative and Qualitative Disclosures about Market Risks 27-29
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 30
Item 5. Other information 30
Item 6. Exhibits and Reports on form 8-K 31
SIGNATURES 32
2
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31 September 30,
2004 2003
(Unaudited) (Audited)
-----------------------------
Assets:
Current Assets:
Cash and cash equivalents $ 6,535,122 $ 5,838,160
Receivables, net of various allowances 9,717,906 9,182,758
Inventories 9,557,603 5,474,374
Prepaid expenses and other current assets 679,503 546,328
-----------------------------
Total current assets 26,490,134 21,041,620
Property, plant and equipment, net 458,310 532,516
Security deposits and other non current assets 76,216 76,216
-----------------------------
$27,024,660 $21,650,352
-----------------------------
-----------------------------
Liabilities and Stockholders' Equity :
Current Liabilities:
Accounts payable $ 8,806,754 $ 7,452,867
Accrued expenses 4,019,145 2,539,678
Income taxes payable 187,730 189,122
----------------------------
Total current liabilities 13,013,629 10,181,667
Stockholders' Equity
Common stock $.01 par value; 25,000,000 shares authorized, 9,476,669
And 9,420,315 issued, respectively 94,767 94,203
Additional paid-in capital 12,410,791 12,302,119
Retained earnings 1,637,237 99,987
Accumulated other comprehensive income 1,365,452 469,592
Treasury Stock, at cost, 542,067 shares (1,497,216) (1,497,216)
----------------------------
Total stockholders' equity 14,011,031 11,468,685
----------------------------
$27,024,660 $21,650,352
----------------------------
----------------------------
See accompanying notes to condensed consolidated financial statements
3
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six months ended March 31,
----------------------------
2004 2003
----------------------------
Net Sales $35,034,581 $29,439,344
Cost of Sales 25,521,988 22,148,910
----------------------------
Gross Profit 9,512,593 7,290,434
Selling, General and Administrative Expenses 6,344,385 5,430,774
Research & Development Expenses 854,664 941,324
Arbitration proceeding 206,250 -
Litigation proceeding 500,000 -
----------------------------
Income from operations 1,607,294 918,336
Other Income:
Interest income 3,136 10,005
Foreign currency 21,899 27,646
----------------------------
Other income 25,035 37,651
----------------------------
Income before taxes on income 1,632,329 955,987
Tax provision 95,079 39,000
----------------------------
Net income $1,537,250 $916,987
----------------------------
----------------------------
Net income per share:
Basic $0.17 $0.10
Diluted $0.16 $0.10
----------------------------
----------------------------
See accompanying notes to condensed consolidated financial statements
4
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended March 31,
-----------------------------
2004 2003
-----------------------------
Net Sales $16,804,283 $13,918,858
Cost of Sales 11,873,313 10,549,386
-----------------------------
Gross Profit 4,930,970 3,369,472
Selling, General and Administrative Expenses 3,223,769 2,724,472
Research & Development Expenses 444,390 448,251
Arbitration proceeding 206,250 -
Litigation proceeding 500,000 -
-----------------------------
Income from operations 556,561 196,749
Other Income:
Interest income 1,397 4,034
Foreign currency 33,232 72,249
-----------------------------
Other income 34,629 76,283
-----------------------------
Income before taxes on income 591,190 272,032
Tax provision 46,800 12,517
-----------------------------
Net income $ 544,390 $ 260,515
-----------------------------
-----------------------------
Net income per share:
Basic and Diluted $0.06 $0.03
-----------------------------
-----------------------------
See accompanying notes to condensed consolidated financial statements
5
HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended March 31,
2004 2003
---- ----
Net income $ 544,390 $ 260,515
Forward exchange contracts marked to market (16,483) 163,879
Foreign currency translation (loss) gain (142,087) 13,318
----------------------------
Other comprehensive income $ 385,820 $ 437,712
----------------------------
----------------------------
Six months ended March 31,
2004 2003
---- ----
Net income $1,537,250 $ 916,987
Forward exchange contracts marked to market 187,978 (355,095)
Foreign currency translation gain 707,882 164,046
----------------------------
Other comprehensive income $2,433,110 $ 725,938
----------------------------
----------------------------
See accompanying notes to condensed consolidated financial statements
6
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended March 31,
2004 2003
----------------------------------
Net income $ 1,537,250 $ 916,987
----------------------------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 121,054 137,530
Other non cash items 12,667 19,241
Changes in current assets and liabilities:
Accounts receivable 360,712 (2,064,815)
Inventories (4,083,229) (806,167)
Prepaid expenses and other current assets (133,175) (195,544)
Accounts payable and other current liabilities 2,831,962 1,836,731
----------------------------------
Total adjustments (890,009) (1,073,024)
----------------------------------
Net cash provided by (used in) operating activities 647,241 (156,037)
----------------------------------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment (46,848) (125,569)
----------------------------------
Net cash used in investing activities (46,848) (125,569)
----------------------------------
Cash Flows From Financing Activities:
Proceeds from employee stock and stock option purchases 96,569 13,501
Purchase of treasury stock - (35,642)
----------------------------------
Net cash provided by (used in) financing activities 96,569 (22,141)
----------------------------------
Net increase (decrease) in cash and cash equivalents 696,962 (303,747)
Cash and cash equivalents, beginning of period 5,838,160 4,964,522
----------------------------------
Cash and cash equivalents, end of period $ 6,535,122 $ 4,660,775
----------------------------------
----------------------------------
Supplemental disclosures:
Income taxes paid $ 81,616 $ 4,945
----------------------------------
----------------------------------
See accompanying notes to condensed consolidated financial statements
7
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements included
herein have been prepared in accordance with generally accepted accounting
principles for interim period reporting in conjunction with the instructions to
Form 10-Q. Accordingly, these statements do not include all of the information
required by generally accepted accounting principles for annual financial
statements. In the opinion of management, all known adjustments (consisting of
normal recurring accruals and reserves) necessary to present fairly the
financial position, results of operations and cash flows for the three month and
six month period ended March 31, 2004 have been included. It is suggested that
these interim statements be read in conjunction with the financial statements
and related notes included in Hauppauge Digital Inc. ("the Company") the
Company's September 30, 2003 Form 10-K.
The operating results for the three month and six month period ended March 31,
2004 are not necessarily indicative of the results to be expected for the
September 30, 2004 year end.
Note 2. Receivables
Accounts and other receivables consisted of the following as of March 31, 2004:
March 31, September 30,
2004 2003
------------ ------------
Trade receivables $ 8,882,829 $ 7,435,539
Receivable from contract manufacturers 3,514,622 4,134,456
GST and VAT taxes receivables 245,019 289,700
Allowances and reserves (3,232,184) (2,887,184)
Income tax receivable 175,000 175,000
Other 132,620 35,247
------------ ------------
$ 9,717,906 $ 9,182,758
============ ============
Note 3. Derivative Financial Instruments
Sales to our European customers are invoiced in local currencies, and subsequent
payments received from our customers are in local currencies (primarily the Euro
and Great British Pound). On the supply side, since we predominantly deal with
North American and Asian suppliers, approximately 75% of our inventory
supporting our Euro and Great British Pound sales are purchased and paid in U.S.
Dollars. Consequently, changes in exchange rates expose our U.S. denominated
inventory on the books of our European subsidiary to market risks resulting from
the fluctuations in the foreign currency exchange rates to the U.S. Dollar. We
attempt to reduce these risks by entering into foreign exchange forward
contracts with financial institutions. The purpose of these forward contracts is
to hedge the foreign currency market exposures underlying the forecasted U.S.
Dollar denominated inventory purchases required to support our European sales.
As of March 31, 2004, we had foreign currency contracts outstanding of
approximately $3,257,700 against the delivery of the Euro. The contracts expire
through September 2004. Our accounting policies for these instruments designate
such instruments as cash flow hedging transactions. We do not enter into such
contracts for speculative purposes. We record all derivative gains and losses on
the balance sheet as a component of stockholders' equity under the caption
"Accumulated other comprehensive income (loss)". The Company recorded a deferred
gain of $187,978 for the six months ended March 31, 2004. As of March 31, 2004,
a deferred loss of $46,613 reflecting the cumulative mark to market loss of our
derivatives, was recorded as a component of accumulated other comprehensive
income on the balance sheet.
For the three months and six months ended March 31, 2004, we recorded a decrease
in sales of $103,835 and $909,368, respectively, related to our contracts that
closed during these periods and the changes in the fair value of our derivative
contracts. For the three months and six months ended March 31, 2003, we recorded
a decrease in sales of $609,100 and $1,158,700, respectively, related to our
contracts that closed during these periods and the changes in the fair value of
our derivative contracts.
8
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Inventories
Inventories have been valued at the lower of average cost or market on a first
in first out basis. The components of inventory consist of:
March 31, September 30,
2004 2003
---- ----
Component Parts $4,275,738 $1,446,670
Finished Goods 5,281,865 4,027,704
---------- ----------
$9,557,603 $5,474,374
========== ==========
Note 5. Net Income Per Share
Basic net income per share includes no dilution and is computed by dividing net
income by the weighted average number of shares of common stock outstanding for
the period. Diluted net income per share reflects, in the periods in which they
have a dilutive effect, the dilution which would occur upon the exercise of
stock options. A reconciliation of the shares used in calculating basic and
diluted net income per share is as follows:
Three Months Ended Six Months Ended
March 31, March 31
2004 2003 2004 2003
--------- --------- ---------- -----
Weighted average shares outstanding-basic 8,901,734 8,862,774 8,891,135 8,860,578
Number of shares issued on the assumed exercise of stock options 848,173 97,047 684,964 57,357
--------- --------- ---------- ---------
Weighted average shares outstanding-diluted 9,749,907 8,959,821 9,576,099 8,917,935
========= ========== ========= =========
Options to purchase 120,513 and 1,240,122 shares of common stock at prices
ranging $5.25 to $10.06 and $1.47 and $10.06, respectively, were outstanding for
the three month period ending March 31, 2004 and 2003, respectively, but were
not included in the computation of diluted earnings per share because they were
anti-dilutive.
Options to purchase 228,905 and 1,455,425 shares of common stock at prices
ranging $3.88 to $10.06 and $1.35 and $10.06, respectively, were outstanding for
the six month period ending March 31, 2004 and 2003, respectively, but were not
included in the computation of diluted earnings per share because they were
anti-dilutive
Note 6. Accumulated other comprehensive income
The Euro is the functional currency of the Company's European subsidiary,
Hauppauge Digital Europe Sarl. Assets and liabilities of this subsidiary are
translated to U.S. Dollars at the spot exchange rate in effect at end of each
reporting period, while equity accounts are translated to U.S. Dollars at the
historical rate in effect at the date of the contribution. Operating results are
translated to U.S. Dollars at the average prevailing exchange rate for the
period, with the exception of sales which are translated to U.S. Dollars at the
average monthly forward exchange contract rate. The use of translating accounts
at the spot, historical and average exchange rates results in foreign currency
translation gains or losses. These translation gains or losses are recorded on
the balance sheet under accumulated other comprehensive income.
The Company uses forward exchange contracts to reduce our exposure to
fluctuations in foreign currencies. Mark to market gains and losses on these
open contracts result from the difference between the USD value of our open
foreign currency forward contracts at the average contract rate as opposed to
the same contracts translated at the month end forward spot rate. The Company
qualifies for cash flow hedge accounting as prescribed under FAS 133, which
allows the Company to record the mark to market gains and losses in the equity
section of our balance sheet under accumulated other comprehensive income.
9
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of March 31, 2004, appearing in the equity section under " Accumulated other
comprehensive income" was a deferred gain of $1,365,452, which consisted of a
deferred translation gain of $1,412,065 and a deferred loss of $46,613 due to
the mark to market losses on the difference between the value of our open
forward exchange contracts at the contract rates versus the same contracts
valued at the period ending forward spot rate.
The Company's Asian subsidiary reports its financial position and results of
operations in the reporting currency of the Company.
Note 7. Revenue Recognition
We sell through a sales channel which consist of retailers , distributors and
original equipment manufacturers ("OEM's"). Our prices are fixed consistently
over the entire sales channel. The majority of our customers are granted open
payment terms. Those customers deemed as large credit risks either pay in
advance or issue us a letter of credit.
The Company requires the customer to submit a purchase order to the Company. The
price of the product and payment terms are fixed per the terms of the purchase
order. Upon shipment of the order to the customer, the title to the goods is
passed to the customer. The customer is legally obligated to pay for the order
within the payment terms stated on the customer's purchase order. The obligation
to insure the products and the cost of any pilferage while in the customer's
possession is the responsibility of the customer. Our retail products are
typically stocked on the shelves of retailers, and are subject to the normal
consumer traffic that retail stores attract. Aside from normal store promotions
such as end-caps and advertisements in the store's circular, the Company has no
further obligation to assist in the resale of the product.
The Company offers it customers a right of return, but does not offer stock
balancing. Our accounting complies with SFAS 48 as typically at the end of every
quarter, the Company, based on historical data, evaluates its sales reserve
level based on the previous six months sales. Due to seasonal nature of our
business coupled with the changing economic environment, management exercises
some judgement with regard to the historical data to arrive at the reserve.
Note 8. Product segment and Geographic Information
We engineer, develop, subcontract for manufacture, market and sell products for
the personal computer ("PC") market and the Apple(R) Macintosh(R) market.
We also offer products for the home entertainment market. We have two primary
product categories: analog TV products and digital TV products. Our WinTV(R)
analog TV receivers allow PC users to watch television on their PC screen in a
resizable window, and also enable recording of TV shows to a hard disk. Our
WinTV(R)-PVR TV personal video recorder products include hardware MPEG encoders,
which improve the performance of TV recording and add instant replay and program
pause functions, plus also enable the `burning' of TV recordings onto DVD or CD
media. Our Eskape(TM) Labs products allow users of Apple(R)Macintosh(R)
computers to watch television on their computer screen.
We offer three types of digital TV receivers. Our WinTV(R) digital receivers can
receive digital TV transmissions and display the digital TV show in a
re-sizeable window on a user's PC screen. Our Digital Entertainment Center
products ("DEC") allow users to receive digital TV broadcasts and display the
digital TV on either a TV set or a PC screen. Our MediaMVP(TM) product was
designed to allow PC users to play digital media such as digital music, digital
pictures and digital videos on a TV set via a home network.
10
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Product segment and Geographic Information-continued
We sell our products through computer and electronic retailers, computer
products distributors and original equipment manufacturers "OEM's". Sales by
functional category are as follows:
Three months ended Six months ended
March 31, March 31,
2004 2003 2004 2003
Product line sales ---- ---- ---- ----
- ------------------
Analog sales $ 13,724,007 $ 10,245,978 $28,153,235 $21,539,440
Digital sales 3,080,276 3,672,880 6,881,346 7,899,904
------------ ------------ ----------- -----------
$ 16,804,283 $ 13,918,858 $35,034,581 $29,439,344
============ ============ =========== ===========
The Company sells its products through an international network of distributors
and retailers. European sales accounted for 65% and 68% and 70% and 69% of sales
for the three and six months ended March 31, 2004 and 2003. Sales percent by
geographic region are as follows:
Three months ended March 31, Six months ended March 31
---------------------------- -------------------------
Sales percent by geographic region 2004 2003 2004 2003
- ---------------------------------- ---- ---- ---- ----
United States 33% 30% 28% 29%
Europe 65% 68% 70% 69%
Asia 2% 2% 2% 2%
---- ---- ---- ----
Total 100% 100% 100% 100%
==== ==== ==== ====
Note 9. Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", ("APB 25"), and related interpretations in
accounting for its employee stock options. Under APB 25, no compensation expense
is recorded so long as the quoted market price of the stock at the date of the
grant is equal to the exercise price.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of Financial Accounting Standards Board Statement No. 123
"Accounting for Stock-Based Compensation", ("FAS 123"). The weighted average
fair value of options granted during the three and six months ended March 31,
2004 and March, 31 2003 was $0.43 and $0.42, respectively. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for the three and
six months ended March 31, 2004 and March 31, 2003: risk-free interest rates of
3.25%, volatility factor of the expected market price of the Company's Common
Stock of 40%, assumed dividend yield of 0%, and a weighted-average expected life
of the option of 5 years.
Under the accounting provisions of FAS 123, the Company's net income and net
income per share would have been adjusted to the pro forma amounts indicated
below:
11
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended Six months ended
---------------------------------------------------------
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported .......................................... $ 544,390 $ 260,515 $ 1,537,250 $916,987
Deduct: Total stock-based employee compensation expense
determined under fair value method, net of related taxes ... (24,788) (11,626) (49,576) (23,252)
--------- --------- ----------- --------
Pro forma net income ............................................ $ 519,602 $ 248,889 $ 1,487,674 $893,735
========= ========= =========== ========
Net income per share - as reported:
Basic............................................................ $ 0.06 $ 0.03 $ 0.17 $ 0.10
========= ========= =========== ========
Diluted.......................................................... $ 0.06 $ 0.03 $ 0.16 $ 0.10
========= ========= =========== ========
Net income per share - pro forma:
Basic............................................................ $ 0.06 $ 0.03 $ 0.17 $ 0.10
========= ========= =========== ========
Diluted.......................................................... $ 0.05 $ 0.03 $ 0.16 $ 0.10
========= ========= =========== ========
Note 10. Arrangements with Off-Balance Sheet Risk - Guarantees
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of the Indebtedness of Others, which clarifies the requirements of
SFAS No. 5, Accounting for Contingencies, relating to a guarantor's accounting
for and disclosures of certain guarantees issued. FIN 45 requires enhanced
disclosures for certain guarantees. It also requires certain guarantees that are
issued or modified after December 31, 2002, including certain third-party
guarantees, to be initially recorded on the balance sheet at fair value. For
guarantees issued on or before December 31, 2002, liabilities are recorded when
and if payments become probable and estimable. FIN 45 has the general effect of
delaying recognition for a portion of the revenue for product sales that are
accompanied by certain third-party guarantees. The financial statement
recognition provisions became effective prospectively beginning January 1, 2003.
The Company has not entered into any new guarantees, nor have they ammended
their existing guarantee since the effective date.
We occupy a facility located in Hauppauge New York and use it for executive
offices and for the testing, storage and shipping of our products. In February
1990, Hauppauge Computer Works, Inc., a wholly-owned subsidiary of the Company
("HCW"), entered into a lease, as amended, with Ladokk Realty Co. (successor
company now known as Ladokk Realty Co., LLC), a real estate partnership which is
principally owned by Kenneth Plotkin, the Company's Chairman of the Board, Chief
Executive Officer, and Vice President of Marketing and the holder of
approximately 6% of the Company's outstanding Common Stock as of May 14, 2003,
Dorothy Plotkin, the wife of Kenneth Plotkin, a holder of approximately 6% of
the Company's Common Stock as of May 14, 2004 and Laura Auppele, believed by the
Company to be the holder of approximately 12% of the Company's Common Stock as
of May 14, 2004. Until February 17, 2004, the premises subject to such lease
were subject to two mortgages guaranteed by the Company. On February 17, 2004
HCW and Ladokk terminated the old lease and HCW entered into a new lease
agreement with Ladokk Realty Co., LLC. The lease term is for five years and
terminates on February 16, 2009. Concurrently with the new lease, our landlord
completed a refinancing of its mortgages, and the new lender did not require us
to sign a guarantee. In recognition of this, we are no longer obligated to
guarantee the landlord's mortgages.
The Company's Audit Committee is in the process of evaluating the February 17,
2004 lease.
12
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11. Settlement of Arbitration and Litigation Proceedings
- -------------------------------------------------------------
Arbitration Proceeding
In November 2002, the estate of Kenneth Aupperle ("Estate") filed a demand for
arbitration against the Company with the American Arbitration Association. The
Estate claimed certain property rights and interest in the Company, amounts due
and owing to the Estate based on various corporate agreements with the late Mr.
Aupperle and certain insurance policies. The Estate was seeking to recover a
minimum of $2.5 million in damages, fees and expenses.
The arbitration proceeding was heard before a New York arbitration panel. On
April 19, 2004, the arbitration panel awarded the Estate a total of $206,250 in
relation to certain stock options. No fees or expenses were awarded. The Company
accrued a charge of $206,250 in the second quarter of fiscal year 2004 to cover
the award.
Litigation Proceeding
In March 2002, Polywell International, Inc. ("Polywell"), a supplier of cables
to the Company, commenced an action seeking $339,520 in damages plus exemplary
damages, attorney's fees, costs and interest with relation to certain unpaid
invoices. The Company paid these invoices to the sales representative, who
subsequently failed to forward the payments to Polywell. The Company had dealt
with this sales representative over a number of years, who also represented
himself as Polywell's payment and collection agent.
The case went to trial and was heard before a jury in the United States District
Court in the Northern District of Texas, Dallas Division. Since the Company had
dealt with the sales representative for several years with respect to all
purchasing and payment issues, the Company believed that paying the invoices to
this sales representative was tantamount to paying Polywell. The jury however
ruled in favor of Polywell and the court granted Polywell a judgment against the
Company, awarding an amount of $339,520 to Polywell. In addition, the Company is
obligated to pay Polywell's attorney's fees and interest. The Company accrued a
charge of $500,000 in the second quarter of fiscal year 2004 to cover the award.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Six Month Period ended March 31, 2004 Compared to March 31, 2003
- ------------------------------------------------------------------------------
Results of operations for the six months ended March 31, 2004 compared to March
31, 2003 are as follows:
Six Six
Months Months
Ended Ended Variance Percentage of sales
3/31/04 3/31/03 $ 2004 2003 Variance
------- ------- - ---- ---- --------
Net Sales $ 35,034,581 $ 29,439,344 $5,595,237 100.0% 100.0% 0
Cost of sales 25,521,988 22,148,910 3,373,078 72.85% 75.24% -2.39%
------------ ------------ --------- ----- ----- ----
Gross Profit 9,512,593 7,290,434 2,222,159 27.15% 24.76% 2.39%
Gross Profit % 27.15% 24.76% 2.39%
Costs:
Sales & Marketing 4,167,323 3,701,409 465,914 11.89% 12.57% -0.68%
Technical Support 215,944 199,775 16,169 0.62% 0.68% -0.06%
General & Administrative 1,961,118 1,529,590 431,528 5.60% 5.20% 0.40%
------------ ------------ --------- ----- ----- ----
Total Selling, General and Administrative costs 6,344,385 5,430,774 913,611 18.11% 18.45% -0.34%
Research & Development 854,664 941,324 (86,660 2.44% 3.20% -0.76%
------------ ------------ --------- ----- ----- ----
Total Costs 7,199,049 6,372,098 826,951 20.55% 21.65% -1.10%
------------ ------------ --------- ----- ----- ----
Net operating income before arbitration & litigation 2,313,544 918,336 1,395,208 6.60% 3.11% 3.49%
Arbitration & litigation items:
Arbitration proceeding 206,250 - 206,250 0.59% 0.00% 0.59%
Litigation proceeding 500,000 - 500,000 1.43% 0.00% 1.43%
------------ ------------ --------- ----- ----- ----
Net operating income 1,607,294 918,336 688,958 4.58% 3.11% 1.47%
Other income
- ------------
Interest income 3,136 10,005 (6,869) 0.01% 0.03% -0.02%
Foreign currency 21,899 27,646 (5,747) 0.06% 0.10% -0.04%
------------ ------------ -------- ----- ----- ----
Total other income 25,035 37,651 (12,616) 0.07% 0.13% -0.06%
------------ ------------ -------- ----- ----- ----
Income before taxes on income 1,632,329 955,987 676,342 4.65% 3.24% 1.41%
Taxes on income 95,079 39,000 56,079 0.26% 0.13% 0.13%
------------ ------------ -------- ---- ---- ----
Net income $ 1,537,250 $ 916,987 $620,263 4.39% 3.11% 1.28%
============ ============ ======== ==== ==== ====
Net sales for the six months ended March 31, 2004 increased $5,595,237 compared
to the six months ended March 31, 2003 as shown on the table below.
Increase
(decrease) Increase Percentage of sales by
Location Six Months Six Months Dollar (decrease) Geographic region
- -------- ended 3/31/04 ended 3/31/03 Variance Variance % 2004 2003
------------- ------------- -------- ---------- ---- ----
Domestic $ 9,956,307 $ 8,675,369 $ 1,280,938 15% 28% 29%
Europe 24,610,163 20,381,092 4,229,071 21% 70% 69%
Asia 468,111 382,883 85,228 22% 2% 2%
------------- ------------- ----------- ---------- --- ---
Total $ 35,034,581 $ 29,439,344 $ 5,595,237 19% 100% 100%
============= ============= =========== ========== === ===
The primary factors contributing the sales increase were:
o Stronger demand for retail PVR-250 products due to exposure generated from
media center awareness
o Increased sales of OEM PVR-250 for media center products
o Introduction in early fiscal 2004 of Media MVP product
o Increase PVR-USB sales due to introduction of lower cost model during
fiscal 2003 and media center awareness
o Higher sales of USB analog product
o Increased DVB sales
o Increase in our average Euro to USD contract rate of about 21.0% (1.2359
versus 0.9650) for the six months ended March 31, 2004 over the same six
months of last year , which yielded higher converted Euro to USD sales
The increases were offset somewhat by:
o Decrease in Digital Entertainment Center (DEC) sales
o Decrease in the analog family sales
o Increase in sales return reserve of $320,000 to reflect increased prior six
month sales level and residual Media MVP returns for improper production
placement of resistor
14
Results of operations-six month period ended March 31, 2004 compared to March
31,2003-continued
- -----------------
Net sales to domestic customers were 28% of net sales for the six months ended
March 31, 2004 compared to 29% for the six months ended March 31, 2003. Net
sales to European customers were 70% of net sales compared to 69% for the same
period of last year. Net sales to Asian customers were 2% for both periods.
Gross profit increased $2,222,159 for the six months ended March 31, 2004
compared to the same six month period of the prior year.
The increases and (decreases) in the gross profit are detailed below:
Increase
(decrease)
--------
Due to increased sales $1,772,136
Higher margins on non OEM sales 1,672,669
Effect on margin due to lower margin OEM sales (635,188)
Due to increases in labor related and other costs (587,458)
-----------
Total increase in gross profit $2,222,159
===========
Gross profit percentage for the six months ended March 31, 2004 was 27.15%
compared to 24.76% for the six months ended March 31, 2004, an increase of
2.39%.
The increases and (decreases) in the gross profit percent are detailed below:
Increase
(decrease)
--------
Higher margins on non OEM sales 4.78%
Effect on margin due to lower margin OEM sales (1.82)%
Labor related and other costs (0.57)%
-----
Net increase in gross profit % 2.39%
=====
The increase in gross profit percent of 2.39% for non-OEM products was primarily
due to:
o Cost reductions attained during fiscal 2003 and the first quarter of fiscal
2004
o Cost reduced versions of the PVR-250 and PVR-USB introduced during fiscal
2003
o Increase in our average Euro to USD contract rates, used to convert Euro
sales to U.S. dollar sales, of about 21% (1.1681 versus 0.9650) for the six
months ended March 31, 2004 over the same six month period of last year.
Since about 75% of our European inventory is purchased in U.S. dollars,
while most of the European sales are invoiced in Euros or Great British
Pounds, the Company benefits from the higher converted Euro to U.S. dollar
sales, which are sold against either stable or declining U.S. dollar unit
inventory cost
o Sales of lower margin DEC boards declined as a percentage of sales from
last year
The decrementing effect of OEM sales on our gross profit percentage for the six
months ended March 31, 2004 due to the following factors:
Sales of our OEM PVR-250 boards for the six months ended March 31, 2004 were
$4,242,227 and 12.11% of sales compared to $1,851,997 and 6.29% of sales for the
six months ended March 31, 2003. The larger mix of lower margin OEM sales during
the first six months of fiscal 2004 compared to fiscal 2003 caused a decrease in
gross profit percent of 1.82% over the prior year.
The decrease in the gross margin percent of 0.57% attributable to labor related
and other costs for the six months ended March 31, 2004 was due to the
percentage increase in labor related and other costs for the six months ended
March 31, 2004 over the six months ended March 31, 2003 of 28.89% exceeding the
percentage increase in sales of 19.01%.
15
Results of operations-six month period ended March 31, 2004 compared to March
31,2003-continued
- -----------------
The chart below illustrates the components of Selling, General and
Administrative costs:
Six months ended March 31,
Dollar Costs Percentage of Sales
------------------------------------------------------------------------
Increase Increase
2004 2003 (Decrease) 2004 2003 (Decrease)
---- ---- -------- ---- ---- --------
Sales and Marketing $ 4,167,323 $3,701,409 $ 465,914 11.89% 12.57% -0.68%
Technical Support 215,944 199,775 16,169 0.62% 0.68% -0.06%
General and Administrative 1,961,118 1,529,590 431,528 5.60% 5.20% 0.40%
----------- ---------- ---------- ----- ----- -----
Total $ 6,344,385 $5,430,774 $ 913,611 18.11% 18.45% -0.34%
----- =========== ========== ========== ===== ====== =====
Selling, General and Administrative expenses increased $913,611 from the prior
year. As a percentage of sales, Selling, General and Administrative expenses
decreased by 0.34% when compared to the six months ended March 31, 2003.
The increase in Sales and Marketing expense of $465,914, which accounted for
approximately 51% of the total increase in Selling, General and Administrative
expenses, was mainly due to:
o Higher advertising costs of $124,975 due to higher sales based co-operative
advertising and increased special promotions
o Higher advertising costs of $151,298 due to higher translated Euro to U.S
dollar amounts due to the strengthening of the Euro against the USD
o Increased commission expense of $18,554 due to higher sales
o Increased commission expense of $41,353 due to higher translated Euro to
U.S dollar amounts due to the strengthening of the Euro against the USD
o Increased European sales office costs of $162,056 due to higher translated
Euro to U.S dollar amounts due to the strengthening of the Euro against the
USD
o Increased third party European merchandising program of $80,470
o Increased UK in store promotions of $70,326
o Increased public relation costs for launch of Media MVP product of $31,722
o Lower merchandise material promotions of $77,178
o Lower sales office expenses of $157,044 due to personnel shift and stricter
budget controls
The increase in General and Administrative expenses of $431,528 was primarily
due to:
o Higher legal and legal related costs of $330,229 due to litigation and
arbitration cases
o Directors fees of $48,625
o European accounting service fees $26,079
o Increment to account receivables reserves of $25,000 in reflection of
higher sales
Research and Development expenses decreased $86,660. The decrease was mainly due
to lower compensation costs attributable to open positions not filled and less
use of third party software development in fiscal 2004 compared to fiscal 2003
16
Results of operations-six month period ended March 31, 2004 compared to March
31,2003 continued
- -----------------
Arbitration Proceeding
In November 2002, the estate of Kenneth Aupperle ("Estate") filed a demand for
arbitration against the Company with the American Arbitration Association. The
Estate claimed certain property rights and interest in the Company, amounts due
and owing to the Estate based on various corporate agreements with the late Mr.
Aupperle and certain insurance policies. The Estate was seeking to recover a
minimum of $2.5 million in damages, fees and expenses.
The arbitration proceeding was heard before a New York arbitration panel. On
April 19, 2004, the arbitration panel awarded the Estate a total of $206,250 in
relation to certain stock options. No fees or expenses were awarded. The Company
accrued a charge of $206,250 in the second quarter of fiscal year 2004 to cover
the award.
Litigation Proceeding
In March 2002, Polywell International, Inc. ("Polywell"), a supplier of cables
to the Company, commenced an action seeking $339,520 in damages plus exemplary
damages, attorney's fees, costs and interest with relation to certain unpaid
invoices. The Company paid these invoices to the sales representative, who
subsequently failed to forward the payments to Polywell. The Company had dealt
with this sales representative over a number of years, who also represented
himself as Polywell's payment and collection agent.
The case went to trial and was heard before a jury in the United States District
Court in the Northern District of Texas, Dallas Division. Since the Company had
dealt with the said sales representative for several years with respect to all
purchasing and payment issues, the Company believed that paying the invoices to
this sales representative was tantamount to paying Polywell. The jury however
ruled in favor of Polywell and the court granted Polywell a judgment against the
Company, awarding an amount of $339,520 to Polywell. In addition, the Company is
obligated to pay Polywell's attorney's fees and interest. The Company accrued a
charge of $500,000 in the second quarter of fiscal year 2004 to cover the award.
Other income
Net other income for the six months ended March 31, 2004 was $25,035 compared to
net other income of $37,651 for the six months ended March 31, 2003 as detailed
below:
Six months ended March 31,
2004 2003
---- ----
Interest income $ 3,136 $10, 005
Foreign currency transaction gains (losses) 21,899 27,646
-------- --------
Total other income (expense) $ 25,035 $ 37,651
======== ========
Re-measurement of accounts denominated in currencies other than the Euro
We follow the rules prescribed in paragraph 16 of SFAS 52 "Foreign Currency
Translation", which states that accounts denominated in a currency other than an
entities functional currency, excluding inter-company accounts which are long
term in nature, need to be re-measured into the entities functional currency,
and any gain or loss from this re-measurement are included in the determination
of net income.
17
Results of operations-six month period ended March 31, 2004 compared to March
31,2003 continued
- -----------------
Re-measurement of accounts denominated in currencies other than the
Euro-continued
Since the functional currency of Hauppauge Digital Europe Sarl ("HDE Sarl") is
the Euro, any asset, liability or equity accounts which are invested in or
purchased using U.S. Dollars or Great British Pounds by HDE Sarl are revalued
into Euros at the end of each period. The gains or losses on HDE Sarl's books
resulting from the revaluation of U.S. Dollar and Great British Pound accounts
into Euros are booked in the Company's profit and loss statement in the other
income (loss) section under the description foreign currency transaction gains
(losses).
Accumulated other comprehensive income (loss)
The Euro is the functional currency of the Company's European subsidiary, HDE
Sarl. Assets and liabilities of this subsidiary are translated to U.S. Dollars
at the exchange rate in effect at the end of each reporting period, while equity
accounts are translated to U.S. Dollars at the historical rate in effect at the
date of the contribution. Operating results are translated to U.S. Dollars at
the average prevailing exchange rate for the period, with the exception of sales
which are translated to U.S. Dollars at the average monthly forward exchange
contract rate. The use of differing exchange rates results in foreign currency
translation gains or losses. Since the Euro denominated accounts on HDE Sarl's
books result in a net asset position (total Euro assets are in excess of Euro
liabilities), an increase in the Euro value results in a deferred gain for the
translation of Euro accounts to U.S. Dollars. The Company had a translation gain
of $704,183 recorded on the balance sheet as of September 30, 2003. For the six
months ended March 31 2004, the Company recorded on the balance sheet deferred
translation gains $707,882 resulting in a translation gain of $1,412,065
recorded as a component of accumulated other comprehensive income as of March
31, 2004.
The Company uses forward exchange contracts to reduce our exposure to
fluctuations in foreign currencies. Mark to market gains and losses on these
open contracts result from the difference between the USD value of our open
foreign currency forward contracts at the average contract rate as opposed to
the same contracts translated at the month end forward rate. The Company
qualifies for cash flow hedge accounting as prescribed under SFAS 133, which
allows the Company to record the mark to market gains and losses in the equity
section of our balance sheet under accumulated other comprehensive income. The
Company had mark to market losses of $234,591 recorded on the balance sheet as
of September 30, 2003. For the six months ended March 31, 2004, the Company
recorded, as component of other comprehensive income, a mark to market gain of
$187,978, resulting in a mark to market loss of $46,613 for contracts open as of
March 31, 2004.
As stated above, accumulated other comprehensive income (loss) consists of two
components:
o Translations gains and losses
o FAS 133 mark to market gains and losses on our open foreign exchange
contracts
The table below details the gains and losses recorded for the components that
make up accumulated other comprehensive income (loss):
Balance October to Balance January 04 to Balance
Accumulated other comprehensive income as of December 2003 As of March 04 As of
- --------------------------------------- September 30, Gains December 31, Gains March 31,
2003 (losses) 2002 (losses) 2004
---- ------------ ---- ------------- ---------
Translation gains $ 704,183 $ 849,969 $ 1,554,152 $ (142,087) $1,412,065
FAS 133 mark to market adjustments (234,581) 204,461 (30,130) (16,483) (46,613)
--------- ----------- ----------- ------------- ----------
$ 469,592 $ 1,054,430 $ 1,524,022 $ (158,570) $1,365,452
========= =========== =========== ============= ==========
18
Results of operations-six month period ended March 31, 2004 compared to March
31,2003 continued
- -----------------
Tax provision
Our net tax provision for the six months ended March 31, 2004 and 2003 is as
follows:
Six months ended March 31,
2004 2003
---- ----
Tax (benefit) attributable to U.S operations $ (434,100) $ (226,000)
Tax expense European operations 80,079 39,000
State taxes 15,000 14,000
Deferred tax asset valuation allowance 434,100 212,000
---------- ----------
Net tax provision $ 95,079 $ 39,000
========== ==========
For the last four fiscal years, our domestic operation has incurred losses. We
analyzed the future realization of our deferred tax assets as of March 31, 2004
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 loss incurred in the first and second quarters of
fiscal 2004 from domestic operations.
As a result of all of the above items mentioned in the Management's Discussion
and Analysis of Financial Condition and Results of Operations, we recorded net
income of $1,537,250 for the six months ended March 31, 2004, which resulted in
basic net income per share of $0.17 and diluted net income per share of $0.16 on
weighted average basic and diluted shares of 8,891,135 and 9,576,099,
respectively, compared to a net income of $916,987 for the six months ended
March 31, 2003, which resulted in basic and diluted net income per share of
$0.10 on weighted average basic and diluted shares of 8,860,578 and 8,917,935,
respectively.
Options to purchase 228,905 and 1,455,425 shares of common stock at prices
ranging $3.88 to $10.06 and $1.35 and $10.06, respectively, were outstanding for
the six month period ending March 31, 2004 and 2003, respectively, but were not
included in the computation of diluted earnings per share because they were
anti-dilutive.
19
Three Month Period ended March 31, 2004 Compared to March 31, 2003
- ------------------------------------------------------------------
Results of operations for the three months ended March 31, 2004 compared to
March 31, 2003 are as follows:
Three Three
Months Months
Ended Ended Variance Percentage of sales
3/31/04 3/31/03 $ 2004 2003 Variance
------- ------- - ---- ---- --------
Net Sales $ 16,804,283 $ 13,918,858 2,885,425 100.00% 100.00% 0.00%
Cost of sales 11,873,313 10,549,386 1,323,927 70.66% 75.79% -5.13%
------------ ------------ --------- ------ ------ ----
Gross Profit 4,930,970 3,369,472 1,561,498 29.34% 24.21% 5.13%
Gross Profit % 29.34% 24.21% 5.13%
Costs:
Sales & Marketing 2,041,614 1,838,397 203,217 12.15% 13.21% -1.06%
Technical Support 107,489 101,415 6,074 0.64% 0.73% -0.09%
General & Administrative 1,074,666 784,660 290,006 6.40% 5.64% 0.76%
------------ ------------ --------- ------ ------ ----
Total Selling, General and Administrative costs 3,223,769 2,724,472 499,297 19.19% 19.58% -0.39%
Research & Development 444,390 448,251 (3,861) 2.64% 3.22% -0.58%
------------ ------------ --------- ------ ------ ----
Total Costs 3,668,159 3,172,723 495,436 21.83% 22.80% -0.97%
------------ ------------ --------- ------ ------ ----
Net operating income 1,262,811 196,749 1,066,062 7.51% 1.41% 6.10%
Arbitration & litigation items:
Arbitration proceeding 206,250 - 206,250 1.23% 0.00% 1.23%
Litigation proceeding 500,000 - 500,000 2.98% 0.00% 2.98%
------------ ------------ --------- ------ ------ ----
Net operating income 556,561 196,749 359,812 3.31% 1.41% 1.90%
Other income
- ------------
Interest income 1,397 4,034 (2,637) 0.01% 0.03% -0.02%
Foreign currency 33,232 72,249 (39,017) 0.20% 0.52% -0.32%
------------ ------------ --------- ------ ------ ----
Total other income 34,629 76,283 (41,654) 0.21% 0.55% -0.34%
------------ ------------ --------- ------ ------ ----
Income before taxes on income 591,190 273,032 318,158 3.52% 1.96% 1.56%
Taxes on income 46,800 12,517 34,283 0.27% 0.09% 0.18%
------------ ------------ --------- ------ ------ ----
Net income $ 544,390 $ 260,515 $ 283,875 3.25% 1.87% 1.38%
============ ============ ========= ====== ====== ====
Net sales for the three months ended March 31, 2004 increased $2,885,425
compared to the three months ended March 31, 2003 as shown on the table below.
Increase
(decrease) Increase Percentage of sales by
Location Three Months Three Months Dollar (decrease) Geographic region
- -------- ended 3/31/04 ended 3/31/03 Variance Variance % 2004 2003
------------- -------------- --------- ----------- ----------------------
Domestic $ 5,603,577 $ 4,195,241 $ 1,408,336 34% 33% 30%
Europe 10,983,449 9,526,393 1,457,056 15% 65% 68%
Asia 217,257 197,224 20,033 10% 2% 2%
------------- -------------- ----------- -- --- ---
Total $16,804,283 $ 13,918,858 $ 2,885,425 21% 100% 100%
=========== ============== =========== == === ===
The primary factors contributing the sales increase were:
o Stronger demand for retail PVR-250 products due to exposure generated from
media center awareness
o Increase PVR-USB sales due to introduction of lower cost model during
fiscal 2003 and media center awareness
o Higher sales of USB analog product
o Introduction in early fiscal 2004 of Media MVP product
o Increased sales of OEM PVR-250 for media center products
o Increased sales if digital satellite DVB product
o Increase in our average Euro to USD contract rate of about 24% (1.2359
versus .9938) for the three months ended March 31 2004 over the three
months ended March 31, 2003, which yielded higher converted Euro to USD
sales
The sales increases were offset by the following negative trends:
o Decrease in Digital Entertainment Center (DEC) sales
o Decrease in the analog family sales
20
Results of operations-three month period ended March 31, 2004 compared to March
31,2003-continued
- -----------------
Net sales to domestic customers were 33% of net sales for the three months ended
March 31, 2004 compared to 30% for the three months ended March 31, 2003. Net
sales to European customers were 65% of net sales compared to 68% for the same
quarter of last year. Net sales to Asian customers were 2% for both periods.
Gross profit increased $1,561,498 for the three months ended March 31, 2004
compared to the prior year's second quarter.
The increases and (decreases) in the gross profit are detailed below:
Increase
(decrease)
--------
Due to increased sales $ 929,330
Higher margins on non-OEM sales 758,180
Effect on margin due to lower margin OEM sales 4,906
Due to increases in labor related and other costs (130,918)
----------
Total increase in gross profit $1,561,498
==========
Gross profit percentage for the three months ended March 31, 2004 was 29.34%
compared to 24.21% for the three months ended March 31, 2003, an increase of
5.13%.
The increases and (decreases) in the gross profit percent are detailed below:
Increase
(decrease)
--------
Higher gross profit percent due to product mix of non-OEM products 4.52%
Effect on margin due to lower margin OEM sales 0.03%
Labor related and other costs 0.58%
-----
Net increase in gross profit % 5.13%
====
The increase in the gross profit margin percent for non-OEM products was
primarily due to:
o Cost reductions attained during fiscal 2003 and the first quarter of fiscal
2004
o Cost reduced versions of the PVR-250 and PVR-USB introduced during fiscal
2003
o Increase in our average Euro to USD contract rates, used to convert Euro
sales to U.S. dollar sales, of about 24% for the three months ended March
31, 2004 (1.2359 versus 0.99938). Since about 75% of our European inventory
is purchased in U.S. dollars, while most of the European sales are invoiced
in Euros or Great British Pounds, the Company benefits from the higher
converted Euro to U.S. dollar sales, which are sold against either stable
or declining U.S. dollar unit inventory cost
o Sales of lower margin DEC boards declined as a percentage of sales from
last year
The decrementing effect of OEM sales on our gross profit percentage was
negligible for the three months ended March 31, 2004 due to the following
factors:
Sales of our OEM PVR-250 boards for the three months ended March 31, 2004 were
$1,488,977 and 8.86% of sales compared to sales of $1,331,866 and 9.57% of sales
for the three months ended March 31, 2003. The gross profit percent was 12.21%
on OEM sales for the three months ended March 31, 2004 compared to a gross
profit percent of 9.38% for the three months ended March 31, 2003. The decrease
in OEM sales as a percent of sales coupled with a higher gross profit resulted
in an increase in the gross profit percent attributable to OEM sales of 0.03%.
The increase in the gross margin percent of 0.58% attributable to labor related
and other costs for the three months ended March 31, 2004 is due to the increase
in net sales for the three months ended March 31, 2004 over the three months
ended March 31, 2003 of 20.73% exceeding the increase in labor related and other
costs for the three months ended March 31, 2004 over the three months ended
March 31, 2003 of 11.76%.
21
Results of operations-three month period ended March 31, 2004 compared to March
31,2003-continued
- -----------------
The chart below illustrates the components of Selling, General and
Administrative costs:
Three months ended March 31,
Dollar Costs Percentage of Sales
---------------------------------------------------------------
Increase Increase
2004 2003 (Decrease) 2004 2003 (Decrease)
---- ---- -------- ---- ---- --------
Sales and Marketing $ 2,041,614 $ 1,838,397 $ 203,217 12.15% 13.21% -1.06%
Technical Support 107,489 101,415 6,074 0.64% 0.73% -0.09%
General and Administrative 1,074,666 784,660 290,006 6.40% 5.64% 0.76%
----------- ----------- --------- ----- ----- -----
Total $ 3,223,769 $ 2,724,472 $ 499,297 19.19% 19.58% -0.39%
----- =========== =========== ========= ===== ===== ====
Selling, General and Administrative expenses increased $499,297 from the prior
year's second quarter. As a percentage of sales, Selling, General and
Administrative expenses decreased by 0.39% when compared to the three months
ended March 31, 2003.
The increase in Sales and Marketing expense of $203,217, which accounted for
approximately 41% of the total increase in Selling, General and Administrative
expenses, was mainly due to:
o Higher advertising costs of $110,278 due to higher sales based co-operative
advertising and increased special promotions
o Higher advertising costs of $64,606 due to higher translated Euro to U.S
dollar amounts due to the strengthening of the Euro against the USD
o Increased commission expense of $19,181 due to higher translated Euro to
U.S dollar amounts due to the strengthening of the Euro against the USD
o Increased European sales office costs of $80,916 due to higher translated
Euro to U.S dollar amounts due to the strengthening of the Euro against the
USD
o Increased third party European merchandising program of $11,111
o Increased public relation costs for launch of Media MVP product of $20,806
o Lower sales office expenses of $60,877 due to personnel shift and stricter
budget controls
o Lower catalogue placement costs of $26,692
The increase in General and Administrative expenses of $290,006 was primarily
due to:
o Higher legal and legal related costs of $272,629
o Directors fees of $18,875
o European accounting service fees $8,597
o Lower bank and credit card fees of $6,307
Research and Development expenses decreased $3,861 . The decrease was mainly due
to lower compensation costs attributable to less staff and less third party
software development services used in the second quarter of fiscal 2004.
Arbitration Proceeding
In November 2002, the estate of Kenneth Aupperle ("Estate") filed a demand for
arbitration against the Company with the American Arbitration Association. The
Estate claimed certain property rights and interest in the Company, amounts due
and owing to the Estate based on various corporate agreements with the late Mr.
Aupperle and certain insurance policies. The Estate was seeking to recover a
minimum of $2.5 million in damages, fees and expenses.
The arbitration proceeding was heard before a New York arbitration panel. On
April 19, 2004, the arbitration panel awarded the Estate a total of $206,250 in
relation to certain stock options. No fees or expenses were awarded.
The Company accrued a charge of $206,250 in the second quarter of fiscal year
2004 to cover the award.
22
Results of operations-three month period ended March 31, 2004 compared to March
31,2003-continued
- -----------------
Litigation Proceeding
In March 2002, Polywell International, Inc. ("Polywell"), a supplier of cables
to the Company, commenced an action seeking $339,520 in damages plus exemplary
damages, attorney's fees, costs and interest with relation to certain unpaid
invoices. The Company paid these invoices to the sales representative, who
subsequently failed to forward the payments to Polywell. The Company had dealt
with this sales representative over a number of years, who also represented
himself as Polywell's payment and collection agent.
The case went to trial and was heard before a jury in the United States District
Court in the Northern District of Texas, Dallas Division. Since the Company had
dealt with the said sales representative for several years with respect to all
purchasing and payment issues, the Company believed that paying the invoices to
this sales representative was tantamount to paying Polywell. The jury however
ruled in favor of Polywell and the court granted Polywell a judgment against the
Company, awarding an amount of $339,520 to Polywell. In addition, the Company is
obligated to pay Polywell's attorney's fees and interest. The Company accrued a
charge of $500,000 in the second quarter of fiscal year 2004 to cover the award.
Other income
Net other income for the three months ended March 31, 2004 was $34,629 compared
to net other income of $76,283 for the three months ended March 31, 2003 as
detailed below:
Three months ended March 31,
2003 2004
---- ----
Interest income $ 1,397 $ 4,034
Foreign currency transaction gains 33,232 72,249
-------- -------
Total other income $ 34,629 $76,283
-------- -------
Re-measurement of accounts denominated in currencies other than the Euro
We follow the rules prescribed in paragraph 16 of SFAS 52 "Foreign Currency
Translation", which states that accounts denominated in a currency other than an
entities functional currency, excluding inter-company accounts which are long
term in nature, need to be re-measured into the entities functional currency,
and any gain or loss from this re-measurement are included in the determination
of net income.
Since the functional currency of Hauppauge Digital Europe Sarl ("HDE Sarl") is
the Euro, any asset, liability or equity accounts which are invested in or
purchased using U.S. Dollars or Great British Pounds by HDE Sarl are revalued
into Euros at the end of each period. The gains or losses on HDE Sarl's books
resulting from the revaluation of U.S. Dollar and Great British Pound accounts
into Euros are booked in the Company's profit and loss statement in the other
income (loss) section under the description foreign currency transaction gains
(losses).
Accumulated other comprehensive income (loss)
The Euro is the functional currency of the Company's European subsidiary, HDE
Sarl. Assets and liabilities of this subsidiary are translated to U.S. Dollars
at the exchange rate in effect at the end of each reporting period, while equity
accounts are translated to U.S. Dollars at the historical rate in effect at the
date of the contribution. Operating results are translated to U.S. Dollars at
the average prevailing exchange rate for the period, with the exception of sales
which are translated to U.S. Dollars at the average monthly forward exchange
contract rate.
23
Results of operations-three month period ended March 31, 2004 compared to March
31,2003-continued
- -----------------
Accumulated other comprehensive income (loss)-continued
The use of differing exchange rates results in foreign currency translation
gains or losses. Since the Euro denominated accounts on HDE Sarl's books result
in a net asset position (total Euro assets are in excess of Euro liabilities),
an increase in the Euro value results in a deferred gain for the translation of
Euro accounts to U.S. Dollars. The Company had a translation gain of $704,183
recorded on the balance sheet as of September 30, 2003. For the three months
ended March 31, 2004, the Company recorded on the balance sheet translation
losses of $142,087. For the six months ended March 31 2004, the Company recorded
on the balance sheet deferred translation gains $707,882 resulting in a
translation gain of $1,412,065 recorded as a component of accumulated other
comprehensive income as of March 31, 2004.
The Company uses forward exchange contracts to reduce our exposure to
fluctuations in foreign currencies. Mark to market gains and losses on these
open contracts result from the difference between the USD value of our open
foreign currency forward contracts at the average contract rate as opposed to
the same contracts translated at the month end forward rate. The Company
qualifies for cash flow hedge accounting as prescribed under SFAS 133, which
allows the Company to record the mark to market gains and losses in the equity
section of our balance sheet under accumulated other comprehensive income. The
Company had mark to market losses of $234,591 recorded on the balance sheet as
of September 30, 2003. For the three months ended March 31, 2004, the Company
recorded as a component of other comprehensive income a mark to market loss of
$16,483. For the six months ended March 31, 2004, the Company recorded, as
component of other comprehensive income, a mark to market gain of $187,978,
resulting in a mark to market loss of $46,613 for contracts open as of March 31,
As stated above, accumulated other comprehensive income (loss) consists of two
components:
o Translations gains and losses
o FAS 133 mark to market gains and losses on our open foreign exchange
contracts
The table below details the gains and losses recorded for the components that
make up accumulated other comprehensive income (loss):
Balance October to Balance January 04 Balance
Accumulated other comprehensive income as of December 2003 As of to March 04 As of
- --------------------------------------- September 30, Gains December 31, Gains March 31,
2003 (losses) 2002 (losses) 2004
---- ------ ---- ------- ----
Translation gains $ 704,183 $ 849,969 $ 1,554,152 $(142,087) 1,412,065
FAS 133 mark to market adjustments (234,591) 204,461 (30,130) (16,483) (46,613)
---------- ---------- ----------- --------- ----------
$ 469,592 $1,054,430 $ 1,524,022 $(158,570) $1,365,452
========== ========== =========== ========= ==========
Tax provision
Our net tax provision for the three months ended March 31, 2004 and 2003 is as
follows:
Three months ended March 31,
2004 2003
------ ------
Tax (benefit) attributable to U.S operations $(360,800) $ (162,300)
Tax expense European operations 39,300 12,517
State taxes 7,500 7,000
Deferred tax asset valuation allowance 360,800 155,300
--------- ----------
Net tax provision $ 46,800 $ 12,517
========= ==========
For the last four fiscal years, our domestic operation has incurred losses. We
analyzed the future realization of our deferred tax assets as of March 31, 2004
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 loss incurred in the second quarter of fiscal 2004
from domestic operations.
24
Results of operations-three month period ended March 31, 2004 compared to March
31,2003-continued
- -----------------
As a result of all of the above items mentioned in the Management's Discussion
and Analysis of Financial Condition and Results of Operations, we recorded net
income of $544,390, for the three months ended March 31, 2004, which resulted in
basic and diluted net income per share of $0.06 on weighted average basic and
diluted shares of 8,901,734 and 9,749,907, respectively, compared to a net
income of $260,515 for the three months ended March 31, 2003, which resulted in
basic and diluted net income per share of $0.03 on weighted average basic and
diluted shares of 8,862,774 and 8,959,821, respectively.
Options to purchase 120,513 and 1,240,122 shares of common stock at prices
ranging $5.25 to $10.06 and $1.47 and $10.06, respectively, were outstanding for
the three month period ending March 31, 2004 and 2003, respectively, but were
not included in the computation of diluted earnings per share because they were
anti-dilutive.
Seasonality
As our sales are primarily to the consumer market, we have experienced certain
seasonal revenue trends. Our peak sales quarter, due to holiday season sales of
computer equipment, is our first fiscal quarter (October to December), followed
by our fourth fiscal quarter (July to September). In addition, our international
sales, mostly in the European, market, were 68%, 73% and 77% of sales for the
years ended September 30, 2003, 2002 and 2003, respectively. Our fiscal fourth
quarter sales (July to September) can be potentially impacted by the reduction
of activity experienced in Europe during the July and August summer holiday
period.
To offset the above cycles, we target a wide range of customer types in order to
moderate the seasonal nature of our retail sales.
Liquidity and Capital Resources
Our cash, working capital and stockholders' equity position is disclosed below:
March 31, September 30,
2004 2003
------- ----
Cash $ 6,535,122 $ 5,838,160
Working Capital 13,476,505 10,859,953
Stockholders' Equity 14,011,031 11,468,685
We had cash and cash equivalents as of March 31, 2004 of $6,535,122, an increase
of $696,952 from September 30, 2003.
The increase was due to:
Net income adjusted for non cash items $ 1,670,971
Increase in accounts payable other current liabilities 2,831,962
Decrease in accounts receivable 360,712
Proceeds from employee stock purchases 96,569
Less cash used for:
Increase in inventories (4,083,229)
Increase in prepaid expenses and other current assets (133,175)
Capital equipment purchases (46,848)
Net cash increase $696,962
=========
Net cash of $647,241 provided by operating activities was primarily due to
increases in accounts payables and accrued expenses of $2,831,962, a decrease in
accounts receivable of $360,712 and net income adjusted for non cash items of
$1,670,971 offset somewhat by increases in inventories and prepaid expenses and
other current assets of $4,083,229 and $133,175 respectively.
25
Liquidity and Capital Resources-continued
Cash of $46,848 was used to purchase fixed assets. Proceeds from the stock
purchased by employees through the employee stock purchase plan provided
additional cash of $96,569.
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 March 31, 2004, we held 542,067
treasury shares purchased for $1,497,216 at an average purchase price of
approximately $2.76 per share.
We believe that our cash and cash equivalents as of March 31, 2004 and our
internally generated cash flow will provide us with sufficient liquidity to meet
our currently foreseeable short-term and long-term capital needs.
Future Contractual Obligations
The following table shows the Company's contractual obligations related to lease
obligations as of March 31, 2004:
Payments due by period
Contractual obligations Total 1 year 1-3 years Over 3 years
- ----------------------- ----- ------ --------- ------------
Operating lease obligations $ 2,120,166 $ 381,567 $ 1,333,599 $ 405,000
=========== ========= =========== =========
Critical Accounting Policies and Estimates
Financial Reporting Release No. 60, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements.
We believe the following critical accounting policies affect the significant
judgments and estimates used in the preparation of the our financial statements:
o Revenue Recognition
o Management's estimates
o Hedging program for European subsidiary inventory purchases denominated in
U.S. dollars
o Translation of assets and liabilities denominated in non functional
currencies on our European financial statements
Revenue Recognition
Our revenues are primarily derived from the sale of computer boards which enable
you to view television programs on your personal computer. Sales of computer
boards are commonly classified as computer hardware. Our sales are primarily to
retailers, distributors and original equipment manufacturers. Sales to our
customers are documented by a purchase order which describes the conditions of
sale. Sales are recorded when products are shipped to our customers, the product
price is fixed and determinable, collection of the resulting receivable is
probable and product returns are reasonably estimable. Revenue from freight
charged to customers is recognized when products are shipped. Provisions for
customer returns and other adjustments are provided for in the period the
related sales are recorded based upon historical data.
Management's Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and
26
Management's Estimates-continued
judgments that affect the reported amounts of assets, liabilities and related
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts for revenues and expenses during
the reporting period. On an ongoing basis, management evaluates estimates,
including those related to sales provisions, as described above, income taxes,
bad debts, inventory reserves and contingencies. We base our estimates on
historical data, when available, experience, and on various other assumptions
that are believed to be reasonable under the circumstances, the combined results
of which form the basis for making judgments approximately the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
Our European subsidiary accounted for approximately 67% and 71% of our net sales
for fiscal 2003 and fiscal 2002, respectively. All of our European sales are
denominated in local currencies, primarily the Euro and Great British Pound. On
the supply side, since we predominantly deal with North American and Asian
suppliers, approximately 75% of our inventory supporting our Euro and Great
British Pound sales are purchased and paid in U.S. Dollars. Consequently,
changes in exchange rates expose our U.S. denominated inventory on the books of
our European subsidiary to market risks resulting from the fluctuations in the
foreign currency exchange rates to the U.S. Dollar. In an attempt to minimize
these risks, we enter into forward exchange contracts with financial
institutions.
We do not enter into contracts for speculative purposes. We enter into monthly
window contracts covering an average period of three months based on existing or
anticipated future inventory purchases. Although we enter into these contracts
to reduce the short term impact of currency rate changes, the following risks
are still inherent in hedging the Euro:
o Actual inventory purchases may fluctuate from our estimates, resulting in
contracts in an excess of contracts
o Short term volatility of currency markets has the potential to reduce the
effectiveness of our hedging program
o Historical volatility of the Euro has the potential to impact our gross
margins and operating income
o The magnitude of the success of our hedging program is dependent upon
movements in the Euro exchange rates. These movements are difficult to
predict over an extended period of time.
Translation of assets and liabilities denominated in non functional currencies
on our European financial statements
The functional currency of our European subsidiary is the Euro. In preparing our
consolidated financial statements, we are required to translate assets and
liabilities denominated in a non functional currency, mainly U.S. Dollars, to
Euros on the books of our European subsidiary. This process results in exchange
gains and losses depending on the changes in the Euro to U.S. Dollar exchange
rate. Under the relevant accounting guidance, with the exception of gains and
losses that are attributable to inter-company accounts which are long term in
nature, we are obligated to include these gains and losses on our statement of
operations, which we report in other income or expense under the description
foreign currency transaction gains (losses).
The extent of these gains and losses can fluctuate greatly from month to month
depending on the change in the exchange rate, causing results to vary widely.
Due to the past volatility of the Euro, it is difficult to forecast the long
term trend of these gains and losses.
27
Inflation
While inflation has not had a material effect on our operations in the past,
there can be no assurance that we will be able to continue to offset the effects
of inflation on the costs of our products or services through price increases to
our customers without experiencing a reduction in the demand for our products;
or that inflation will not have an overall effect on the computer equipment
market that would have a material affect on us.
Euro
On January 1, 1999, the Euro was adopted in Europe as the common legal currency
among 11 of the 15 member countries of the European Community. On that date, the
participating countries established fixed Euro conversion rates (i.e. the
conversion exchange rate between their existing currencies and the Euro). The
Euro now trades on currency exchanges and is available for non-cash
transactions. A new European Central Bank was established to direct monetary
policy for the participating countries.
Prior to the adoption of the Euro, we billed our European customers in German
Marks or British Pounds, depending upon which currency the customer preferred to
be billed in. Effective January 1, 1999, we began invoicing our customers who
are located in the eleven member countries in Euros. We continue to bill
customers located in the United Kingdom in British Pounds. The benefits to
billing customers in Euros were twofold:
o Our foreign currency hedging program was streamlined to the Euro and
the British Pound
o The pricing from country to country was harmonized, eliminating price
differences between countries due to the fluctuating local currencies
We handled the conversion to the Euro without any material disruptions to our
operations.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation Number 46, "Consolidation of Variable Interest Entities" ("FIN
46"). This interpretation of Accounting Research Bulletin ("ARB") No. 51,
"Consolidated Financial Statements," provides guidance for identifying a
controlling interest in a variable interest entity ("VIE") established by means
other than voting interests. FIN 46 also requires consolidation of a VIE by an
enterprise that holds such a controlling interest. In December 2003, the FASB
completed its deliberations regarding the proposed modification to FIN 46 and
issued Interpretation Number 46R, "Consolidation of Variable Interest Entities -
an Interpretation of ARB No. 51" ("FIN 46R"). The decisions reached included a
deferral of the effective date and provisions for additional scope exceptions
for certain types of variable interests. Application of FIN 46R is required in
financial statements of public entities that have interests in VIEs or potential
VIEs commonly referred to as special-purpose entities for periods ending after
December 15, 2003. Application by public entities (other than small business
issuers) for all other types of entities is required in financial statements for
periods ending after March 15, 2004. The adoption of FIN 46R did not have a
material impact on our financial position, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
- --------------------------------------------------------------------
Derivatives and Hedging Activities
Product is invoiced to our European customers in local currencies and payments
from our customers are received in local currencies (primarily the Euro and
Great British Pound). On the supply side, since we predominantly deal with North
American and Asian suppliers, approximately 75% of our inventory supporting our
Euro and Great British Pound sales are purchased and paid in U.S. Dollars.
Consequently, changes in exchange rates expose our U.S. denominated inventory on
the books of our European subsidiary to market risks resulting from the
fluctuations in the foreign currency exchange rates to the U.S. Dollar. We
attempt to reduce
28
Derivatives and Hedging Activities-continued
these risks by entering into foreign exchange forward contracts with financial
institutions. The purpose of these forward contracts is to hedge the foreign
currency market exposures underlying the forecasted U.S. Dollar denominated
inventory purchases required to support our European sales.
Although we do not try to hedge against all possible foreign currency exposures
because we can not fully estimate the size of our exposure, the contracts we
procure are specifically entered into to as a hedge against existing or
anticipated foreign currency exposure. We do not enter into contracts for
speculative purposes. Although we maintain these programs to reduce the short
term impact of changes in currency exchange rates, when the U.S. Dollar sustains
a long term strengthening position against the foreign currencies in countries
where we sell our products, our gross margins, operating income and retained
earnings can be adversely affected. Factors that could impact the effectiveness
of our hedging program include volatility of the currency markets and
availability of hedging instruments.
As of March 31 2004, we had foreign currency contracts outstanding of
approximately $3,257,726 against the delivery of the Euro. The contracts expire
through September 2004. Our accounting policies for these instruments are based
on its designation of such instruments as cash flow hedging transactions. We do
not enter into such contracts for speculative purposes. We record all derivative
gains and losses on the balance sheet as a component of stockholders' equity
under the caption "Accumulated other comprehensive income (loss)". As of March
31, 2004, a deferred loss of $46,613 reflecting the net mark to market loss of
our derivatives was recorded as a component of accumulated other comprehensive
income on our balance sheet.
For the three months and six months ended March 31, 2004, we recorded a decrease
in sales of $103,835 and $909,368, respectively, related to our contracts that
closed during these periods and the changes in the fair value of our derivative
contracts. For the three months and six months ended March 31, 2003, we recorded
a decrease in sales of $609,100 and $1,158,700, respectively, related to our
contracts that closed during these periods and the changes in the fair value of
our derivative contracts.
Item 4. Controls and Procedures
- -------------------------------
Our Chief Executive Officer and Chief Financial Officer conducted an evaluation
of the effectiveness of our disclosure controls and procedures. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of March 31, 2004
in alerting them in a timely manner to material information required to be
included in our SEC reports. In addition, no change in our internal control over
financial reporting occurred during the fiscal quarter ended March 31, 2004 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Special Note Regarding Forward Looking Statements
This Quarterly Report contains forward-looking statements as that term is
defined in the federal securities laws. The events described in forward-looking
statements contained in this Quarterly Report may not occur. Generally these
statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of our plans or strategies, projected or
anticipated benefits from acquisitions to be made by us, or projections
involving anticipated revenues, earnings or other aspects of our operating
results. The words "may," "will," "expect," "believe," "anticipate," "project,"
"plan," "intend," "estimate," and "continue," and their opposites and similar
expressions are intended to identify forward-looking statements. We caution you
that these statements are not guarantees of future performance or events and are
subject to a number of uncertainties, risks and other influences (including, but
not limited to, those set forth in our Annual Report on Form 10-K for the year
ended September 30, 2003), many of which are beyond our control, that may
influence the accuracy of the statements and the projections upon which the
statements are based. Our actual results, performance and
29
Special Note Regarding Forward Looking Statements-continued
achievements could differ materially from those expressed or implied in these
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether from new information, future
events or otherwise.
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
We were involved in arbitration proceedings before the American Arbitration
Association, which had been brought against the Company by the estate of the
late Mr. Kenneth Aupperle ("Estate"). The Estate was 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.
On April 19, 2004, the arbitration panel awarded the estate of Kenneth Aupperle,
one of the Company's founders and former President, a total of $206,250. No
other fees or expenses were awarded.
The Company accrued a charge of $206,250 in the second quarter of fiscal year
2004 to cover the award.
See Note 11 in the "NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS" and
"Managements discussion and analysis of financial results" with respect to
certain litigation with Polywell International, Inc.
Item 5. Other information
This information shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
incorporated by reference in any filing under the Securities Act of 1933, as
amended or the Exchange Act except as shall be expressly set forth by specific
reference in such a filing.
We occupy a facility located in Hauppauge New York and use it for executive
offices and for the testing, storage and shipping of our products. In February
1990, Hauppauge Computer Works, Inc., a wholly-owned subsidiary of the Company
("HCW"), entered into a lease, as amended, with Ladokk Realty Co. (successor
company now known as Ladokk Realty Co., LLC), a real estate partnership which is
principally owned by Kenneth Plotkin, the Company's Chairman of the Board, Chief
Executive Officer, and Vice President of Marketing and the holder of
approximately 6% of the Company's outstanding Common Stock as of May 14, 2003,
Dorothy Plotkin, the wife of Kenneth Plotkin, a holder of approximately 6% of
the Company's Common Stock as of May 14, 2004 and Laura Auppele, believed by the
Company to be the holder of approximately 12% of the Company's Common Stock as
of May 14, 2004. Until February 17, 2004, the premises subject to such lease
were subject to two mortgages guaranteed by the Company. On February 17, 2004
HCW and Ladokk terminated the old lease and HCW entered into a new lease
agreement with Ladokk Realty Co., LLC. The lease term is for five years and
terminates on February 16, 2009. Concurrently with the new lease, our landlord
completed a refinancing of its mortgages, and the new lender did not require us
to sign a guarantee. In recognition of this, we are no longer obligated to
guarantee the landlord's mortgages.
The Company's Audit Committee is in the process of evaluating the February 17,
2004 lease.
On May 13, 2004, HAUPPAUGE DIGITAL, INC. issued a press release announcing its
financial results for the fiscal quarter ended March 31, 2004. A copy of this
press release is furnished as Exhibit 99.1 to this Report.
30
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Lease, dated February 17, 2004, between Ladokk Realty Co., LLC and
Hauppauge Computer Works, Inc.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule
15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.1 Press Release, dated May 13, 2004 issued by HAUPPAUGE DIGITAL, INC.
(b) Reports on form 8-K
The Company filed one current Report on Form 8-K during the fiscal quarter ended
March 31, 2004 as follows:
Date of report: January 12, 2004
Item reported : 5, 7 and 12
31
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAUPPAUGE DIGITAL, INC.
-----------------------
Registrant
Date: May 14, 2004 By:/s/ Kenneth Plotkin
------------ -----------------------------------
KENNETH PLOTKIN
Chief Executive Officer, Director,
Vice President of Marketing
(Principal Executive Officer)
and Director
Date: May 14, 2004 By:/s/ Gerald Tucciarone
------------ ----------------------------------
GERALD TUCCIARONE
Treasurer and Chief
Financial Officer
32