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 also offer products for the home entertainment market.
We have two primary product categories: analog TV products and digital TV products.
We offer several types of analog products. Our WinTV(R) analog TV receivers allow PC users to watch television on their PC screen in a resizable window, and also enable recording of TV shows to a hard disk. Our WinTV(R)-PVR TV personal video recorder products include hardware MPEG encoders, which improve the performance of TV recording and add instant replay and program pause functions, plus also enable the `burning' of TV recordings onto DVD or CD media. Our Eskape(TM) Labs products allow users of Apple(R)Macintosh(R) computers to watch television on their computer screen.
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.
We sell our products through computer and electronic retailers, computer products distributors and original equipment manufacturers ("OEMs").
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 international 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 are able to enhance the capabilities of the multimedia PC to enable it to become a one-stop integrated entertainment system. We feel our current and future products have the potential to be ubiquitous in PC-based home entertainment systems.
Our engineering group works on updating our current products to add new and innovative features that the marketplace seeks, while remaining vigilant in trying to ensure that our products are 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, technology providers, and internet and e-commerce solutions providers give us important advantages in developing new technologies and marketing our products. By jointly working with and sharing our engineering expertise with a variety of other companies, we seek 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 comprised of computer and electronic retailers, computer products distributors and OEMs. Electronic retailers include retail stores, web stores and third-party catalogs, both print and on-line among others. We work closely
with our retailers to enhance sales through joint advertising campaigns and promotions. We believe that developing our international presence contributes to our strategic position, allowing us to benefit from investments in product development, and more firmly establishing our Hauppauge(R), WinTV(R), MediaMVP(TM) and DEC brand names in the international marketplace.
We seek to maintain and improve our profit margins by, among other things, outsourcing our production to contract manufacturers suited to accommodate the type and volume of our needs. We also leverage international 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 and commonality of parts along with the use of single platforms for multiple models are other important ways that we believe our design and build strategy contribute to our financial performance.
Products
We have two primary product categories: analog TV and digital TV products.
See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements comprising part of this Annual Report on Form 10-K for additional information relating to our operating segments.
Analog TV Products - ------------------
Our analog TV receiver products enable a PC user to watch TV in a resizable window on a PC. Our software controls functions such as channel change, volume adjustment, freeze frame, and channel scan. Our analog receiver products include audio functions that allow sound to be heard while watching TV or video. The audio can be connected to speakers or to a PC's sound card.
(i) WinTV(R) TV Receiver Products
The WinTV(R) analog TV receiver products include 125-channel cable-ready TV tuners 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 (with the addition of a camera or camcorder), 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) analog TV receiver products can be used to receive teletext data broadcasts, which allow 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 video-conference 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 video-conference over the internet with the addition of a camera and camcorder. Included with the board is a remote control for both TV and FM stereo.
Some WinTV(R) analog TV receiver 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 desktop, laptop or notebook computer to another.
Over the fiscal 2003, we upgraded nearly all our European analog TV receiver products to offer improved video quality at lower prices to the customer. Additionally we also introduced the PCI Express, an entry level version of the WinTV(R)-GO in Europe.
Over fiscal 2003, we also added a software-based TV recording feature to all analog WinTV(R) products. Marketed under the SoftPVR(TM) name, this feature allows consumers to record their TV shows to their hard disk. SoftPVR(TM) is not as powerful as our hardware MPEG encoder-based WinTV(R)-PVR products, but does allow rudimentary television recording capabilities. SoftPVR(TM) is available on both the internal WinTV(R)-PCI boards and the external WinTV(R)-USB products.
(ii) WinTV(R)-PVR TV Recording Products
Our WinTV(R)-PVR TV recording products include all of the basic features of our analog TV receiver products, such as TV on the PC screen, channel changing and volume adjustment. They also add the ability to record TV shows to disk using a built-in high quality hardware MPEG 2 encoder. This technology allows a typical desktop computer system to record up to hundreds of hours of video to disk, limited only by the size of the disk (or storage medium). In addition, the WinTV(R)-PVR user can pause a live TV show, and then resume watching the TV show at a later time. The maximum amount of recording time and the maximum amount of paused TV is dependent upon the hard disk space available on the PC.
The WinTV(R)-PVR user can record a TV show to the hard disk using a TV scheduler and then play the recording back, edit it, and record the show onto a 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 during viewing, recording or playback. Our WinTV(R)-PVR products also provide for instant replay and are available in both internal and external USB models.
In fiscal 2003, we introduced several new models with new price points and feature sets. The WinTV(R)-PVR-250 was introduced, replacing the WinTV(R)-PVR-pci model. The WinTV(R)-PVR-250 provides better quality video and audio at a lower price point than prior models. The WinTV(R)-PVR-350 is similar to the WinTV(R)-PVR-350, but adds a hardware MPEG video decoder which allows recorded TV shows to be played back on a TV set. The WinTV(R)-PVR-usb2 has similar hardware and software capabilities to the WinTV(R)-PVR-250, but it is an external device which connects to a PC or laptop via a USB port.
An added feature to the WinTV(R)-PVR-250 is that it supports Microsoft(R)'s Windows(R) XP Media Center Edition. Microsoft(R)'s 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 "live" TV, record a program or a whole series, and manage all their digital music, home movies, videos, photos and DVDs on the PC. Users can also access and control this new entertainment device 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, approximately one hour of television can be recorded on two gigabytes of disk space. Microsoft(R)'s 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.
(iii) Eskape(TM) Labs Products
Our Eskape(TM) Labs product line delivers TV for Apple(R) Macintosh(R) computers. The video is sent to the Apple(R)Macintosh(R) computer through the USB port and as a result, there is no complicated installation process. Eskape products are available for all Apple(R) Macintosh(R) users from the on-the-go iBooks(TM) to G5(TM) power users. All our Eskape(TM) Labs products are QuickTime(R) compatible.
MyTV2GO and MyTV2GO-FM are the lower priced models of the "My" line. They enable users to bring TV to their iMacs(TM), PowerBooks(TM) and G3(TM), G4(TM) and G5(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 to disk. 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.
MyCapture II allows users to capture video on their iMac(TM), iBook(TM), PowerBook(TM)or G3(TM)/G4(TM)/G5(TM) Macintosh(R) without opening their computer. 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 used in 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.
Digital TV Products - -------------------
(i) Digital TV Receivers for the U.S. and North America
Destination Digital TV, a publication of the National Association of Broadcasters, reported, in its October 2003 issue(http://www.nab.org/newsroom/issues/digitaltv/DDTV/), that a survey conducted, by the National Association of Broadcasters, amongst stations found that the number of DTV stations on air in the United States had increased to 1,060 - in 202 markets which serve nearly 100% of TV households. It also reported that 82% of U.S. TV households are in markets with five or more broadcasters airing DTV, and 56% are in markets with eight or more broadcasters sending digital signals.
We offer both digital TV and High Definition Digital TV products ("HDTV Receiver Products"), which exploit the superior images and sound of the U.S. digital TV standard.
Our internal WinTV(R)-D board allows users to watch digital TV and conventional analog 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 enabling users to watch digital TV on a TV set, a 5-channel Dolby(TM) Digital surround sound (AC3) decoder and a remote control.
Our WinTV(R)-HD board allows users to watch terrestrial digital and conventional analog TV. It supports
the viewing of High Definition video in any of the ATSC HDTV formats. 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.
(ii) Digital TV Receivers for the International Market
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, which we sell, is required together with a decryption card that is available for a fee from the provider of these channels. In 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.
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 subscription pay TV channels to be received and decoded, for a fee payable to the subscription service.
(iii) Digital Entertainment Center ("DEC")
Our DEC products, introduced in Europe during fiscal 2002, are set top boxes that enable analog TV sets to receive digital satellite and digital terrestrial broadcasts. DEC products enable an owner of an analog TV set to 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 without the need to purchase a costly digital ready TV. 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.
(iv) Media MVP(TM)
The MediaMVP(TM) is a Linux-based digital media, and is one of a new class of PC products which link TV sets and PCs. Media, such as music, digital pictures, and digital videos, are transmitted from the PC, where they are stored, to the MediaMVP(TM), where they are converted from a digital format into an analog format, enabling playback on a TV connected to the MediaMVP(TM). MediaMVP(TM) was introduced to the market in fiscal 2003, but first customer shipments were not made until the beginning of fiscal 2004.
The MediaMVP(TM) enables users to watch and listen to PC-based videos, music and pictures on their TV sets through a home network. The MediaMVP(TM) connects to TV sets or home theater systems and, via an Ethernet network, plays back MP3 music, MPEG-1 and MPEG-2 videos, JPEG and GIF digital pictures that have been recorded and stored on a PC. The MediaMVP(TM) decodes this media and then outputs video through composite and S-Video connections for the best video quality on TV sets, and audio through stereo
audio output connectors to TV sets or home theater systems.
The MediaMVP(TM) also provides an on-TV-screen display of media directory listings. It receives commands from the supplied remote control, and sends these commands to the PC server. The TV menus are created on the PC server, sent over the Ethernet LAN and displayed by the MediaMVP(TM)'s browser. The MediaMVP(TM)'s remote control allows a user to pause, fast forward and rewind through videos, plus pause music and picture shows. A user can adjust the audio volume from MediaMVP(TM)'s remote control, avoiding the need to use the TV's remote control.
Other Products - --------------
(i) Video Editing Products
Our primary video capture product, the DV-Wizard Pro, allows users to record and edit videos from a digital video camcorder on their PC. This product also allows users to connect their digital video camcorder to their PC through a firewire connection, convert digital movies into a compressed format, thus saving hard disk space, edit the digital movies, add voice narrations and music, and then record the edited digital movies onto a DVD or CD-ROM.
The DV-Wizard Pro was designed to enable the user 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, DVD title producers and creators of corporate product literature on CD-ROM.
(ii) Video Capture Products
Our ImpactVCB 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 capture in industrial applications, the ImpactVCB features "live" video-in-a-window, still image capture and drivers for Windows(R) 2000, Windows(R) XP, Windows(R) NT and Windows(R) 98. There are third party drivers and applications for use with the Linux operating system.
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 or camcorder.
Technology
Analog TV Technology - --------------------
We have developed five generations of products which convert analog video into digital video since our first such product was introduced 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. Our
initial customers were mostly professional PC users, such as financial market professionals who needed to be able to view 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.
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 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 per 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.
The fourth generation analog TV receivers are the WinTV(R)-PVR models which were first developed during fiscal 2000 and introduced to the market in early fiscal 2001. The WinTV(R)-PVRs include both internal PCI and external USB TV receivers which are designed to add the ability to record TV shows to a PC's hard disk. The core technology in the WinTV(R)-PVR products is a hardware MPEG encoder, which compresses analog video from a TV tuner or external video source into an MPEG format in real time. MPEG is the compression format used on DVDs. This MPEG encoder is a purchased chip, to which we add our driver and application software to create the recording and program pause functions. Our WinTV(R)2000 application was enhanced to add the functions needed to record, pause and play back TV on a PC screen.
Digital TV Technology - ---------------------
Our WinTV(R)-D board, developed during the 1999 fiscal year and delivered to the market in the beginning of fiscal 2000, was the first digital TV receiver for the U.S. market which allowed 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.
Our MediaMVP(TM) contains our newest technology. Based on the Linux operating system, the MediaMVP(TM) works in a client/server system with a PC, communicating with the PC `server' and
receiving digital media from the PC and displaying the media on a TV set. The core technology to the MediaMVP(TM) comprises the configuration and enhancements to the Linux operating system, the user interface displayed on the TV set, and the technology to transmit digital media reliably over the local area network.
Research and Development
Our development efforts are currently focused on extending the range and features of the WinTV(R)PVR products, developing additional externally attached TV products and additional high-definition digital TV products. We are also developing more highly integrated versions of hardware products to further improve performance and price points, and new versions of software to add features, improve ease of use, and provide support for new operating systems.
We currently have two research and development ("R & D") 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 extending the range and features of the WinTV(R)PVR products, developing additional externally attached TV products and additional high-definition digital TV 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 R & D. We spent approximately $1,902,000, $1,592,000 and $1,510,000 for R & D expenses for the years ended September 30, 2003, 2002, and 2001, 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, 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."
Product Production and Suppliers
We design the hardware for most models of the WinTV(R), MediaMVP 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 systems, including Windows(R) XP, Windows(R)98, Windows(R)Me, Windows(R)NT and Windows(R)2000. We subcontract the manufacturing and assembly of most of these 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 U.S.(Hauppauge, New York), Singapore, and Ireland before packaging the products and shipping them to our customers. We also buy from others finished products such as the DEC and WinTV(R)-DVB products, that we have not designed but are sold under our name, on an OEM basis.
Certain component parts, such as TV tuners, video decoder chips and software compression chips, plus certain assembled products, such as the DEC and WinTV(R)-DVB, that are essential to our business are available from a single source or limited sources. Other essential component parts that are generally available from multiple sources may be obtained by us from only a single source or limited sources because of pricing concerns. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Risk Factors."
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 attempt to 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. Purchased assembled products are normally covered by longer term purchase orders.
If the supply of a key component, or a purchased assembled product, 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. Similar occurrences in the future could have a material adverse effect on our business, operating results and financial condition.
During fiscal 2003, other than for purchased assembled products like the DEC and WinTV(R)-DVB, all manufacturing was 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 ensure 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 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 only utilize three out of the five contract manufacturers. During fiscal 2003, these three contract manufacturers handled all of our international production. If demand were to increase dramatically, we believe additional production could be absorbed by these and the other qualified contract manufacturers.
During a portion of fiscal 2003, we produced some of our European products 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.
Customer Service and Technical Support
We maintain customer service and technical support departments in our Hauppauge, New York headquarters, as well as in the U.K., Germany, France, Italy, the Netherlands and in Singapore. Technical support is provided to help with installation problems or pre-sale and post-sale questions on our products, while customer service provides repair service.
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 screen while the PC continues 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 2003, net sales to distributors and retailers totaled approximately $44,404,000, or 87%, of our net sales compared to approximately $41,458,000, or 97%, and $47,365,000, or 93%, for the years ended September 30, 2002 and 2001, 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 OEMs - -------------
The OEM business is one where a PC manufacturer incorporates our products into an item sold under the OEM's label. Factors that could impact the expansion of our OEM business include the ability to successfully negotiate and implement new agreements with OEMs. The OEM business is often project based, where the OEM builds a specially configured PC to implement a project for a customer.
Our sales to OEMs totaled approximately $6,552,000, $1,338,000 and $3,546,000 for the years ended
September 30, 2003, 2002 and 2001, 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 ended Setepmber 30, 2003. Sales to OEM customers accounted for approximately 13%, 3% and 7% of our net sales for 2003, 2002 and 2001, respectively.
Marketing and Sales - -------------------
We market our products both domestically and internationally through our sales offices in the U.S.(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, 2003, 2002 and 2001, approximately 32%, 27% and 23% of our net sales were made within the U.S., respectively, while approximately 68%, 73% and 77% were made outside the United States (predominately in Germany, the United Kingdom, France, Italy and Asia), respectively.
Our analog WinTV(R)-PCI, WinTV(R)-USB, WinTV(R)-PVR 250 products and digital WinTV(R)-DVB products contributed to 28.18%, 15.61%, 14.44% and 15.77% respectively of our consolidated revenue for fiscal year 2003.
Our analog WinTV(R)-PCI and WinTV(R)-USB products and digital WinTV(R)-DVB products contributed to 45.98%, 16.55% and 17.70% respectively of our consolidated revenue for fiscal year 2002 and 56.21%, 8.44% and 10.20% respectively of our consolidated revenue for fiscal year 2001.
More information on our geographic segments can be obtained from "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations," and the notes to the "Consolidated Financial Statements which comprise part of this Annual Report on Form 10-K.
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 14 sales people located in Europe, 1 sales person in the Far East and 2 sales people in the U.S., located in New York and California. We also utilize the services of 3 manufacturer representatives retained by us, on a non-exclusive basis, who work with customers in certain domestic geographic areas.
See "Item 7 -- 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 Great British Pound. 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, 2003, we had foreign currency forward contracts outstanding of approximately $3,560,000 against delivery of the Euro. The contracts expire through December 2003.
Although we do not try to hedge against all possible foreign currency exposures, because we cannot fully estimate the size of our exposure, the contracts we procure are specifically entered into 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 the volatility of the currency markets and availability of hedging instruments.
For the years ended September 30, 2003 and 2002, respectively, we recorded approximately $1,895,200 and $408,000 as a decrease to net sales related to the changes in the fair value of our derivative contracts.
See "Item 7 -- 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 against companies such as ATI Technologies Inc. and Pinnacle Systems, Inc. Our new MediaMVP(TM) and DEC products compete in the consumer electronics market, where competition comes from Sony Corp., Toshiba Corporation, Cisco Systems Inc. and others.
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 our business, operating results and financial condition.
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 high 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 or which party eventually prevails. If we do not prevail in a litigation suit, we may be required to pay significant damages and/or 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
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 certain of our designs and software programs, but currently we have no patent on the WinTV(R) board or other products 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. We have filed to register the SoftPVR(TM), HardPVR(TM) and MediaMVP(TM) marks with the U.S. Patents and Trademarks Office.
See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations."
Employees
As of September 30, 2003, we had 113 employees, 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 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 purposes of the restructuring were to consolidate our international sales and marketing operations under Hauppauge Digital Europe S.a.r.l., provide a more cost-effective and operationally efficient distribution center for the European market and to take advantage of certain tax benefits available to us.
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 British 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 Ballycoolin, Ireland. As mentioned above. The purpose of 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.
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. The lease term expires on January 31, 2006 and includes an option to extend for three additional years.
Rent relating to this facility is currently at the annual rate of approximately $432,000 per year and will increase to approximately $454,000 per year on February 1, 2004. The rent is payable in equal monthly installments and increases at a rate of 5% per year on February 1st of each year thereafter, including 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, 2003 was $745,567. We pay the taxes and operating costs of maintaining the premises. See "Item 13 - Certain Relationships and Related Transactions".
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.
Item 3.
Item 3. LEGAL PROCEEDINGS
We are presently 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 is 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. Based on the 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. However, due to the uncertainties inherent in litigation, we are unable to predict the ultimate outcome.
Item 4.
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 22, 2003 at our offices:
Proposal No. 1: Election of Directors
The following directors were elected by the votes indicated:
For Withheld --- -------- Kenneth Plotkin 7,384,917 1,493,331 Bernard Herman 7,388,317 1,489,931 Steven J. Kuperschmid 7,371,187 1,507,061 Robert S. Nadel 7,374,917 1,503,331 Christopher G. Payan 7,374,617 1,503,631 Neal Page 7,390,337 1,487,911 Seymour G. Siegel 7,374,917 1,503,331
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 --- ------- ------- 1,363,669 1,587,801 23,454
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 --- ------- ------- 2,320,358 581,828 68,069
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 --- ------- ------- 1,322,115 1,615,796 32,344
Proposal No. 5: Ratify the Board of Director's resolution to adopt the Company's 2003 Performance and Equity Incentive Plan, as further detailed in the Company's Proxy Statement dated August 22, 2003.
The proposed amendment to ratify the Board of Director's resolution to adopt the Company's 2003 Performance and Equity Incentive Plan, as further detailed in the Company's Proxy Statement dated August 22, 2003, was approved by the shareholders.
For Against Abstain --- ------- ------- 2,346,869 544,418 78,968
PART II
Item 5.
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 for the periods indicated. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Fiscal Year Ended September 30, 2003 High Low - ------------------ ---- --- First Quarter 1.41 0.95 Second Quarter 1.67 1.28 Third Quarter 3.74 1.38 Fourth Quarter 3.10 2.34
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
(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 of December 8, 2003 was 180. We believe there are in excess of 7,100 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.
The information required by this Item regarding equity compensation plans is incorporated by reference to Item 12 of this Annual Report on Form 10-K.
Item 6.
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, 2003 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 and "Item 7
Item 7A. Market Risks
Due to extensive sales to European customers with payment made to us in those local currencies (primarily the Euro and Great British Pound) and limited expenses paid in local currencies, we are a net receiver of currencies other than the U.S. dollar. As such, we benefit from a weak dollar and are negatively affected by a strong dollar relative to the major worldwide currencies, especially the Euro and Great British Pound. Consequently, changes in exchange rates expose us to market risks resulting from the fluctuations in the foreign currency exchange rates to the U.S. dollar. We attempt to reduce these risks by entering into foreign exchange forward contracts with financial institutions to protect against currency exchange risks associated with our foreign denominated sales.
The strength or weakness of the U.S. dollar against the Euro and Great British Pound impacts our financial results. Changes in exchange rates may positively or negatively affect our revenues, gross margins, operating income and retained earnings (which are all expressed in U.S. dollars). We engage in hedging
programs aimed at limiting, in part, the impact of currency fluctuations. By selling foreign currency 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. For the years ended September 30, 2003 and 2002, respectively, we recorded approximately $1,895,200 and $408,000 as a decrease to net sales related to the changes in the fair value of our derivative contracts.
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 hedging instruments.
Item 8.
Item 8. Financial Statements and Supplementary Data
See Consolidated Financial Statements annexed hereto.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9a.
Item 9a. 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 September 30, 2003 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 September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III --------
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
Directors and Executive Officers
The following table sets forth the positions and offices presently held with the Company by each present Director and executive officer, and his age as of September 30, 2003:
- --------------------- --------------- ----------------------------------------- Name Age Officer and Positions Held - --------------------- --------------- ----------------------------------------- Kenneth Plotkin 52 Chairman of the Board of Directors, Chief Executive Officer, Vice President of Marketing and Director - --------------------- --------------- ----------------------------------------- Dean Cirielli 37 President, Chief Operating Officer - --------------------- --------------- ----------------------------------------- Gerald Tucciarone 48 Chief Financial Officer and Treasurer - --------------------- --------------- ----------------------------------------- John Casey 47 Vice President in Charge of Technology - --------------------- --------------- ----------------------------------------- Bernard Herman 76 Director - --------------------- --------------- ----------------------------------------- Steven J. Kuperschmid 43 Director - --------------------- --------------- ----------------------------------------- Robert S. Nadel 64 Director - --------------------- --------------- ----------------------------------------- Christopher G. Payan 29 Director - --------------------- --------------- ----------------------------------------- Neal Page 44 Director - --------------------- --------------- ----------------------------------------- Seymour G. Siegel 61 Director - --------------------- --------------- -----------------------------------------
Kenneth Plotkin is a co-founder of the Company and has served as a Director since the Company's inception in 1994. He has been the Company's Chairman of the Board of Directors and Chief Executive Officer since the Company's incorporation. From March 14, 2001 until May 1, 2002, Mr. Plotkin served as the Chief Operating Officer and President of the Company. Mr. Plotkin has been the Company's Vice-President of Marketing since August 2, 1994. He holds a BS and an MS in Electrical Engineering from the State University of New York at Stony Brook.
Dean Cirielli joined the Company on May 1, 2002 as President and Chief Operating Officer. Previously he served as Vice President of R&D from 2000-2001 at Priority Call, a telecommunications subsidiary of SchlumbergerSema, which he joined in 1993. His early career includes telecommunications software and systems engineering at Boston Technology, Inc.; R&D program management at Philips Display Components, a television display tube manufacturer, and a series of internships at IBM, including Yorktown Heights' Watson Labs. Mr. Cirielli received a BA in 1988 and a Masters of Engineering in 1991, both in Applied and Engineering Physics from Cornell University.
Gerald Tucciarone joined the Company in January 1995 and has served as Chief Financial Officer and Treasury since such time. Prior to his joining the Company he served as Vice-President of Finance, from 1985 to 1992, with Walker-Telecommunications, Inc., a manufacturer of phones and voice-mail equipment, and from 1992 to 1995, as Assistant Controller with Chadbourne and Parke. Mr. Tucciarone is a certified public accountant.
John Casey has been the Company's Vice President in charge of Technology for more than six years.
Bernard Herman has served as a Director of the Company since 1996. From 1979 to 1993 Mr. Herman was Chief Executive Officer of Okidata Corp. of Mount Laurel, New Jersey, a distributor of computer peripheral products. Since then he has served as a consultant with reference to computer products. He is also an Arbitration Neutral for the American Arbitration Association and the National Association of Security Dealers.
Steven J. Kuperschmid has served as a Director of the Company since 1998 and as Assistant Secretary since June 2001. He has been practicing law since 1986 and has been a partner with Certilman Balin Adler & Hyman, LLP, counsel to the Company, since January 1, 1994. Mr. Kuperschmid received his BA from New York University and JD from Fordham University School of Law.
Robert S. Nadel has served as a Director of the Company since May 16, 2003. He is the President of Human Resources Spectrum, Inc., a management consulting firm specializing in executive and employee compensation and benefits and organizational effectiveness. From 1989 to 1991, Dr. Nadel served as Partner in Charge of the Actuarial Benefits and Compensation Practice of Deloitte and Touche, and from 1969 to 1989, he was Managing Partner of the Northeast Region for the Hay Group. Dr. Nadel received a BBA from City College in 1959, an MS in General Psychology from Yeshiva University in 1962 and a Doctorate in Public Administration from NYU in 1968.
Christopher G. Payan has served as a Director of the Company since May 16, 2003. He has served as Senior Vice-President, Co-Chief Operating Officer, Chief Financial Officer, Secretary and Treasurer of Emerging Vision, Inc. ("EVI"), a publicly held company involved in the operation and franchising of retail optical stores in the United States. From July 2001 through December 2001, he served as EVI's Vice President of Finance. From March 1995 through July 2001, Mr. Payan worked for Arthur Andersen LLP, where he provided various audit, accounting, consulting and advisory services to various small and mid-sized private and public companies in various industries. Mr. Payan is a certified public accountant.
Neal Page has served as a Director of the Company since May 16, 2003. After founding Osprey Technologies in 1994, he served as corporate Vice President and General Manager of the Osprey Video Division of ViewCast Corporation from 1995 to March 2003. From 1994 to 1998, Mr. Page held both management and engineering positions with Sun Microsystems, Inc. From 1983 to 1988, Mr. Page developed advanced multimedia products at General Electric and Data General. Mr. Page serves as a board member for a private software firm. He holds Bachelor of Science and Master of Science degrees in Electrical and Computer Engineering from North Carolina State University, and has completed executive business programs at University of North Carolina's Kenan-Flagler Business School.
Seymour G. Siegel has served as a Director of the Company since May 16, 2003. He is a Certified Public Accountant and a principal in the Siegel Rich Division of Rothstein, Kass & Company, P.C., an accounting and consulting firm. From 1974 to 1990 he was managing partner and founder of Siegel Rich and Co, P.C., CPAs which merged into Weiser LLC, where he was a senior partner. He formed Siegel Rich Inc. in 1994 which in April, 2000 became a division of Rothstein, Kass & Company, P.C. Mr. Siegel has been a director, trustee and officer of numerous businesses, philanthropic and civic organizations. He has served as a director and member of the audit committees of Barpoint.com, Oak Hall Capital Fund, Prime Motor Inns Limited Partnership and Noise Cancellation Technologies, all public companies.
Audit Committee Financial Expert
Our Board of Directors has determined that it has an "audit committee financial expert," as defined by Item 401(h) of Regulation S-K. Our audit committee financial expert is Seymour G. Siegel. Mr. Siegel is "independent," as such term is used in Item 7(d)(3)(iv) of Schedule 14A.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934, as amended ("Section 16"), requires that reports of beneficial ownership of capital stock and changes in such ownership be filed with the Securities and Exchange Commission (the "SEC") by Section 16 "reporting persons," including directors, certain officers, holders of more than 10% of the outstanding Common Stock and certain trusts of which reporting persons are trustees. The Company is required to disclose in this Annual Report on Form 10-K each reporting person whom it knows to have failed to file any required reports under Section 16 on a timely basis during the fiscal year ended September 30, 2003.
To the Company's knowledge, based solely on a review of copies of Forms 3, 4 and 5 furnished to it and representations that no other reports were required, during the fiscal year ended September 30, 2003, the Company's officers, Directors and 10% stockholders complied with all Section 16(a) filing requirements applicable to them.
Code of Ethics for Senior Financial Officers
Our Board of Directors has adopted a Code of Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the Code of Ethics is filed as an exhibit to this Annual Report on Form 10-K.
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth certain information for the fiscal years ended September 30, 2003, 2002 and 2001 concerning the compensation of Kenneth Plotkin, Chairman of the Board, Chief Executive Officer, Vice President of Marketing, and Director, Dean Cirielli, our President and Chief Operating Officer, John Casey, our Vice President of Technology of the Company and Gerald Tucciarone, our Chief Financial Officer and Treasurer of the Company. No other Executive Officer of the Company had a combined salary and bonus in excess of $100,000 for the fiscal year ended September 30, 2003.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value Table
The following table sets forth certain information concerning the value of stock options unexercised as of September 30, 2003:
Employment Contracts; Termination of Employment and Change-in-Control Arrangements
As of January 10, 1998, after the expiration of a prior employment agreement with the Company, Kenneth Plotkin entered into an employment agreement (the "1998 Employment Agreement") with the Company to serve in certain offices of the Company. The 1998 Employment Agreement provided for a three-year term, which term automatically renews from year to year thereafter unless otherwise terminated by the Board of Directors or the executive. The 1998 Employment Agreement provided for an annual base salary of $125,000 during the first year, $150,000 during the second year, and $180,000 during the third year. For each Annual Period (as defined in the 1998 Employment Agreement) thereafter, the 1998 Employment Agreement provides that compensation shall be as mutually determined between the Company and the executive, but not less than that for the preceding Annual Period. In addition, the 1998 Employment Agreement provides for a bonus to be paid as follows: an amount equal to 2% of the Company's earnings, excluding earnings that are not from operations and before reduction for interest and income taxes ("EBIT"), for each fiscal year starting with the year ended September 30, 1998, provided that the Company's EBIT for the applicable fiscal year exceeds 120% of the prior fiscal year's EBIT, and if not, then 1% of the Company's EBIT. The determination of EBIT shall be made in accordance with the Company's audited filings with the Securities and Exchange Commission on its Form 10-KSB or Form 10-K. Pursuant to the 1998 Employment Agreement, on January 21, 1998, incentive stock options to acquire a total of 90,000 Common Shares each were granted to Mr. Plotkin, exercisable, beginning on January 21, 1999, in increments of 33 1/3% per year at $2.544 per share. Each increment of these options expires five (5) years after it first becomes exercisable. Also on January 21, 1998, pursuant to the 1998 Employment Agreement, non-qualified options to acquire a total of 60,000 Common Shares each were granted to Mr. Plotkin, exercisable immediately for a period of ten (10) years. These options expire as of January 20, 2008. Options granted under the 1998 Incentive Stock Option Plan shall become immediately vested and exercisable in the event of a Change in Control (as defined in the 1998 Incentive Stock Option Plan). The 1998 Employment Agreement further provides for disability benefits, the obligation of the Company to pay the premiums on a term life insurance policy or policies in the amount of $500,000 on the life of Mr. Plotkin owned by Mr. Plotkin or his spouse, or a trust for his respective benefit or for the benefit of his family, a car allowance of $500 per month, reasonable reimbursement for automobile expenses, and medical insurance as is standard for executives of the Company. The 1998 Employment Agreement further provides that the Company may apply for and own life insurance on the life of Mr. Plotkin for the benefit of the Company, in such amounts as the Board of Directors of the Company may from time to time determine. As set forth in the 1998 Employment Agreement, the Company shall pay the premiums as they become due on any such insurance policies, and all dividends and any cash value and proceeds on such insurance policies shall belong to the Company. In the event of a termination of employment associated with a Change in Control of the Company (as defined in the 1998 Employment Agreement), a one-time bonus shall be paid to the executive equal to three times the amount of the executive's average annual compensation (including salary, bonus and benefits, paid or accrued) received by him for the thirty-six month period preceding the date of the Change of Control.
As of May 1, 2002, Dean Cirielli entered into an Employment Agreement with the Company (the "Cirielli Employment Agreement"). The Cirielli Employment Agreement provides for a two-year term, unless terminated earlier by either Mr. Cirielli or the Company. The Cirielli Employment Agreement provides that Mr. Cirielli shall be paid an annual salary of $175,000 for the first year of the Cirielli Employment Agreement, with annual performance evaluations and upward adjustments as determined by the
Compensation Committee of the Board of Directors, based on his performance. In addition, the Cirielli Employment Agreement provides that he shall also receive a yearly bonus totaling one percent of the operating income of the Company, provided that earnings are at least 120% of the prior fiscal year's earnings. Pursuant to the Cirielli Employment Agreement, Mr. Cirielli was granted an option to purchase 50,000 shares of Common Stock of the Company, on May 1, 2002 at an exercise price of $1.81 per share (for the purposes of the Company's 2000 Performance and Equity Incentive Plan, the fair market value of the Company's Common Stock as May 1, 2002) was $1.81 per share. Such options are exercisable to the extent of 12,500 shares on each of May 1, 2003, 2004, 2005 and 2006, with each installment being exercisable over a ten year period commencing on the date of grant of the options; and that such options are not intended to qualify as incentive stock options, as defined in section 422 of the Internal Revenue Code, as amended. All outstanding options as of the date such Change in Control (as defined in the Company's 2000 Performance and Equity Incentive Plan) shall become fully exercisable and vested, unless the terms of the award provide otherwise. Pursuant to the Cirielli Employment Agreement, the Company and Mr. Cirielli entered into a Relocation Package Agreement providing for, amongst other things, a relocation reimbursement of no more than $100,000. Such relocation reimbursement shall be paid as follows:
(i) 50% of the Relocation Costs (as defined in his Relocation Package Agreement) or $50,000 (whichever is lower) on or before he physically and permanently relocates to Long Island, NY, such date to be the date of signing a definitive sale and purchase agreement to either sell his existing residence or buy a house in the Long Island area, NY, whichever is earlier (the "Relocation Date"),
(ii) 25% of the Relocation Costs or $25,000 (whichever is lower) on the first anniversary of the Relocation Date and
(iii)25% of the Relocation Costs or $25,000 (whichever is lower) on the second anniversary of the Relocation Date.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, to the knowledge of the Company based solely upon records available to it, certain information as of December 8, 2003 regarding the beneficial ownership of the Company's Common Stock (i) by each person who the Company believes to be the beneficial owner of more than 5% of its outstanding Common Stock, (ii) by each current Director, (iii) by each person listed in the Summary Compensation Table under "Item 11 -- Executive Compensation" and (iv) by all current executive officers and Directors as a group:
Name of Management Person and Name and Address of Beneficial Owner Number Percent - ------------------------- ------ -------
Kenneth Plotkin 1,012,950(1)(4)(5)(7) 11.4% 91 Cabot Court Hauppauge, NY 11788
Estate of Kenneth R. Aupperle(3) 603,220(2)(3)(4)(6) 6.8% 23 Sequoia Drive Hauppauge, NY 11788
Laura Aupperle 572,440(2)(3)(4)(6) 6.5% 23 Sequoia Drive Hauppauge, NY 11788
Dorothy Plotkin 559,560(1)(4)(7) 6.3% 91 Cabot Court, Hauppauge, NY 11788
John Casey 142,200(8) 1.6%
Bernard Herman 53,996(9) *
Gerald Tucciarone 36,500(10) *
Steven J. Kuperschmid 30,000(11) *
Dean Cirielli 12,500(12) *
Robert S. Nadel 5,000(13) *
Christopher G. Payan 5,000(13) *
Neal Page 5,400(13) *
Seymour G. Siegel 5,000(13) *
Directors and executive officers 1,308,546(1)(4)(5)(8) 14.7% as a group (10 persons) (9)(10)(11)(12)(13) - --------------------------------- * Less than one (1%) percent.
(1) Dorothy Plotkin, wife of Kenneth Plotkin, beneficially owns 559,560 shares of Common Stock or 6.3% of the outstanding shares of Common stock. Ownership of shares of Common Stock by Mr. Plotkin does not include ownership of shares of Common Stock by Mrs. Plotkin, and ownership of shares of Common Stock by Mrs. Plotkin does not include ownership of shares of Common Stock by Mr. Plotkin.
(2) To the Company's knowledge, Laura Aupperle, the widow of Kenneth R. Aupperle, beneficially owns 572,440 shares of Common Stock, or 6.5% of the outstanding shares of Common Stock. Ownership of shares of Common Stock by the Estate of Kenneth R. Aupperle does not include ownership of shares of Common Stock by Laura Aupperle and ownership of shares of Common Stock of Laura Aupperle does not include ownership of shares of Common Stock by the Estate of Kenneth R. Aupperle.
(3) The Company is unaware of any filings made by the Estate of Kenneth R. Aupperle with the Securities and Exchange Commission. The Company has assumed that any securities of the
Company beneficially owned by Mr. Aupperle prior to his death, and of which the Company is aware, are now beneficially owned by the Estate of Kenneth R. Aupperle.
(4) One presently exercisable warrant has been issued for 120,000 shares of Common Stock to LADOKK Realty Co. ("LADOKK"), a partnership, which prior to Mr. Aupperle's death, consisted of Kenneth Plotkin, Dorothy Plotkin, Kenneth Aupperle and Laura Aupperle. Mr. Plotkin expressly disclaims any percentage interest in the warrant other than that which represents his percentage interest in the partnership, which is equal to 30,000 shares of Common Stock. The Company has assumed that the Estate of Kenneth R. Aupperle now owns the interest which Mr. Aupperle formerly had in LADOKK.
(5) Includes 180,000 shares of Common Stock issuable upon the exercise of currently exercisable non-qualified stock options granted on January 10, 1995 and exercisable until September 29, 2006, which options were part of an overall grant of a non-qualified stock option to purchase 300,000 shares of Common Stock at $1.575 per share. Also includes 105,400 shares of Common Stock issuable upon the exercise of currently exercisable non-qualified options and 118,450 shares of Common Stock issuable upon the exercise of currently exercisable incentive stock options. Does not include 120,000 shares of Common Stock issuable upon the exercise of currently unexercisable non-qualified stock options and 26,150 shares of Common Stock issuable upon the exercise of currently unexercisable incentive stock options.
(6) Does not include 50,000 shares of Common Stock, in the aggregate, owned by Mr. Aupperle's brother, as custodian for each of Mrs. Aupperle's minor children (25,000 Common Shares to each minor child) under the New York Uniform Gifts to Minors Act.
(7) Does not include 18,000 shares of Common Stock owned by the Plotkins' adult daughter. Does not include 25,000 shares of Common Stock, owned by Mr. Plotkin's father as custodian for the Plotkins' minor child under the New York Uniform Gifts to Minors Act. Each of Mr. and Mrs. Plotkin disclaim beneficial ownership of all such 43,000 shares of Common Stock.
(8) Includes 52,000 shares of Common Stock issuable upon the exercise of currently exercisable incentive stock options. Does not include 40,500 shares of Common Stock issuable upon the exercise of currently unexercisable incentive stock options.
(9) Includes 30,000 shares of Common Stock issuable upon the exercise of currently exercisable non-qualified stock options.
(10) Includes 33,500 shares of Common Stock issuable upon the exercise of currently exercisable incentive stock options. Does not include 40,500 shares of Common Stock issuable upon the exercise of currently unexercisable incentive stock options.
(11) Includes 30,000 shares of Common Stock issuable upon the exercise of currently exercisable non-qualified stock options.
(12) Includes 12,500 shares of Common Stock issuable upon the exercise of currently exercisable incentive stock options. Does not include 37,500 shares of Common Stock issuable upon the exercise of currently unexercisable incentive stock options.
Item 13.
Item 13. Certain Relationships and Related Transactions
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. The lease term expires on January 31, 2006 and includes an option to extend for three additional years.
Rent relating to this facility is currently at the annual rate of approximately $432,000 per year and will increase to approximately $454,000 per year on February 1, 2004. The rent is payable in equal monthly installments and increases at a rate of 5% per year on February 1st of each year thereafter, including 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, 2003 was $745,567. We pay the taxes and operating costs of maintaining the premises.
On December 17, 1995 in connection with a re-negotiation of the lease term, the Company granted options to purchase 120,000 shares to a real estate partnership partially owned by the principal stockholder at an exercise price of $1.905 per share, which are exercisable through the lease term. The market price of the option equaled the exercise price at the date of the grant. The effect of imputing the fair value of the options granted was immaterial. The options were still outstanding as of September 30, 2003.
The Company had amounts payable to this related party for unpaid rent of $302,128 as of September 30, 2003 and 2002.
On December 17, 1996 the Board of Directors approved the issuance of warrants to LADOKK in consideration of LADOKK's agreement to cancel the last three years of the Company's lease and to grant
an option to the Company to extend the lease for three years. The Stock Option Committee authorized the grant of a warrant to LADOKK to acquire 120,000 Common Shares at an exercise price of $1.906, which warrant is exercisable for a term of ten years.
Certilman Balin Adler & Hyman, LLP, a law firm of which Mr. Kuperschmid is a member, serves as counsel to the Company. It is presently anticipated that such firm will continue to represent the Company and its subsidiaries and affiliates and will receive fees for its services at rates and amounts not greater than would be paid to unrelated law firms performing similar services.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not Applicable.
PART IV -------
Item 15.
Item 15. Exhibits, financial statement schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The following consolidated financial statements are incorporated by reference in Item 8 of this Annual Report on Form 10-K:
Page ----
Report of Independent Certified Public Accountants Consolidated Balance Sheet as of September 30, 2003 and 2002 Consolidated Statements of Operations for the years ended September 30, 2003, 2002 and 2001 Consolidated Statements of Other Comprehensive Income (Loss) for the years ended September 30, 2003, 2002 and 2001 Consolidated Statements of Stockholders' Equity for the years ended September 30, 2003, 2002 and 2001 Consolidated Statements of Cash Flows for the years ended September 30, 2003, 2002 and 2001 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants
(a)(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts--Allowance for Doubtful Accounts Schedule II Valuation and Qualifying Accounts--Reserve for Obsolete and Slow Moving Inventory Schedule II Valuation and Qualifying Accounts--Reserve for Sales Returns
(a)(3) Exhibits.
Exhibit Number Description of Exhibit
3.1 Certificate of Incorporation, as amended to date (1) 3.2 By-laws, as amended to date (2) 4.1 Form of Common Stock Certificate (1) 4.2 1994 Incentive Stock Option Plan (1) 4.3 1996 Non-Qualified Stock Option Plan 4.4 1998 Incentive Stock Option Plan 4.5 2000 Hauppauge Digital Inc. Performance and Equity Incentive Plan (3) 4.6 Hauppauge Digital Inc. Employee Stock Purchase Plan (4) 4.7 Stockholder Rights Plan (5) 4.8 2003 Hauppauge Digital Inc. Performance and Equity Incentive Plan (6) 10.1 Employment Agreement with Kenneth Plotkin 10.2 Lease dated February 7, 1990 between Ladokk Realty Company and Hauppauge Computer Works, Inc. (1) 10.2 (a) Modification made February 1, 1996 to lease dated February 7, 1990 between LADOKK Realty and Hauppauge
Computer Works, Inc. 10.3 Long Island Development Corporation (""LIDC"") Mortgage Loan Agreements (1) 10.4 The Company's Guaranty of LIDC Loan Agreements (1) 10.5 Shawmut Mortgage Loan Agreements (1) 10.6 The Company's Guaranty of the Shawmut Mortgage Loan Agreements (1) 10.7 Employment Agreement with Dean Cirielli 10.8 Relocation Agreement with Dean Cirielli 14 Code of Ethics 21 Subsidiaries of the Company 23 Consent of BDO Seidman, LLP 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 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 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
1. Denotes document filed as an Exhibit to the Company's Registration Statement on Form SB-2 (No. 33-85426), as amended, effective January 10, 1995 and incorporated herein by reference. 2. Denotes document filed as an Exhibit to the Company's Form 8-K dated August 22, 2001 and incorporated herein by reference. 3. Denotes document filed as an Exhibit to the Company's Registration Statement on Form S-8 (No. 333-46906), and incorporated herein by reference. 4. Denotes document filed as an Exhibit to the Company's Registration Statement on Form S-8 (No. 333-46910), and incorporated herein by reference. 5. Denotes document filed as an Exhibit to the Company's Form 8-K dated July 20, 2001 and as an Exhibit to the Company's Registration Statement on Form 8-A12G and incorporated herein by reference. 6. Denotes document filed as an Exhibit to the Company's Registration Statement on Form S-8 (No. 333-109065), and incorporated herein by reference.
(b) Reports on Form 8-K
The Company filed one Current Report on Form 8-K during the fourth quarter of the fiscal year ended September 30, 2003 as follows:.
Date of Report: August 18, 2003 Item Reported: 7,12
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of Hauppauge Digital, Inc. and Subsidiaries Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Hauppauge Digital, Inc. and Subsidiaries as of September 30, 2003 and 2002 and the related consolidated statements of operations, other comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended September 30, 2003. These financial statements are the responsibility of the management of Hauppauge Digital, Inc. and Subsidiaries. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hauppauge Digital, Inc. and Subsidiaries as of September 30, 2003 and 2002 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2003 in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP - ----------------------- BDO Seidman, LLP
Melville, New York December 4, 2003
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements
HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements
HAUPPAUGE DIGITAL, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
See accompanying notes to consolidated financial statements
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Hauppauge Digital, Inc. and its wholly-owned subsidiaries, Hauppauge Computer Works, Inc., HCW Distributing Corp., Eskape Acquisition Corporation and Hauppauge Digital Europe S.a.r.l. and its wholly-owned subsidiaries, Hauppauge Digital Asia Pte Ltd, Hauppauge Computer Works, GmbH, Hauppauge Computer Works, Ltd., and Hauppauge Computer Works S.a.r.l. All inter-company accounts and transactions have been eliminated.
Nature of Business
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.
We offer several types of analog products. Our WinTV(R) analog TV receivers allow PC users to watch television on their PC screen in a resizable window, and also enable recording of TV shows to a hard disk. Our WinTV(R)-PVR TV personal video recorder products include hardware MPEG encoders, which improve the performance of TV recording and add instant replay and program pause functions, plus also enable the `burning' of TV recordings onto DVD or CD media. Our Eskape(TM) Labs products allow users of Apple(R)Macintosh(R) computers to watch television on their computer screen.
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.
We sell our products through computer and electronic retailers, computer products distributors and original equipment manufacturers ("OEMs").
Product segment and Geographic Information
The Company sells its product through a worldwide network of distributors and retailers. Net sales to international and domestic customers were approximately 68% and 32%, 73% and 27%, and 77% and 23% of total sales for the years ended September 30, 2003, 2002 and 2001, respectively. It maintains sales offices in both Europe and Asia.
Net sales to customers by geographic location consist of:
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30,
Sales to: 2003 2002 2001 --------- ---- ---- ----
United States 32% 27% 23% Germany 30% 37% 41% United Kingdom 15% 14% 12% France 8% 8% 6% Asia 1% 2% 7% Italy 2% 2% 2% Netherlands 3% 2% 1% Other Countries 9% 8% 8% --- --- --- Total 100% 100% 100%
Product Segment and Geographic Information
We offer several types of analog products. Our WinTV(R) analog TV receivers allow PC users to watch television on their PC screen in a resizable window, and also enable recording of TV shows to a hard disk. Our WinTV(R)-PVR TV personal video recorder products include hardware MPEG encoders, which improve the performance of TV recording and add instant replay and program pause functions, plus also enable the `burning' of TV recordings onto DVD or CD media. Our Eskape(TM) Labs products allow users of Apple(R)Macintosh(R) computers to watch television on their computer screen.
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.
Our products are either sold, or can be sold, by the same retailers and distributors in our marketing channel. We also sell product directly to OEM customers. The Company evaluates its product lines under the functional categories of analog and digital products. Sales by functional category are as follows:
Twelve months ended September 30,
2003 2002 2001 ---- ---- ---- Product line sales - ------------------ Analog sales $38,219,898 $34,526,717 $43,483,587 Digital sales 12,736,136 8,270,009 7,426,876 ---------- --------- --------- $50,956,034 $42,796,726 $50,910,463 =========== =========== ===========
Net long lived assets located in the United States, Europe and Asia locations were approximately 70%, 26% and 4% of total net long lived assets, respectively, at September 30, 2003, and 73%, 22% and 5%, respectively, at September 30, 2002.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any adjustments when necessary.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity date of three months or less to be cash equivalents.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. At times such cash in banks are in excess of the FDIC insurance limit. Concentration of credit risk with respect to accounts receivable exists because the Company operates in one industry (also see Note 8). Although the Company operates in one industry segment, it does not believe that it has a material concentration of credit risk either from an individual counter party or a group of counter parties, due to the large and diverse user group for its products. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains allowances to cover potential or anticipated losses for uncollectible amounts.
Shipping and Handling Costs
The Company records all shipping and handling charges in Cost of Sales.
Revenue Recognition
We sell through a sales channel which consist of retailers, OEMS and distributors. 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 boards and the cost of any pilferage while in the customer's possession is the responsibility of the customer. The products we sell are analog or digital computer boards that are 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 advertisements in the store's circular, the Company has no further obligation to assist in the resale of the products.
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.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warranty Policy
The Company warrants that its products are free from defects in material and workmanship for a period of one year from the date of initial retail purchase. The warranty does not cover any losses or damage that occur as a result of improper installation, misuse or neglect and repair or modification by anyone other than the Company or its authorized repair agent. The Company accrues anticipated warranty costs based upon historical percentages of items returned for repair within one year of the initial sale. The Company's repair rate of product under warranty has been minimal and the warranty reserve has not been material.
Inventories
Inventories are valued at the lower of cost (principally average cost) or market. A reserve has been provided to reduce obsolete and/or excess inventory to its net realizable value.
Property, Plant and Equipment
Depreciation of office equipment and machinery and amortization of leasehold improvements is provided for using both accelerated and straight line methods over the estimated useful lives of the related assets as follows:
Office Equipment and Machinery: 5 to 7 years Leasehold improvements: Asset life or lease term, whichever is shorter
Income taxes
The Company follows the liability method of accounting for income taxes. Deferred income taxes are recorded to reflect the temporary differences in the tax bases of the assets or liabilities and their reported amounts in the financial statements.
Long-Lived Assets
Long-lived assets, such as property and equipment and goodwill, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. (See Note 11)
Research and Development
Expenditures for research and development are charged to expense as incurred.
Foreign Currency Translations and Transactions
The Company's Asian subsidiary reports its financial position and results of operations in the reporting currency of the Company.
The financial position and results of operations of the Company's European subsidiaries are determined using Euros as the functional currency. Certain assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year end. Euro-denominated income statement accounts that pertain to sales are translated at the average monthly forward exchange contract rate. Currencies other than Euros (primarily Great British Pound) and Euro accounts other than sales are translated at the average prevailing exchange rate during the year. Translation adjustments arising from the translation to U.S. dollars at differing exchange rates are included in the accumulated other comprehensive income (loss) account in stockholders' equity. Gains and losses resulting from transactions that are denominated in currencies other than Euros are included in earnings
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
as a component of other income. During the years ended September 30, 2003 and 2002, the Company recorded on the balance sheet translation gains of $708,028 and $215,142, respectively, under other comprehensive income (loss) in stockholders' equity section.
Derivatives and Hedging Activities
Due to extensive sales to European customers with payment made to us in local currencies (primarily the Euro and Great British Pound) , the Company uses derivatives to reduce its exposure to fluctuations in foreign currencies. Derivative products, such as foreign currency forward contracts, are used to hedge the foreign currency market exposures underlying forecasted sales transactions with customers. The Company's accounting policies for these instruments are based on its designation of such instruments as cash flow hedging transactions. The Company does not use derivative instruments for purposes other than hedging. All open derivative contracts are recorded on the balance sheet under accounts receivable at fair value. Prior to July 1, 2002, the Company did not qualify for cash hedge accounting under FAS 133, therefore material gains or losses were recorded through operations.
The Company recognizes gains and losses on closed derivative contracts as an adjustment to net sales.
Derivatives and Hedging Activities
For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure of variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of Accumulated Other Comprehensive Income (Loss) (a component of stockholders' equity) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument, if any (i.e. the ineffective portion and any portion of the derivative excluded from the assessment of effectiveness) is recognized in earnings in the current period. For derivative instruments not designated as hedging instruments, changes in their fair values are recognized in earnings in the current period.
The effect of implementing SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities", which was adopted on October 1, 2000, is presented in this annual report on form 10-K as a cumulative effect of a change in accounting principle.
Fair Value of Financial Instruments
The carrying amounts of certain financial instruments, including cash, receivables and accounts payable, approximate fair value as of September 30, 2003 and 2002 because of the relatively short term maturity of these instruments.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net income (loss) per share
Basic net income (loss) per share includes no dilution and is computed by dividing net income (loss) by the weighted average number of Common Stock outstanding for the period. Diluted net income (loss) per share reflect, in 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 earnings (loss) per share follows:
Options to purchase 1,896,101, 825,322 and 1,827,326 shares of Common Stock at prices ranging $1.05 to $10.06, $2.07 to $10.06 and 1.05 to $10.06, respectively, were outstanding as of September 30, 2003, 2002 and 2001, but were not included in the computation of diluted net income (loss) per share of Common Stock because they were anti-dilutive.
Stock Based Compensation
The Company accounts for its stock option awards under the intrinsic value based method of accounting as prescribed by APB Opinion Number 25, "Accounting for Stock Issued to Employees". Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. The Company discloses the pro forma impact on net income and earnings per share as if the fair value based method had been applied as required by SFAS No. 123, "Accounting for Stock Based Compensation".
Stock Based Compensation
SFAS Statement 123 "Accounting for Stock Based Compensation," ("SFAS 123") requires the Company to provide pro forma information regarding net income or (loss) and net income or (loss) per share as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in SFAS123. 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 2003, 2002 and 2001: risk free interest rates of 3.25%, 3.25% and 4.25%, volatility factor of the expected market price of the Company's stock of 40%, 40% and 40% and expected lives of either five or ten years. The weighted average fair value ranges of options granted in 2003, 2002 and 2001 were $0.43 to $1.22, $0.42 and $0.57 to $1.72, respectively.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the accounting provisions of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (" SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures three classes of freestanding financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. SFAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has not entered into any financial instruments within the scope of SFAS 150 since May 31, 2003, nor does it currently hold any significant financial instruments within its scope.
In January 2003, the FASB issued Interpretation No.46, Consolidation of Variable Interest Entities. Interpretation No. 46 requires companies with a variable interest in a variable interest entity to apply this guidance as of the beginning of the first reporting period ending after December 15, 2003. The application of the guidance could result in the consolidation of a variable interest entity. The only potential variable interest entity with which the Company is associated is the real estate partnership owned by certain of the Company's principal shareholders, as disclosed in Note 9. The Company is evaluating whether the partnership is a variable interest entity, whether the Company is the primary beneficiary and, if so, the impact of this interpretation on financial position and results of operations.
2. Accounts receivable
Receivables consist of:
o Trade receivables from sales to customers o Receivables pertaining to component parts purchased from us by our contract manufacturer, which are excluded from sales o General services tax (GST) and value added tax (VAT) reclaimable on goods purchased by our Singapore and Ireland locations
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o Allowances, consisting of sales and bad debt o Income tax receivables o Other minor non trade receivables
Attached below is a listing by category of our accounts receivable as of September 30, 2003 and 2002.
As September 30, 2003 2002 ---- ----
Trade receivables $ 7,435,539 $ 6,027,048 Receivable from contract manufacturers 4,134,456 1,345,584 GST and VAT taxes receivables 289,700 659,667 Income tax receivables 175,000 501,000 Allowances (2,887,184) (2,887,184) Other 35,247 37,623 ----------- ----------- $ 9,182,758 $ 5,683,738 =========== ===========
3. Inventories
Inventories consist of the following:
September 30, 2003 2002 ---- ---- Component Parts $1,446,670 $2,842,460 Work in Process - 42,616 Finished Goods 4,027,704 5,206,419 --------- --------- $5,474,374 $8,091,495 ========== ==========
In recognition of the sales decline experienced in during fiscal 2001, which primarily occurred in the third and fourth quarters of fiscal 2001, slower sales of older product lines and engineering changes to products during the latter part of fiscal 2001, the Company reviewed the net realizable value of its inventory. The Company deemed it necessary to increase its reserve for obsolete and slow moving inventory. An additional reserve of approximately $1,863,000 was recognized during the fourth quarter of fiscal 2001 and charged to cost of sales. During fiscal 2002, the Company recorded a net reduction to cost and sales of $386,000 for adjustments to inventory allowances.
4. Property, Plant and Equipment
The following is a summary of property, plant and equipment:
September 30, 2003 2002 ---- ---- Office Equipment and Machinery $2,095,268 $1,885,094 Leasehold Improvements 77,916 76,622 ---------- ---------- 2,173,184 1,961,716 Less: Accumulated depreciation and amortization 1,640,668 1,350,662 ---------- ---------- $ 532,516 $ 611,054 ========== ===========
Depreciation expense totaled $ 274,784, $ 302,401 and $ 294,234 for the total years ended September 30, 2003, 2002 and 2001, respectively.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Income Taxes
The Company's income tax provision consists of the following:
Components of deferred taxes are as follows:
Years ended September 30, 2003 2002 ---- ---- Deferred tax assets: Net operating loss carry forwards $2,554,807 $ 1,498,761 Tax credit carry forward 407,971 407,971 Inventory allowances 1,061,750 1,038,333 Warranty reserve 9,158 9,158 Allowance for doubtful accounts 76,853 76,853 Deferred rent payments 5,344 24,344 Capitalized inventory costs 16,130 92,130 Sales return reserve 289,826 289,826 Goodwill amortization 239,926 258,496 Other allowances (1,637) (16,839) ---------- ----------- Total deferred assets 4,660,128 3,679,033 Valuation allowance (4,660,128) (3,679,033) ---------- ----------- Net deferred assets - - ========== ===========
As of September 30, 2003, the Company had $125,295 of restricted net operating losses, (which expire in the years through 2010) and $6,597,885 of unrestricted net operating losses (which expire between 2010 and 2022) available to offset future taxable income. As of September 30, 2003, the Company has an income tax receivable for $175,000, relating to the anticipated refund of taxes paid for fiscal 1999. In addition, as of September 30, 2003, the Company has a tax credit carry forward for research and development expenses totaling $407,000.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the last four fiscal years, the Company's domestic operation has incurred losses. On September 30, 2000, the Company's domestic operation had a deferred tax benefit of $1,267,997. The Company analyzed the future realization of the deferred tax asset during the fourth quarter of fiscal 2001 and it concluded that under the present circumstances, it would be appropriate for the Company to record a valuation allowance against the deferred tax asset and reduce certain income tax liabilities. The net result was a charge to the Company's tax provision for approximately $1,082,000. Due to the domestic losses incurred for the last four fiscal years , as of September 30, 2003, the Company has recorded a valuation allowance of $4,660,138 against the deferred tax asset.
5. Income Taxes
The difference between the actual income tax provision (benefit) and the tax provision (benefit) computed by applying the Federal statutory income tax rate of 34% to the income before income tax is attributable to the following:
Effective October 1, 1999, the Company restructured its 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 the Company's European customers. The new structure created separate domestic and foreign tax entities, with the new Luxembourg entity paying a license fee to the Company's domestic operation for use of the Hauppauge name.
During the fiscal year ended September 30,2003, the Company adjusted the prior year provision for estimated income tax receivable and income tax payable, based in part upon the completion of a tax examination. The net result was a change of $198,425.
For the years ended September 30, 2003, 2002 and 2001 the Company's domestic operation incurred a pretax loss of $2,606,829, $2,623,414 and $3,951,550 respectively, and the Company's international operations had pretax net income of $2,099,687, $3,039,936 and $2,419,350, respectively.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Line of Credit
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 was 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. However, there can be no assurance that we will secure a replacement line of credit at competitive terms, or secure a credit line at all.
7. Stockholders' Equity
a. Treasury Stock
On November 8, 1996, the Company approved a stock repurchase program. The program, as amended, authorizes the Company to repurchase up to 850,000 shares of its own Common Stock. The repurchased shares will be used by the Company for certain employee benefit programs. As of September 30, 2003 and 2002, 542,067 and 517,317 treasury shares with an accumulated cost of $1,497,216 and $1,461,574 and average prices of $2.76 and $2.84 were held by the Company as treasury shares.
b. Stock Compensation Plans
In August 1994, the Company adopted an Incentive Stock Option Plan ("ISO"), as defined in section 422(A) of the Internal Revenue Code. Pursuant to the ISO, up to 400,000 options may be granted for up to ten years with exercise prices at the fair market value of the Common Stock at the date of the grant, subject to adjustment as provided in the plan. As of September 30, 2003, 2002 and 2001, 118,500, 118,500 and 151,000 options were outstanding, respectively, ranging in prices from $1.35 to $2.55.
On December 14, 1995, the Board of Directors authorized the adoption of the 1996 Non-Qualified Stock Option Plan (the "1996 Non-Qualified Plan") which was approved by the Company's stockholders on March 5, 1996. The 1996 Non-Qualified Plan authorizes the grant of 500,000 shares of Common Stock, subject to adjustment as provided in the plan. The plan terminates on March 5, 2006. This plan does not qualify for treatment as an incentive stock option plan under the Internal Revenue Code. There are various tax benefits which could accrue to the Company upon exercise of non-qualified stock options that may not be available to the Company upon exercise of qualified incentive stock options. The purpose of the plan is to provide the Company greater flexibility in rewarding key employees, consultants, and other entities without burdening the Company's cash resources. As of September 30, 2003, 2002 and 2001, 346,479, 235,404 and 328,804 options ranging in prices from $1.08 to $10 were outstanding under the 1996 Non-Qualified Plan.
On December 17, 1997 the Company's Board of Directors adopted and authorized a new incentive stock option plan ("1997 ISO") pursuant to section 422A of the Internal Revenue Code. This plan was approved by the Company's stockholders at its March 12, 1998 annual stockholders' meeting. The 1997 ISO plan as adopted authorizes the grant of up to 700,000 shares of Common Stock, subject to adjustment as provided in the plan. This plan terminates on December 16, 2007. The options terms may not exceed ten years. Options cannot be granted at less than 100% of the market value at the time of grant. Options granted to employees who own more than 10% of the Company's outstanding common stock cannot be granted at less than 110% of the market value at the time of grant. As of September 30, 2003, 2002 and 2001, 634,122, 545,822 and 603,822 options were outstanding with exercise prices from $1.08 to $ 10.06.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's Board of Directors on May 9, 2000 adopted the 2000 Performance and Equity Incentive Plan (the "2000 Plan"). This plan was approved by the stockholders at its July 18, 2000 annual stockholders' meeting. The purpose of the 2000 Plan is to attract, retain and motivate key employees, directors and non-employee consultants.
The 2000 Plan as adopted reserves 500,000 shares of Common Stock to be issued pursuant to stock options grants or other awards, subject to adjustment for any merger, reorganization, consolidation, recapitalization, stock dividend, stock split or any other changes on corporate structure affecting the common stock. This plan is to be administered by the Board of Directors. Grants of awards to non-employee directors require the approval of the Board of Directors.
The 2000 plan allows the granting of options as either incentive stock options or non-qualified options. Non-employee directors and non-employee consultants may only be granted Non-Qualified Stock Options. Incentive stock options are priced at the market value at the time of grant and shall be exercisable no more than ten years after the date of the grant. Incentive stock options granted to employees who own 10% or more of the Company's combined voting power cannot be granted at less than 110% of the market value at the time of grant. Non-qualified options shall be granted at a price determined by the Board of Directors, or a committee thereof, and shall be exercisable no more than 10 years and one month after the grant. The aggregate fair market value of shares subject to an incentive stock option granted to an optionee in any calendar year shall not exceed $100,000.
As of September 30, 2003, 2002 and 2001, 497,000, 243,100 and 263,700 shares have been issued from this plan ranging in prices from $1.05 to $ 5.78.
The Company's Board of Directors on May 16, 2003 adopted the 2003 Performance and Equity Incentive Plan (the "2003 Plan"). This plan was approved by the stockholders at its September 22, 2003 annual stockholders' meeting. The purpose of the 2003 Plan is to provide equity ownership opportunities and performance based incentives to attract and retain the services of key employees, Directors and non-employee consultants of the Company and to motivate such individuals to put forth maximum efforts on behalf of the Company.
The 2003 Plan as adopted reserves up to 500,000 shares of Common Stock to be issued pursuant to stock options grants or other awards, subject to adjustment for any merger, reorganization, consolidation, recapitalization, stock dividend, stock split or any other changes on corporate structure affecting the common stock. All of the Common Stock which may be awarded under the 2003 Plan may be subject to delivery through Incentive Stock Option Plans. The 2003 Plan will be administered by the Board of Directors or a Committee thereof composed of two or more members who are non-employee Directors (the "Committee"). Grants of awards under the 2003 Plan to non-employee Directors require the approval of the Board of Directors.
The Board or the Committee may amend, suspend or discontinue the 2003 Plan or any portion thereof at any time, but no amendment, suspension or discontinuation shall be made which would impair the right of any holder without the holder's consent. Subject to the foregoing, the Board or the Committee has the authority to amend the 2003 Plan to take into account changes in law and tax and accounting rules, as well as other developments. The Board or the Committee may institute loan programs to assist participants in financing the exercise of options through full recourse interest bearing notes not to exceed the cash consideration plus all applicable taxes in connection with the acquisition of shares.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This plan allows the granting of options as either incentive stock options or non-qualified options. Non-employee directors and non-employee consultants may only be granted Non-Qualified Stock Options. Incentive stock options are priced at the market value at the time of grant and shall be exercisable no more than ten years after the date of the grant. Incentive stock options granted to employees who own 10% or more of the Company's combined voting power cannot be granted at less than 110% of the market value at the time of grant. Non-qualified options shall be granted at a price determined by the Board of Directors and shall be exercisable no more than 10 years and one month after the grant. The aggregate fair market value of shares subject to an incentive stock option granted to an optionee in any calendar year shall not exceed $100,000. As of September 30, 2003, no stock options have been granted under the 2003 Plan.
The Board or the Committee may grant options with a reload feature. A reload feature shall only apply when the option price is paid by delivery of Common Stock held by the optionee for at least 12 months. The agreement for options containing the reload feature shall provide that the option holder shall receive, contemporaneously with the payment of the option price in Common Stock, a reload stock option to purchase the number of Common Stock equal to the number of Common Stock used to exercise the option, and, to the extent authorized by the Board or the Committee, the number of Common Stock used to satisfy any tax withholding requirement incident to the underlying Stock Option. The exercise price of the reload options shall be equal to the fair market value of the Common Stock on the date of grant of the reload option and each reload option shall be fully exercisable six months from the effective date of the grant of such reload option. The term of the reload option shall be equal to the remaining term of the option which gave rise to the reload option. No additional reload options shall be granted to optionees when Stock Options are exercised following the termination of the optionee's employment. Subject to the foregoing, the terms of the 2003 Plan applicable to the option shall be equally applicable to the reload option.
Stock Appreciation Rights may be granted in conjunction with all or part of any stock option granted under the 2003 Plan or independent of a stock option grant. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined by the Board or the Committee. Upon the exercise of a Stock Appreciation Right, a holder shall be entitled to receive an amount in cash, Common Stock, or both, equal in value to the excess of the fair market value over the option exercise price per Common Stock
Shares of Restricted Stock may also be issued either alone or in addition to other amounts granted under the 2003 Plan. The Board or the Committee shall determine the officers, key employees and non-employee consultants to whom and the time or times at which grants of Restricted Stock will be made, the number of shares to be awarded, the time or times within which such awards may be subject to forfeiture and any other terms and conditions of the award.
Long term performance awards (or "Award) may be awarded either alone or in addition to other awards granted under the 2003 Plan. The Board or the Committee shall determine the nature, length, and starting date of the performance period which shall generally be at least two years. The maximum award for any individual with respect to any one year of any applicable performance period shall be 100,000 Common Stock.
Upon a Change in Control as defined in the 2003 Plan, but only to the extent determined by the Board or the Committee, stock options, stock appreciation rights and Long term performance awards (the "Award") will vest, provided that no award granted to an employee of the Company shall vest or be exercisable unless the employee's employment is terminated within 24 months from the date of the Change in Control, (as defined in
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the 2003 Plan) unless the employee is terminated for Cause, as defined in the 2003 Plan or if the employee resigns his employment without Good Reason, as defined in the 2003 Plan. Otherwise, the Award shall not vest and be exercisable upon a Change in Control, unless otherwise determined. The employee shall have 30 days from after his employment is terminated due to a Change in Control to exercise all unexercised Awards. However, in the event of the death or disability of the employee, all unexercised Awards must be exercised within twelve (12) months after the death or disability of the employee.
The Company's Board of Directors on May 9, 2000 adopted the Employee Stock Purchase Plan. This plan was approved by the stockholders at its July 18, 2000 annual stockholders' meeting. This plan is intended to provide the Company's full-time employees an opportunity to purchase an ownership interest in the Company through the purchase of Common Stock. The Company has reserved 100,000 Common Stock for issuance under the plan. This plan is to be administered by the Board of Directors. Employees who have completed six months of employment and who work more than 20 hours per week for more than five months in the year are eligible to participate in the plan. The employee may elect to payroll deductions up to 10% per pay period. The purchase price shall either be the lower of 85% of the closing price on the offering commencement date or the offering termination date. No employee will be granted an option to purchase Common Stock if such employee would own shares or holds options to purchase shares which would cause the employee to own more than 5% of the combined voting power of all classes of stock. Non-employees are not eligible to participate. This plan terminates on December 31, 2003. The maximum number of shares that may be issued in any quarterly offering is 10,000, plus unissued shares from prior offerings whether offered or not. At our September 6, 2002 stockholders' meeting, our stockholders' approved an increase in shares reserved under this plan to 180,000, and extended the plan termination date to December 31, 2004. As of September 30, 2003 and 2002, 97,937 and 67,786 Common Stock were purchased under this plan.
A summary of the status of the Company's fixed options plans as of September 30, 2003, 2002 and 2001 and changes during the years ending those dates is presented below:
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at September 30, 2003:
c. Stockholders' Rights Agreements
On July 19, 2001, the Company's Board of Directors adopted a stockholder rights plan, as set forth in the Rights Agreement, dated as of July 20, 2001 (the "Rights Agreement") between the Company and North American Transfer Company as Rights Agent. Pursuant to the Rights Agreement, one Right will be issued for each share of common stock, par value $0.01 per share, of the Company ("Common Stock") outstanding as of August 5, 2001. Each of the Rights will entitle the registered holder to purchase from the Company one share of Common Stock at a price of $11.00 per share, subject to adjustment. The Rights generally will not become exercisable unless and until, among other things, any person acquires 10% to 12% or more of the outstanding Common Stock or makes a tender offer to acquire 10% or more of the outstanding Common Stock. The 10% threshold will not be applicable to institutional investors who stay below a 20% ownership level and who report their ownership on a Schedule 13G under the Securities Exchange Act of 1934. In addition, stockholders of more than 10% of the Common Stock as a of July 19, 2001 will be grandfathered at a their current level plus 1% unless they later fall below the 10% threshold. The Rights are redeemable under certain circumstances at $0.001 per Right and will expire, unless earlier redeemed or extended, on July 19, 2011.
8. Significant Customer Information
For the years ended September 30, 2003 and 2002 the Company had no single customer who accounted for more than 10% of net sales. As of September 30, 2003 and 2002, the Company had fourteen customers who accounted for 74% and 79% , respectively of the net accounts receivable.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Related Party Transactions
The Company rents its principal office and warehouse space in Hauppauge, New York from a real estate partnership owned by certain of the Company's principal stockholders. The lease term expires on January 31, 2006 and includes an option to extend for three additional years. The lease provides for rent increases of 5% per year. Rent is currently at the annual rate of $431,454 and will increase to $453,027 annually as of February 1, 2004. On December 17, 1995 in connection with a re-negotiation of the lease term, the Company granted options to purchase 120,000 shares to a real estate partnership partially owned by the principal stockholder at an exercise price of $1.905 per share, which are exercisable through the lease term. The market price of the option equaled the exercise price at the date of the grant. The effect of imputing the fair value of the options granted was immaterial. The options were still outstanding as of September 30, 2003.
The Company had amounts payable to this related party for unpaid rent of $302,128 as of September 30, 2003 and 2002.
The indebtedness partially incurred by the principal stockholder to purchase the building is also guaranteed by the Company and totaled $745,567 at September 30, 2003.
Minimum annual lease payments to related parties and third parties are as follows:
Year September 30, - ------------------
2004 679,272 2005 673,673 2006 239,803 ------- Total $1,592,748 ==========
Rent expense to related parties and third parties totaled approximately $622,000, $619,000 and $623,000 for the years ended September 30, 2003, 2002 and 2001 respectively. The Company pays the real estate taxes and it is responsible for normal building maintenance.
10. Commitments and Contingencies
a. Litigation
In the normal course of business, the Company is party to various claims and/or litigation. Management and its legal counsel believe that the settlement of all such claims and or/litigation, considered in the aggregate, will not have a material adverse effect on the Company's financial position and results of operations.
We are presently 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 is 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. Based on the 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. However, due to the uncertainties inherent in litigation, we are unable to predict the ultimate outcome.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b. Employment Contract
As of January 10, 1998, after the expiration of a prior employment agreement with the Company, Kenneth Plotkin entered into an employment agreement (the "1998 Employment Agreement") with the Company to serve in certain offices of the Company. The 1998 Employment Agreement provided for a three-year term, which term automatically renews from year to year thereafter unless otherwise terminated by the Board of Directors or the executive. The 1998 Employment Agreement provided for an annual base salary of $125,000 during the first year, $150,000 during the second year, and $180,000 during the third year. For each Annual Period (as defined in the 1998 Employment Agreement) thereafter, the 1998 Employment Agreement provides that compensation shall be as mutually determined between the Company and the executive, but not less than that for the preceding Annual Period. In addition, the 1998 Employment Agreement provides for a bonus to be paid as follows: an amount equal to 2% of the Company's earnings, excluding earnings that are not from operations and before reduction for interest and income taxes ("EBIT"), for each fiscal year starting with the year ended September 30, 1998, provided that the Company's EBIT for the applicable fiscal year exceeds 120% of the prior fiscal year's EBIT, and if not, then 1% of the Company's EBIT. The determination of EBIT shall be made in accordance with the Company's audited filings with the Securities and Exchange Commission on its Form 10-KSB or Form 10-K. Pursuant to the 1998 Employment Agreement, on January 21, 1998, incentive stock options to acquire a total of 90,000 Common Shares each were granted to Mr. Plotkin, exercisable, beginning on January 21, 1999, in increments of 33 1/3% per year at $2.544 per share. Each increment of these options expires five (5) years after it first becomes exercisable. Also on January 21, 1998, pursuant to the 1998 Employment Agreement, non-qualified options to acquire a total of 60,000 Common Shares each were granted to Mr. Plotkin, exercisable immediately for a period of ten (10) years. These options expire as of January 20, 2008. Options granted under the 1998 Incentive Stock Option Plan shall become immediately vested and exercisable in the event of a Change in Control (as defined in the 1998 Incentive Stock Option Plan). The 1998 Employment Agreement further provides for disability benefits, the obligation of the Company to pay the premiums on a term life insurance policy or policies in the amount of $500,000 on the life of Mr. Plotkin owned by Mr. Plotkin or his spouse, or a trust for his respective benefit or for the benefit of his family, a car allowance of $500 per month, reasonable reimbursement for automobile expenses, and medical insurance as is standard for executives of the Company. The 1998 Employment Agreement further provides that the Company may apply for and own life insurance on the life of Mr. Plotkin for the benefit of the Company, in such amounts as the Board of Directors of the Company may from time to time determine. As set forth in the 1998 Employment Agreement, the Company shall pay the premiums as they become due on any such insurance policies, and all dividends and any cash value and proceeds on such insurance policies shall belong to the Company. In the event of a termination of employment associated with a Change in Control of the Company (as defined in the 1998 Employment Agreements), a one-time bonus shall be paid to the executive equal to three times the amount of the executive's average annual compensation (including salary, bonus and benefits, paid or accrued) received by him for the thirty-six month period preceding the date of the Change of Control.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of May 1, 2002, Dean Cirielli entered into an Employment Agreement with the Company (the "Cirielli Employment Agreement"). The Cirielli Employment Agreement provides for a two-year term, unless terminated earlier by either Mr. Cirielli or the Company. The Cirielli Employment Agreement provides that Mr. Cirielli shall be paid an annual salary of $175,000 for the first year of the Cirielli Employment Agreement, with annual performance evaluations and upward adjustments as determined by the Compensation Committee of the Board of Directors, based on his performance. In addition, the Cirielli Employment Agreement provides that he shall also receive a yearly bonus totaling one percent of the operating income of the Company, provided that earnings are at least 120% of the prior fiscal year's earnings. Pursuant to the Cirielli Employment Agreement, Mr. Cirielli was granted an option to purchase 50,000 shares of Common Stock of the Company, on May 1, 2002 at an exercise price of $1.81 per share (for the purposes of the Company's 2000 Performance and Equity Incentive Plan, the fair market value of the Company's Common Stock as May 1, 2002) was $1.81 per share. Such options are exercisable to the extent of 12,500 shares on each of May 1, 2003, 2004, 2005 and 2006, with each installment being exercisable over a ten year period commencing on the date of grant of the options; and that such options are not intended to qualify as incentive stock options, as defined in section 422 of the Internal Revenue Code, as amended. All outstanding options as of the date such Change in Control (as defined in the Company's 2000 Performance and Equity Incentive Plan) shall become fully exercisable and vested, unless the terms of the award provide otherwise. Pursuant to the Cirielli Employment Agreement, the Company and Mr. Cirielli entered into a Relocation Package Agreement providing for, amongst other things, a relocation reimbursement of no more than $100,000. Such relocation reimbursement shall be paid as follows:
(i) 50% of the Relocation Costs (as defined in his Relocation Package Agreement) or $50,000 (whichever is the lower) on or before he physically and permanently relocates to Long Island, NY, such date to be the date of signing a definitive sale and purchase agreement to either sell his existing residence or buy a house in the Long Island area, NY, whichever is the earlier (the "Relocation Date"),
(ii) 25% of the Relocation Costs or $25,000 (whichever is the lower) on the first anniversary of the Relocation Date and
(iii)25% of the Relocation Costs or $25,000 (whichever is the lower) on the second anniversary of the Relocation Date.
c. Forward Exchange Contracts
Due to extensive sales to European customers denominated in local currencies (primarily the Euro and Great British Pound), the Company is a net receiver of currencies other than the U.S. dollar and as such, benefit from a weak dollar and are adversely affected by a strong dollar relative to the major worldwide currencies, especially the Euro and Great British Pound. Consequently, changes in exchange rates expose the Company to market risks resulting from the fluctuations in the foreign currency exchange rates to the U.S. dollar. The Company attempts to reduce these risks by entering into foreign exchange forward contracts with financial institutions to protect against currency exchange risks.
As of September 30, 2003, the Company has foreign currency forward contracts outstanding of $3,560,000 against delivery of the Euro. The contracts expire through December, 2003.
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended September 30, 2003 and 2002, the Company recorded approximately $1,395,200 and $408,000 as a decrease to net sales related to the changes in the fair value of the Company's derivative contracts.
11. Business Acquisition
On June 1, 2000 the Company acquired certain assets of Eskape 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 the Company's 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, including $100,000 for direct transactions costs and a restrictive covenant totaling $50,000. The excess of the acquisition cost over the fair value of identifiable assets acquired totaled approximately $810,000 and was amortized on a straight line basis over 10 years and the restrictive covenant on a straight line basis over two years.
In connection with the acquisition the Company had recorded goodwill of approximately $810,000. Due to changing conditions that occurred during the second half of fiscal 2001, such as declining sales, lost market share and the market changes caused by the introduction of a new Macintosh operating system, the following events and circumstances indicated to the Company that its goodwill asset has been impaired and is not likely to be recovered:
o The Eskape(TM) Labs division was not profitable during fiscal 2001 and did not contribute, nor is to expected to contribute, any positive cash flow stream o The asset value was greater than the estimated future cash flows o Eskape(TM) Labs division did not fulfill its internal sales forecast for fiscal 2001 o At the time of the acquisition, the Company 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, the Company recognized an impairment loss during the fourth quarter of fiscal 2001 for the entire remaining goodwill balance of $701,919.
The Company recorded the impairment loss as a component of income (loss) from operations for fiscal 2001.
12. Life Insurance Proceeds
On January 29, 2001 the Company's President unexpectedly passed away. Pursuant to key man life insurance policies the Company had on its President, it collected life insurance proceeds in the aggregate of $2 million from these policies, $1 million of which was recorded in the quarter ended June 30, 2001, while the other $1 million was recorded during the quarter ended September 30, 2001. The proceeds were reported on the Company's statement of operations in "Other income (expense)" under the caption "Life insurance proceeds".
HAUPPAUGE DIGITAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Quarterly Information (Unaudited)
The following presents certain unaudited quarterly financial data:
Quarterly Information (Unaudited)
Since the Company sells primarily to the consumer market, it has experienced certain revenue trends. The sales of the Company's products, which are primarily sold through distributors and retailers, have historically been stronger during the Company's first fiscal quarter (October to December), which due to the holiday season, is a strong quarter for computer equipment sales. In addition, the Company's international sales, mostly in the European market, were 68%, 73% and 77% of sales for the years ended September 30, 2003, 2002 and 2001, respectively. Due to this, the Company's sales for its fourth fiscal quarter (July to September) can be potentially impacted by the reduction of activity experienced with Europe during the July and August summer holiday period.
During the 4th quarter of the fiscal year ended September 30, 2001, the Company recorded the following adjustments:
o Due to the decline in sales during the third and fourth quarters of the current fiscal year, the Company deemed it necessary to increase its reserve for obsolete and slow moving inventory. An additional reserve of approximately $1,863,000 was recognized during the fourth fiscal quarter of fiscal 2001 and charged to cost of sales (see Note 2) o The Company analyzed the future realization of the deferred tax asset during the fourth quarter of fiscal 2001 as a result of the operating losses incurred in the third and fourth quarters of 2001, and it concluded that under the present circumstances, it would be appropriate for the Company to record a valuation allowance against the deferred tax asset and reduce certain income tax liabilities. The net result was a charge to the Company's tax provision for $1,082,000 (see Note 4)
o Due to changing conditions that occurred during the second half of fiscal 2001, such as declining sales, lost market share and the market changes caused by the introduction of a new Macintosh operating system, the Company deemed it necessary to write off approximately $701,000 of goodwill related to its June 2000 acquisition of Eskape Labs (see Note 10)
During the 4th quarter of the fiscal year ended September 30, 2003, the Company recorded the following adjustments:
o During the fiscal year ended September 30,2003, the Company adjusted the prior year provision for estimated income tax receivable and income tax payable, based in part upon the completion of a tax examination. The net result was a change of $198,425.
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of Hauppauge Digital, Inc. and Subsidiaries Hauppauge, New York
The audits referred to in our report dated December 4, 2003, relating to the consolidated financial statements of Hauppauge Digital, Inc. and Subsidiaries included the audits of the financial statement schedules for each of the three years in the period ended September 30, 2003. These financial statement schedules are the responsibility of management. Our responsibility is to express an opinion on these schedules based on our audits.
In our opinion, such financial statement schedules presents fairly, in all material respects, the information set forth therein.
/s/ BDO Seidman, LLP - ---------------------------- BDO Seidman, LLP
Melville, New York December 4, 2003
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Reserve for Obsolete and Slow Moving Inventory - ----------------------------------------------
(1) Obsolete inventory disposed of
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Reserve for sales returns - -------------------------
(1) Sales reserve adjusted per historical evaluation
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:/s/ Kenneth Plotkin Date: December 22, 2003 -------------------------- KENNETH PLOTKIN Chief Executive Officer, Chairman of the Board, Vice President of Marketing (Principal Executive Officer)
By:/s/ Gerald Tucciarone Date: December 22, 2003 -------------------------- GERALD TUCCIARONE Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:/s/ Kenneth Plotkin Date: December 22, 2003 --------------------------- KENNETH PLOTKIN Chief Executive Officer, Chairman of the Board, Vice President of Marketing (Principal Executive Officer) and Director
By:/s/ Gerald Tucciarone Date: December 22, 2003 --------------------------- GERALD TUCCIARONE Treasurer and Chief Financial Officer
By:/s/ Seymour G. Siegel Date: December 22, 2003 --------------------------- SEYMOUR G. SIEGEL Director
By:/s/ Steven J. Kuperschmid Date: December 22, 2003 --------------------------- STEVEN J. KUPERSCHMID Director
By:/s/ Bernard Herman Date: December 22, 2003 --------------------------- BERNARD HERMAN Director
By:/s/ Robert S. Nadel Date: December 22, 2003 --------------------------- ROBERT S. NADEL Director
By:/s/ Neal Page Date: December 22, 2003 --------------------------- NEAL PAGE Director
By:/s/ Christopher G. Payan Date: December 22, 2003 --------------------------- CHRISTOPHER G. PAYAN Director