UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended                September 30, 2013
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from___________to___________
 
Commission file number            1-13550
 
HAUPPAUGE DIGITAL INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
11-3227864
(State or other jurisdiction of
 
(I.R.S Employer
incorporation or organization)
 
Identification No.)
 
 
91 Cabot Court, Hauppauge, New York
11788
 
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code         (631) 434-1600
 
Securities registered pursuant to Section 12 (b) of the Act:
 
Title of each class
Name of each exchange on which registered
 
 
 
 
 
Securities registered pursuant to Section 12 (g) of the Act:
 
Common Stock, $.01 par value
(Title of class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
¨ Yes                                    x No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
 
¨ Yes                                    x No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.
 
x Yes                                    ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
x Yes                                    ¨ No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
 
¨ Large Accelerated Filer
¨ Accelerated Filer
 
 
¨ Non-Accelerated Filer
x Smaller reporting company
(Do not check box if smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).
 
¨ Yes                                    x No
 
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of the close of business on March 31, 2013 was approximately $9,248,399 based upon the last price reported on such date on the NASDAQ Capital Market. Non-affiliates include all stockholders other than officers, directors and 5% stockholders of the registrant.
 
As of December 12, 2013, the number of shares of Common Stock, $0.01 par value, outstanding was 10,122,344.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.  
 
 
 
PART I
 
Special Note Regarding Forward Looking Statements
 
This Annual Report on Form 10-K contains forward-looking statements as that term is defined in the federal securities laws.   The events described in forward-looking statements contained in this Annual Report on Form 10-K may not occur.   Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, financing plans, projected or anticipated benefits from acquisitions that we may make, or projections involving anticipated revenues, earnings or other aspects of our operating results or financial position, and the outcome of any contingencies.   Any such forward-looking statements are based on current expectations, estimates and projections of management.   We intend for these forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements.   Words such as “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions are intended to identify forward-looking statements.   We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences (including, but not limited to, those set forth in “Item 1A–Risk Factors”), many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based.   Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate.   Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements.   We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.   All cautionary statements made in this Annual Report on Form 10-K should be read as being applicable to all related forward-looking statements wherever they appear.

 

ITEm 1.   BUSINESS

 
OVERVIEW
 
We are a public company with a 21-year history that designs, develops, manufactures and markets a variety of consumer electronic hardware and software products that link TV and other video delivery technologies to personal computers and mobile devices, thereby facilitating and enhancing home and mobile entertainment systems. These products fall within the following general categories:
 
·       TV Receivers and Tuners
·       High Definition Video Recorders
·       Peripheral Software Applications and Video Streaming Support Devices
 
·       Administrative offices are in New York, Ireland and Singapore.
·       Sales offices are in Germany, London, Paris, The Netherlands, Sweden, Italy, Spain, Singapore, Taiwan and California.
·       Research and development centers are in Hauppauge, New York, Braunschweig, Germany and Taipei,Taiwan.
 
Our cash requirements for the next twelve months will include, among other things, the cash to fund our operating and working capital needs. We rely exclusively upon cash generated from operations to fund these needs. We do not have a working capital line of credit or other borrowing facility in place to draw upon in the event that cash from our operations is insufficient to fund our capital requirements to sustain our operations. Our cash and cash equivalents as of   September   30, 2013 and our internally generated cash will not provide sufficient liquidity to meet our capital needs for the next twelve months, and   additional sources of cash may be required to meet our capital needs.   There can be no assurance that the we will be able to obtain additional sources of cash if needed.   The financial statements have been prepared assuming that we will continue as a going concern and do not include any adjustments that might result from the outcome of the uncertainty described here.
 
In recognition of the operating losses, loss of sales and   reduction of cash, we have been   implementing expense reduction initiatives to lower our expense structure to bring it in line with sales.   We have also retained,   on a consulting basis, an advisory firm to assist   in considering   and pursuing strategic alternatives, including possible additional financing to fund our capital needs and the   restructuring of our business.
 
 
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OUR STRATEGY
 
Since our founding in 1994, we have become a leader in bringing live TV and other video content to personal computers and mobile devices. We are known throughout the consumer electronics industry as a pioneer in developing cutting-edge peripheral products for analog and digital streaming and recording of video to the PC. We have become a leader by consistently focusing on five strategic principles:
 
1.      Innovating and diversifying products and product lines.
2.      Introducing new and desirable features in its products.
3.      Expanding domestic and international sales and distribution channels.
4.      Forging strategic relationships with key industry players.
5.      Outsourcing production to reliable, high-quality contract manufacturers.
 
As more consumers look to PCs and mobile devices to deliver a total entertainment experience, our products are components of a total entertainment system that go “beyond the TV” and integrate desktop and laptop PC’s, leading game system consoles, Apple iPads and Android mobile devices. Enhancements to our most successful products, combined with new products we may introduce in the future have the potential to   permanently change the consumer’s experience with, and perception of, home entertainment.
 
As more people are looking to PCs for a total entertainment experience, we believe that our products are able to enhance the capabilities of the PC to enable it to become a one-stop integrated entertainment system.   We feel our current products and products we may introduce in the future have the potential to be widely accepted for PC-based home entertainment systems.
 
Our engineering group plans and designs new products and new product families. They also work on updating our current products to add new and innovative features that the marketplace seeks, while remaining vigilant in keeping our manufacturing costs low and trying to ensure that our products are compatible with new operating systems.
 
During fiscal 2013, our engineering department introduced the HD-PVR- Rocket. Our HD PVR Rocket records video game play from PlayStation, Xbox and PC gaming systems in high definition up to 1080p. The HD PVR Rocket is a portable video recorder which is small enough to fit in your hand and weights just 4.6 oz . The HD PVR Rocket has a built-in audio mixer and has a USB port where a gamer can plug a USB thumb drive to record game play. A 16 Gbyte USB thumb drive, when plugged into the HD PVR Rocket, can record 4 hours of video game play at an HD resolution of 1080p. The HD PVR Rocket also has a built-in audio mixer that can record game commentary along with game audio.   In addition to the recorder, a Windows application called Hauppauge Capture is provided which can be used to upload video game play to YouTube.
 
During fiscal 2012, our engineering department introduced the HD PVR 2 Gaming edition, designed for the dedicated Xbox360 or PS3 gamer, which enables the user to video record real time H.264 compressed game play recordings from an Xbox or PS3 player.   HD PVR 2 comes with HDMI in and out to make it easier to connect to your Xbox 360 and your HD TV set. For the PS3, HD PVR 2 comes with a PS3 component video gaming cable, while still using the HDMI out for no-delay pass through to your HD TV set. HD PVR 2 has a top mounted record button: hit the record button and recording   starts on your PC. This makes recording video game play super easy. We started shipping this product at the end of fiscal 2012.   
 
During fiscal 2012, our engineering department tested and certified most of our TV tuners for use with Microsoft’s Windows 8 operating system.
 
During fiscal 2012, our engineering department also introduced ‘StreamEez’. StreamEez is designed as an Internet steaming device for small groups and organizations who want to stream live events over the Internet. The target markets are local administrations such as school boards, political organizations and churches. StreamEez was designed to make Internet streaming easy, and is pre-configured to support streaming services such as Ustream, Justin.TV and Twitch.    This product began shipping in early fiscal 2014.
 
 
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We believe that strategic relationships with key suppliers, PC manufacturers, 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 domestic and international sales and marketing team cultivates a variety of distribution channels comprised of computer and electronic retailers, computer products distributors and PC manufacturers. Computer and 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®, WinTV®, PCTV and MediaMVP™ brand names in the international marketplace. We currently have nine sales offices in countries outside of the U.S., and a R&D facility in Taiwan to service the growing Asian market.
 
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. This approach enables us to focus our human and financial resources on developing, marketing and distributing our products.     Successfully engineering products to have low production costs and commonality of parts along with the use of single platforms for multiple models are additional important ways that we believe our design and build strategy contributes to our financial performance.
 
PRODUCTS
 
Our products generally fall under three product categories:
 
·   High Definition Video Recorders – This category includes   products that record high-definition video direct from video game consoles, including, among others, Xbox and Sony PlayStation game systems. Certain models also can record HD video from cable TV and satellite set-top boxes.   These products enable the recording of video and TV content to a PC’s hard drive, the receiving of digital TV data transmissions, and the displaying of computer-stored digital media on TV sets and other mobile devices via in-home networks
 
·   TV Receivers and Tuners – This category includes products which receive TV signals that enable PC, tablet and smartphone users to watch television on a PC or laptop device screen. On PCs, the TV can be in a resizable window. On tablet and smartphones, the TV image is a fixed window or full screen.   Specifically, our devices include digital TV receivers, serving those markets relying on the latest digital-based TV systems, hybrid analog/digital TV receivers, serving the many markets internationally that are still in the process of converting from analog to digital TV formats, and analog-only TV receivers, serving the remaining markets.   In this category are products based on CableCARD technology which allow consumers in the U.S. to watch and record cable TV programs and can be used in place of cable TV company rented cable boxes. Also in this category is a line of TV receivers which have Wi-fi connections that enable the viewing of TV on tablets and other mobile devices.  
 
·     Other Video Products and Software – This category includes an array of product lines consisting of software applications and video capture board and digital media adapter units that support video-streaming in and around the home or over the Internet based on inbound TV signals.
 
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 product categories.
 
High Definition Video Recorder Products
 
USB-Live2 is a standard definition video recorder which can be used to record video tapes and other types of video onto a PC. Once on a PC, these recordings can be burned onto a DVD disc. USB-Live2 is sold to consumers who want to save their old video tapes by converting them to a DVD disc. USB-Live2 comes with software which allows a consumer to record a VHS tape, and then author a DVD disc from the video recording.
 
 
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Our HD PVR Rocket is our new portable high definition video recorder. The   HD PVR Rocket records video game play from PlayStation, Xbox and PC gaming systems in high definition up to 1080p. The HD PVR Rocket is a portable video recorder which is small enough to fit in your hand and weights just 4.6 oz . The HD PVR Rocket has a built-in audio mixer and has a USB port where a gamer can plug a USB thumb drive to record game play. A 16 Gbyte USB thumb drive, when plugged into the HD PVR Rocket, can record 4 hours of video game play at an HD resolution of 1080p. The HD PVR Rocket also has a built-in audio mixer that can record game commentary along with game audio.   In addition to the recorder, a Windows application called Hauppauge Capture is provided which can be used to upload video game play to YouTube.
 
Our HD PVR 2 Gaming Edition is   a complete kit for gamers who want to record their Sony PlayStation 3 or Xbox 360 game-play in high definition. The   HD PVR 2 Gaming Edition has high video quality and records HD video from either HDMI or component video at up to 1080p/30. Gamers can share their best video game-play with friends on YouTube by using the included Showbiz application to record and then upload videos to YouTube. HD PVR 2 Gaming Edition allows any user to produce their own video movies from their game-play. A special PS3 component video cable is included.

HD PVR is our previous generation High-Definitionvideo recorder for making real-time H.264 compressed video recordings at resolutions up to 1080i. The HD PVR records component video from a game console such as the Xbox 360, Playstation 3 or cable TV and satellite set top boxes. When used to record HD video from a cable TV or satellite set top box, the HD PVR can automatically change TV channels for scheduled recordings with its built-in IR blaster. The HD PVR recording format can be used to burn Blu-ray DVD disks. The HD PVR’s recording quality allows personal archival of   high definition TV programs from any component video HD set top box. The HD PVR also has standard definition composite and S-Video inputs which allows the user to record their old home video tapes into an AVCHD format for creating Blu-ray DVD recordings.
 
Colossus has similar capabilities as HD PVR, but is an internal card for Windows based PCs. Colossus can record high definition video from a cable TV or satellite set top box, or an Xbox 360 or Sony Playstation 3 game console. Recording is done at up to 1080i HD video.

 

TV receivers and Tuners

 
Broadway live TV streaming products for the iPad and iPhone
 
Broadway, developed by our PCTV Systems Sarl R&D team in Braunschweig Germany, connects to a TV signal and then transmits that TV signal over a Wi-Fi network or over the Internet. An Apple iPhone or iPad can receive this TV signal and display the live TV program on the screen. Broadway is a small, low power, stand alone device which is designed for unattended operation. With Broadway, an iPad or iPhone user can watch live TV in the home over their Wi-Fi network, or anywhere around the world via the Internet.
 
There are three models of Broadway: a model for Europe and parts of Asia which includes dual digital TV receivers for over-the-air digital TV, a model for North America with a built-in universal ATSC/NTSC and clear QAM receiver, and a model which includes a free-to-air high definition DVB-S2 satellite TV receiver.
 
Digital TV receivers and hybrid analog/digital TV receiver
 
Our digital TV tuner products enable, among other things, a PC user to watch digital television in a resizable window on a PC or laptop screen.   There are different digital TV standards throughout the world, and we develop TV tuner products for many of these digital TV formats. Examples of digital TV broadcasts we can receive on our TV tuner products include: over-the-air high definition ATSC, clear QAM and DVB-C digital cable, digital terrestrial DVB-T, digital satellite DVB-S and DVB-S2. To support these digital TV formats, and as many of our primary markets transition from analog to digital TV, we have been concentrating our engineering resources on digital TV tuner products and have discontinued development on analog only TV tuners.
 
Our WinTV-DCR-2650 is a PC-based cable TV set top box utilizing CableCARD technology that has two tuners. With Windows 7 Media Center, the user can record two TV programs at the same time, or the user can watch one TV program while recording another. There are other applications besides Windows Media Center which will work with the WinTV-DCR-2650. These programs will allow the user to watch and record cable TV programs which are marked as "copy freely" by their local cable operator. Most of these programs are network TV channels, including CBS, NBC and Fox.
 
 
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Our WinTV-DCR-3250 is a TV set top box utilizing CableCARD technology that has three tuners. The WinTV-DCR 3250 sends TV over your home network and enables the user to record premium digital cable TV on your PC and watch TV from any computer of your home network.   You can record the full resolution of the original broadcast, up to 1080i. With Windows 7 or 8 Media Center, the user can schedule and record premium cable TV programs.
 
We have a line of external TV tuners called TV tuner “sticks”. TV tuner “sticks” are small TV tuners which connect to a PC, notebook or netbook computer through the USB port.   TV tuner “sticks” are typically used for mobile PC users and others who want the flexibility to simply insert a USB TV tuner and watch TV on their screen. The small size and UPC plug-in capability are good for use in laptops while traveling. Our TV tuner “sticks” include the WinTV-NOVA, WinTV-Ministick and WinTV-Aero series.
 
Our WinTV-NOVA products are digital only TV tuners for PCs.   They support the various forms of digital TV and come in either an internal or external form factor.
 
Our   WinTV-NOVA-T is a   DVB-T digital terrestrial   tuner for our   European markets   which allows for the viewing of digital terrestrial TV and listening to digital radio on a PC. The product also allows recording of digital TV and radio to a hard drive.   This product is available as either a PCI card or an external USB device.
 
Our WinTV-NOVA-T-500 is a dual tuner DVB-T tuner for our European markets which uses “Diversity Technology” and allows for the viewing of digital terrestrial programs while recording another program. The product   also allows recording of two digital TV programs simultaneously or watching one channel while recording another.
 
Our WinTV-NOVA-T-USB2 is an external high performance DVB-T digital TV tuner, with dual tuners for recording of two digital TV programs simultaneously or watching one channel while recording another.
 
Our WinTV-NOVA-T TV tuner stick is a pocket sized external DVB-T tuner for our European markets which allows for the viewing of digital terrestrial TV and the listening of digital   radio on a PC or laptop. The product also allows recording of   digital TV and radio   to a hard drive. The product’s pocket size and UPC plug-in capability is good for use in laptops while traveling.
 
Our WinTV-NOVA-TD stick   is a pocket-sized external DVB-T tuner for our European markets   which employs “Diversity Technology” with the use of two antennas   to maximize the reception   for the   viewing of digital terrestrial TV on a PC or laptop. The product also allows recording of digital TV to a hard drive in high quality MPEG-2 format. The product’s pocket size and UPC plug-in capability is good for use in laptops while traveling.
 
Our WinTV-Ministick is a small and portable   external DVB-T tuner for our European markets   which allows   a user to watch and record digital TV programs on a netbook, laptop or desktop computer. WinTV-Ministick comes with a remote control and a portable digital TV antenna which allows a user to watch TV at home or when they travel.
 
Our WinTV-HVR-900 stick is a pocket sized   external tuner for our European markets   which allows   for the viewing of digital terrestrial and analog terrestrial   TV   on a PC or laptop.   Digital and analog programs can be recorded to a hard drive in high quality MPEG-2 format.  
 
Our WinTV-HVR-930C stick is a triple mode external tuner for our European markets which allows for the viewing of digital cable TV and radio, digital terrestrial TV and radio and analog cable or analog terrestrial TV   on a PC or laptop. This product allows the recording of digital and analog programs to a hard drive in high quality MPEG-2 format and includes a DVB-T antenna.    
 
Our WinTV-HVR-950Q stick is a pocket sized external tuner for our North American markets which allows for the viewing of   ATSC high definition   TV and NTSC cable   TV   on a PC or laptop. The product also allows recording of digital and analog programs to a hard drive in high quality MPEG-2 format.  
 
 
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Our myTV 2GO-m is an external stick sold in the European market that allows the user to watch and record live Freeview digital TV on the user’s iPad, iPad 2 and iPhone 4S. The myTV 2GO-m's built-in antenna can be used to receive Freeview TV within approximately 10 miles of a Freeview broadcast transmitter, depending on location. The myTV 2GO-m comes with an EPG built into the application which allows the user to see a guide of upcoming digital TV programs.   Other features allow the user to pause live TV or record the user’s favorite Freeview TV program.
 
Our WinTV-HVR-1100 is a PCI based tuner for our European market, which is designed to be installed inside a desktop PC. This TV tuner allows the viewing of digital terrestrial and analog terrestrial TV on a PC screen, in addition to listening to FM radio and DVB-T radio through a PC’s audio system. This product also allow the recording of digital and analog programs to a hard drive in high quality MPEG-2 format.   .
 
Our WinTV-HVR-1400 is a dual tuner ExpressCard/54 card designed for notebook computers with ExpressCard/54mm expansion slots.    This TV tuner is for analog and digital TV watching and recording on laptop computers, and allows the recording of   digital programs to a hard drive in high quality MPEG-2 format and the recording of analog programs.
 
Our WinTV-HVR-1600 is a PCI combination analog and digital TV tuner for our   North American   market. The WinTV-HVR-1600 is installed in an internal PCI slot in a desktop PC and allows the watching and recording of   ATSC high definition   TV and NTSC cable   TV. The WinTV-HVR-1600 can record all ATSC formats, including the 1080i format.   The WinTV-HVR-1600 also supports viewing and recording clear QAM digital cable TV channels and   includes a remote control and IR blaster which   changes the channels on the user’s satellite or cable TV set top box.
 
Our WinTV-HVR-4400 is a quad-format PCI based TV tuner for our European markets. It is installed in a desktop PC and can be used to watch and record   digital terrestrial (DVB-T), digital satellite (DVB-S), high definition digital satellite (DVB-S2) and analog cable TV; in addition, it has the ability to receive FM radio and DVB-T radio. When recording digital TV programs, the original digital broadcast format is used which preserves the quality of the recording.   
 
Our WinTV-HVR-1950   is a high performance external USB based TV tuner for the user’s PC or laptop. The WinTV-HVR-1950 allows the user to watch, pause and record analog cable TV,   clear QAM digital cable TV, or ATSC over-the-air digital TV   at up to 1080i resolution.   The product comes with a remote control and IR blaster, and   contains a built-in hardware MPEG-2 encoder for use when recording analog video.
 
Our WinTV-HVR-2200 and WinTV-HVR-2250 products are dual tuner PCI Express based TV tuners designed to be installed in a desktop PC. These PCI Express boards allow a PC user to watch, pause or record two analog or digital TV programs at the same time.    A user can either watch one TV program while recording another or can record two TV programs at once.   With the WinTV-HVR-2250, a user in North America can watch and record analog cable TV or high definition digital ATSC and clear QAM digital cable TV.   With the WinTV-HVR-2200, a user in Europe or Asia can watch or record analog PAL TV or digital DVB-T TV. Both of these products allow the recording of analog cable TV programs to a PC's hard disk with our built-in high quality MPEG-2 hardware encoder.
 
Video recorder products
 
USB-Live2 is a standard definition video recorder which can be used to record video tapes and other types of video onto a PC. Once on a PC, these recordings can be burned onto a DVD disc. USB-Live2 is sold to consumers who want to save their old video tapes by converting them to a DVD disc. USB-Live2 comes with software which allows a consumer to record a VHS tape, and then author a DVD disc from the video recording.
 
HD PVR 2 Gaming Edition is our newest high definition video recorder. It is a complete kit for gamers who want to record their Sony PlayStation 3 or Xbox 360 game-play in high definition. The   HD PVR 2 Gaming Edition has high video quality and records HD video from either HDMI or component video at up to 1080p/30. Gamers can share their best video game-play with friends on YouTube by using the included Showbiz application to record and then upload videos to YouTube. HD PVR 2 Gaming Edition allows any user to produce their own video movies from their game-play. A special PS3 component video cable is included.

 
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HD PVR is our previous generation High-Definitionvideo recorder for making real-time H.264 compressed video recordings at resolutions up to 1080i. The HD PVR records component video from a game console such as the Xbox 360, Playstation 3 or cable TV and satellite set top boxes. When used to record HD video from a cable TV or satellite set top box, the HD PVR can automatically change TV channels for scheduled recordings with its built-in IR blaster. The HD PVR recording format can be used to burn Blu-ray DVD disks. The HD PVR’s recording quality allows personal archival of   high definition TV programs from any component video HD set top box. The HD PVR also has standard definition composite and S-Video inputs which allows the user to record their old home video tapes into an AVCHD format for creating Blu-ray DVD recordings.
 
Colossus has similar capabilities as HD PVR, but is an internal card for Windows based PCs. Colossus can record high definition video from a cable TV or satellite set top box, or an Xbox 360 or Sony Playstation 3 game console. Recording is done at up to 1080i HD video.
 
PCTV Systems TV tuner products
 
Our PCTV Systems Sarl operation, based in Germany, develops TV tuner products which allow Windows or Macintosh users to view television programming on their computers. Our PCTV line consists of a family of USB sticks with a small and convenient form factor well-suited for use with laptops and PCI-based cards more appropriate for desktop users, in addition to PCI cards for use in desktop computers. PCTV products are positioned as our   high end product offering. We believe that the positioning of the PCTV product line is complementary to our WinTV line and expanded our product offerings.
 
Analog TV tuners
 
With the global shift to digital TV broadcasts, the sales of our analog family of products have been declining and we expect this decline to continue during the transition from analog to digital broadcasts.
 
Other Video Products and Software

 

Software Products
 
Our WinTV application is a PC based TV watching, pause and recoding application. The WinTV application has been under continuous development since 1992. The current WinTV version 7 application is typically supplied on a CD-ROM and it is installed on a user’s PC which contains one of our WinTV TV tuner products. Features in WinTV version 7 include: live TV in a window or full screen, program pause, scheduled record, multiple TV tuner support, close captioning and parental control.
 
Our WinTV Extend software product is a PC based Internet video server which streams live TV or other video content to remote devices such as an Apple iPad or iPhone. The difference between WinTV Extend and our Broadway product is that WinTV Extend runs on a PC while Broadway is stand alone. WinTV Extend was initially introduced in 2009 and is standard in the Hauppauge WinTV version 7.2 application. Currently, WinTV Extend supports native Apple iOS encoding plus Adobe Flash. Adobe Flash is the preferred media format for PCs and Mac computers, plus the Android mobile platform.
 
Our WinTV Extend for the iPad and iPhone applications were introduced at the end of fiscal 2011. These applications are native Apple iOS applications which allow the watching of live TV over a Wi-Fi or Internet connection. The WinTV Extend for iPad and iPhone require a streaming server as the TV source. Current streaming servers supported are Broadway and the WinTV version 7.2 application. These applications are provided through the Apple application store.
 
Video Capture Boards
 
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. There are also third party drivers and applications available for use with the Linux operating system.
 
 
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Digital Media Adapters  
 
Our MediaMVP-HD™ is a Linux-based digital media device, and is one of a 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™, where they are converted from a digital format into an analog format, enabling playback on a TV connected to the MediaMVP™. MediaMVP™ was introduced to the market in fiscal 2003, and the first shipments to customers were made at the start of our 2004 fiscal year.
 
Our MediaMVP™ enables a user to watch and listen to PC-based videos, music and pictures on a TV set through a home network.   The MediaMVP™ connects to TV sets or home theater systems and, via an Ethernet network, plays back MP3 music, MPEG-1 and MPEG-2 videos,   and JPEG and GIF digital pictures that have been recorded and stored on a PC. The MediaMVP™ decodes this media and then outputs video through composite and S-Video connections for high   quality video on TV sets and high quality audio through stereo audio output connectors to TV sets or home theater systems.
 
Our MediaMVP™ 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™’s browser. The MediaMVP™’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 the MediaMVP™’s   remote control, avoiding the need to use the TV’s   remote control.   The MediaMVP™   is available in a wired or wireless version.

 

Technology

 
Video Recorder Technology
 
Our HD PVR and Colossus high definition video recorders accept video from a component video source, such as the output of a cable TV or satellite set top box, or a video game console such as an Xbox 360 or Playstation 3. Hauppauge uses HD video encoder chips from Ambarella or Vixs inside these products to compress the component video into an H.264 form. H.264 is the compression technology used in Blu-ray DVD discs and is high quality. This compressed high definition video is then stored on the computers disc drive. Once on the disc drive, a user can playback the video recording in HD, burn the video recording onto a Blu-ray compatible DVD disc, or upload the video recording to YouTube.
 
We plan to continue our engineering effort to deliver higher quality video recordings. In addition, we plan to continue developing support in our HD Video Recorders for third party applications such as Microsoft’s Media Center application.
 
Digital TV Receiver Technology
 
Our WinTV®-D board, developed during the 1999 fiscal year and delivered to the market in the beginning of fiscal 2000, was the first ATSC digital TV tuner for the North American market which allowed PCs to receive, display and record over-the-air digital TV signals. ATSC digital television is the digital TV standard for North America which has replaced analog television in the United States and Canada.   In the U.S., all analog over-the-air television transmissions have ceased as of June 19, 2009 and only digital TV transmissions are broadcast.   Since our first ATSC digital TV tuner was delivered in 2000, we have introduced 8 new digital TV tuners for use in North America.
 
In fiscal 1999, we also introduced the WinTV®-DVB board for the European market. This board brings European digital TV to PCs, and is based on the Digital Video Broadcast standard.   Both the WinTV®-D and the WinTV®-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 may   work on standardized reception and display software, if such broadcasts become standardized.
 
The software to control the digital TV reception is based on our WinTV®-2000 software, which was developed during fiscal 1999 and   had a major update in 2006 and 2008   Over the two fiscal years ended September 30, 2010 we further developed the digital TV reception capabilities of our digital family of products. As of the date of this Report   we had 18 products for DVB-T terrestrial, DVB-S and DVB-S2 satellite, ATSC and clear QAM digital TV reception.   In addition, there are seven PCTV products which allow digital TV to be watched on a PC or notebook computer.
 
 
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Our MediaMVP™ is a device which allows TV recordings which are stored on a PC or notebook computer to be viewed on a TV set. Based on the Linux operating system, the MediaMVP™ 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 the TV set. The core technology to the MediaMVP™ 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. The MediaMVP™   is available in a wired or wireless version.
 
Analog TV Receiver Technology
 
We have developed four generations of products which convert analog video into digital video since our first such product was introduced in 1991.
 
The first generation of WinTV® products put the TV image on the PC screen using chroma keying, requiring a dedicated “feature connector cable” between the WinTV® 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 June 1996, we introduced the WinTV®-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®-Celebrity and CinemaPro products.
 
The fourth generation analog TV tuners were WinTV®-PVR models which were first developed during fiscal 2000 and introduced to the market in early fiscal 2001. The WinTV®-PVRs include both internal PCI and external USB TV tuners which are designed to add the ability to record TV shows to a PC’s hard disk. The core technology in the WinTV®-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.

 

Research and Development

 
Our Research and Development efforts are focused on both extending the range of our current TV receiver and high definition video recording products, plus developing new features for our WinTV and WinTV Extend software products. We intend to develop 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.
 
As of September 30, 2013, we had three research and development operations: one based in our Hauppauge, New York headquarters, one based in Taipei, Taiwan, ROC and one in Braunschweig, Germany.   The New York and Taiwan R&D operations are aimed at extending the range and features of our high definition video recorders and digital/analog TV receiver products. The PCTV Systems research and development operation is based in Braunschweig, Germany, and is responsible for the updating and enhancement of Broadway and developing other PCTV 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. See, “Item 1A — Risk Factors”. We maintain an ongoing research and development 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 in research and development. We spent approximately $3,098,000 and $3,399,000 for research and development expenses for the years ended September 30, 2013 and 2012, respectively.   There can be no assurance that our current and 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 1A- Risk Factors.”
 
 
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Production and Suppliers

 
We design the hardware for most models of the WinTV, HD PVR, HD PVR 2, PCTV and MediaMVP products, and also write the operating software to be used in conjunction with the Microsoft Windows operating system and the Apple iOS operating system.
 
During fiscal 2013, we sub-contracted the manufacturing and assembly of most of our products to five independent third parties at facilities in various Asian countries.   Based on the timing of inventory requirements we use a combination of ocean and air shipments.   We monitor and test the quality of the completed products at any one of our facilities in the U.S. (Hauppauge, New York), Singapore or Ireland before packaging the products and shipping them to our customers.. We also buy some models of TV tuner products, such as the WinTV Nova-T-Stick and WinTV-Nova-T-USB from other unrelated third party companies, add Hauppauge software and sell under our name or on a private label basis.
 
Certain component parts, such as TV tuners, video decoder chips and video compression chips, plus certain assembled products, such as the WinTV-HVR stick products 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 1A-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. See “Item 1A-Risk Factors.” 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. Our principal suppliers of component parts are Arrow Electronics, Dibcom S.A., Ambarella, Sigma Designs, NXP Semiconductors, WT Microelectronics Singapore Pte Ltd, Magnum Semiconductor, Inc. and Conexant Systems.
 
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, operating results   and financial condition 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. See “Item 1A-Risk Factors.” 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. See “Item 1A-Risk Factors.”
 
During fiscal 2013 and 2012, all HD PVR, WinTV,   PCTV and MediaMVP manufacturing was performed by five unrelated contract manufacturers in Asia. Product design specifications are provided by our engineering team 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 additional parts for each board produced. Some products 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. As of September 30, 2013, we had five qualified contract manufacturers located in Malaysia, Indonesia, Taiwan and China, who are capable of producing our products to our standards.   If demand were to increase dramatically, we believe additional production could be absorbed by these qualified contract manufacturers. For fiscal 2013 and 2012,   we did not engage any contract manufacturers in Europe or North America.
 
 
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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, Scandinavia, Taiwan 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 in accordance with our warranty policy free of charge for product that is within the warranty period.
  The Company warrants that its products are free from defects in material and workmanship for a period of two years from the date of initial retail purchase. The warranty does not cover any losses or damage that may 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.

 

Customers and Markets

 
We primarily market our products to the personal computer market, including both Microsoft Windows and Apple Macintosh based systems. Our HD PVR Gaming Edition products are marketed to the gaming market.   To reach these multiple markets, we sell to a network of computer retailers in the U.S., Europe and Asia and through computer products distributors and manufacturers. To attract new users to our products, from time to time 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 fitness market where our product is primarily used to display TV on treadmills and elliptical exercise machines.   We have sold our WinTV® products on a direct corporate sales basis to 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 manufacturers that either embed a WinTV® product in a PC that they sell, or sell the WinTV® as an accessory to the PC.
 
Sales Channels for Our Products  
 
We primarily sell through a sales channel which consist of retailers, PC manufacturers and distributors. We have no exclusive distributors and retailers.    For fiscal 2013, we had no customer that accounted for over 10% of our net sales. For fiscal 2012,   we had one customer, Best Buy, that accounted for approximately 10.3% of our net sales.   
 
Our   PCTV products are offered as our high end line and are sold through similar retail and distribution channels as our WinTV products.
 
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, Taiwan and Singapore, plus sales representative offices in the Netherlands, Spain, Scandinavia and Italy. For fiscal 2013, approximately 63% of our sales were made within the United States while approximately 37% were made outside the United States. For fiscal 2012, approximately 56% of our sales were made within the United States while approximately 44% were made outside the United States.    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.  
 
From time to time, we advertise our products in a number of consumer computer 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 website on the internet, are the principal means of getting our products 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 trade shows.
 
 
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We have 12 sales people located in Europe, two sales people in the Far East and three sales people in the U.S.   In addition to our sales people, we also utilize the services of seven manufacturer representatives in the United States and two manufacturer representatives in Europe.
 
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

 
For each of the fiscal years ended September 30, 2013 and 2012, 37% and 44%, respectively, of our sales were generated by our European subsidiary and were invoiced and collected in local currency, which is primarily the Euro. On the supply side, since we predominantly deal with North American and Asian suppliers and contract manufacturers, approximately 95% of our inventory required to support our European sales is purchased and paid in U.S. Dollars.  
 
The combination of sales billed in Euros supported by inventory purchased in U.S. Dollars results in an absence of a natural local currency hedge. Consequently, our financial results are subject to market risks resulting from the fluctuations in the Euro to U.S. Dollar exchange rates.
 
See “Item 1A-Risk Factors” and “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Competition
 
Our business is subject to significant competition. Competition exists from larger companies that possess substantially greater technical, financial, human, sales and marketing resources than we do. 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 a number of Asian and European companies.   For example, our WinTV-DCR-2650 digital CableCARD receiver competes in the cable TV set top box market with Motorola, Scientific Atlanta, and with Tivo Inc.   Our Broadway product competes in the consumer electronics market, where competition comes from Sling Media, a subsidiary of EchoStar Corporation, and others.   Our HD PVR product competes in the video recorder market with Roxio, a subsidiary of Rovi Corporation, AVerMedia Technologies and ElGato Systems. Our Win TV tuner products compete in the PC peripheral market where competition comes from a number of large Asian suppliers. There can be no assurance that we will not experience increased competition in the future. Such increased competition may have a material adverse affect on our ability to successfully market our products. Competition is expected to remain intense and, as a result, we may lose some of our market share to our competitors. Further, we believe that the market for our products will continue to be price competitive and thus we could continue to experience lower selling prices, lower gross profit margins and reduced profitability levels for such products than in the past.   “Item 1A-Risk Factors”.
 
Though management believes that the delivery of TV via the internet will become more popular in the future, we believe that TV delivered via cable, broadcast or satellite will continue to dominate the way consumers watch live television. Since our products connect directly to cable, broadcast and satellite tuners, we view our products as the preferred way to watch and record TV on the PC.

 

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 with regard to our market. 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 we are required to obtain a license from them.
 
 
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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 litigation, we may be required to pay significant damages and/or cease sales and production of infringing products, and also 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:
 
·               failure by a licensor to accurately develop, timely introduce, promote or support the technology
·               delays in shipment of products
·               excess customer support or product return costs due to problems with licensed technology and
·               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 intend to aggressively assert our intellectual property rights when necessary.
 
Even though we independently develop most of our products and copyright the operating software which our products use, 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 our TV tuner products (as we believe that such technology cannot be patented) or other products.
 
The trademarks “Hauppauge®”, “SoftPVR®”, “HardPVR®” , “MediaMVP®”   and "WinTV®"   have been registered with the United States Patent and Trademark Office.  
 
See “Item   1A-Risk Factors” and   “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Employees

 
As of September 30, 2013, we employed 99 people domestically and internationally, including our executive officers, all of whom are employed on a   full-time basis, and   none of whom are represented by a union.    Included in the 99 employees are   15 employees located   in Braunschweig, Germany, primarily consisting of engineers and product support personnel,   formerly employed by Avid Technology, Inc., whom we hired   to support our PCTV operations.   
 
Corporate Structure  
 
Hauppauge Digital Inc. is a corporation that was incorporated in the state of Delaware on August 2, 1994. Listed below is a chart depicting our corporate structure.
 
 
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Corporate Organization Chart
 
 
 
Hauppauge Digital Inc. is the parent holding company.   Our subsidiaries function as follows:
 
Hauppauge Computer Works Inc., incorporated in New York, is our United States operating company. It has locations in Hauppauge, New York and Danville, California. The Hauppauge, New York location functions as our company headquarters and houses the executive offices and is responsible for some or all of the following functions:
 
·               Sales
·               Technical Support
·               Research and development
·               Warehousing and shipping
·               Finance and Administrative
·               Inventory planning and forecasting
 
Hauppauge Digital Europe Sarl (“HDE”), incorporated in Luxembourg, is our European subsidiary.   It has the
following wholly-owned subsidiaries:
 
·               Hauppauge Digital Asia Pte Ltd. (incorporated in Singapore)
·               Hauppauge Computer Works, GMBH (incorporated in Germany)
·               Hauppauge Computer Works Ltd. (incorporated in the United Kingdom)
 
 
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The subsidiaries of HDE listed above function as sales and commission agents, and are primarily responsible for some or all of the following functions:
 
·               Directing and overseeing European sales, marketing and promotional efforts
·               Procuring sales and servicing customers
·               Sales administration
·               Technical support
·               Product and material procurement   support
·               Contract manufacturer and production support
 
Hauppauge Digital Europe Sarl   also   has a branch office in Blanchardstown, Ireland, which functions as our European distribution center and   is responsible for some or all of our following functions:
 
·               Warehousing of   product
·               Shipment of   product
·               Repair center
·               European logistics center
 
Hauppauge Digital Inc. Taiwan was incorporated during fiscal 2004 in Taiwan, ROC and is responsible for some or all of the following functions:
 
·               Sales administration for Asia and China
·               Research and development activities
 
PCTV Systems Sarl   Luxembourg is a wholly owned subsidiary of Hauppauge Digital Inc.   This subsidiary   was created to be the holding company of certain assets and properties acquired from   Avid Technology, Inc., Pinnacle Systems, Inc.,   Avid Technology GmbH,   Avid Development GmbH and Avid Technology International BV.  PCTV Systems Sarl is a branch of PCTV Systems Sarl, Luxembourg.   Located in Germany, PCTV Systems Sarl is responsible for PCTV research and development.
 
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).
 
HCW Distributing Corp., incorporated in New York, is an inactive company.
 
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   1A.        RISK Factors

 
Our operating results and financial condition are subject to various risks and uncertainties, including those described below, that could materially adversely affect our business, operating results and financial condition, any of which could negatively affect the trading price of our Common Stock.   Because of the following factors, as well as other variables affecting our business, operating results and financial condition, past performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends for future periods.
 
 
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If our technology is not accepted, we will not be able to sustain or expand our business .
 
Our future success depends on the growing use and acceptance of TV tuner products, video products for PCs, internet based video technology and video gaming-related products. The market for these products and technology is still evolving, and may not develop to the extent necessary to enable us to further expand our business. We have invested, and continue to invest, significant time and resources in the development of new products for this market.
 
Our:
·       dependence on sales of TV tuner products, video recording products for the PC and internet based video technology
·       lack of market diversification
·       concentration on the North American and European market for the majority of our sales
·       potential inability to remain ahead of the development of competing technologies,
 
could each have a material adverse effect on our business, operating results and financial condition if we are unable to address any of the factors listed above.
 
We rely upon sales of a small number of product lines, and the failure of any one product line to be successful in the market could substantially reduce our sales.
 
We currently rely upon sales from our existing product lines to generate our sales. While we continue to develop additional products within these and other product lines, there can be no assurance that we will be successful in doing so. Consequently, if the existing or future products are not successful, sales could decline substantially, which would have a material adverse effect on our business, operating results and financial condition.
 
We rely heavily on the success of retailers, dealers and PC manufacturers to market, sell and distribute our products. If these channels are not effective in distributing our products, or if a significant customer were to cease purchasing our products,   our sales could be reduced.
 
These retailers, dealers and PC manufacturers may not effectively promote or market our products or they may experience financial difficulties and even close operations.   Our sales channels are not contractually obligated to sell our products, and they typically sell on an “as needed” basis. Therefore, they may, at any time:
 
·            refuse to promote our products
·            discontinue the use of our products in favor of a competitor's product
 
Also, with a distribution channel standing between us and the actual end user, we may not be able to accurately gauge current demand and anticipate future demand for our products.   For example, retailers, dealers and PC manufacturers may place large initial orders for a new product just to keep their stores and products stocked with the newest TV tuners and not because there is a significant demand for them.
 
Our largest customer is Best Buy, a consumer electronics retailer based in the United States. Sales to Best Buy accounted for 4.80% in 2013 and 10.35% in 2012. Should Best Buy cease to purchase our products, a significant percentage of our sales would be lost.
 
We operate in a highly competitive market, and many of our competitors have much greater resources, which may make it difficult for us to remain competitive.
 
Our business is subject to significant competition. Competition exists from larger companies that possess substantially greater technical, financial, human, sales and marketing resources than we do. 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 TiVo Inc. and a number of Asian and European companies. Our internet based video technology products compete in the consumer electronics market, where competition comes from Sony Corporation, Toshiba Corporation, Cisco Systems, Inc., Sling Media 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 assurance that we will not experience increased competition in the future. Such increased competition may have a material adverse affect on our ability to successfully market our products. Competition is expected to remain intense and, as a result, we may lose some of our market share to our competitors. Further, we believe that the market for our products will continue to be price competitive and thus we could continue to experience lower selling prices, lower gross profit margins and reduced profitability levels for such products than in the past.
 
 
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Rapid technological changes and short product life cycles in our industry and the availability of new products, services and technologies could harm our business.
 
The technology underlying our products and other products in the computer industry, in general, is subject to rapid change, including the potential introduction of new types of products, services and technologies, which may have a material adverse impact upon our business, operating results and financial condition.   The pervasive availability of new products, services (including internet services) and technologies may have a material adverse impact upon our business, operating results and financial condition.   We will need to maintain an ongoing research and development program, and our potential 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 expended approximately $3,098,000 and $3,399,000 for research and development expenses for the fiscal years ended September 30, 2013 and 2012, respectively. There can be no assurance that our research and development will be successful or that we will be able to foresee and respond to such advances in technological developments and to successfully develop additional products. Additionally, there can be no assurances that the development of technologies, services or products by competitors will not render our products or technologies non-competitive or obsolete.
 
If TV or video capabilities are included in PCs or in operating systems, it could result in a reduction in the demand for add-on TV and video devices.   Although we believe that our software is a competitive strength, as operating systems such as Windows move to integrate and standardize software support for video capabilities, we will be challenged to further differentiate our products.   Our operating results and ability to retain our market share are also dependent on continued growth in the underlying markets for PC, TV and video products.
 
Anticipated new gaming industry product offerings have significantly affected the sales of certain of our products.
 
The users of video games account for a significant portion of our market. Our HD PVR products are used with games and gaming systems produced by other companies. In February 2013, Microsoft announced that it would be replacing its Xbox 360 gaming system with a new generation Xbox, the Xbox One, and in May 2013, Sony announced that it would be replacing its PS3 gaming system with a new generation PlayStation, the PS4. These next generation gaming systems were introduced to the market in our first fiscal quarter of 2014 for the 2013 holiday season. During our last two quarters of fiscal 2013, the Company experienced a drop in sales of its HD PVR products by approximately 50% compared to sales of those products in fiscal 2012. The Company believes that this drop in sales was attributable to consumers deciding not to purchase HD PVR products out of concern that they may not have been compatible with the new Xbox One and PS4 systems. The Company’s HD PVR products are compatible with the new Xbox One and PS4 systems and the Company believes that consumers will purchase its HD PVR products with the Xbox One and PS4 systems having been brought to market. However, the Company cannot assure that consumers will return to buying these HD PVR products. If demand for our HD PVR products does not return, it would have a material adverse effect on our financial condition and prospects.
 
We may not be able to timely adopt emerging industry standards, which may make our products unacceptable to potential customers, delay our product introductions or increase our costs.
 
Our products must comply with a number of current industry standards and practices established by various international bodies. Failure to comply with evolving standards, including video compression standards, TV transmission standards, and PC interface standards, will limit acceptance of our products by the market. If new standards are adopted in the industry, we will be required to adopt those standards in our products. It may take a significant amount of time to develop and design products incorporating these new standards, and we may not succeed in doing so. We may also become dependent upon products developed by third parties and have to pay royalty fees, which may be substantial, to the developers of the technology that constitutes the newly adopted standards.
 
 
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We are substantially dependent upon foreign markets for sales of our products, primarily the European market, and adverse changes in these markets could reduce our sales.
 
Our future performance will likely be dependent, in large part, on our ability to continue to compete successfully in the European markets, where a large portion of our current and potential customers are located. Our ability to compete in these markets will depend on many factors, including:
 
·
the economic conditions in these regions
·
the value of the Euro versus the U.S. dollar
·
the stability of the political environment in these regions
·
adverse changes in the relationships between major countries in these regions
·
the state of trade relations among these regions and the United States
·
restrictions on trade in these regions
·
the imposition or changing of tariffs by the countries in these regions on products of the type that we sell
·
changes in the regulatory environment in these regions
·
export restrictions and export license requirements
·
restrictions on the export of critical technology
·
our ability to develop products that meet the varied technical requirements of customers in each of these regions
·
our ability to maintain satisfactory relationships with our foreign customers and distributors
·
changes in freight rates
·
our ability to enforce agreements and other rights in the countries in these regions
·
difficulties in staffing and managing international operations
·
difficulties assessing new and existing international markets and credit risks
·
potential insolvency of international customers and difficulty in collecting accounts
 
If we are unable to address any of these factors, it could have a material adverse effect on our business, operating results and financial condition.
 
We are heavily dependent upon foreign manufacturing facilities for our products, primarily facilities in Asia, which exposes us to additional risks.
 
The majority of our products are built at contract manufacturing facilities in Asia.   Our ability to successfully build products at overseas locations will depend on many factors, including:
 
·               the economic conditions in these regions
·               the acceptance of the U.S. dollar as the currency to purchase manufactured products
·               the stability of the political environment in these regions
·               adverse changes in the relationships between major countries in these regions
·               the state of trade relations among these regions and the United States
·               restrictions on trade in these regions
·               the imposition or changing of tariffs by the countries in these regions on products of the type that we sell
·               changes in the regulatory environment in these regions
·               import restrictions and import license requirements
·               our ability to maintain satisfactory relationships with our foreign manufacturers
·               changes in freight rates
·               difficulties in staffing and managing international operations
·               potential insolvency of vendors and difficulty in obtaining materials
 
If we are unable to address any of these factors, it could have a material adverse effect on our business, operating results and financial condition.
 
 
19

 
Foreign currency exchange fluctuations could adversely affect our results.
 
For the two fiscal years ended September 30, 2013 and 2012, 32% and 40% of our sales were generated by our European subsidiary and were invoiced and collected in local currency, which was primarily the Euro. On the supply side, since we predominantly deal with North American and Asian suppliers and contract manufacturers, approximately 95% of our inventory required to support our European sales are purchased and paid in U.S. Dollars.  
 
The combination of sales billed in Euros supported by inventory purchased in U.S. Dollars results in an absence of a natural local currency hedge. Consequently, our financial results are subject to market risks resulting from the fluctuations in the Euro to U.S. Dollar exchange rates.
 
See “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
We may be unable to develop new products that meet customer requirements in a timely manner.
 
Our success is dependent on our ability to continue to introduce new products with advanced features, functionality and performance that our customers demand. We may not be able to introduce new products on a timely basis, that are accepted by the market, and that sell in quantities sufficient to make the products viable for the long-term. Sales of new products may negatively impact sales of existing products.   In addition, we may have difficulty establishing our products' presence in markets where they do not currently have significant brand recognition.
 
We may experience volatile gross profit margins.
 
Over the last two fiscal years ended September 30, 2013 and 2012, our gross profit margins have ranged from a low of 24.70% to a high of 31.63%    due to the following factors, among others:
 
·               sales mix of lower margin products
·               changes in foreign currency exchange rates, primarily the Euro
·               allowances for excess inventory
·               increases in costs charged by contract manufacturers
·               increases in duty and tariff rates
·               increases in shipping costs
·               lower average selling prices
·               increases in material acquisition costs and
·               different gross margins for like products in different markets
 
As margins may decline, our profitability will be more dependent upon effective cost management controls.   There can be no assurances that such cost management controls can be implemented and maintained, and if implemented, that they will be successful.  
 
We have experienced, and expect to continue to experience, downward pricing pressure on our products, which could substantially impair our operating performance.
 
We are experiencing, and are likely to continue to experience, downward pricing pressure on our products. As a result, we have experienced, and we expect to continue to experience, declining average sales prices for our products.   Increases in the number of units that we are able to sell and reductions in per unit costs may not occur, and if they occur, they may not be sufficient to offset reductions in per unit sales prices, in which case our net income would be reduced and we could incur losses. Since we typically negotiate supply arrangements far in advance of delivery dates, we may need to commit to price reductions for our products before we are aware of how, or if, these cost reductions can be obtained. As a result, any current or future price reduction commitments and our inability to respond to increased price competition could have a material adverse effect on our business, operating results and financial condition.
 
Our cost reduction and operational efficiency programs may not achieve the intended results.
 
Changing economic and business conditions may dictate that we undertake a plan of cost and operational efficiency reductions.   We cannot be certain that these programs will achieve their intended results. Additionally, these programs may be misplaced or insufficient for purposes of positioning us for future growth, in which case our long-term competitive position may suffer.   Failure of these programs, if any, could have a material adverse effect on our business, operating results and financial condition.
 
 
20

 
We are dependent upon contract manufacturers for our production.   If these manufacturers do not meet our requirements, either in volume or quality, then we could be materially harmed.
 
During fiscal 2013, we subcontracted the manufacturing and assembly of our products to five independent third parties at facilities in various Asian countries.  
 
Relying on subcontractors involves a number of significant risks, including:
 
·               loss of control over the manufacturing process
·               potential absence of adequate production capacity
·               potential delays in production lead times
·               unavailability of certain process technologies
·               reduced control over delivery schedules, manufacturing yields, quality and costs, and
·               unexpected increases in component costs
 
Based on the timing of inventory requirements we use a combination of ocean and air shipments.   Due to this
we may need to hold more inventory than is immediately required to compensate for potential manufacturing disruptions.
 
If our significant subcontractors become unable or unwilling to continue to manufacture these products in required volumes, we will have to identify qualified alternate subcontractors. Additional qualified subcontractors may not be available, or may not be available on a timely or cost competitive basis. Any interruption in the supply of, or increase in the cost of, the products manufactured by third party subcontractors could have a material adverse effect on our business, operating results and financial condition.
 
We are dependent upon single or limited source suppliers for our components and assembled products.   If these suppliers do not meet the demand, either in volume or quality, then we could be materially harmed.
 
If the supply of a key component or assembled product, such as the HD-PVR   or a PCTV product, were to be delayed or curtailed,   or in the event a key manufacturing or sole vendor delays shipment of such components or completed products, our ability to ship products in desired quantities and in a timely manner would be adversely affected. Our business, operating results and financial condition could also 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 are also seeking out alternative sources for assembled products, making us less dependent on a single or limited source.
 
We may need to hold more inventory than is immediately required to compensate for potential component shortages or discontinuation. This could lead to an increase in the costs of manufacturing or assembling our products.
 
If any single or limited source supplier becomes unable or unwilling to continue to supply these components or assembled products in required volumes, we will have to identify and qualify acceptable replacements or redesign our products with different components.   Additional sources may not be available, or product redesign may not be feasible on a timely basis. Any interruption in the supply of or increase in the cost of the components and assembled products provided by single or limited source suppliers could have a material adverse effect on our business, operating results and financial condition.
 
We may incur excessive expenses if we are unable to accurately forecast sales of our products.
 
We generally ship products within one to four weeks after receipt of orders. Therefore, our sales backlog is typically minimal. Accordingly, our expectations of future net sales and our product manufacturing and materials planning are based largely on our own estimates of future demand and not on firm customer orders. If we obtain orders in excess of our internal forecasts, we may be unable to timely increase production to meet demand, which could have a material adverse effect on our business, operating results and financial condition.   If our net sales do not meet expectations, our business, operating results and financial condition would be adversely affected, we may be burdened with excess inventory, and we may be subject to excess costs or inventory write-offs.
 
 
21

 
We may experience a reduction in sales if we are unable to respond quickly to changes in the market for our products.
 
Our net sales can be affected by changes in the quantity of products that our retail, distributor and PC manufacturer customers maintain in their inventories. We may be directly and rapidly affected by changes in the market, including the impact of any slowdown or rapid increase in end user demand. Despite efforts to reduce distribution channel inventory exposure, retailers, distribution partners and PC manufacturer customers may still choose to alter their inventory levels, which could cause a reduction in our net sales; this could have a material adverse effect on our business, operating results and financial condition.
 
We may accumulate inventory to minimize the impact of shortages from manufacturers and suppliers, which may result in obsolete inventory that we may need to write off resulting in losses.
 
Managing our inventory is complicated by fluctuations in the demand for our products as well as the issues of using contract manufacturers and procuring components from suppliers mentioned above.   Based on the timing of inventory requirements we use a combination of ocean and air shipments.   As we must plan to have sufficient quantities of products available to satisfy our customers' demands, we sometimes accumulate inventory for a period of time to minimize the impact of possible insufficient capacity or availability of components from our manufacturers and suppliers. Although we expect to sell the inventory within a short period of time, products may remain in inventory for extended periods of time and may become obsolete because of the passage of time and the introduction of new products or new components within existing products. In these situations, we would be required to write off obsolete inventory which could have a material adverse effect on our business, operating results and financial condition.
 
We may need financing, and may not be able to raise financing on favorable terms, if at all, which could increase our costs and limit our ability to grow and operate.
 
We anticipate that we may need to raise additional capital in the future to continue our long term expansion plans, to respond to competitive pressures or to respond to unanticipated requirements.   We currently do not have a working capital line of credit in place. We cannot be certain that we will be able to obtain financing on commercially reasonable terms, if at all.   Our failure or inability to obtain financing on acceptable terms could require us to limit our plans for expansion, incur indebtedness that has high rates of interest or substantial restrictive covenants, issue equity securities that will dilute existing stockholders’ holdings or discontinue a portion of our operations, each of which could have a material adverse effect on our business, operating results and financial condition.
 
We may become involved in costly intellectual property disputes.
 
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, we may be required to pay significant damages and/or to cease sales and production of infringing products, and also 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:
 
·               failure by a licensor to accurately develop, timely introduce, promote or support the technology
·               delays in shipment of products
·               excess customer support or product return costs due to problems with licensed technology
·               termination of our relationship with such licensors
 
 
22

 
We may be unable to enforce our intellectual property rights.
 
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 intend to aggressively assert our intellectual property rights when necessary.
 
Even though we typically develop our products independently, our success, of which there can be no assurances,   will depend, in a large part, on our ability to innovate, obtain or license patents, protect trade secrets, copyrights and trademarks, and draw upon our proprietary technology without infringing on the proprietary rights of others. We maintain copyrights on our designs and software programs, but currently we have no patent on the WinTV® board as we believe that such technology cannot be patented.
 
We have no patents issued or pending that relate to our technology. We are subject to a number of risks relating to intellectual property rights, including the following:
 
·
the means by which we seek to protect our proprietary rights may not be adequate to prevent others from misappropriating our technology or from independently developing or selling technology or products with features based on or similar to our products
·
our products may be sold in foreign countries that provide less protection to intellectual property than is provided under U.S. laws
·
our intellectual property rights may be challenged, invalidated, violated or circumvented and may not provide us with any competitive advantage
 
We may not be able to attract and retain qualified managerial and other skilled personnel.
 
Our success, of which there can be no assurances, depends, in part, on our ability to identify, attract, motivate and retain qualified managerial, technical and sales personnel. Our success, of which there can be no assurances, is dependent on our ability to manage effectively the enhancement and introduction of existing and new products and the marketing of such products. We are particularly dependent on our ability to identify, attract, motivate and retain qualified managers, engineers and salespersons. The loss of the services of a significant number of engineers or sales people or one or more senior officers or managers could be disruptive to product development efforts or business relationships and could seriously harm our business.
 
We depend on a limited number of key personnel, and the loss of any of their services could adversely affect our future growth and profitability and could substantially interfere with our operations.
 
Our products are complex and our market is evolving. The success of our business depends in large part upon the continuing contributions of our management and technical personnel. The loss of the services of any of our key officers or employees could adversely affect our future growth and profitability and could have a material adverse effect on our business, operating results and financial condition.
 
Our dependence upon our key officers and employees is increased by the fact that they are responsible for our sales and marketing efforts as well as our overall operations. We do not have key person life insurance policies covering any of our employees other than Mr. Plotkin, our   President, Chairman of the Board, Chief Executive Officer and Chief Operating Officer.   The insurance coverage that we have on him may be insufficient to compensate us for the loss of his services.
 
 
23

 
Our products could contain defects, which could result in delays in recognition of sales, loss of sales, loss of market share, or failure to achieve market acceptance, or claims against us.
 
We develop complex products for TV and video processing. Despite testing by our engineers, subcontractors and customers, errors may be found in existing or future products. This could result in, among other things, a delay in recognition of sales, loss of sales, loss of market share, failure to achieve market acceptance or substantial damage to our reputation. We could be subject to material claims by customers, and may need to incur substantial expenses to correct any product defects. We do not have product liability insurance to protect against losses caused by defects in our products, and we also do not have "errors and omissions" insurance. As a result, any payments that we may need to make to satisfy our customers may be substantial and may result in a substantial charge to earnings.
 
We may experience fluctuations in our future operating results, which will make predicting our future results difficult.
 
Historically, our quarterly and annual operating results have varied significantly from period to period, and we expect that our results will continue to do so. These fluctuations result from a variety of factors, including:
 
·               market acceptance of our products
·               changes in order flow from our customers, and their inability to forecast their needs accurately
·               the timing of our new product announcements and of announcements by our competitors
·               increased competition, including changes in pricing by us and our competitors
·               delays in deliveries from our limited number of suppliers and subcontractors
·               difficulty in implementing effective cost management constraints
·               market and economic conditions
 
As our sales are primarily to the consumer market, we have experienced certain seasonal revenue trends. Our peak sales quarter, due to holiday season sales of computer equipment, is typically our first fiscal quarter (October to December), followed by our second fiscal quarter (January to March). In addition, our international sales, mostly in the European market, were 37% and 44% of sales for the fiscal years ended September 30, 2013 and 2012, respectively. Our fiscal fourth quarter sales (July to September) can be potentially impacted by the reduction of activity experienced in Europe during the July and August summer holiday period. Accordingly, any sales or net income in any particular period may be lower than the sales and net income in a preceding or comparable period. Period-to-period comparisons of our results of operations may not be meaningful, and should not be relied upon as indications of our future performance. In addition, our operating results may be below the expectations of securities analysts and investors in future periods. Failure to meet such expectations, should such an event occur, will likely cause our share price to decline.
 
Our Common Stock price is highly volatile.
 
The market price of our Common Stock has been, and may continue to be, subject to a high degree of volatility. Numerous factors may have a significant impact on the market price of our Common Stock, including:
 
·               general conditions in the PC and TV industries
·               product pricing
·               new product introductions
·               market growth forecasts
·               technological innovations
·               mergers and acquisitions
·               announcements of quarterly operating results
·               overall U.S. and international economic and market conditions and economic health
·               stability of the U.S. and international securities markets
 
In addition, stock markets have experienced extreme price volatility and broad market fluctuations in recent years. This volatility has had a substantial effect on the market price of securities issued by many high technology companies in many cases for reasons unrelated to the operating performance of the specific companies. The price of our Common Stock has experienced volatility not necessarily related to our performance.
 
 
24

 
Our common stock has been delisted from the Nasdaq Capital Market and is currently quoted on the OTCQB.
 
As of November 18, 2013, our Common Stock was delisted and ceased to be quoted by The NASDAQ Capital Market, and all trading in our common stock on the NASADQ Capital Market was suspended, due to NASDAQ’s determination that we did not the meet minimum eligibility requirements for continued listing, including, among other things, maintenance of a minimum closing bid price of $1.00 and a minimum of $2,500,000 in stockholders’ equity.   The determination regarding the delisting was arrived at by the NASDAQ Hearings Panel following ongoing initiatives on our part to preserve the listing.   Since the delisting of our common stock from The NASDAQ Capital Market, our common stock has been quoted under the symbol “HAUP” on the OTCQB, an electronic quotation service for securities traded over-the-counter (OTC) owned and operated by Pink OTC Markets, Inc.   The OTCQB is a market tier for OTC-traded companies that are registered and reporting, as we are, with the Securities and Exchange Commission. As a result of the switch from NASDAQ to the OTCQB, Investors may find it more difficult to dispose of or obtain accurate quotations as to the market value of our Common Stock, and the per share price of our Common Stock may be adversely affected.   The lack of liquidity and volatility of the stock price and may also make it more difficult for us to obtain financing or raise additional capital that may be needed for our operations. The switch to the OTCQB may result in a loss of confidence by investors, customers, suppliers or employees.
 
Our Amended and Restated By-Laws   may have anti-takeover effects, limiting the ability of outside stockholders to seek control of management, and any premium over market price that an acquirer might otherwise pay may be reduced and any merger or takeover may be delayed.
 
Effective August 16, 2001, the Board of Directors unanimously approved Amended and Restated By-Laws for us (the “By-Laws”).   The By-Laws do not permit stockholders to call a special meeting of stockholders and consequently, an expensive proxy contest cannot occur other than in connection with the annual meeting of stockholders.   The By-Laws also impose strict requirements for shareholder proposals and nominations of prospective board members other than those nominated by or at the discretion of the Board of Directors.   These amendments may collectively or individually impact a person’s decision to purchase voting securities in our company and may have anti-takeover effects in that any merger or takeover may be delayed.   Accordingly, any premium over market price that an acquirer might otherwise pay may be reduced.  
 
We have paid no dividends and none are anticipated.
 
We have never paid any cash dividends on our Common Stock and do not contemplate or anticipate paying any cash dividends on our Common Stock in the foreseeable future. It is currently anticipated that earnings, if any, will be used to finance the development and expansion of the business.    
 
We may not be able to effectively integrate businesses or assets that we acquire.
 
We may identify and pursue acquisitions of complementary companies and strategic assets, such as customer bases, products and technology.   However, there can be no assurance that we will be able to identify suitable acquisition opportunities.
 
If any such opportunity involves the acquisition of a business, we cannot be certain that:
 
·       we will successfully integrate the operations of the acquired business with our own
·       all the benefits expected from such integration will be realized
·       management's attention will not be diverted or divided, to the detriment of current operations
·       amortization of acquired intangible assets will not have a negative effect on operating results or other aspects of our business
·       delays or unexpected costs related to the acquisition will not have a detrimental effect on our business, operating results and financial condition
·       customer dissatisfaction with, or performance problems at, an acquired company will not have an adverse effect on our reputation
·       respective operations, management and personnel will be compatible.
 
In most cases, acquisitions will be consummated without seeking and obtaining stockholder approval, in which case stockholders will not have an opportunity to consider and vote upon the merits of such an acquisition.
 
Although we will endeavor to evaluate the risks inherent in a particular acquisition, there can be no assurance that we will properly ascertain or assess such risks.
 
 
25

 
We have a history of operating losses and there can be no assurance that we will be profitable in the future, nor can there be any assurances that we will be able to generate enough cash   to fund operations at their current levels
 
Our cash requirements for the next twelve months will include, among other things, the cash to fund our operating and working capital needs. We rely exclusively upon cash generated from our operations to fund these needs. We do not have a working capital line of credit or other borrowing facility in place to draw upon in the event that cash from our operations is insufficient to fund our capital requirements to sustain our operations. Based on our current scale of operating expenses and our new product development schedule, we have evaluated that there is substantial doubt that our cash and cash equivalents as of September 30, 2013 and our internally generated cash will provide sufficient liquidity to meet our capital needs for the next twelve months, and that additional sources of cash may be required to meet our capital needs.
 
We   have incurred operating losses for the last six fiscal years.   Those losses are primarily attributable to a continuing decline in sales. For the fiscal year ended September 30, 2013, we experienced   drop in sales of approximately 24% from the fiscal year ended September 30, 2012.   We believe that our sales have declined for reasons which we described in certain of the other risk factors in this Item 1A of this report, including, among other things:
 
·       Reliance on a small number of our product lines being successful, the failure of any one of which could substantially reduce our sales.
·       Our potential inability to develop new products or services that will meet our customers’ needs or wants.
·       Intense competitive pressures from larger companies that have greater resources than we do and from new market entrants, stemming from frequent new product introductions, technological advances, and declining sales prices, among other things.
·       Our potential inability to remain ahead of the development of competing technologies, products and services.
·       Lack of market diversification.
·       Heavy reliance on retailers, dealers and PC manufacturers to market, sell and distribute our products
 
Since the fourth quarter of fiscal 2011, we have been implementing expense reduction initiatives. We switched from air to ocean freight to reduce shipping costs, outsourced most of   our shipping and   logistics to a third party, reduced   personel, relocated   certain facilities to smaller offices,   renogotiated certain   exisitng leases to reduce rent and closed certain sales offices. We believe that it may be increasingly difficult to make further material reductions in costs and   maintain a viable operating plan.
 
We are working to develop a strategy to address our continuing operating losses and loss of sales, and we   retained Corporate Fuel Advisors, an investment bank and advisory firm, to assist us in considering   and pursuing strategic alternatives, including possible additional financing to fund our capital needs and the   restructuring of our business.
 
We cannot assure that we will be able to develop and implement a plan that will enable us to successfully address our business and financial challenges. Among other things:
 
·       If we seek financing, we may not be able to obtain funding to address our capital needs on commercially reasonable terms, or at all.  
·       We may not be able to develop new lines of products or services that will be positively accepted by the marketplace.
·       We may not be able to successfully compete with our competitors’ product and service offerings.
·       Customers and consumers may lose confidence in us as a result of our financial condition and performce and our   de-listing from the Nasdaq Capital Market, and their perceptions of our business prospects and competitive position, and they may cease to do business with us or buy our products.
 
If any strategic or restructuring plan that we develop and implement is not successful, or if we are not able to raise additional capital,   there is a substantial risk that that we might not be able to sustain our operations at current levels, which would have a material adverse effect on our business, operating results and financial condition.
 
 
26

 
We may not be able to generate enough cash flow to fund our operating needs for the next twelve months and our auditors have expressed substantial doubt regarding our ability to continue as a “going concern .”
 
Our cash requirements for the next twelve months will include, among other things, the cash to fund our operating and working capital needs. We rely exclusively upon cash generated from operations to fund these needs. We do not have a working capital line of credit or other borrowing facility in place to draw upon in the event that cash from operations is insufficient to fund our capital requirements to sustain operations. Our   cash and cash equivalents as of   September   30, 2013 and our internally generated cash may not provide sufficient liquidity to meet our capital needs for the next twelve months, and   additional sources of cash may be required to meet these capital needs.   There can be no assurance that we will be able to obtain additional sources of cash if needed.
 
Inflation could have a material adverse effect on our business, operating results or financial condition
 
While inflation has not had a material adverse effect on our business, operating results or financial condition in the past, in the event that the inflation rate increases, there can be no assurance that we will be able to offset the effects of inflation through price increases to our customers, without experiencing a reduction in the demand for our products; or that inflation will not have a material adverse effect on our business, operating results or financial condition.

 

Item   1B.        unresolved staff comments

 
Not applicable
 

Item   2.         PROPERTIES

 
We occupy a facility located at 91 Cabot Court, Hauppauge, New York 11788 for our executive offices, sales, research and development, and for the testing, storage and shipping of our products.   Hauppauge Computer Works Inc. leases the premises   from Ladokk Realty LLC, a real estate limited liability company,   which is 25% owned by Kenneth Plotkin, our President, Chairman of the Board, Chief Executive Officer and Chief Operating Officer and the holder of approximately 9.05% of our shares of common stock as of September 30, 2013, 25%   owned   by Dorothy Plotkin, the wife of Kenneth Plotkin and the holder of approximately 5.45% of our shares of common stock as of September 30, 2013, and 50% owned   by Laura Aupperle, the widow of   Kenneth Aupperle, a founder and former President of our Company.
 
  On August 25, 2011, we entered into a new five year lease, commencing September 1, 2011 and ending August 31, 2016.   Under the prior lease we were paying annual rent of $337,656.   In recognition of the current real estate market conditions we were able to obtain a rent reduction. The new lease calls for base rent of $250,000 in the first and second years of the lease; base rent of $257,500 in the third and fourth years of the lease and base rent of $265,225 for the fifth year of the lease.   The rent is payable monthly on the first day of each month.    The execution of the lease agreement was approved by our Board of Directors, following the recommendation of our Audit Committee.   Under the lease we are obligated to pay real estate taxes, utilities, insurance and operating costs of maintaining and repairing the premises during the term of the lease.    
 
On May 1, 2001, Hauppauge Digital Europe Sarl 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 by the lessee on the fifth and tenth year of the lease, calls for an annual rent of approximately $97,500.   The rent includes an allocation for common area maintenance charges.
 
Our PCTV Systems operation occupies approximately 8,400 square feet in Braunschweig, Germany. This location houses our PCTV engineering and product development personnel. The lease expires on March 31, 2014 and calls for an annual rent of approximately $107,000.
 
Our Singapore subsidiary, Hauppauge Digital Asia Pte Ltd., occupies approximately 5,400 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 expires on November 30, 2016 and calls for an annual rent of approximately $74,000. The rent includes an allocation for common area maintenance charges.
 
 
27

 
Our German subsidiary, Hauppauge Computer Works GMBH, occupies approximately 6,000 square feet in Mönchengladbach, 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 $25,000 for this facility pursuant to a rental agreement, which expires on July 31, 2014.
 
Hauppauge Computer Works Inc. occupies a shared office facility at the Danville Business Center in Danville, California.   We use the California office as our western region sales office.    The lease expires on May 31, 2014 and requires us to pay an annual rent, which includes telecommunications services, of approximately $9,800.   

 

Item 3.     LEGAL PROCEEDINGS

 
We are presently not party to any pending material legal proceedings.

 

item 4. MINE SAFETY DISCLOSURES

 
Not applicable
 
PART II
 
ITEM 5.           MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Until November 15, 2013, our Common Stock was listed on the NASDAQ Capital Market under the symbol HAUP.   Effective November 18, 2013, our Common Stock became listed on the OTCQB Market under the symbol HAUP.   The range of high and low sales prices for our Common Stock during the two fiscal years ended September 30, 2013 and 2012 were as follows:
 
 
 
Years ended September30,
 
 
 
2013
 
2012
 
Price per share
 
High
 
Low
 
High
 
Low
 
First Quarter
 
$
1.14
 
$
0.89
 
$
1.28
 
$
0.60
 
Second Quarter
 
 
1.09
 
 
0.70
 
 
1.66
 
 
0.69
 
Third Quarter
 
 
1.06
 
 
0.67
 
 
1.48
 
 
0.98
 
Fourth Quarter
 
 
0.72
 
 
0.39
 
 
1.37
 
 
1.01
 
 
We have been advised by our transfer agent, Continental Stock Transfer & Trust Company, that the approximate number of holders of record (registered holders) of our Common Stock as of September 30, 2013 was 124.
 
No cash dividends have been paid during the two fiscal years ended September 30, 2013. 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.
 
On November 8, 1996, we approved a stock repurchase program.   The program authorized us to repurchase up to 850,000 shares of our own stock. The stock repurchase program was extended by a resolution of our Board of Directors on December 17, 1997.   At our August 3, 2007 Board meeting, our Board of Directors approved an increase in the number of shares which can be repurchased under the plan to 1,200,000.   As of September 30, 2013, we had repurchased 760,479 shares at an average price of $3.16.  
 
As of November 18, 2013, our Common Stock was delisted and ceased to be quoted by The NASDAQ Capital Market, and all trading in our common stock on the NASADQ Capital Market was suspended, due to NASDAQ’s determination that we did not the meet minimum eligibility requirements for continued listing, including, among other things, maintenance of a minimum closing bid price of $1.00 and a minimum of $2,500,000 in stockholders’ equity.   The determination regarding the delisting was arrived at by the NASDAQ Hearings Panel following ongoing initiatives on our part to preserve the listing.   Since the delisting of our common stock from The NASDAQ Capital Market, our common stock has been quoted under the symbol “HAUP” on the OTCQB, an electronic quotation service for securities traded over-the-counter (OTC) owned and operated by Pink OTC Markets, Inc.   The OTCQB is a market tier for OTC-traded companies that are registered and reporting, as we are, with the Securities and Exchange Commission.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
Set forth in the table below is certain information regarding the number of shares of our common stock that may be issued under options, warrants and rights pursuant to all of our existing equity compensation plans as of September 30, 2013.  
 
 
28

 
Equity Compensation Plan Information
 
Plan Category
 
Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
 
 
Weighted average
exercise price of
outstanding options,
warrants and
rights
 
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in the
first column)
 
Equity compensation plans approved by stockholders
 
1,280,125
 
$
2.98
 
817,000
 
Equity compensation plans not approved by stockholders
 
-
 
 
-
 
-
 
Total
 
1,280,125
 
$
2.98
 
817,000
 
 

ITEM 6.    SELECTED FINANCIAL DATA

 
Item 301 of Regulation S-K “Selected Financial Data” is not required for Smaller Reporting Companies.
 
 
29

 

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

                                                          AND RESULTS OF OPERATIONS

 
Results of operations
Twelve months ended September 30, 2013 compared to September 30, 2012.
 
Results of operations for the twelve months ended September 30, 2013 compared to September 30, 2012 are as follows:
 
 
 
Twelve
 
 
Twelve
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Months
 
 
Months
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ended
 
 
Ended
 
 
Variance
 
 
Percentage of sales
 
 
 
9/30/13
 
 
9/30/12
 
 
$
 
 
2013
 
2012
 
Variance
 
Net Sales
 
$
34,017,233
 
 
$
44,640,360
 
 
$
(10,623,127)
 
 
 
100.00
%
 
100.00
%
 
0.00
%
Cost of sales
 
 
21,664,056
 
 
 
31,144,077
 
 
 
(9,480,021)
 
 
 
63.69
%
 
69.77
%
 
-6.08
%
Gross Profit
 
 
12,353,177
 
 
 
13,496,283
 
 
 
(1,143,106)
 
 
 
36.31
%
 
30.23
%
 
6.08
%
Gross Profit %
 
 
36.31
%
 
 
30.23
%
 
 
6.08
%
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales & marketing
 
 
6,410,989
 
 
 
7,481,104
 
 
 
(1,070,115)
 
 
 
18.85
%
 
16.76
%
 
2.09
%
Sales & marketing-PCTV
 
 
216,493
 
 
 
251,585
 
 
 
(35,092)
 
 
 
0.64
%
 
0.56
%
 
0.08
%
Technical support
 
 
336,932
 
 
 
360,135
 
 
 
(23,203)
 
 
 
0.99
%
 
0.81
%
 
0.18
%
General & administrative
 
 
2,991,106
 
 
 
2,987,203
 
 
 
3,903
 
 
 
8.79
%
 
6.69
%
 
2.10
%
General & administrative-PCTV
 
 
296,608
 
 
 
270,906
 
 
 
25,702
 
 
 
0.87
%
 
0.61
%
 
0.26
%
Amortization of intangible assets
 
 
754,836
 
 
 
754,836
 
 
 
0
 
 
 
2.22
%
 
1.69
%
 
0.53
%
Impairment of intangible assets
 
 
1,676,758
 
 
 
0
 
 
 
1,676,758
 
 
 
4.93
%
 
0.00
%
 
4.93
%
Selling, general and administrative stock compensation expense
 
 
71,550
 
 
 
81,773
 
 
 
(10,223)
 
 
 
0.21
%
 
0.18
%
 
0.03
%
Total selling, general and administrative expense
 
 
12,755,272
 
 
 
12,187,542
 
 
 
567,730
 
 
 
37.50
%
 
27.30
%
 
10.20
%
Research and development
 
 
2,103,522
 
 
 
2,226,880
 
 
 
(123,358)
 
 
 
6.18
%
 
4.99
%
 
1.19
%
Research and development-PCTV
 
 
953,828
 
 
 
1,125,616
 
 
 
(171,788)
 
 
 
2.80
%
 
2.52
%
 
0.28
%
Research and development stock compensation expense
 
 
40,876
 
 
 
46,717
 
 
 
(5,841)
 
 
 
0.12
%
 
0.10
%
 
0.02
%
Total expenses
 
 
15,853,498
 
 
 
15,586,755
 
 
 
266,743
 
 
 
46.60
%
 
34.91
%
 
11.69
%
Net operating loss
 
 
(3,500,321)
 
 
 
(2,090,472)
 
 
 
(1,409,849)
 
 
 
-10.29
%
 
-4.68
%
 
-5.61
%
Other income :
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
 
2,901
 
 
 
4,500
 
 
 
(1,599)
 
 
 
0.01
%
 
0.01
%
 
0.00
%
Foreign currency
 
 
43,028
 
 
 
9,904
 
 
 
33,124
 
 
 
0.13
%
 
0.02
%
 
0.11
%
Total other income
 
 
45,929
 
 
 
14,404
 
 
 
31,525
 
 
 
0.14
%
 
0.03
%
 
0.11
%
Loss before income tax provision
 
 
(3,454,392)
 
 
 
(2,076,068)
 
 
 
(1,378,324)
 
 
 
-10.15
%
 
-4.65
%
 
-5.50
%
Current income tax expense
 
 
140,670
 
 
 
150,204
 
 
 
(9,534)
 
 
 
0.41
%
 
0.34
%
 
0.07
%
Deferred income tax expense
 
 
453,876
 
 
 
317,178
 
 
 
136,698
 
 
 
1.33
%
 
0.71
%
 
0.62
%
Net loss
 
$
(4,048,938)
 
 
$
(2,543,450)
 
 
$
(1,505,488)
 
 
 
-11.89
%
 
-5.70
%
 
-6.19
%
 
Net sales for the twelve months ended decreased $10,623,127 compared to the twelve months ended September 30, 2012 as shown in the table below.
 
 
 
 
 
 
 
 
 
Increase
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(decrease)
 
Increase
 
 
Percentage
 
Percentage of
 
 
 
Twelve Months
 
Twelve Months
 
Dollar
 
(decrease)
 
 
Total Sales
 
Total Sales
 
Location
 
Ended 9/30/13
 
Ended 9/30/12
 
Variance
 
Variance % 
 
 
Fiscal 2013
 
Fiscal 2012
 
The Americas
 
$
21,382,250
 
$
24,785,200
 
$
(3,402,950)
 
 
(13.73)
%
 
 
62.85
%
 
55.52
%
Europe
 
 
10,918,237
 
 
18,055,428
 
 
(7,137,191)
 
 
(39.53)
%
 
 
32.10
%
 
40.45
%
Asia
 
 
1,716,746
 
 
1,799,732
 
 
(82,986)
 
 
(4.61)
%
 
 
5.05
%
 
4.03
%
Total
 
$
34,017,233
 
$
44,640,360
 
$
(10,623,127)
 
 
(23.80)
%
 
 
100.00
%
 
100.00
%
 
Increased competition, tepid economic conditions and a greater sales decline in our seasonally slow third and fourth fiscal quarters due to a reduction in video gaming product sales, which management believes stemmed from consumers awaiting the release of the new generation of game players from Sony and Microsoft, had a negative impact on sales.    In addition,   fiscal 2012 included the product rollouts of the DCR-2650 cable card, the Broadway, the HD-PVR gaming unit and the MY TV 2 Go TV application for the PC, Apple iPad® and iPhone® product. The rollout of these products resulted in a concentration of sales for fiscal 2012, which did not repeat in fiscal 2013.     

 

 
30

  

Seasonal nature of sales

   
 
 
There is a seasonal pattern to our quarterly sales.   Listed below are the primary causes of our seasonal sales:
 
·       We primarily sell through a sales channel which consists of retailers, PC manufacturers and distributors.   Spurred on by holiday spending, our sales during our first fiscal quarter, which encompasses the holiday season, have historically been the highest of our fiscal year.
·       We typically experience a slowdown during the summer holiday period in Europe starting with the second half of our fiscal third quarter and into the first half of our fiscal fourth quarter.   We also experience decreased sales during the summer holiday period in the U.S.   This has historically caused sales for the last six months of our fiscal year to be lower than the first six months of our fiscal year. Our sales for the first six months of fiscal 2013 and fiscal 2012 accounted for approximately 66% and 60% of sales, respectively, and our sales for the last six months of fiscal 2013 and 2012 accounted for approximately 34% and 40% of sales, respectively.  
 
Although our strategy has been to diversify our sales to minimize the seasonal nature of our business, we anticipate similar seasonal trends for the near term future.     
 
 
31

   
Gross profit
 
Gross profit decreased $1,143,106 for the twelve months ended September 30, 2013 compared to the twelve months ended September 30, 2012.
 
The decrease in the gross profit is detailed below:
 
 
Increase
 
 
(decrease)
 
Decrease in sales
$
(4,382,208)
 
Due to change in Euro exchange rate
 
(13,425)
 
Lower labor related and other production costs
 
1,155,814
 
Mix of higher gross profit retail sales
 
213,476
 
Accrued expense fee adjustment
 
1,883,237
 
Total decrease in gross profit
$
(1,143,106)
 
 
Gross profit percentage for the twelve months ended September 30, 2013 was 36.31% compared to 30.23% for the twelve months ended September 30, 2012, an increase of 6.08 points.
 
The increase in the gross profit percentage is detailed below:
 
 
 
Increase
 
 
 
(decrease)
 
Higher gross profit on sales mix
 
 
0.25
%
Due to change in Euro exchange rate
 
 
(0.01)
%
Higher labor related and other production costs as a percentage of sales
 
 
(0.04)
%
Accrued expense fee adjustment
 
 
5.88
%
Total increase in gross profit percentage
 
 
6.08
%
 
The components of the increase in the gross profit percentage for the twelve months ended September 30, 2013 compared to the twelve months ended September 30, 2012 are detailed below:
 
·       Transition of product lines from low margin OEM products to higher margin retail products resulted in an increase in the gross profit percentage for fiscal 2013 over fiscal 2012 of 0.25%.
·       Changes in the Euro to USD rate during fiscal 2013 resulted in a small decrease in gross profit percentage of 0.01% for fiscal 2013 compared to fiscal 2012.
·       A decrease in sales of 23.80%, which was slightly higher than the decrease in labor related and other production costs of 23.50%, resulted in a slight decrease in the gross profit percentage for fiscal 2013 over fiscal 2012 of 0.04%.
·       Higher changes during fiscal 2013 in accrued expense fees due to changes in estimates resulted in a gross profit percentage increase of 5.88% for fiscal 2013 compared to fiscal 2012.  
 
 
32

 

Volatility of gross profit percentage:

 
 
Over the eight quarters covering fiscal 2013 through fiscal 2012, the gross profit percentage, excluding changes in estimates related to adjustments to accrued licensing fees, has ranged from a low of 24.70% to a high of 31.63%.
 
Listed below are factors which contribute to the volatility of our gross profit percentage.
 
·
Gross profit percentages vary within our retail family of products as well as for products sold to computer manufacturers. Changes in the product line sales mix affect the gross profit percentage.
·
Changes in the Euro to U.S. dollar exchange rate impact gross profit. An increase in the Euro tends to increase our gross profit percentage, while a decrease in the Euro tends to decrease our gross profit percentage.
·
Included in cost of sales are certain fixed and semi-fixed expenses, mainly for production labor, warehouse labor and the overhead costs of our Ireland distribution facility. When unit and dollar sales decline due to seasonal sales trends, these fixed costs get spread over lower unit and dollar sales, resulting in increased unit costs and increased fixed and semi-fixed costs as a percentage of sales, which lowers the gross profit percentage.
·
Our market is constantly changing with new competitors joining our established competitors. These competitive pressures from time to time result in a lowering of our average sales prices to meet our competitors’ prices, which tends to reduce the gross profit and gross profit percentage.
·
The supply and demand for component parts affect the gross profit percentage. When component parts are in short supply we may be subject to price increases. Conversely, when component parts’ supply is high we may be able to secure favorable prices.
·
As unit sales volume increases, we have more leverage in negotiating volume price reductions with our component suppliers and our contract manufacturers. A decrease in unit volume reduces the leverage we have with our suppliers and contract manufacturers.
 
33

 
·
Pricing from our suppliers and our contract manufacturers are continually reviewed as we seek to achieve cost reductions from our component part suppliers and contract manufacturers.
·
Our mix of sales impact our obligation to pay certain licensing costs.
·
Increases in fuel costs are reflected in the amounts we pay for the delivery of product from our suppliers and the amounts we pay for deliveries to our customers. Rising fuel prices increase our freight costs and negatively impact our gross profit.
 
Managing product mix through market strategy and new products, moderating seasonal trends, efficiently managing shipments and achieving cost reductions are a company priority and are critical to our competitive position in the market.   Although our goal is to optimize gross profit and minimize gross profit fluctuations, in light of the dynamics of our market we anticipate the continuance of gross profit percentage fluctuations.  
 
Selling, general and administrative expenses
 
The chart below illustrates the components of selling, general and administrative expenses.
 
 
 
Twelve months ended September 30,
 
 
 
 
 
 
 
 
 
 
 
Dollar Amounts
 
Percentage of Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
Increase
 
 
 
 
 
 
 
 
 
Increase
 
 
 
2013
 
2012
 
(Decrease)
 
2013
 
 
2012
 
 
(decrease)
 
Sales & marketing-HCW
 
$
6,410,989
 
$
7,481,104
 
$
(1,070,115)
 
 
18.85
%
 
 
16.76
%
 
 
2.09
%
Sales & marketing-PCTV
 
 
216,493
 
 
251,585
 
 
(35,092)
 
 
0.64
%
 
 
0.56
%
 
 
0.08
%
Technical support
 
 
336,932
 
 
360,135
 
 
(23,203)
 
 
0.99
%
 
 
0.81
%
 
 
0.18
%
General & administrative-HCW
 
 
2,991,106
 
 
2,987,203
 
 
3,903
 
 
8.79
%
 
 
6.69
%
 
 
2.10
%
General & administrative-PCTV
 
 
296,608
 
 
270,906
 
 
25,702
 
 
0.87
%
 
 
0.61
%
 
 
0.26
%
Amortization of intangible assets
 
 
754,836
 
 
754,836
 
 
0
 
 
2.22
%
 
 
1.69
%
 
 
0.53
%
Impairment of intangible asset
 
 
1,676,758
 
 
0
 
 
1,676,758
 
 
4.93
%
 
 
0.00
%
 
 
4.93
%
Stock compensation expense
 
 
71,550
 
 
81,773
 
 
(10,223)
 
 
0.21
%
 
 
0.18
%
 
 
0.03
%
Total selling, general and administrative expense
 
$
12,755,272
 
$
12,187,542
 
$
567,730
 
 
37.50
%
 
 
27.30
%
 
 
10.20
%
 
Selling, general and administrative expense for the twelve months ended September 30, 2013 increased $567,730 from the prior fiscal year as follows:
 
Sales and marketing expenses decreased $1,105,207 driven primarily by $706,704 in lower commission and co-operative advertising expense, which declined due to lower sales, a reduction in expenses of   $213,783 for a change in estimate for unused severance liabilities and a reduction of   $264,946 for a reduction in sales office expenses due to consolidation of offices and personnel reductions.    The decrease in expenses was offset somewhat by $80,226 in higher compensation expenses related to the addition of sales and marketing resources.
 
The decrease in technical support of $23,203 was primarily due to lower personnel expenses. The increase in general and administrative expenses of $29,605 was due to higher legal fees and consulting fees required during fiscal 2013 somewhat offset by decreases in rent and utilities due to the relocation of offices to smaller spaces, lower credit card processing fees due to the issuing lines of credit to certain customers who previously purchased product with credit cards, lower bad debt expense and lower depreciation. The decrease in stock compensation expense was due to fewer non vested options outstanding issued at a lower fair value price.
 
During fiscal 2013, we recorded an impairment charge of $1,676,758 related to the intangible assets associated with the acquisition of the PCTV product lines. See our Critical Accounting Policies and Estimates for further detail on the methodology used to calculate the impairment.
 
 
34

 
Selling, general and administrative expense as a percentage of sales
 
Due to fixed costs which fluctuate minimally with changes in sales, coupled with the seasonal nature of our business, selling general and administrative expense   as a percentage of sales is sensitive to seasonal sales fluctuations. Over the eight quarters of fiscal 2013 and fiscal 2012, selling general and administrative expense (excluding amortization of intangible assets ) as a percentage of sales has resulted in the following trends:
 
·
With our first quarter usually yielding the highest quarterly sales levels of the fiscal year, selling, general and administrative expense as a percentage of sales have typically been the lowest of the fiscal year. As reflected in the chart, selling, general and administrative expense as a percentage of sales was the lowest in the first quarter of fiscal 2013 and 2012.
·
Reflecting the seasonal trend in sales, selling, general and administrative expense for the third or fourth quarter are the highest as a percentage of sales. Total selling, general and administrative expense as a percentage of sales were the highest in the third quarter of fiscal 2013 and fourth quarter of fiscal 2012.
·
Reflecting the decrease in sales, total selling, general and administrative expenses as a percentage of sales were higher for fiscal 2013 compared to fiscal 2012.
 
With the expectation that the seasonal nature of sales will continue for the near future, we expect selling, general and administrative expenses as a percentage of sales to reflect a future trend that is similar to the historical trends we have experienced over the prior two fiscal years.
 
Research and development expense
 
Research and development expenses for the fiscal year ended September 30, 2013 decreased $300,987 from    the prior fiscal year.   The decrease was mainly due to lower compensation expenses of $232,270, primarily due to a change in estimate for unused severance liabilities plus $62,877 in lower product development related expenses. The decrease in stock compensation expense was due to fewer non vested options outstanding issued at a lower fair value price.
 
 
35

 
Tax provision
 
Our net tax provision for the fiscal years ended September 30, 2013 and 2012 is as follows:
 
 
 
Twelve months ended September  30,
 
 
 
2013
 
2012
 
Deferred tax expense
 
$
453,876
 
$
317,178
 
Foreign income tax
 
 
100,670
 
 
110,204
 
State income tax
 
 
40,000
 
 
40,000
 
Net tax provision
 
$
594,546
 
$
467,382
 
 
Our net deferred tax asset is primarily attributable to our Hauppauge Computer Works Inc. domestic operations.    In evaluating the future realization of our deferred tax asset and the corresponding valuation allowance as of September 30, 2013, we took into consideration:
 
·       before   inventory disposals, write offs of accounts receivable   and utilization of   net operating loss carry-forwards, our   domestic operations had   taxable income for the   last five fiscal years;
·       over the last five fiscal years our domestic operations had $4,909,657 in inventory disposals, account receivable write offs and net operating loss carry-forward utilization, which at a 38% blended tax rate provided a $1,865,670 reduction in taxes payable;
·       a three year forecast that included the impact of new products   as well as an expense reduction plan that we   put into effect which supports the deferred tax asset utilization of our domestic net operating losses and   timing differences over the next three years; and
·       our history of   utilization of   prior   domestic net operating losses.
 
After evaluating the circumstances listed above, it was our opinion that our net deferred tax asset of $1,145,532 is realizable as of September 30, 2013.  
 
As a result of all of the above items mentioned in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, we had   incurred a net   loss of   $4,048,938 for the fiscal year ended September 30, 2013, which resulted in   basic and diluted   net loss per share of $0.40   on weighted average basic   and diluted shares of 10,122,344, compared to a net loss   of   $2,543,450 for the fiscal year ended September   30, 2012, which resulted in basic and diluted   net loss per share of $0.25 on weighted average basic   and diluted shares of 10,122,344.
 
Options to purchase 1,280,125 and 1,524,567 shares of Common Stock at prices ranging $0.74 to $7.45 and    $0.77 to $7.45, respectively, were outstanding as of September 30, 2013 and 2012, respectively, but were not included in the computation of diluted net loss per share of Common Stock because they were anti-dilutive.  
 
Liquidity and Capital Resources
 
We had cash and cash equivalents as of September 30, 2013 of $1,482,566, a decrease of $3,613,287 from September 30, 2012.
 
 
36

 
The decrease in cash was due to:
 
 
 
Operating
 
Investing
 
Financing
 
 
 
 
Sources of cash:
 
Activities
 
Activities
 
Activities
 
Total
 
Decrease in accounts receivable
 
$
3,821,592
 
$
-
 
$
-
 
$
3,821,592
 
Total sources of cash
 
 
3,821,592
 
 
-
 
 
-
 
 
3,821,592
 
Less cash used for:
 
 
 
 
 
 
 
 
 
 
 
 
 
Increase in inventory
 
 
(2,322,723)
 
 
-
 
 
-
 
 
(2,322,723)
 
Decrease in accounts payable
 
 
(2,120,049)
 
 
-
 
 
-
 
 
(2,120,049)
 
Decrease in accrued expenses
 
 
(1,588,463)
 
 
-
 
 
-
 
$
(1,588,463)
 
Net loss adjusted for non cash items
 
 
(1,266,672)
 
 
-
 
 
-
 
 
(1,266,672)
 
Increase in prepaid expenses and other current assets
 
 
(63,928)
 
 
-
 
 
-
 
 
(63,928)
 
Capital equipment purchases
 
 
-
 
 
(30,482)
 
 
-
 
 
(30,482)
 
Total cash usage
 
 
(7,361,835)
 
 
(30,482)
 
 
0
 
 
(7,392,317)
 
Effect of exchange rates on cash
 
 
-
 
 
-
 
 
-
 
 
(42,562)
 
Net cash decrease
 
$
(3,540,243)
 
$
(30,482)
 
$
0
 
$
(3,613,287)
 
 
Our cash requirements for the next twelve months will include, among other things, the cash to fund our operating and working capital needs. We rely exclusively upon cash generated from our operations to fund these needs. We do not have a working capital line of credit or other borrowing facility in place to draw upon in the event that cash from our operations is insufficient to fund our capital requirements to sustain our operations. Based on our current scale of operating expenses and our new product development schedule, we have evaluated that there is substantial doubt that our cash and cash equivalents as of September 30, 2013 and our internally generated cash will provide sufficient liquidity to meet our capital needs for the next twelve months, and that additional sources of cash may be required to meet our capital needs.
 
We   have incurred operating losses for the last six fiscal years. Those losses are primarily attributable to a continuing decline in sales. For the fiscal year ended September 30, 2013,   we experienced   drop in sales of approximately 24% from the fiscal year ended September 30, 2012.   We believe that our sales have declined for reasons which we described under “Risk Factors” in Item 1A of this report, including, among other things:
 
·       Reliance on a small number of our product lines being successful, the failure of any one of which could substantially reduce our sales.
·       Our potential inability to develop new products or services that will meet our customers’ needs or wants.
·       Intense competitive pressures from larger companies that have greater resources than we do and from new market entrants, stemming from frequent new product introductions, technological advances, and declining sales prices, among other things.
·       Our potential inability to remain ahead of the development of competing technologies, products and services.
·       Lack of market diversification.
·       Heavy reliance on retailers, dealers and PC manufacturers to market, sell and distribute our products.
 
Since the fourth quarter of fiscal 2011, we have been implementing expense reduction initiatives. We switched from air to ocean freight to reduce shipping costs, outsourced most of   our shipping and   logistics to a third party, reduced   personel, relocated   certain facilities to smaller offices,   renogotiated certain   existing leases to reduce rent and closed certain sales offices. We believe that it may be increasingly difficult to make further material reductions in costs and   maintain a viable operating plan.
 
We are working to develop a strategy to address our continuing operating losses and loss of sales, and we   retained Corporate Fuel Advisors, an investment bank and advisory firm, to assist us in considering   and pursuing strategic alternatives, including possible additional financing to fund our capital needs and the   restructuring of our business.
 
We cannot assure that we will be able to develop and implement a plan that will enable us to successfully address our business and financial challenges. Among other things:
 
 
37

 
·       If we seek financing, we may not be able to obtain funding to address our capital needs on commercially reasonable terms, or at all.  
·       We may not be able to develop new lines of products or services that will be positively accepted by the marketplace.
·       We may not be able to successfully compete with our competitors’ product and service offerings.
·       Customers and consumers may lose confidence in us as a result of our financial condition and performce and our impending de-listing from Nasdaq, and their perceptions of our business prospects and competitive position, and they may cease to do business with us or buy our products.
 
If any strategic or restructuring plan that we develop and implement is not successful, there is a substantial risk that that we might not be able to sustain our operations at current levels, which would have a material adverse effect on our business, operating results and financial condition.
 
On November 8, 1996, we approved a stock repurchase program.   The program authorized us to repurchase up to 850,000 shares of our own stock. The stock repurchase program was extended by a resolution of our Board of Directors on December 17, 1997.    At our August 3, 2007 Board meeting, our Board of Directors approved an increase in the number of shares which can be repurchased under the plan to 1,200,000.   As of September 30, 2013 and 2012, we held 760,479 treasury shares purchased for $2,405,548 at an average purchase price of $3.16.
 
Sources and (usage) of cash components
 
The chart below shows our cash balances, sources of cash and (usage) of cash by quarter for fiscal 2012 through fiscal 2013.
 
Sources and (usage) of cash primarily comes from the items listed below:
 
·       Net   income (loss) adjusted for non cash items
·       Changes in the levels of current assets and current liabilities, primarily accounts receivable, inventories and accounts payable
·       Purchase of   capital equipment
 
 
38

 
 
 
39

 
Accounts receivable, inventory, accounts payable and accrued expenses make up the majority of our current asset and current liability levels. Our cash balances are affected by changes in these assets and liabilities. In the quarters where cash was used to increase the current asset levels or decrease the current liability levels, there was usually a corresponding decrease or neutral position in the cash balances during those quarters.   Conversely, in the quarters where we generated cash by reducing the current asset levels or by increasing the current liability levels, there was a corresponding increase in the cash balances during those quarters.   Our cash balance is also impacted by the net losses adjusted for non cash items we have incurred.   Net cash used to fund the net loss adjusted for non cash items for fiscal 2013 of $1,266,672 was a substantial portion of the reduction of the $3,613,287 reduction in cash for fiscal 2013.
 
We expect that our operating structure will remain similar to past years, therefore investment in and subsequent changes to the current assets and current liabilities required to fund our operating cycles and the generation of cash from net income or the usage if cash caused from net losses will continue to have a material impact on our cash generation, cash usage and cash balance.     
 
Future Contractual Obligation
 
The following table shows our contractual obligations related to lease obligations as of September 30, 2013:
 
 
 
Payments due by period
 
 
 
Total
 
Less than 1 year
 
1-3 years
 
3 to 5 years
 
Operating lease obligations
 
$
1,536,751
 
$
542,770
 
$
993,981
 
$
0
 
 
Inflation
 
While inflation has not had a material adverse effect on our business, operating results or financial condition in the past, in the event that the inflation rate increases, there can be no assurance that we will be able to offset the effects of inflation through price increases to our customers, without experiencing a reduction in the demand for our products; or that inflation will not have a material adverse   effect on our business, operating results or financial condition.
 
Critical Accounting Policies and Estimates
 
We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our financial statements:
 
·
Revenue recognition
·
Management’s estimates
·
Translation of assets and liabilities denominated in non-functional currencies on our European financial statements
·
Inventory obsolescence and reserves
·
Accounts receivable related reserves
·
Accrued expense fees
·
Intangible assets
·
Income taxes
 
Revenue Recognition
 
We sell through a sales channel which is comprised of retailers, PC manufacturers and distributors. The majority of    our customers are granted lines of credit. The product is shipped on account with the majority of customers typically given 30 to 60 day payment terms. Those customers deemed as significant credit risks either pay in advance or issue us   a letter of credit.   We require the customer to submit a purchase order to us.   The product price and payment terms are fixed per the terms of the purchase order.   Upon shipment of the order to the customer, the title to the goods is passed to the customer.    The customer is legally obligated to pay for the order within the payment terms stated on the customer’s purchase order.   The obligation to insure the products and the   cost of pilferage, while in the customer’s possession, is the responsibility of the customer.   We sell analog, hybrid video recorders or digital computer products 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, we have   no further obligation to assist in the resale of the products.
 
 
40

 
We offer some of our   customers a right of return. We typically,   at the end of every quarter and based on historical data, evaluate our sales reserve level based on the previous six months sales.   Due to seasonal nature of the business coupled with the changing economic environment, management exercises judgment with regard to the historical data when calculating the reserve.  
 
We offer mail-in rebates on certain products at certain times as determined by us. The rebates are recorded as a reduction to sales. We also participate in limited cooperative advertising programs with retailers and distributors and we classify these expenses as a component of sales and marketing expenses.   
 
Management’s Estimates

 

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States.   The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts for revenues, cost of sales and expenses during the reporting period. On an ongoing basis, management evaluates estimates, including those related to sales provisions, as described above, bad debts, income taxes, inventory allowances, accrued licensing fees and other contingencies.   We base   our estimates on historical data, when available, experience, and on various other assumptions that are believed to be reasonable under the circumstances, the combined results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
 
Translation   of assets and liabilities denominated in non-functional currencies on our European   financial statements
 
The functional currency of our European subsidiary is the Euro.   In preparing our consolidated financial statements, we are required to translate assets and liabilities denominated in a non-functional currency, mainly U.S. Dollars, to Euros on the books of our European subsidiary.   This process results in exchange gains and losses depending on the changes in the Euro to U.S. Dollar exchange rate.    Under the relevant accounting guidance, with the exception of inter-company accounts which are considered long term in nature, we are obligated to include these gains and losses on our statement of operations, which   we report in other income or expense under the caption “foreign currency”.  
 
The extent of these gains and losses can fluctuate greatly from month to month depending on the change in the exchange rate, causing results to vary widely.   Due to the past volatility of the Euro, it is difficult to forecast the long term trend of these gains and losses.
 
Inventory obsolescence and reserves
 
The technology underlying our products and other products in the computer industry, in general, is subject to rapid change, including the potential introduction of new types of products and technologies.   Due to this, we    maintain a program in which we review on a regular basis our inventory forecasting, inventory purchasing and    our inventory levels. We review our inventory realization and inventory reserves on a quarterly basis.     
 
Accounts receivable and related reserves
 
On a daily basis, we credit approve all orders scheduled for shipment. Customers who are over their credit limit or who have invoices that are past their due date are typically placed on credit hold until the credit problem is resolved.   Credit reviews are performed on new customers.   Existing customers who request an increased credit line are subject to a new credit review before increases in their credit line are approved.
 
 
41

 
Our reserve for bad debt is computed using a specific identification method. On a quarterly basis, we review the age and quality of our accounts receivable. We reserve amounts due us from companies that have gone bankrupt or companies that we evaluate are near bankrupt.
 
Our products are sold through sales channels which consist of retailers, PC manufacturers and distributors. Our products are primarily a retail product sold to end user consumers. Similar to other companies in the computer industry, our products are subject to returns by the end user. In recognition that product   may be returned at a later date,   at the end of every quarter, based on historical data, we evaluate our sales return reserve level based on the previous six months sales and we adjust our sales return reserve as required.
 
Accrued expenses-fees
 
We use various software and technologies in certain of our products. In certain cases, we purchases or licenses these software and technologies from third parties. The related purchase or license agreements provide for payment of royalty and other fees associated with our sale of the related products. Such fees are estimated and get accrued and reflected as a component of cost of sales when those sales occur. In certain circumstances, such fees are not specifically covered by contractual arrangements but are nonetheless potentially due to the third party sellers or owners of the software and technologies. We use all available applicable information in determining these estimates and thus the accrued amounts are subject to change as new information is made available to us. Occasionally, third parties audit our historical determination of fees and adjustments are made. Accrued fees are subject to elimination after three to seven years if not billed by or requested from the third parties
 
Intangible assets
 
Long-lived assets include definite-lived intangible assets. Definite-lived intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows derived from such assets. Definite-lived intangible assets primarily consist of covenant not to compete, customer relationships and technology.   Based on a cash flow model prepared by us at September 30, 2013, we determined that our definite-lived intangible assets were not recoverable. This conclusion was reached based on the significant decrease in sales during the third and fourth quarters of fiscal 2013 and our future forecasts specific to the products associated with the intangible assets. The related assets were written down to zero. Although we believe our judgments, estimates and/or assumptions used in estimating cash flows and determining fair value are reasonable, making material changes to such judgments, estimates and/or assumptions could materially affect such impairment analyses and our financial results.
 
Income taxes
 
We account for income taxes under an asset and liability approach, which recognizes deferred tax assets and liabilities based on the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse and for tax credit carry forwards. Valuation allowances are provided for if, based upon the weight of available evidence, it is more likely than not that some or all of the net deferred tax assets will not be realized.
 
Our deferred tax asset is primarily attributable to our Hauppauge Computer Works Inc. domestic operations.    As of September 30, 2013, we had $1,495,345 in net operating losses that expire between 2028 and 2032. The estimated tax benefit from the utilization of these net operating losses is $435,231 as of September 30, 2013, and is reflected as a component of our deferred tax asset. In addition to the net operating loss carry forwards,   we had $347,724 in inventory obsolescence reserves and $102,123 in bad debt reserves, with a combined deferred tax asset value of $170,942.     Based on management's current estimate of book and taxable income attributable to our domestic operations for the next three years, it was determined that it is more likely than not that our domestic operations will be able to generate enough taxable income in the respective carry forward periods and this taxable income will enable us to utilize the respective net operating loss carry forwards.   Management’s estimates considered the following:
 
 
42

 
·       before   inventory disposals, write offs of accounts receivable   and utilization of   net operating loss carry-forwards, our   domestic operations had   taxable income for the   last five fiscal years;
 
·       over the last five fiscal years our domestic operations had $4,909,657 in inventory disposals, account receivable write offs and net operating loss carry-forward utilization, which at a 38% blended tax rate provided a $1,865,670 reduction in taxes payable;
 
·       a three year forecast that included the impact of new products   as well as an expense reduction plan that we put into effect which supports the deferred tax asset utilization of our domestic net operating losses and   timing differences over the next three years; and
 
·       our history of   utilization of   prior   domestic net operating losses.
 
While we believe that our estimates and assumptions are reasonable, if we do not realize enough taxable income to fully utilize the net operating loss carry forwards, additional valuation allowances or tax provisions may be required.
 
We recognize the financial statement impact of tax provisions, taken or expected to be taken, utilizing a more-likely-than-not recognition threshold. We also recognize any interest and penalties related to tax uncertainties as income tax expense.   As of September 30, 2013, there were no unrecognized tax benefits, or related accrued interest and penalties, recorded in the financial statements.
 
Recent Accounting Pronouncements
 
In February 2013, the FASB issued new accounting guidance which amends Accounting Standards Codification (“ASC”) 220, “Comprehensive Income.” The amended guidance requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, entities are required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. generally accepted accounting principles (“GAAP”) to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under   GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures in the financial statements. The amended guidance does not change the current requirements for reporting net income or other comprehensive income. The amendments will become effective for us   beginning with the first quarter of fiscal year 2014. As this is disclosure-only guidance, it will not have an impact on our consolidated financial results.
 
In July 2013, the FASB issued new accounting guidance which requires the netting of unrecognized tax benefits against a deferred tax asset for a loss or other carry forward that would apply in settlement of the uncertain tax positions. Under the new standard, unrecognized tax benefits will be netted against all available same-jurisdiction loss or other tax carry forwards that would be utilized, rather than only against carry forwards that are created by the unrecognized tax benefits. The new guidance is effective prospectively to all existing unrecognized tax benefits, but entities can choose to apply it retrospectively. The guidance will be effective for us in our first quarter of fiscal year 2015, with early adoption permitted. We are currently assessing the impact this guidance will have on our consolidated statements of financial position and cash flows.

 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT Market Risk

 
Item 305 of Regulation S-K “Quantitative and Qualitative Disclosures About Market Risk” is not required for Smaller Reporting Companies.

 

Item 8.   Financial Statements and Supplementary Data

 
The financial statements required by this Item 8 are included in this Annual Report on Form 10-K following Item 15 hereof.
 
 
43

 

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 
Not applicable.

 

Item 9a.      Controls and Procedures

 
Disclosure Controls and Procedures
 
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
Management’s Annual Report on Internal Control Over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.   Internal Control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.   Our internal control over   financial reporting includes   policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of   unauthorized acquisition, use, or disposition of our   assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
 
Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2013.   Management conducted its evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.   Based on this evaluation, management has concluded that, as of September 30, 2013, our internal controls over financial reporting were effective.
 
Exclusion of Registered Public Accounting Firm Attestation Report due to Rules of the Securities and Exchange Commission
 
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to a provision under the Dodd-Frank Wall Street Reform and Consumer Protection Act which grants a permanent exemption for non-accelerated filers from complying with Section 404(b) of the Sarbanes-Oxley (SOX) Act of 2002.   
 
Changes in Internal Control Over Financial Reporting
 
There has been no change in our internal control over financial reporting   during our fourth   fiscal quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.       OTHER INFORMATION

 
None  
 
 
44

 
PART III

 

Item 10. directors, Executive Officers AND CORPORATE GOVERNANCE

 
The following table sets forth the positions and offices presently held with us by each of our directors and executive officers, his age as of September 30, 2013 and the year in which each director became a director.
 
Name
 
Age

 

P ositions and Offices Held

 
Year Became
Director
 
Kenneth Plotkin
 
62
 
Chairman of the Board, Chief Executive Officer, President, Chief Operating Officer and Director
 
1994
 
Gerald Tucciarone
 
58
 
Chief Financial Officer, Treasurer and Secretary
 
 
 
John Casey
 
57
 
Vice President of Technology
 
 
 
Bernard Herman
 
85
 
Director
 
1996
 
Adam M Zeitsiff
 
39
 
Director
 
2011
 
Seymour G. Siegel
 
70
 
Director
 
2003
 
 
Kenneth Plotkin is one of our co-founders and has served as our Chairman of the Board, Chief Executive Officer and one of our directors since our inception in 1994.  He has been our President and Chief Operating Officer since September 27, 2004 and has also served in such offices from March 14, 2001 until May 1, 2002.  Mr. Plotkin served as our Secretary until June 20, 2001 and Vice-President of Marketing from August 2, 1994 until October 16, 2005.  He holds a BS and an MS in Electrical Engineering from the State University of New York at Stony Brook. We believe that Mr. Plotkin’s   past business experience in addition to holding the position of CEO since 1994 give him the qualifications and skills necessary to serve as one of our directors.
 
Gerald Tucciarone joined us in January 1995 and has served as Chief Financial Officer and Treasurer since such time. He has served as our Secretary since July 25, 2005.   Prior to his joining us, Mr. Tucciarone 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 & Parke.   Mr. Tucciarone is a certified public accountant.
 
John Casey has been our Vice President of Technology since January 1995.
 
Bernard Herman has served as one of our directors from 1996 to December 17, 2013 when he retired. 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 Securities Dealers.  
 
Seymour G. Siegel has served as one of our directors since May 16, 2003.  He is a Certified Public Accountant, inactive, and a Principal Emeritus at Rothstein   Kass & Company, P.C , an accounting and consulting firm.   Since April 2000 he has been a principal in the Business Consulting Group of Rothstein, Kass.  From 1974 to 1990 he was managing partner and founder of Siegel Rich and Co, P.C., CPAs, which merged into WeiserMazars LLC, where he was a senior partner.   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, Noise Cancellation Technologies Inc., Emerging Vision, Inc., and GreenHouse Holdings, Inc., all public companies.  He is currently a director and chairman of the audit committee of Air Industries Inc., Stratus Media Group, Inc. and a member of the Audit Committee of Premier Alliance Group Inc.   We believe that Mr. Siegel’s business expertise and experience and his accounting background give him the qualifications and skills necessary to serve as one of our directors.
 
 
45

 
Adam Zeitsiff   joined our Board of Directors on June 9, 2011. Since January 2006, Mr. Zeitsiff has served as the Chief Executive Officer of EZFacility, Inc., which is the lead brand within the Fitness, Sports and Leisure division of Jonas Software, Inc., for which he also serves as the Business Unit Manager.   EZFacility provides cloud-based business management software and billing solutions in the fitness, sports and leisure industries. From May 2004 until January 2006 he was the Chief Executive Officer and Co-Founder of VCinema, an internet based downloadable video store service.    From May 1995 to April 2004 he was the President, Chief Executive and Co-Founder of IVCi, LLC, a global provider of video conferencing, audio-visual and IP video networking solutions. Mr. Zeitsiff also serves as a Director of the Long Island Elite, a 501(c)(3) charity focused on raising funds and awareness for lesser-known charities across Long Island.   We believe that Mr. Zeitsiff’s business experience in starting, running and growing technology-oriented companies gives him the qualifications and skills necessary to serve as one of our directors.
 
Family Relationships
 
There is no family relationship among any of our executive officers and directors.
 
Term of Office
 
Each director will hold office until the next annual meeting of stockholders and until his or her successor is elected and qualified or until his/her earlier resignation, removal or death.   Each executive officer will hold office until the next regular meeting of the Board of Directors following the next annual meeting of stockholders and until his or her successor is elected or appointed and qualified or until his or her earlier death, resignation or removal from office.  
 
Audit Committee    
 
The Audit Committee of the Board of Directors is responsible for (i) the appointment, compensation, retention and oversight of the work of the independent registered public accountants, (ii) reviewing our financial statements with management and the independent registered public accountants, (iii) making an appraisal of our audit effort, (iv) recommending, establishing and monitoring procedures designed to improve the quality and reliability of the disclosure of our financial condition and results of operations, and (v) consulting with management and our independent registered public accountants with regard to the adequacy of internal accounting controls. The members of the Audit Committee currently are Messrs. Siegel and Zeitsiff. Bernard Herman also served on the Audit Committee during our 2013 fiscal year and until his retirement on December 17, 2013.  Our Board of Directors has adopted a written charter for the Audit Committee. A copy of the charter is available on our website, www.hauppauge.com
 
Audit Committee Financial Expert
 
Our Board of Directors has determined that we have an "audit committee financial expert" (as defined by Item 407(d)(5) of Regulation S-K as promulgated by the Securities and Exchange Commission) serving on our Audit Committee.   Our audit committee financial expert is Seymour G. Siegel.   The directors who serve on the Audit Committee are "independent" directors based on the definition of independence in the listing rules of The Nasdaq Stock Market.
 
Code of Ethics
 
Our Board of Directors has adopted a Code of Ethics for our officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller and other persons performing similar functions.   You can obtain a free copy of our Code of Ethics by writing to our Secretary at our offices at 91 Cabot Court, Hauppauge, New York 11788.   We intend to satisfy the disclosure requirement under Item 5.05(c) of Form 8-K   regarding an amendment to, or waiver from, a provision of our Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of the code of ethics definition enumerated in paragraph (b) of Item 406 of Regulation S-K by posting such information on our website, www.hauppauge.com .
 
 
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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 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 and that copies of such reports be furnished to us.
 
To our knowledge, based solely on a review of copies of Forms 3, 4 and 5 furnished to us and written representations from such persons that no other reports were required, our officers, directors and 10% stockholders complied with all Section 16(a) filing requirements applicable to them during the fiscal year ended September 30, 2013.
 
ITEM 11. EXECUTIVE   COMPENSATION
 
Summary Compensation Table
 
The following table sets forth certain compensation information for each of the fiscal years ended September 30, 2013 and 2012 for our Chief Executive Officer and two other most highly compensated executive officers.
 
Name and Principal
Position
 
Fiscal
Year
 
Salary
($)
 
Bonus
($)
 
Option
Awards
($)
 
All Other
Compensation
($)
 
Total
($)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kenneth Plotkin
 
 
2013
 
$
187,200
 
$
-
 
$
2,650
(1)(5)
$
8,106
(2)
$
197,956
 
President, Chairman of the Board, Chief Executive Officer, and Chief Operating Officer
 
 
2012
 
$
183,600
 
$
-
 
$
2,450
(1)(3)
$
8,106
(2)
$
194,156
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gerald Tucciarone
 
 
2013
 
$
164,320
 
$
-
 
$
2,650
(1)(5)
 
-
 
$
166,970
 
Treasurer, Chief Financial Officer, and Secretary
 
 
2012
 
$
161,160
 
$
-
 
$
2,450
(1)(3)
 
-
 
$
163,310
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
John Casey
 
 
2013
 
$
162,240
 
$
-
 
$
4,240
(1)(6)
 
-
 
$
166,480
 
Vice President of Technology
 
 
2012
 
$
159,120
 
$
-
 
$
3,920
(1)(4)
 
-
 
$
163,040
 
  ____________________________________________
 
(1)
Represents the aggregate grant date fair value of option awards computed in accordance with FASB ASC-718.  
See Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 for a description of the assumptions used in that computation. The actual value realized with respect to option awards will depend on the difference between the market value of our common stock on the date the option is exercised and the exercise price.
 
 
(2)
Represents non-cash compensation in the form of the use of a car and related expenses and insurance premiums paid by us.
 
 
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 (3)
5,000 options were granted on January 5, 2012 at an exercise price of $0.77 and a fair value price of $0.49.   The options vest to the extent of 2,500 shares on January 5, 2013 and 2,500 shares on January 5, 2014 and expire on January 4, 2022.
 
 
(4)
8,000 options were granted on January 5, 2012 at an exercise price of $0.77 and a fair value price of $0.49.   The options vest to the extent of 4,000 shares on January 5, 2013 and 4,000 shares on January 5, 2014 and expire on January 4, 2022.
 
     
(5)
5,000 options were granted on February 1, 2013 at an exercise price of $0.74 and a fair value price of $0.53.   The options vest to the extent of 2,500 shares on February 1, 2014 and 2,500 shares on February 1, 2015 and expire on January 31, 2023.5,00   
 
       
(6)  
8,000 options were granted on February 1, 2013 at an exercise price of $0.74 and a fair value price of $0.53.   The options vest to the extent of 4,000 shares on February 1, 2014 and 4,000 shares on February 1, 2015 and expire on January 31, 2023.
 
Employment Contracts
 
Kenneth Plotkin serves in certain of our officerships pursuant to an employment agreement dated 1998 (the "1998 Employment Agreement"), which replaced a prior employment agreement that had expired.   The 1998 Employment Agreement provides for a three-year term, which term automatically renews on an annual basis, unless otherwise terminated by the Board or the executive.  The 1998 Employment Agreement provides 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 mutually agreed upon by the Company and the executive, said amount not to be less than that for the preceding Annual Period.
 
The 1998 Employment Agreement provides for a bonus to be paid to Mr. Plotkin as follows: an amount equal to 2% of our earnings, excluding earnings that are not from operations and before reduction for interest and income taxes ("EBIT"), for each fiscal year commencing with the year ended September 30, 1998, provided that our EBIT for the applicable fiscal year exceeds 120% of the prior fiscal year's EBIT, and if not, then 1% of our EBIT.  The determination of EBIT shall be made in accordance with our audited financial statements filed with the Securities and Exchange Commission on our Annual Report on Form 10-K.
 
The 1998 Employment Agreement further provides for disability benefits, our obligation 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 their respective benefit or for the benefit of their family, a car allowance of $500 per month, reasonable reimbursement for automobile expenses, and medical insurance as is standard for our executives.  Furthermore, the 1998 Employment Agreement provides that we may apply for, and own, life insurance on the life of Mr. Plotkin for our benefit, in such amount as the Board may from time to time determine; we 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 us.
 
 
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table sets forth certain information concerning outstanding option awards held by our named executive officers as of the fiscal year ended September 30, 2013.
 
OPTION AWARDS
Number of Securities Underlying
Unexercised Options
 
Name
 
Exercisable
 
Unexercisable
 
 
Option
Exercise
Price ($) (1)
 
Option
Expiration
Date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kenneth Plotkin
 
 
5,000
 
 
-
 
 
$
3.32
 
 
8/09/2014
 
 
 
 
200,000
 
 
-
 
 
$
4.96
 
 
11/20/2016
 
 
 
 
25,000
 
 
25,000
(2)
 
$
2.27
 
 
11/01/2020
 
 
 
 
2,500
 
 
2,500
(3)
 
$
0.77
 
 
1/04/2022
 
 
 
 
-
 
 
5,000
(5)
 
$
0.74
 
 
1/31/2023
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gerald Tucciarone
 
 
20,000
 
 
-
 
 
$
4.62
 
 
2/11/2015
 
 
 
 
30,000
 
 
-
 
 
$
7.45
 
 
1/22/2017
 
 
 
 
8,000
 
 
-
 
 
$
1.64
 
 
6/26/2018
 
 
 
 
12,500
 
 
-
 
 
$
1.27
 
 
4/25/2020
 
 
 
 
2,500
 
 
2,500
(3)
 
$
0.77
 
 
1/04/2022
 
 
 
 
-
 
 
5,000
(5)
 
$
0.74
 
 
1/31/2023
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
John Casey
 
 
20,000
 
 
-
 
 
$
4.62
 
 
2/11/2015
 
 
 
 
16,000
 
 
-
 
 
$
7.45
 
 
1/22/2017
 
 
 
 
8,000
 
 
-
 
 
$
4.13
 
 
12/26/2017
 
 
 
 
5,000
 
 
-
 
 
$
1.64
 
 
6/26/2018
 
 
 
 
12,500
 
 
-
 
 
$
1.27
 
 
4/25/2020
 
 
 
 
4,000
 
 
4,000
(4)
 
$
0.77
 
 
1/04/2022
 
 
 
 
-
 
 
8,000
(6)
 
$
0.74
 
 
1/31/2023
 
 
(1)
Calculated using the closing price of our common stock on the date of the grant.
 
 
(2)
25,000 options vest to the extent of 12,500 shares on November 2, 2013 and 2014.
 
 
(3)  
2,500 options vest to the extent of 2,500 shares on January 5, 2014.
 
 
(4)  
4,000 options vest to the extent of 4,000 shares on January 5,   2014.
 
(5)  
5,000 options vest to the extent of 2,500 shares on February 1, 2014 and 2015.
 
(6)      
8,000 options vest to the extent of 4,000 shares on February 1, 2014 and 2015
 
Termination of Employment and Change in Control Agreements
 
In the event of a termination of employment of Mr. Plotkin associated with a Change in Control of the Company, as defined in the 1998 Employment Agreement, a one-time bonus shall be paid to him 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 in Control.
 
 
49

   
In the event of a Change in Control, as defined in our 1998 Incentive Stock Option Plan, options granted to the named executive officers pursuant to said plan shall become immediately vested and exercisable.  The 1998 Incentive Stock Option Plan further provides that options granted shall terminate if and when the optionee ceases to be our employee or the employee of one our subsidiaries, unless (1) the optionee shall die while in our employ or the employ of one of our subsidiaries, in which case, the options shall be exercisable, as and to the extent exercisable by such person or persons as shall have acquired the optionee's rights by will or the laws of descent and distribution, but not later than one year after the date of death and not after the expiration of the specific period fixed in the option grant or (2) the optionee shall become disabled (within the meaning of section 105(d)(4) of the Internal Revenue  Code) while in our employ or the employ of one of our subsidiaries and such optionee's employment shall terminate by reason of such disability, in which case the options shall be exercisable, as and to the extent exercisable at the time of the termination of his employment, within such period as shall be set forth in the option grant, but only within one year after the termination of the optionee's employment and not after the expiration of the specific period fixed in the option grant as in effect at the time of the termination of his employment. In the event of a termination of employment associated with a Change in Control, as defined in the 2003    Performance and Equity Incentive Plan and the 2012 Performance and Equity Incentive Plan,    options granted pursuant to said plan shall vest or be exercisable upon termination of an employee’s employment within 24 months from the date of the Change in Control, but only to the extent determined by the Board (or the Committee, as defined in such plan), unless the employee is terminated for Cause or the employee resigns his employment without Good Reason (as such terms are defined in the 2003 Performance and Equity Incentive Plan and the   2012 Performance and Equity Incentive Plan, respectively).
 
DIRECTOR COMPENSATION FOR 2013 FISCAL YEAR
 
The following table sets forth compensation paid to our non-employee directors for the fiscal year ended September 30, 2013: 
 
Name
 
 
Fees Earned
or Paid in Cash
 
 
Option
Awards
 
Stock  Awards
 
 
 
 
All Other
Compensation
 
 
Total
 
Bernard Herman
 
$
24,300
 
$
5,300
 
-
(1)
 
 
$
-
 
$
29,600
 
Adam M. Zeitsiff
 
$
24,300
 
$
5,300
 
-
(2)
 
 
$
-
 
$
29,600
 
Seymour G. Siegel
 
$
31,050
 
$
5,300
 
-
(3)
 
 
$
-
 
$
36,350
 
 
(1)    As of September 30, 2013, Mr. Herman held options to purchase 55,000 shares of the Company’s Common Stock and had awards of 8,994 shares of the Company’s Common Stock outstanding.
(2)    As of September 30, 2013, Mr. Zeitsiff held options to purchase 40,000 shares of the Company’s Common Stock.  
(3)    As of September 30, 2013, Mr. Siegel held options to purchase 55,000 shares of the Company’s Common Stock.  
 
During fiscal 2013, each of Bernard Herman, Adam M. Zeitsiff and Seymour G. Siegel, each a non-employee director, received an annual retainer of $18,000, paid in quarterly installments in advance, and $1,350 for every Board meeting that he attended in person.    Additionally, the Chairman of the Audit Committee, Mr. Siegel, received an annual stipend of $9,000.  

 

Item 12.   Security Ownership of Certain Beneficial Owners and Management AND RELATED STOCKHOLDER MATTERS

 
Security Ownership
 
The following table sets forth, to our knowledge based solely upon records available to us, certain information as of December 17, 2013 regarding the beneficial ownership of our shares of common stock by (i) each person who we believe to be the beneficial owner of more than 5% of our outstanding shares of common stock, (ii) each current director, (iii) each of the named executive officers, and (iv) all current executive officers and directors as a group.
 
 
50

   
Name and Address
of  Beneficial Owner
 
Title of Class
 
Amount and Nature of
Beneficial
Ownership
 
 
Percent
of Class
 
 
 
 
 
 
 
 
 
 
Kenneth Plotkin
91 Cabot Court
Hauppauge, N.Y. 11788
 
common stock
 
916,085
(1)(2)(3)
 
9.05
%