HAUP Hauppague Digital Inc (CE)

PROPOSAL 1: REVERSE STOCK SPLIT

General

Our Board of Directors has adopted and is recommending that our stockholders approve a proposal to amend our Certificate of Incorporation to authorize the Board of Directors to effect a reverse stock split of our outstanding shares of common stock. The authorization will permit the Board of Directors to effect a reverse stock split of our common stock at a ratio ranging from 1:2 to 1:5, to be selected by the Board of Directors in its sole discretion following stockholder approval. The Board of Directors may effect only one reverse stock split as a result of this authorization. The Board’s decision as to whether and when to effect the reverse stock split will be based on a number of factors, including market conditions, existing and expected trading prices for our common stock, and the continued listing requirements of The NASDAQ Capital Market. Although our stockholders may approve the reverse stock split, we will not effect the reverse stock split if the Board of Directors does not in its sole discretion deem it to be in our best interests and the best interests of our stockholders. The reverse stock split, if authorized pursuant to this resolution and if deemed by the Board of Directors in its sole discretion to be in our best interests and the best interests of our stockholders, will be effected, if at all, at a time that is not later than six months from the date of the meeting. The reverse stock split will not change the par value of common stock or preferred stock.

Purpose and Background of the Reverse Stock Split

Our Board of Directors approved the proposal authorizing an amendment to our Certificate of Incorporation to authorize the Board of Directors to effect a reverse stock split based on its belief that:

If the reverse stock split successfully increases the per share price of our common stock, as to which no assurance can be given, the Board of Directors believes this increase may facilitate future financings, if sought, and enhance our ability to attract, retain, and motivate employees and other service providers.

We are currently exploring the possibility of a “PIPE” or other financing which could include the issuance of our common stock and/or other equity or debt securities convertible or exercisable into our common stock. However, no assurances can be made that we will be able to obtain such financing on terms favorable to us, if at all.

NASDAQ Requirements for Continued Listing

Our common stock is quoted on The NASDAQ Capital Market under the symbol “HAUP.” One of the requirements for continued listing on The NASDAQ Capital Market is maintenance of a minimum closing bid price of $1.00.

On February 6, 2013, we received a notice from The NASDAQ Stock Market indicating that, for the prior 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share required for continued listing under NASDAQ Marketplace Rule 5550(a)(1). Pursuant to NASDAQ Listing Rule 5810(c)(3)(A), we were afforded 180 calendar days, or until August 6, 2013, to regain compliance with the minimum bid price requirement.

On August 6, 2013 we received notification from NASDAQ stating that as a result of our failure to regain compliance with the $1 minimum bid price for our common stock, our common stock was scheduled for delisting and would be suspended from The NASDAQ Capital Market effective at the open of the market on August 15, 2013. Pursuant to NASDAQ’s Listing Rule 5810(c)(3)(A), we requested an appeal of this determination and we received notification from NASDAQ that a hearing on our appeal was scheduled for September 11, 2013.

On August 20, 2013, we received a letter from NASDAQ stating that we were in non-compliance with NASDAQ Listing Rule 5550(b)(1), which requires us to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing on The NASDAQ Capital Market. As of June 30, 2013, we had stockholders’ equity of $866,233, as reported in our Quarterly Report on Form 10-Q filed by on August 14, 2013. The August 20 NASDAQ letter also noted that, as of August 19, 2013, we did not meet the other compliance alternatives under NASDAQ Listing Rule 5550(b) of a market value of listed securities of $35 million, or $500,000 of net income from continuing operations in the most recently completed fiscal year or in two of the last three most recently completed fiscal years.

On September 16, 2013, the NASDAQ Hearings Panel rendered a decision on our appeal delisting our shares from The NASDAQ Capital Market and directed that trading of our shares was to be suspended, effective at the open of business on Wednesday, September 18, 2013. That same day we requested that the Panel reconsider its decision based on new information that we believed changed, materially, the facts upon which the Panel’s decision was based, including, among other things, implementation of the reverse stock split described in this proxy statement upon receiving stockholder approval on or about November 15, 2013, and our proposal to pursue and close a financing.

By letters dated September 19, 2013 and September 27, 2013, NASDAQ advised us that the Panel’s decision has been stayed to allow us to continue with our efforts to regain compliance with the rules on the following conditions:

On October 1, 2013, the Company received a letter (the “October Letter”) from NASDAQ stating that the Company failed to hold its annual meeting within the time frame allowed under the NASDAQ Listing Rules 5620(a) and 5620(b), and such failure serves as an additional basis for delisting the Company’s securities from the NASDAQ Capital Markets. The October Letter also noted that the Panel will consider this matter in their decision regarding the Company’s continued listing on the NASDAQ Capital Market and that the Company should present its views with respect to this additional deficiency to the Panel in writing by no later than October 8, 2013. On October 7, 2013, the Company advised NASDAQ that it had filed its preliminary proxy statement with the SEC on September 30, 2013 and that it expected to hold its annual meeting of stockholders on November 15, 2013. The Company can provide no assurance that the Panel will accept the Company’s response regarding this deficiency, and that NASDAQ will not delist the Company’s securities from the NASDAQ Capital Markets.

We cannot provide assurance that our share bid price will comply with the requirements for continued listing of our common stock on The NASDAQ Capital Market in the future if we effectuate the reverse split, or that we will comply with the other continued listing requirements. If our common stock is delisted on The NASDAQ Capital Market, our common stock would likely trade in the over-the-counter market. If our shares were to trade on the over-the-counter market, selling our shares of common stock could be more difficult because smaller quantities of shares would likely be bought and sold, and transactions could be delayed. In addition, in the event our shares of common stock are delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our shares of common stock, further limiting the liquidity of our shares of common stock. These factors could result in lower prices and larger spreads in the bid and ask prices for our common stock.

Such delisting from The NASDAQ Capital Market and continued or further declines in our share price could also greatly impair our ability or efforts to raise additional necessary capital through equity or debt financing.

In light of the factors mentioned above, our Board of Directors unanimously approved this proposal as a potential means of increasing the price of our common stock to above $1.00 per share, as to which no assurances can be made.

Potential Increased Investor Interest

In approving this proposal, the Board of Directors considered that our common stock may not appeal to brokerage firms that are reluctant to recommend lower priced securities to their clients. Investors may also be dissuaded from purchasing lower priced stocks because the brokerage commissions, as a percentage of the total transaction, tend to be higher for such stocks. Moreover, the analysts at many brokerage firms do not monitor the trading activity or otherwise provide coverage of lower priced stocks.

There are risks associated with the reverse stock split, including, among other things, that the reverse stock split may not result in a sustained, if any, increase in the per share price of our common stock.

We cannot predict whether the reverse stock split will increase the market price for our common stock on a sustained or other basis. The history of similar stock split combinations for companies in like circumstances is varied. There is no assurance that:

The market price of our common stock will also be based on our performance and other factors, some of which are unrelated to the number of shares outstanding. If the reverse stock split is effected and the market price of our common stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of a reverse stock split. Furthermore, the liquidity of our common stock could be adversely affected by the reduced number of shares that would be outstanding after the reverse stock split.

Determination of Reverse Stock Split Ratio

The ratio of the reverse stock split, if approved and implemented, will be a ratio of not less than 1:2 and not more than 1:5, as determined by the Board of Directors in its sole discretion. In determining the reverse stock split ratio, the Board of Directors will consider, among other factors:

The purpose of asking for authorization to implement the reverse stock split at a ratio to be determined by the Board of Directors, as opposed to a ratio fixed in advance, is to give the Board of Directors the flexibility to take into account then-current market conditions and changes in price of our common stock and to respond to other developments that may be deemed relevant when considering the appropriate ratio.

Principal Effects of the Reverse Stock Split

Shares of common stock either issued and outstanding or held by us in our treasury shall automatically and without any action on the part of the respective holders thereof, be combined and converted into one (1) share of common stock. By approving this reverse stock split, stockholders will approve the combination of any whole number of shares of common stock between and including two (2) and five (5) into one (1) share. In accordance with these resolutions, the Board of Directors will not implement any amendment providing for a different split ratio.

No fractional shares shall be issued in connection with the reverse stock split. As discussed below, stockholders who otherwise would be entitled to receive fractional shares of common stock shall be entitled to receive cash (without interest or deduction) in lieu of such fractional share interests.

The reverse stock split will be effected simultaneously for all issued and outstanding shares of common stock and the exchange ratio will be the same for all issued and outstanding shares of common stock. The reverse stock split will affect all of our stockholders uniformly and will not affect any stockholder’s percentage ownership interests in us, except to the extent that the reverse stock split results in any of our stockholders owning a fractional share. After the reverse stock split, the shares of our common stock will have the same voting rights and rights to dividends and distributions and will be identical in all other respects to our common stock now authorized. Common stock issued pursuant to the reverse stock split will remain fully paid and non-assessable. The reverse stock split will not affect our continuing to be subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The reverse stock split is not intended to be, and will not have the effect of, a “going private transaction” covered by Rule 13e-3 under the Exchange Act.

The reverse stock split may result in some stockholders owning “odd-lots” of less than 100 shares of our common stock. Brokerage commissions and other costs of transactions in odd-lots are generally higher than the costs of transactions in “round-lots” of even multiples of 100 shares.

Procedure for Effecting Reverse Stock Split and Exchange of Stock Certificates, if Applicable

If the reverse stock split is approved by our stockholders, and if at such time the Board of Directors still believes that a reverse stock split is in our best interests and the best interests of our stockholders, the Board will determine in its sole discretion the ratio, within the range approved by our stockholders, of the reverse stock split to be implemented. We will inform the Secretary of State of the State of Delaware at such time as the Board of Directors deems in its sole discretion appropriate to effect the reverse stock split. The Board of Directors may delay effecting the reverse stock split without re-soliciting stockholder approval. The reverse stock split will become effective on the effective date of the split.

As soon as practicable after the effective date of the split, stockholders will be notified that the reverse stock split has been effected. If you hold shares of common stock in a book-entry form, you will receive a transmittal letter from our transfer agent as soon as practicable after the effective time of the reverse stock split with instructions on how to exchange your shares. After you submit your completed transmittal letter, if you are entitled to post-split shares of our common stock, a transaction statement will be sent to your address of record as soon as practicable after the effective date of the split indicating the number of shares of common stock you hold. If you are entitled to a payment in lieu of any fractional interest, a check will be mailed to you at your registered address as soon as practicable after the effective date of the split. See “Fractional Shares” below for additional information.

Some stockholders hold their shares of common stock in certificate form or a combination of certificate and book-entry forms. We expect that our transfer agent will act as exchange agent for purposes of implementing the exchange of stock certificates, if applicable. If you are a stockholder holding pre-split shares in certificate form, you will receive a transmittal letter from our transfer agent as soon as practicable after the effective time of the reverse stock split. The transmittal letter will be accompanied by instructions specifying how you can exchange your certificate representing the pre-split shares of our common stock for a statement of holding, together with any payment of cash in lieu of fractional shares to which you are entitled. When you submit your certificate representing the pre-split shares of our common stock, your post-split shares of our common stock will be held electronically in book-entry form. This means that, instead of receiving a new stock certificate, you will receive a statement of holding that indicates the number of post-split shares you own in book-entry form. We will no longer issue physical stock certificates unless you make a specific request for a share certificate representing your post-split ownership interest. STOCKHOLDERS SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY CERTIFICATE(S) UNTIL REQUESTED TO DO SO.

Beginning on the effective time of the reverse stock split, each certificate representing pre-split shares will be deemed for all corporate purposes to evidence ownership of post-split shares. If you are entitled to a payment in lieu of any fractional share interest, payment will be made as described below under “Fractional Shares.”

Reduction in Authorized Common Stock

Stockholder approval of this proposal shall constitute authorization for us to reduce the number of our authorized shares of common stock to a number which results in a ratio of authorized shares of common stock to issued and outstanding shares of common stock that most closely approximates the ratio of our authorized shares of common stock to issued and outstanding shares of common stock immediately prior to the reverse stock split. Accordingly, assuming that our Board determines to implement a one-for-five reverse stock split, our Board would have the authority to reduce our authorized shares of common stock in the same proportion. This would result in our authorized shares of common stock being reduced from 25,000,000 to 5,000,000. However, our Board will have the sole discretion to determine whether or not to implement such a reduction in authorized shares of common stock in connection with the reverse stock split. Alternatively, our Board will have the sole discretion to implement a reduction in authorized shares of common stock to a lesser degree, if at all, such that, following the reverse stock split, the ratio of authorized shares of common stock to issued and outstanding shares of common stock would be higher than that in effect prior to the reverse stock split. Therefore, in the event that our Board determines to implement a reverse stock split but not to implement a proportionate reduction in authorized shares of common stock, we would, in effect have authority to issue a greater number of shares of common stock than prior to the reverse stock split.

We are currently exploring the possibility of a “PIPE” or other financing which could include the issuance of our common stock and/or other equity or debt securities convertible or exercisable into our common stock. The Company is involved in discussions with a potential placement agent whom it has not formally engaged at this time regarding a possible financing. Those discussions have not resulted in any definitive plans or arrangements and are in the developmental stages. The Company has also been working to develop a strategy to address its continuing operating losses and loss of sales, and the Company has retained an investment bank and advisory firm to assist the Company in considering and pursuing strategic alternatives, including possible additional financing to fund its capital needs and the restructuring of its business, but nothing specific has been discussed with in regard to any financing. Accordingly, as of the date of this proxy statement the Company has no definitive financing structure in place, and no specific plans, proposals or arrangements to use any of the shares of common stock which may be newly available if the proposal regarding a reverse stock split is approved, to pursue a financing transaction. However, in the event that the Company does secure financing, it is possible that the Company may use newly available shares for that purpose. No assurances can be made that we will be able to obtain such financing on terms favorable to us, if at all.

Effect on Stock Plans

We have stock plans designed primarily to provide equity-based incentives to employees and directors, including the 1996 Non-Qualified Stock Option Plan, the 2003 Performance and Equity Incentive Plan and our 2012 Performance and Equity Incentive Plan . We currently have 1,418,125 options outstanding under these plans. Accordingly, if the reverse stock split is approved by our stockholders and our Board of Directors decides to implement the reverse stock split, as of the effective date, the number of all outstanding equity awards, the number of shares available for issuance and the exercise price under these plans will be proportionately adjusted using the reverse stock split ratio selected by our Board of Directors. Our Board of Directors has also authorized us to effect any other changes necessary, desirable or appropriate to give effect to the reverse stock split, including any applicable technical, conforming changes. For example, if a 1-for-5 reverse stock split is effected, the 1,418,125 shares of common stock that remained available for issuance under our stock option plans would be adjusted to equal approximately 283,625 shares. In addition, the exercise price per share under each outstanding stock option would be increased by five (5) times and the number of shares subject to each outstanding stock option would be decreased by five (5) times, such that upon an exercise, the aggregate exercise price payable by the optionee to we would remain the same.

Fractional Shares

No fractional shares will be issued in connection with the reverse stock split. Stockholders of record who otherwise would be entitled to receive fractional shares, because they hold a number of pre-split shares not evenly divisible by the number of pre-split shares for which each post-split share is to be exchanged, will be entitled, upon the submission of a transmission letter by a stockholder holding the shares in book-entry form and, where shares are held in certificated form, upon surrender to the exchange agent of certificates representing such shares, to a cash payment in lieu thereof in an amount equal to the product obtained by multiplying (i) the closing sales price of our common stock as reported on the NASDAQ Global Market on the effective date of reverse stock split by (ii) the number of shares of our common stock held by such stockholder before the reverse stock split that would otherwise have been exchanged for such fractional share interest. The ownership of a fractional interest will not give the holder thereof any voting, dividend, or other rights except to receive payment therefore as described herein.

Stockholders should be aware that, under the escheat laws of the various jurisdictions where stockholders reside, where we are domiciled, and where the funds will be deposited, sums due for fractional interests that are not timely claimed after the effective date of the split may be required to be paid to the designated agent for each such jurisdiction, unless correspondence has been received by us or the exchange agent concerning ownership of such funds within the time permitted in such jurisdiction. Thereafter, stockholders otherwise entitled to receive such funds will have to seek to obtain them directly from the state to which they were paid.

Accounting Matters

The reverse stock split will not affect the common stock capital account on our balance sheet. However, because the par value of our common stock will remain unchanged on the effective date of the split, the components that make up the common stock capital account will change by offsetting amounts. Depending on the size of the reverse stock split the Board of Directors decides to implement, the stated capital component will be reduced to an amount between one-half (1/2) and one-fifth (1/5) of its present amount, and the additional paid-in capital component will be increased with the amount by which the stated capital is reduced. The per share net income or loss and net book value of our common stock will be increased because there will be fewer shares of common stock outstanding. Prior periods’ per share amounts will be restated to reflect the reverse stock split.

No Dissenters’ Rights

Under the General Corporation Law of the State of Delaware, our stockholders will not be entitled to dissenters’ rights with respect to the reverse stock split, and we do not intend to independently provide stockholders with any such right.

Material United States Federal Income Tax Consequences of the Reverse Stock Split

The following discussion describes the material United States Federal income tax consequences to “U.S. holders” (as defined below) of our common stock relating to the reverse stock split. This discussion is based upon the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations, judicial authorities, published positions of the Internal Revenue Service (“IRS”), and other applicable authorities, all as currently in effect and all of which are subject to change or differing interpretations (possibly with retroactive effect). We have not obtained a ruling from the IRS or an opinion of legal or tax counsel with respect to the tax consequences of the reverse stock split. The following discussion is for informational purposes only and is not intended as tax or legal advice. Each holder should seek advice based on the holder’s particular circumstances from an independent tax advisor.

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of our common stock that is for United States Federal income tax purposes:

This discussion assumes that a U.S. holder holds our common stock as a capital asset within the meaning of Code Section 1221. This discussion does not address all of the tax consequences that may be relevant to a particular stockholder of ours or to our stockholders that are subject to special treatment under United States Federal income tax laws including, but not limited to, banks, financial institutions, tax-exempt organizations, insurance companies, regulated investment companies, real estate investment trusts, persons that are broker-dealers, traders in securities who elect the mark-to-market method of accounting for their securities, certain former citizens or long-term residents of the U.S., or our stockholders holding their shares of our common stock as part of a “straddle,” “hedge,” “conversion transaction,” or other integrated transaction. This discussion also does not address the tax consequences to us, or to our stockholders that own 5% or more of our common stock, are affiliates of ours, or are not U.S. holders. In addition, this discussion does not address other United States Federal taxes (such as gift or estate taxes or alternative minimum taxes), the tax consequences of the reverse stock split under state, local, or foreign tax laws or certain tax reporting requirements that may be applicable with respect to the reverse stock split. No assurance can be given that the IRS would not assert, or that a court would not sustain a position contrary to any of the tax consequences set forth below.

If a partnership (or other entity treated as a partnership for United States Federal income tax purposes) is a stockholder of ours, the tax treatment of a partner in the partnership, or any equity owner of such other entity will generally depend upon the status of the person and the activities of the partnership or other entity treated as a partnership for United States Federal income tax purposes.

Tax Consequences of the Reverse Stock Split Generally

We believe that the reverse stock split will qualify as a “reorganization” under Section 368(a)(1)(E) of the Code, with the following consequences:

Cash Received Instead of a Fractional Share

A U.S. holder who receives cash instead of a fractional share of post-reverse stock split shares will be treated as having received the fractional share of post-reverse stock split shares pursuant to the reverse stock split and then as having exchanged the fractional share of post-reverse stock split shares for cash in a transaction treated as a sale of the shares. Gain or loss generally will be recognized based on the difference between the amount of cash received and the portion of the U.S. holder’s adjusted tax basis of the pre-reverse stock split shares exchanged in the reverse stock split which is allocable to such fractional share. Such gain or loss generally will be long-term capital gain or loss if the U.S. holder’s holding period for such pre-reverse stock split shares is more than one year as of the effective date of the reverse stock split, and otherwise will be short-term capital gain or loss.

The Board of Directors unanimously recommends a vote “FOR” the approval of the proposal to authorize the Board of Directors to effect a reverse stock split if determined necessary in its sole discretion.