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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1999
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 0-26516
EUPHONIX, INC.
(Exact name of registrant as specified in its charter)
California 77-0189481
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Portage Avenue, Palo Alto, CA 94306
(Address of principal executives, zip code)
(650) 855-0400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed (1) all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ____X_____ No _________
The number of shares outstanding of the registrant's common stock as of June 30,
1999 was 7,956,595 ($.001 par value).
<PAGE>
EUPHONIX, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION ----
ITEM 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 and 1998.................3
Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998...............................4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998...................5
Notes to Condensed Consolidated Financial Statements
as of and for the six months ended June 30, 1999..................6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................8
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders...............14
ITEM 6. Exhibits and Reports on Form 8-K..................................14
Signatures.................................................................15
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Euphonix, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net revenues.............. $ 2,861,097 $ 3,441,106 $ 5,020,544 $ 7,721,273
Cost of sales............. 1,827,595 2,244,219 3,589,595 4,363,071
----------- ----------- ----------- -----------
Gross profit.............. 1,033,502 1,196,887 1,430,949 3,358,202
Operating expenses:
Research & development.. 1,142,793 1,263,138 2,368,057 2,144,896
Sales & marketing....... 1,437,437 1,338,524 2,666,167 2,554,451
General & administrative 121,342 612,446 660,887 1,292,383
----------- ----------- ----------- ------------
Total operating expenses. 2,701,572 3,214,108 5,695,111 5,991,730
----------- ----------- ----------- ------------
Operating loss............ (1,668,070) (2,017,221) (4,264,162) (2,633,528)
Other income / (expense) (26,708) 22,203 (14,224) 41,979
----------- ----------- ----------- ------------
Loss before income taxes.. (1,694,778) (1,995,018) (4,278,386) (2,591,549)
Tax provision............. ---- ---- ---- ----
----------- ----------- ----------- ------------
Net loss.................. $(1,694,778) $(1,995,018) $(4,278,386) $(2,591,549)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted....... $ (0.21) $ (0.30) $ (0.55) $ (0.42)
=========== =========== =========== ===========
Number of shares used in
computing per share amounts :
Basic and diluted....... 7,956,508 6,630,555 7,772,786 6,173,745
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
Euphonix, Inc.
Condensed Consolidated Balance Sheets
June 30, December 31,
1999 1998
-------------------- --------------------
(unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......... $ 552,094 $ 1,637,332
Short-term investments............ --- 601,146
Accounts receivable, net.......... 1,462,588 1,543,335
Inventories....................... 6,273,482 5,558,637
Prepaid expenses and other current
assets........................... 395,586 237,512
------------- -------------
Total current assets................ 8,683,750 9,577,962
Property and equipment, net......... 1,650,560 1,360,186
Deposits and other assets........... 300,262 292,716
------------- -------------
Total assets........................ $ 10,634,572 $ 11,230,864
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................. $ 1,841,438 $ 1,636,357
Accrued payroll and related liabili-
ties............................. 515,383 548,926
Accrued warranty.................. 439,240 439,397
Accrued commissions............... 63,178 126,094
Sales tax payable................. 52,235 187,687
Deferred revenues................. --- 185,344
Other accrued liabilities......... 469,655 401,118
Customer deposits................. 580,517 97,914
Short term portion capital leases. 12,679 29,691
------------- -------------
Total current liabilities........... 3,974,325 3,652,529
Long term portion capital leases.... 2,282 2,282
Convertible note.................... 2,023,831 ----
Deferred rent....................... 174 1,055
Deferred income taxes............... 200,000 200,000
SHAREHOLDERS' EQUITY:
Preferred stock.................... ---- ----
Common stock....................... 7,957 6,636
Additional paid-incapital.......... 16,975,313 15,672,808
Accumulated other comprehensive income 63,497 74,975
Accumulated deficit................ (12,608,307) (8,329,921)
Deferred compensation.............. (4,500) (49,500)
------------- -------------
Total shareholders'equity........... 4,433,960 7,374,998
------------- -------------
Total liabilities and shareholders'
equity............................. $ 10,634,572 $ 11,230,864
============= =============
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
See notes to condensed consolidated financial statements
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C>
Euphonix, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended
June 30,
1999 1998
------------- ------------
Operating activities
Net loss.............................................$ (4,278,386) $(2,591,549)
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization...................... 293,369 240,405
Deferred compensation amortization................. 45,000 45,000
Changes in operating assets and liabilities:
Prepaid expenses, other current assets and other
assets........................................... (177,098) 50,618
Accounts receivable............................... 80,747 14,666
Inventories....................................... (714,845) (414,110)
Accounts payable, accrued liabilities, and deferred
rent............................................. (120,845) 484,154
Customer deposits................................. 482,603 379,484
------------- ------------
Total adjustments.................................... (111,069) 800,217
------------- ------------
Net cash used in operating activities................ (4,389,455) (1,791,332)
Investing activities
Proceeds from sales of short-term investment
maturities........................................... 601,146 1,669,947
Purchases of short-term investments.................. --- (1,044,889)
Purchase of property and equipment................... (583,743) (637,125)
------------- ------------
Net cash provided by (used for) investing activities. 17,403 (12,067)
Financing activities
Principal payments under capital lease obligations... (17,012) (27,271)
Proceeds from issuance of convertible note........... 2,000,000 ---
Proceeds from sale of common stock................... 1,303,826 1,950,167
------------- ------------
Net cash provided by (used in) financing activities.. 3,286,814 1,922,896
------------- ------------
Net increase (decrease) in cash and cash equivalents. (1,085,238) 119,497
Cash and cash equivalents at beginning of period..... 1,637,332 1,880,093
------------- ------------
Cash and cash equivalents at end of period...........$ 552,094 $ 1,999,590
============= ============
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 5
EUPHONIX, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the six-month period
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1999.
For further information, refer to the audited financial statements and
footnotes thereto included in the Registrant Company's annual report on Form
10-K for the year ended December 31, 1998.
2. Use of Estimates
The preparation of the financial statements in conformity with general-
ly accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Inventories
Inventories are stated at the lower cost (first-in, first-out) or market (net
realizable value). Inventories consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
1999 1998
------------ ------------
Raw materials......................... $ 2,635,027 $ 2,112,349
Work-in-process....................... 1,457,746 1,390,931
Finished goods........................ 2,180,709 2,055,357
------------ ------------
$ 6,273,482 $ 5,558,637
============ ============
</TABLE>
4. Total comprehensive loss for the three and six month periods ended
June 30, 1999 and 1998, respectively, was $1,671,649, $2,021,879, $4,289,864,
and $2,597,312.
<PAGE> 6
EUPHONIX, INC.
Notes to Condensed Consolidated Financial Statements - Continued
5. Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standard Boards issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which was required to be
adopted in years beginning after June 15, 1999. The adoption of SFAS 133 is not
expected to materially impact the Company's results of operations, financial
position or cash flows.
The American Institute of Certified Public Accountants issued Statement
of Position 98-1, "Accounting For the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"), on March 4, 1998. SOP 98-1 provides
guidelines for accounting for costs of computer software developed for internal
use. SOP 98-1 is effective for financial statements for fiscal years beginning
after December 15, 1998. The adoption of SOP 98-1 is not expected to materially
impact the Company's results of operations, financial position or cash flow.
6. Common Stock
In January 1999,the Company received proceeds of $1,303,676 from exist-
ing investors in exchange for the issuance of 1,320,446 shares of $0.001 par
value common stock at $0.987 per share, 90% of the average closing bid
price per share on the NASDAQ, for the ten days immediately preceding January
26, 1999. The authorized capital stock of the Company as of the date of this
agreement is 20,000,000 shares of common stock and 2,000,000 shares of preferred
stock, par value $0.001. As of June 30, 1999, there were 7,956,595 shares of
common stock issued and outstanding, and there were no issued and outstanding
shares of preferred stock.
7. Long Term Debt
In April 1999, the Company executed a secured promissory note with
existing investors under
which the Company may draw up to $2 million through July 31, 1999. During the
quarter ended June 30, 1999, the Company received the entire $2 million under
the agreement. The note is convertible into as many shares of common stock as
the outstanding principle and accrued interest balance at the date of conversion
yield when divided by the price per share of $1.03, at the time of conversion
into common stock. The note is due in April 2001, and bears interest at 7.75%.
The interest is payable upon maturity of the note and is convertible into com-
mon stock. At June 30, 1999, accrued interest payable was $23,831, which is
included in the convertible notes line of the accompanying condensed consol-
idated balance sheet.
8. Subsequent Event
In July 1999, the Company executed a secured promissory note with a
group of investors led by an existing investor under which the Company may draw
up to $2.1 million through October 31, 1999. The note is convertible into common
stock of the Company under certain circumstances and is secured by the assets of
the Company.
<PAGE> 7
Item 2. Management's Discussion & Analysis of Financial Condition & Results of
Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Factors Affecting Future Operating
Results."
Results of Operations
Net Revenues. Net revenues decreased to $2.9 million in the second
quarter of 1999 down from $3.4 million in the second quarter of 1998,
representing a decrease of 17% in 1999 from 1998. Net revenues decreased to $5.0
million in the first six months of 1999 down from $7.7 million in the first six
months of 1998, representing a decrease of 35% in 1999 from 1998. The Company's
decrease in net revenues in the second quarter and six months of 1999 as
compared to the second quarter and six months of 1998 resulted primarily from
reduced sales in Asia Pacific and South America, and to a lesser extent,
declining domestic sales. The Company shipped its first digital console for beta
testing in the second quarter of 1999 and received over $1.8 million in orders,
with substantial deposits, for shipments in the third quarter for this new,
unannounced digital console.
Domestic sales of the Company's products for the second quarter of 1999
and 1998 were $2.3 million, comprising approximately 78.8% and 67.5% of the
Company's net revenues for the second quarter of 1999 and 1998, respectively.
Domestic sales of the Company's products for the six months of 1999 and 1998
were $3.3 million and $4.7 million, comprising approximately 66.3% and 61.5% of
the Company's net revenues for the first six months of 1999 and 1998,
respectively.
Gross Margin. The Company's gross margin increased from 34.8% in the
second quarter of 1998 to 36.1% in the second quarter of 1999. In absolute
dollars, the gross margin decreased from $1.2 million in the second quarter of
1998 to $1.0 million in the second quarter of 1999 as a result of lower sales.
For the first half of 1999, gross margin was $1.4 million, or 28.5% of net
revenues, compared with $3.4 million, or 43.5% of net revenues, for the first
half of 1998 as a result of lower sales. The decrease in margins for the first
six months in 1999 is associated with start-up costs related to the R-1 recorder
which began shipping in the first quarter of 1999, and the new digital console.
Research and Development Expenses. Research and development expenses
decreased to $1.1 million in the second quarter of 1999, down from $1.3 million
in the second quarter of 1998, representing a decrease of 9.5%. For the first
six months in 1999, research and development expenses of $2.4 million increased
10.4% from $2.1 million in 1998. Research and development expenses constituted
39.9%, 36.7%, 47.2%, and 27.8% of net revenues in the second quarter of 1999 and
1998 and the first six months of 1999 and 1998, respectively. The decreases in
absolute spending in the second quarter of 1999 from the same quarter a year ago
resulted from completion of the new R-1 Multitrack Recorder which was under
development in 1998 and began shipment in the first quarter of 1999 and
the new digital console. The slippage of research and development spending from
the first quarter of 1998 into the second quarter of 1998 also contributed to
the decreases in absolute spending when comparing the second quarter of 1999
with the same quarter of 1998. The increases in the first half of 1999 from the
first half of 1998 were primarily due to increased employee costs and other
professional fees.
<PAGE> 8
Sales and Marketing Expenses. Sales and marketing expenses increased to
$1.4 million in the second quarter of 1999, from $1.3 million in the second
quarter of 1998 representing an increase of 7.4%. For the first six months of
fiscal 1999, sales and marketing expenses of $2.7 million increased 4.4% from
$2.6 million in 1998. Sales and marketing expenses constituted 50.2%, 38.9%,
53.1%, and 33.1% of net revenues in the second quarter of 1999 and 1998 and the
first six months of 1999 and 1998, respectively. The increase in the second
quarter and first six months of 1999 in absolute dollars and as a % of sales as
compared with 1998 resulted primarily from increases in spending for the sales
office in Japan, in advertising, trade shows, and product demonstrations to
support new product introductions.
General and Administrative Expenses. General and administrative
expenses decreased to $121,342 in the second quarter of 1999 from $612,446 in
the second quarter of 1998, representing a decrease of 80.2%. For the first six
months of 1999, general and administrative expenses of $660,887 decreased 48.9%
from $1.3 million in the first six months of 1998. General and administrative
expenses constituted 4.2%, 17.8%, 13.2%, and 16.7% of net revenues in the second
quarter of fiscal 1999 and 1998 and the first six months of fiscal 1999 and
1998, respectively. The decrease in the second quarter and first six months of
1999 as compared with 1998 was mostly attributable to a decrease in the
allowance for doubtful accounts reserve primarily due to collections of
previously reserved account balances, a reduction in headcount, and the sublease
of a portion of the premises located at corporate headquarters.
Provision / (benefit) for Income Taxes. For the second quarter of 1999
and 1998, the Company did not recognize the tax benefit of its operating losses.
Management believes the resulting deferred tax assets are not realizable on a
more likely than not basis. The Company's effective tax rate was 0% in the
second quarter and six month periods ended June 30, 1999 and 1998, and differs
from the federal statutory rate primarily due to the limitations controlling the
timing for realization of net operating losses and tax credits established by
the Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
Liquidity and Capital Resources
The Company has funded its operations to date primarily through cash
flows from operations, the private sale of equity securities, and the initial
public offering of Common Stock completed in September 1995. In March 1998, the
Company received proceeds of $1,950,000 from existing investors in exchange for
the issuance of 1,040,000 shares of $0.001 par value common stock at $1.875 per
share, the closing price of the Company's common stock on the NASDAQ on the date
the common stock purchase agreement was executed. In January 1999, the Company
received proceeds of $1,303,676 from existing investors in exchange for the
issuance of 1,320,446 shares of $0.001 par value common stock at $0.987 per
share. In April 1999, the Company executed a secured promissory note with
existing investors under which the Company was authorized to draw up to $2
million through July 31, 1999. The note is convertible into common stock of the
Company under certain circumstances and is secured by the assets of the Company.
In July 1999, the Company executed a secured promissory note led by an existing
investor under which the Company may draw up to $2.1 million through October 31,
1999. The note is convertible into common stock of the Company under certain
circumstances and is secured by the assets of the Company. For the second
quarter ended June 30, 1999, cash, cash equivalents and short-term investments
decreased by $1.7 million to approximately $552,100. Also, during this period,
working capital decreased by $1.2 million to approximately $4.7 million.
The Company's operating activities used cash of approximately $4.4
million and $1.8 million for the six months ended June 30, 1999 and 1998,
respectively. Cash used in operating activities for 1999 was comprised primarily
<PAGE> 9
of net loss and an increase in inventories, prepaid expenses and other current
assets and other assets, a decrease in accounts payable and other accrued
liabilities, offset partially by depreciation and amortization, and customer
deposits. Cash used in operating activities for 1998 was comprised primarily of
net loss, and an increase in inventory, offset partially by an increase in
accounts payable, accrued liabilities and customer deposits. The Company's
investing activities provided cash of $17,403 and used cash of $12,067 for the
six months ended June 30, 1999 and 1998, respectively.
The Company's financing activities provided $1.3 million in cash from
the sale of common stock and $2 million in the form of a secured promissory note
with existing investors during the first six months ended June 30, 1999. For the
first six months ended June 30, 1998 proceeds from the sale of common stock
provided $1,950,167.
As of June 30, 1999, the Company's sources of liquidity included cash
totaling approximately $552,100. Management believes that cash combined with the
additional $2.1 million of convertible debt financing from existing investors
and others received in the third quarter ended September 30, 1999, as well
as the cost reduction activities already initiated, a possible reduction in
operating expenses during the second half of 1999, and increased sales due to
new products, will be sufficient to support its operations through at least Dec-
ember 1999. In addition, the Company may need to delay or significantly reduce
other operating expenditures, which would have a material adverse effect on its
business, results of operations and business prospects.
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000.
Based on recent assessments, the Company determined that it would not be
required to upgrade, modify, and/or replace portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that the Year 2000 issue is resolved
without modifications or replacements of existing software and certain hardware.
The Company's plan in resolving the Year 2000 issue involved the following
four phases: inventory, assessment, remediation, and testing/implementation.
Both information technology ("IT") and non-information technology technology
("Non-IT") systems were addressed. The Company has completed its assessment of
IT and Non-IT systems that could have been significantly affected by the Year
2000. The completed assessment indicated that all of the Company's significant
IT systems would not be affected, particularly the order entry, general ledger,
billing, and inventory systems. The assessment also indicated that Non-IT
systems would not be affected.
Based on a review of its product lines, the Company has determined that
most of the products it has sold and will continue to sell do not require
remediation to be Year 2000 compliant. Based on the results of product review
and testing completed, the Company believes its programming software for its
audio consoles, R-1 Multi-track Recorders, and new digital consoles to be com-
pliant as defined by the British Standards Institute DISC PC-2000-1 definition.
Accordingly, the Company does not believe that the Year 2000 presents a material
exposure as it relates to the Company's products.
<PAGE> 10
The Company has queried all of its significant suppliers and
subcontractors systems with the Company ("suppliers"). To date, the Company is
not aware of any supplier with a Year 2000 issue that would materially impact
the Company's results of operations, liquidity, or capital resources. However,
the Company has no means of ensuring that its suppliers will be Year 2000 ready.
The inability of suppliers to complete their Year 2000 resolution process in a
timely fashion could materially and adversely impact the Company. However many
significant suppliers have been second sourced and the Company is currently
taking steps to assess whether these suppliers are currently taking steps to
address any Year 2000 issues they may have.
To date, the Company has incurred costs of less than $5,000 on the
Year 2000 project, and estimates that there will be no material future costs.
As noted above, the Company has completed all necessary phases of the
Year 2000 program. The Company believes that it is more likely to experience
Year 2000 problems with the systems of key suppliers rather than with the
Company's internal systems or products. The Company's Year 2000 program includes
efforts to assess the Year 2000 compliance of its key suppliers.
The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 program. The Company intends to
develop a contingency plan to deal with Year 2000 issues that may materially
adversely affect its business processes. The Company intends to have a
contingency plan in place no later than September 30, 1999.
Factors Affecting Future Operating Results
Historically, the Company has derived virtually all of its revenues from
sales of its digitally controlled audio mixing console system, which system is
based upon its hardware platform. The Company believes that sales of this
system, along with enhancements thereof, and the R-1 recorder and new digital
console will continue to constitute a significant portion of the Company's reve-
nues. It is expected for the foreseeable future that a greater portion of the
Company's revenue will come from the new digital console. Accordingly, any fac-
tor adversely affecting the Company's base system, whether technical, competi-
tive or otherwise, could have a material adverse effect on the Company's busi-
ness and results of operations.
The Company has expended and will continue to expend substantial funds to
launch its new product developments in the second half of fiscal 1999. The
Company's ability to fund operations through December 31, 1999 is dependent upon
achievement of its operating plan. If the Company did not attain its operating
plan it would obtain additional financing or cut expenses. The Company believes
that additional debt or equity financing will be available from existing inves-
tors and others. However, there can be no assurance as to the terms and con-
ditions of any such financing and no certainty that funds would be available
when needed. The inability to obtain additional financing, if needed,
would be likely to have a material adverse effect on the Company. To the extent
that any future financing involves the sale of the Company's equity securi-
ties, the Company's then existing shareholders could be substantially diluted.
A limited number of the Company's system sales typically account for a
substantial percentage of the Company's quarterly revenue because of the
relatively high average sales price of such systems. Moreover, the Company's
expense levels are based in part on its expectations of future revenue.
Therefore, if revenue is below expectations, the Company's operating results are
likely to be adversely affected. In addition, the timing of revenue is
<PAGE> 11
influenced by a number of other factors, including the timing of individual
orders and shipments, industry trade shows, seasonal customer buying patterns,
changes in product development and sales and marketing expenditures, custom
financing arrangements, production limitations and international sales activity.
Because the Company's operating expenses are based on anticipated revenue levels
and a high percentage of the Company's expenses are relatively fixed in the
short term, variations in the timing of recognition of revenue could cause
significant fluctuations in operating results from quarter to quarter and may
result in unanticipated quarterly earnings shortfalls or losses.
The markets for the Company's system are characterized by changing
technologies and new product introductions. The Company's future success will
depend in part upon its continued ability to enhance its base system with
features including new software and hardware add-ons and to develop or acquire
and introduce new products and features which meet new market demands and
changing customer requirements on a timely basis. The Company is currently
designing and developing new products, primarily in the areas of recording,
editing and mixing functions of sound production as well as digital audio
processing and networking systems. In addition, there can be no assurance that
products or technologies developed by others will not render the Company's
products or technologies non-competitive or obsolete. See "Business".
Historically, the Company's primary market success was in the music
segment of the professional audio market. In order for the Company to grow, the
Company believes that it must continue to gain market share in the music market
segment, as well as in its other targeted market segments. There can be no
assurance that the Company will be able to compete favorably in any market
segments. The Company's inability to compete favorably could have a material
adverse effect on its business and results of operations. The markets for the
Company's products are intensely competitive and characterized by significant
price competition. The Company believes that its ability to compete depends on
elements both within and outside its control, including the success and timing
of new product development (including development on a timely basis of digital
products, of which there can be no assurance) and introduction by the Company
and its competitors, product performance and price, distribution, availability
of lease or other financing alternatives, resale of used systems and customer
support. See "Business--Competition".
Currently, the Company uses many sole or limited source suppliers, certain
of which are critical to the integrated circuits included in the Company's base
system. Major delays or terminations in supplies of such components could have a
significant adverse effect on the Company's timely shipment of its products,
which in turn would adversely affect the Company's business and results of
operations. The Company also relies on single vendors to manufacture major
subassemblies for its products. Any extended interruption in the future supply
or increase in the cost of subassemblies manufactured by its primary or other
third party vendors could have a material adverse effect on the Company's
business and results of operations. See "Business--Manufacturing and Suppliers".
In addition, as different electrical, radiation or other standards
applicable to the Company's products are adopted in countries, including the
United States, or groups of countries in which the Company sells its products,
the failure of the Company to modify its products, if necessary, to comply with
<PAGE> 12
such standards would likely have an adverse effect on the Company's business and
results of operations. See "Business--Sales and Distribution".
The Company generally relies on a combination of trade secret, copyright
law and trademark law, contracts and technical measures to establish and protect
its proprietary rights in its products and technologies. However, the Company
believes that such measures provide only limited protection of its proprietary
information, and there is no assurance that such measures will be adequate to
prevent misappropriation. In addition, significant and protracted litigation may
be necessary to protect the Company's intellectual property rights, to determine
the scope of the proprietary rights of others or to defend against claims of
infringement. There can be no assurance that third-party claims alleging
infringement will not be asserted against the Company in the future. Any such
claims could have a material adverse effect on the Company's business and
results of operations. See "Business--Proprietary Rights".
The Company's success depends, in part, on its ability to retain key
management and technical employees and its continued ability to attract and
retain highly skilled personnel. In addition, the Company's ability to manage
any growth will require it to continue to improve and expand its management,
operational and financial systems and controls. If the Company's management is
unable to manage growth effectively, its business and results of operations will
be adversely affected.
The Company acquired Spectral in February 1996. Sale of Spectral products
for 1998, 1997 and 1996 were significantly below plan and below 1995 sales
levels. Spectral's pre-tax operating loss for 1998 decreased from 1997 and 1996
due primarily to transferring the general and administrative, and sales
functions to Palo Alto. In 1996, Spectral engineering, marketing and sales
activities were integrated into the respective Euphonix organizations. In 1997,
the Company further integrated Spectral activities by the transfer of their
manufacturing to Euphonix headquarters in Palo Alto, California. In 1998, the
Company sold Spectral's technology to Telos, Inc.
As a result of these and other factors, the Company has experienced
significant quarterly fluctuations in operating results and anticipates that
these fluctuations will continue in future periods. There can be no assurance
that the Company will be successful in maintaining or improving its
profitability or avoiding losses in any future period. Further, it is likely
that in some future period the Company's net revenues or operating results will
be below the expectations of public market securities analysts and investors. In
such event, the price of the Company's Common Stock would likely be materially
adversely affected. See "Factors Affecting Future Operating Results."
<PAGE> 13
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders:
The Company's Annual Meeting of Shareholders was held on June 25, 1999.
The results of the voting were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Proposal 1: Election of the Board of Directors of the Company.
Nominee Votes For Votes Withheld
Barry L. Margerum 5,984,485 94,569
Robert F. Kuhling, Jr. 5,991,607 87,447
Scott W. Silfvast 5,991,807 87,247
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Proposal 2: Approval of the Company's 1999 Stock Plan.
Votes For: 5,718,689
Votes Against: 183,617
Votes Abstaining: 19,200
Broker Non-Vote: 2,232,176
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Proposal 3: Approval of Conversions of the Secured Promissory Note.
Votes For: 3,724,086
Votes Against: 111,992
Votes Abstaining: 10,800
Broker Non-Vote: 2,232,176
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Proposal 4: Ratification of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending
December 31, 1999.
Votes For: 5,988,184
Votes Against: 84,170
Votes Abstaining: 6,700
</TABLE>
Item 6: Exhibits and Reports on Form 8-K/A
(a) Exhibits.
Exhibit 27 - Financial Data Schedule (page 16)
The exhibit listed on the accompanying index immediately
following the signature page is filed as part of this report.
(b) Reports on Form 8-K None.
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Euphonix, Inc.
Date: August 5, 1999 By: /s/ BARRY L. MARGERUM
-------------- ----------------------
Barry L. Margerum, Chief Executive
Officer, President
<PAGE> 15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 552,094
<SECURITIES> 0
<RECEIVABLES> 1,462,588
<ALLOWANCES> 0
<INVENTORY> 6,273,482
<CURRENT-ASSETS> 8,683,750
<PP&E> 3,311,611
<DEPRECIATION> 1,661,051
<TOTAL-ASSETS> 10,634,572
<CURRENT-LIABILITIES> 3,974,325
<BONDS> 0
0
0
<COMMON> 7,957
<OTHER-SE> 4,426,003
<TOTAL-LIABILITY-AND-EQUITY> 10,634,572
<SALES> 5,020,544
<TOTAL-REVENUES> 5,020,544
<CGS> 3,589,595
<TOTAL-COSTS> 5,695,111
<OTHER-EXPENSES> 14,224
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,278,386)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,278,386)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,278,386)
<EPS-BASIC> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
