==================================================================
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, 2000
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,
2000 was 12,154,000 ($0.001 par value).
<PAGE>
EUPHONIX, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999..............................3
Consolidated Statements of Operations for the
three and six months ended June 30, 2000 and 1999................4
Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999..................5
Notes to Consolidated Financial Statements........................6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................9
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders..............16
ITEM 6. Exhibits and Reports on Form 8-K.................................16
Signatures................................................................17
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
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EUPHONIX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
June 30, December 31,
2000 1999
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................$ 1,558 $ 838
Accounts receivable, (net of allowance for doubtful
accounts of $141 in 2000 and $112 in 1999)........... 1,504 2,354
Inventories........................................... 6,583 6,964
Prepaid expenses and other current assets............. 235 174
---------- ----------
Total current assets................................... 9,880 10,330
Property and equipment, net............................ 1,198 1,881
Deposits and other assets.............................. 729 89
---------- ----------
Total assets..........................................$ 11,807 $ 12,300
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................$ 1,088 $ 2,007
Accrued liabilities................................... 821 1,090
Customer deposits..................................... 524 240
---------- ----------
Total current liabilities.............................. 2,433 3,337
Convertible notes payable.............................. 4,612 2,166
---------- ----------
Total liabilities..................................... 7,045 5,503
---------- ----------
Contingencies (Note 3)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.001 par value: 2,000,000 authorized
shares, none issued and outstanding.................. ---- ----
Common stock, $0.001 par value: 20,000,000 authorized
shares, 12,154,000 and 11,591,000 shares issued and
outstanding in 2000 and 1999, respectively........... 12 12
Additional paid-in capital............................. 24,001 21,402
Accumulated other comprehensive income................. 40 42
Accumulated deficit.................................... (19,291) (14,659)
---------- ----------
Total shareholders' equity............................. 4,672 6,797
---------- ----------
Total liabilities and shareholders' equity............$ 11,807 $ 12,300
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
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EUPHONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Net revenues...........................$ 4,241 $ 2,861 $ 7,076 $ 5,021
Cost of revenues....................... 2,753 1,828 4,828 3,590
----- ----- ----- -----
Gross margin........................... 1,488 1,033 2,248 1,431
----- ----- ----- -----
Operating expenses:
Research and development............. 847 1,143 1,757 2,368
Sales and marketing.................. 1,414 1,437 2,706 2,666
General and administrative........... 566 121 925 661
----- ----- ----- -----
Total operating expenses............... 2,827 2,701 5,388 5,695
----- ----- ----- -----
Operating loss......................... (1,339) (1,668) (3,140) (4,264)
Interest and other income.............. 40 ---- 41 10
Interest expense and other charges..... (101) (27) (1,499) (24)
------ ----- ----- -----
Loss before equity in net loss of investee(1,400) (1,695) (4,598) (4,278)
Equity in net loss of investee......... (34) ---- (34) ----
------ ----- ----- -----
Net loss...............................$ (1,434) $(1,695) $ (4,632) $(4,278)
======= ======= ======= =======
Basic and diluted net loss per share...$ (0.12) $ (0.21) $ (0.39) $ (0.55)
======= ======= ======= =======
Shares used in computing
basic and diluted net loss per share. 12,021,111 7,956,508 11,869,837 7,772,786
========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
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EUPHONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
2000 1999
---- ----
Cash flows from operating activities:
------------------------------------
Net loss.................................................. $ (4,632) $ (4,278)
--------- ---------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 317 286
Write-off of property and equipment..................... 30 ---
Allowance for doubtful accounts......................... 29 (99)
Beneficial conversion feature on convertible notes payable 1,279 ---
Deferred compensation amortization...................... 58 45
Transfer of demonstration equipment to inventory........ 253 ---
Transfer of property and equipment to investee.......... 152 ---
Changes in assets and liabilities:
Accounts receivable................................... 821 180
Inventory............................................. 381 (715)
Prepaid expenses and other assets..................... (343) (170)
Accounts payable...................................... (919) 205
Accrued liabilities................................... (124) (343)
Customer deposits..................................... 284 483
--------- --------
Total adjustments......................................... 2,218 (128)
--------- --------
Net cash used in operating activities..................... (2,414) (4,406)
--------- -------
Cash flows from investing activities:
------------------------------------
Proceeds from sales of available-for-sale securities...... --- 601
Purchase of property and equipment........................ (68) (584)
---------- -------
Net cash (used in) provided by investing activities....... (68) 17
---------- -------
Cash flows from financing activities:
------------------------------------
Proceeds from issuance of convertible notes............... 2,300 2,000
Proceeds from sale of common stock........................ 800 1,304
Proceeds from exercise of stock options................... 102 ---
----------- -------
Net cash provided by financing............................ 3,202 3,304
----------- -------
Net increase (decrease) in cash and cash equivalents..... 720 (1,085)
Cash and cash equivalents at beginning of period.......... 838 1,637
----------- -------
Cash and cash equivalents at end of period................ $ 1,558 $ 552
=========== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The Company and Summary of Significant Accounting Policies
The Company
Euphonix, Inc. (the "Company") was incorporated on July 6, 1988 in the
state of California. Euphonix develops, manufactures and supports networked
digital audio systems for music, film and TV post production, broadcast, sound
reinforcement and multimedia applications.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q. 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, 2000 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2000.
For further information, refer to the audited financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1999.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is required to be
adopted in years beginning after June 15, 2000. The adoption of SFAS 133 is not
expected to materially impact the Company's results of operations, financial
position or cash flows.
In December 1999, the SEC staff issued Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition." The SEC staff addresses several issues
in SAB No. 101, including the timing for recognizing revenue derived from
selling arrangements that involve contractual customer acceptance provisions and
installation of the product occurs after shipment and transfer of title. The
Company's existing revenue recognition policy is to recognize revenue at the
time the customer takes title to the product, generally at the time of shipment,
because the Company has routinely met its installation obligations and obtained
customer acceptance. Applying the requirements of SAB No. 101 to the present
selling arrangements used by the Company for the sale of equipment may re-
quire a change in the Company's accounting policy for revenue recognition
and the deferral of the recognition of revenue from such equipment sales until
installation is complete and accepted by the customer. The effect of such a
change, if any, must be recognized as a cumulative effect of a change in
accounting no later than the Company's fourth quarter of its fiscal year ending
on December 31, 2000. The Company is currently evaluating the impact.
6
<PAGE>
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -(Continued)
(unaudited)
In March 2000, the Financial Accounting Standards Board issued Interpre-
tation No. 44 ("FIN 44") "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25." FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan quali-
fies as a noncompensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
Management does not expect that the adoption of FIN 44 will have a material
effect on the financial statements.
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2. Balance Sheet Components (in thousands):
(a) Inventories:
June 30, December 31,
-------- -----------
2000 1999
---- ----
Raw materials...............................$ 2,173 $ 2,878
Work-in-process............................. 2,391 1,494
Finished goods.............................. 2,019 2,592
---------- -----------
$ 6,583 $ 6,964
========== ===========
(b) Accrued liabilities:
June 30, December 31,
-------- -----------
2000 1999
---- ----
Accrued compensation and related............$ 318 $ 429
Accrued warranty............................ 97 244
Accrued commissions......................... 100 83
Sales tax payable........................... 61 91
Other....................................... 245 243
---------- -----------
$ 821 $ 1,090
========== ===========
</TABLE>
(c) Convertible notes payable:
On February 22, 2000, the Company executed promissory notes with existing
investors under which the Company borrowed $1,500,000. The notes accrue interest
at 10% per annum with principal and accrued interest due at February 22, 2001.
The assets of the company are pledged as collateral. The notes contain a
conversion feature, to allow the holder to convert the note into common stock of
the Company at a rate of $2 17/32 per share. In addition this note provides that
upon conversion, if such conversion occurs, the Company will issue warrants to
purchase 1,185,185 shares of common stock at prices ranging from $3 to $5. The
warrants, if issued, will be exercisable at any time and from time to time in
part or in full on or before February 1, 2003. At the date of issuance of the
note, the quoted market price of the Company's common stock was $2.531 per
share, resulting in a beneficial conversion feature in the amount of $1,279,000.
7
<PAGE>
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -(Continued)
(unaudited)
The beneficial conversion was recorded as a credit to equity and
a charge to interest expense at the time the notes were issued.
On April 14, 2000, the Company executed promissory notes with existing investors
under which the Company borrowed $800,000. The notes accrue interest at 10% per
annum with principal and accrued interest due at January 1, 2001. The assets of
the company are pledged as collateral. The notes contain a conversion feature,
which is subject to shareholder approval, and if approved, will allow the holder
to convert the note into common stock of the Company at a rate of $3 5/8 per
share. Shareholder approval had not been obtained as of June 30, 2000.
3. Contingencies
From time to time, the Company may have certain contingent liabilities
that arise in the ordinary course of its business activities. The Company
accrues contingent liabilities when it is probable that future expenditures will
be made and such expenditures can be reasonably estimated. In the opinion of
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect in the financial position or results of
operations of the Company.
4. Joint Venture
On February 18, 2000, the Company entered into a joint venture
arrangement with Audio Exports George Neumann & Company Gmbh ("Audio Exports").
The joint venture was formed by the contribution by the Company of property and
equipment with a net book value of $297,000 to its wholly owned subsidiary,
Euphonix Europe. Concurrently, Audio Exports contributed $680,000 in cash in
exchange for common stock of Euphonix Europe, representing 70% of the
outstanding common stock of Euphonix Europe after the transaction. The joint
venture arrangement included a Shareholder Agreement between the Company and
Audio Exports and a distribution agreement between the Company and Euphonix
Europe. In addition, on February 18, 2000, the President of Audio Exports
purchased 240,000 shares of the Company's common stock from the Company for
$300,000 in cash. The sale of the 240,000 shares was at a $360,000 discount from
the quoted market price of the Company's common stock on that date. The total of
the discount and the net book value of the property and equipment contributed of
$657,000 was recorded as "Investment in Euphonix Europe". The Company's
investment and ownership interest in Euphonix Europe represents 30% of the
outstanding shares of Euphonix Europe, and was accounted for using the equity
method commencing April 1, 2000, the effective date of the joint venture
arrangement. The Company's equity in the net loss of investee was $34,000 for
the three months ended June 30, 2000.
5. Sale of Common Stock
On June 1, 2000, the Company received $500,000 from the sale to existing
investors of 147,928 shares of common stock at $3.38 per share.
8
<PAGE>
Item 2. Management's Discussion & Analysis of Financial Condition & Results
of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements
represent the Company's expectations or beliefs concerning future events and
include statements, among others, concerning sales of the System 5 digital
console, sales to significant customers, the development of new products, the
ability to gain market share in the music market segment, the ability to retain
key suppliers and the availability of future capital by way of debt and equity
financing. 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 increased to $4.2 million in the second quarter in 2000
up from $2.9 million in the second quarter of 1999, representing an increase of
48.2%. The increase in the Company's net revenues for the second quarter of 2000
as compared to 1999, resulted primarily from the sale of System 5 digital
consoles from 1 unit in the second quarter of 1999 to 6 units in the second
quarter of 2000.
Net revenues increased to $7.1 million in the first six months of 2000
up from $5.0 million in the first six months of 1999, representing an increase
of 41.0%. The increase in the Company's net revenues in the first six months of
2000 as compared to 1999, resulted primarily from the sale of System 5 digital
consoles from 1 unit in the first six months of 1999 to 10 units in the first
six months of 2000.
Domestic sales of the Company's products for the second quarter of
both 2000 and 1999 were $2.3 million, comprising approximately 55.0% and 78.8%
of the Company's net revenues for the second quarter of 2000 and 1999,
respectively. Domestic sales of the Company's products for the first six months
of 2000 and 1999 were $4.2 million and $3.3 million, comprising approximately
59.1% and 66.3% of the Company's net revenues for the first six months of 2000
and 1999, respectively. Export sales were $1.9 million and $607,000, comprising
approximately 45.0% and 21.2% of the Company's revenues for the second quarter
of 2000 and 1999, respectively. Export sales were $2.9 million and $1.7 million
comprising approximately 41.0% and 33.7% of the Company's revenues for the first
six months of 2000 and 1999, respectively. Export sales as a percent of net
revenues increased in the second quarter and first six months of 2000 due to
increased sales in Asia Pacific and Canada, as compared to the second quarter
and first six months of 1999.
Gross Margin
The Company's gross margin decreased to 35.1% in the second quarter of
2000 down from 36.1% in the second quarter of 1999. For the first half of 2000,
gross margin was $2.2 million, or 31.8% of net revenues, compared with $1.4
million, or 28.5% of net revenues, for the first half of 1999. The decrease in
gross margin for the second quarter was due to a write off of inventory. The
increase in gross margin in the first six months in 2000 was primarily due to
increased sales of System 5, from 1 unit in 1999 to 10 units in the first half
of 2000.
9
<PAGE>
Research and Development Expenses
Research and development expenses decreased to $847,000 in the second
quarter of 2000, down 26.0% from $1.1 million in the second quarter of 1999. For
the first six months in 2000, research and development expenses of $1.8 million
decreased 25.8% from $2.4 million in 1999. The decrease in research and
development expenses in the second quarter and first six months of 2000 from the
corresponding periods in 1999 was primarily due to the reduction of project
expenses for the new R-1 Multitrack Recorder and the new System 5 digital
console, and a reduction in personnel in the last quarter of 1999, as well as in
the first six months in 2000.
Sales and Marketing Expenses
Sales and marketing expenses were $1.4 million in the second quarter of
both 2000 and 1999. As a percentage of net revenues, sales and marketing
expenses decreased by 16.9% in the second quarter of 2000 as compared to the
second quarter of 1999. Sales and marketing expenses were $2.7 million in the
first six months of both 2000 and 1999. As a percentage of net revenues, sales
and marketing expenses decreased by 14.9% in the first six months of 2000 as
compared with the first six months of 1999, primarily due to increased revenues
in the first six months of 2000.
General and Administrative Expenses
General and administrative expenses increased to $566,000 in the
second quarter of 2000 from $121,000 in the second quarter of 1999, representing
an increase of 367.8%. General and administrative expenses increased to $925,000
in the first six months of 2000 from $661,000 in the first six months of 1999,
representing an increase of 40.0%. The increase in the second quarter and first
six months of 2000 as compared with 1999 was attributable to a decrease in bad
debt expense due to a reversal of bad debt expense in the second quarter of 1999
and an increase in legal and professional fees in the first six months of 2000.
Interest expense and other charges
Interest expense and other charges increased to $101,000 in the second
quarter of 2000 from $27,000 in the second quarter of 1999, due to the interest
expense on additional convertible notes payable. Interest expense and other
charges increased to $1.5 million in the first six months of 2000 from $24,000
in the first six months of 1999, due to the beneficial conversion feature of
$1.3 million associated with the promissory notes issued February 22, 2000.
Equity in net loss in investee
The Company recorded a charge of $34,000 for equity in net loss of
investee, Euphonix Europe, in the second quarter of 2000. There was no such
charge in the second quarter of 1999.
Provision for Income Taxes
For the first six months of 2000 and 1999, the Company did not
recognize the tax benefit of its operating losses. Management believes that
sufficient uncertainty exists with regard to the realizability of these tax
assets such that a full valuation allowance is necessary. These factors include
the lack of a significant history of consistent profits and the lack of
carryback capacity to realize these assets. Based on this absence of objective
evidence, management is unable to assert that it is more likely than not that
the Company will generate sufficient taxable income to realize the Company's net
deferred tax assets.
10
<PAGE>
Liquidity and Capital Resources
The Company has funded its operations to date primarily through cash
flows from operations, the private sale of equity securities, the issuance of
convertible notes payable and the initial public offering of Common Stock
completed in September 1995.
On February 18, 2000, the Company entered into a joint venture
arrangement with Audio Exports George Neumann & Company Gmbh ("Audio Exports").
The joint venture was formed by the contribution by the Company of property and
equipment with a net book value of $297,000 to its wholly owned subsidiary,
Euphonix Europe. Concurrently, Audio Exports contributed $680,000 in cash in
exchange for common stock of Euphonix Europe, representing 70% of the
outstanding common stock of Euphonix Europe after the transaction. The joint
venture arrangement included a Shareholder Agreement between the Company and
Audio Exports and a distribution agreement between the Company and Euphonix
Europe. In addition, on February 18, 2000, the President of Audio Exports
purchased 240,000 shares of the Company's common stock from the Company for
$300,000 in cash. The sale of the 240,000 shares was at a $360,000 discount from
the quoted market price of the Company's common stock on that date. The total of
the discount and the net book value of the property and equipment contributed of
$657,000 was recorded as "Investment in Euphonix Europe". The Company's
investment and ownership interest in Euphonix Europe represents 30% of the
outstanding shares of Euphonix Europe, and was accounted for using the equity
method as of April 1, 2000, the effective date of the joint venture arrangement.
On February 22, 2000, the Company executed promissory notes with
existing investors under which the Company borrowed $1,500,000. The notes accrue
interest at 10% per annum with principal and accrued interest due at February
22, 2001. The assets of the company are pledged as collateral. The notes contain
a conversion feature, to allow the holder to convert the note into common stock
of the Company at a rate of $2 17/32 per share. In addition this note provides
that upon conversion, if such conversion occurs, the Company will issue warrants
to purchase 1,185,185 shares of common stock at prices ranging from $3 to $5.
The warrants, if issued, will be exercisable at any time and from time to time
in part or in full on or before February 1, 2003. At the date of issuance of the
note, the quoted market price of the Company's common stock was $2.531 per
share, resulting in a beneficial conversion feature in the amount of $1,279,000.
The beneficial conversion was recorded as a credit to equity and a charge to
interest expense at the time the notes were issued.
On April 14, 2000, the Company executed promissory notes with existing
investors under which the Company borrowed $800,000. The notes accrue interest
at 10% per annum with principal and accrued interest due at January 1, 2001. The
assets of the Company are pledged as collateral. The notes contain a conversion
feature, which is subject to shareholder approval, and if approved, will allow
the holder to convert the note into common stock of the Company at a rate of
$3 5/8 per share. Shareholder approval had not been obtained as of June 30,
2000.
On June 1, 2000, the Company received $500,000 from the sale to
existing investors of 147,928 shares of common stock at $3.38 per share.
11
<PAGE>
For the second quarter ended June 30, 2000, cash and cash equivalents
increased by $720,000 to approximately $1.6 million. Also, during this period,
working capital increased by $454,000 to approximately $7.4 million.
The Company's operating activities used cash of approximately $2.4
million and $4.4 million for the six months ended June 30, 2000 and 1999,
respectively. Cash used in operating activities for 2000 was comprised primarily
of net loss and a beneficial conversion feature on notes payable, an increase in
prepaid expenses and other assets, a decrease in accounts payable and other
accrued liabilities, offset partially by depreciation and amortization, an
increase in accounts receivable, inventory and customer deposits. Cash used in
operating activities for 1999 was comprised primarily of net loss and an
increase in inventories, prepaid expenses and other assets, a decrease in
other accrued liabilities, offset partially by depreciation and amortization,
an increase in accounts receivable, an increase in accounts payable, and
customer deposits.
The Company's investing activities used cash of $68,000 and provided
cash of $17,000 in the first six months ended June 30, 2000 and 1999,
respectively. In the first six months of 2000, $68,000 was used to purchase
property and equipment. In the first six months of 1999 the Company used
$584,000 to purchase property and equipment and the Company received $601,000 in
proceeds from the sales of short term investments.
The Company's financing activities provided cash of $3.2 million and
$3.3 million in the first six months of 2000 and 1999, respectively. The Company
received $2.3 million in proceeds from the issuance of convertible notes,
$800,000 from the sale of common stock and $102,000 from the exercise of stock
options. For the six months ended June 30, 1999, proceeds from the issuance of
convertible notes provided $2.0 million and proceeds from the sale of common
stock provided $1.3 million.
Management intends to rely upon internally generated cashflows.
However, should there be a decline in revenues, the Company would either have to
cut expenses or go to outside sources of financing. There can be no assurance
that outside sources of financing would be available to the Company.
Factors Affecting Future Operating Results
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair the Company's business
operations. If any of the following risks actually occur, the Company's
business, results of operations or cash flows could be adversely affected. In
these cases, the trading price of our common stock could decline, and you may
lose all or part of your investment.
Historically, the Company has derived virtually all of its revenues
from sales of its digitally controlled audio mixing console system, which 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 System 5
digital console will continue to constitute a significant portion of the
Company's revenues. It is expected that in the foreseeable future, a greater
portion of the Company's revenue will come from the new System 5 digital
console. Accordingly, any factor adversely affecting the Company's base system,
whether technical, competitive or otherwise, could have a material adverse
effect on the Company's business and results of operations.
12
<PAGE>
The Company has expended and will continue to expend substantial funds
to introduce its new System 5 digital console around the world. The Company's
ability to fund operations through June 30, 2001 is dependent upon achievement
of its operating plan. If the Company did not attain its operating plan, it
would have to obtain additional financing or cut expenses. The Company believes
that additional debt or equity financing will be available from existing
investors and others. However, there can be no assurance as to the terms and
conditions 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 securities, 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
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.
Historically, the Company's primary market success has been 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 markets. There can be no assurance
that the Company will be able to compete favorably in all 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 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.
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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.
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
such standards would likely have an adverse effect on the Company's business and
results of operations.
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.
The Company's success depends, in part, on its ability to retain key
management and 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.
In December 1999, the SEC staff issued Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition." The SEC staff addresses several issues in SAB
No. 101, including the timing for recognizing revenue derived from selling
arrangements that involve contractual customer acceptance provisions and
installation of the product occurs after shipment and transfer of title. The
Company's existing revenue recognition policy is to recognize revenue at the
time the customer takes title to the product, generally at the time of shipment,
because the Company has routinely met its installation obligations and obtained
customer acceptance. Applying the requirements of SAB No. 101 to the present
selling arrangements used by the Company for the sale of equipment may
require a change in the Company's accounting policy for revenue recognition
and the deferral of the recognition of revenue from such equipment sales until
installation is complete and accepted by the customer. The effect of such a
change, if any, must be recognized as a cumulative effect of a change in
accounting no later than the Company's fourth quarter of its fiscal year ending
on December 31, 2000. The Company is currently evaluating the impact.
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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.
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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 26, 2000.
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
James Dobbie 8,812,825 24,920
Stephen D. Jackson 8,815,375 22,370
Dieter W. Meier 8,815,175 22,570
Proposal 2: Approval of the Company's 1999 Stock Plan.
Votes For: 6,610,361
Votes Against: 106,980
Votes Abstaining: 7,050
Broker Non-Vote: 5,151,541
Proposal 3: Approval of Conversions of the Secured Promissory Note.
Votes For: 6,639,483
Votes Against: 81,008
Votes Abstaining: 3,900
Broker Non-Vote: 5,151,541
Proposal 4: Ratification of PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year
ending December 31, 2000.
Votes For: 8,824,675
Votes Against: 10,370
Votes Abstaining: 2,700
Broker Non-Vote: 3,038,187
</TABLE>
Item 6: Exhibits and Reports on Form 8-K/A
(a) Exhibits.
Exhibit 27 - Financial Data Schedule (page 18)
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.
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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 10, 2000 By: /s/ JAMES DOBBIE
------------------ ----------------
James Dobbie, Chief Executive
Officer
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