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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 MARCH 31, 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 March
31, 2000 was 11,875,000 ($.001 par value).
<PAGE>
EUPHONIX, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999...............................3
Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999.........................4
Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 1999.................5
Notes to Consolidated Financial Statements .........................6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...................................16
Signature...................................................................17
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
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EUPHONIX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
March 31, December 31,
2000 1999
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................$ 907 $ 838
Accounts receivable, (net of allowance for doubtful
accounts of $120 in 2000 and $112 in 1999).......... 2,349 2,354
Inventories.......................................... 7,156 6,964
Prepaid expenses and other current assets............ 325 174
------------- ------------
Total current assets.................................. 10,737 10,330
Property and equipment, net........................... 1,452 1,881
Deposits and other assets............................. 491 89
------------- ------------
Total assets.........................................$ 12,680 $ 12,300
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................$ 2,113 $ 2,007
Accrued liabilities................................... 1,022 1,090
Customer deposits..................................... 190 240
------------- -----------
Total current liabilities.............................. 3,325 3,337
Convertible notes payable.............................. 3,719 2,166
-------------- ----------
Total liabilities..................................... 7,044 5,503
-------------- ----------
Commitments and contingencies (Note 3)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.001 par value: 2,000,000 authorized
shares, none issued and outstanding.................... ---- ----
Common stock, $0.001 par value: 20,000,000 authorized
shares, 11,875,000 and 11,591,000 shares issued and
outstanding in 2000 and 1999, respectively............. 12 12
Additional paid-in capital.............................. 23,441 21,402
Accumulated other comprehensive income.................. 40 42
Accumulated deficit.....................................(17,857) (14,659)
------------- -----------
Total shareholders'equity............................... 5,636 6,797
------------- -----------
Total liabilities and shareholders'equity..............$ 12,680 $ 12,300
============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
EUPHONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended March 31,
2000 1999
---- ----
Net revenues............................. $ 2,835 $ 2,159
Cost of revenues......................... 2,075 1,762
------------- --------------
Gross margin............................. 760 397
------------- --------------
Operating expenses:
Research and development................ 909 1,225
Sales and marketing..................... 1,292 1,229
General and administrative.............. 359 539
-------------- --------------
Total operating expenses................. 2,560 2,993
-------------- --------------
Operating loss........................... (1,800) (2,596)
Interest and other income................ ---- 13
Interest expense and other charges....... (1,398) (1)
--------------- --------------
Net loss................................. $ (3,198) $ (2,584)
=============== ==============
Basic and diluted net loss per share..... $ (0.27) $ (0.34)
=============== ==============
Shares used in computing
basic and diluted net loss per share.... 11,719 7,589
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
EUPHONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
March 31,
2000 1999
---- ----
Cash flows from operating activities:
Net loss.............................................$ (3,198) $ (2,584)
----------- --------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 176 140
Write-off of property and equipment................ 30 ---
Allowance for doubtful accounts.................... 8 142
Beneficial conversion feature on convertible notes
payable........................................... 1,279 ---
Deferred compensation amortization................. 57 23
Transfer of demonstration equipment to inventory... 256 ---
Changes in assets and liabilities:
Accounts receivable............................... (3) 13
Inventory......................................... (192) (967)
Prepaid expenses and other assets................. (194) (128)
Accounts payable.................................. 106 1,506
Accrued liabilities............................... (15) (265)
Customer deposits................................. (50) 65
------------ -------------
Total adjustments.................................... 1,458 529
------------ -------------
Net cash used in operating activities................ (1,740) (2,055)
------------ -------------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities. --- 589
Purchase of property and equipment................... (33) (367)
------------ -------------
Net cash (used in) / provided by investing activities. (33) 222
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of convertible notes.......... 1,500 ---
Proceeds from sale of common stock................... 300 1,304
Proceeds from exercise of stock options.............. 42 ---
------------- -------------
Net cash provided by financing....................... 1,842 1,304
------------- -------------
Net increase (decrease) in cash and cash equivalents 69 (529)
Cash and cash equivalents at beginning of period..... 838 1,637
------------- -------------
Cash and cash equivalents at end of period...........$ 907 $ 1,108
============= =============
</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 & 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 three-month period ended March 31, 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 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 installa-
tion is complete and accepted by the customer. The effect of such a change,
6
<PAGE>
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -(Continued)
(unaudited)
if any, must be recognized as a cumulative effect of a change in accounting no
later than the Company's second quarter of its fiscal year ending on December
31, 2000.
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<S> <C> <C>
2. Balance Sheet Components (in thousands):
(a) Inventories:
March 31, December 31,
2000 1999
---- ----
Raw materials.................... $ 2,698 $ 2,878
Work-in-process.................. 1,902 1,494
Finished goods................... 2,556 2,592
--------------- ---------------
$ 7,156 $ 6,964
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(b) Accrued liabilities:
March 31, December 31,
2000 1999
---- ----
Accrued compensation and related..........$ 422 $ 429
Accrued warranty.......................... 164 244
Accrued commissions....................... 82 83
Sales tax payable......................... 98 91
Other..................................... 256 243
-------------- --------------
$ 1,022 $ 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, 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 $2 17/32 per share. Shareholder
approval had not been obtained as of March 31, 2000. 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. Although shareholder
approval had not been obtained as of March 31, 2000, such approval is
considered perfunctory as the holders of the notes comprise 54% of the
outstanding voting stock of the Company at February 22, 2000. As a result,
the beneficial conversion was recorded as a credit to equity and a charge
to interest expense at the time the notes were issued.
7
<PAGE>
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -(Continued)
(unaudited)
3. Commitments and 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 will be accounted for using the
equity method commencing April 1, 2000, the effective date of the joint venture
arrangement.
5. Subsequent Events
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 holders to convert the notes into common stock of the Company at a rate of
$3 5/8 per share.
8
<PAGE>
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -(Continued)
(unaudited)
Item 2. Management's Discussion and 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 increased to $2.8 million in the first quarter of 2000 up
from $2.2 million in the first quarter of 1999, representing an increase of
31.3% in 2000 from 1999. The increase in the Company's net revenues for the
first quarter of 2000 as compared to 1999, resulted primarily from the sale of
System 5 digital consoles.
Domestic sales of the Company's products for the first quarter of 2000
and 1999 were $1.8 million and $1.1 million, respectively, comprising
approximately 65.3% and 49.8% of the Company's net revenues for the first
quarter of 2000 and 1999, respectively. Export sales were $1.0 million and $1.1
million comprising approximately 34.7% and 50.2% of the Company's revenues for
the first quarter of 2000 and 1999, respectively. Export sales as a percent of
net revenues decreased in the first three months of 2000 due to reduced sales in
Europe, as compared to the first three months of 1999.
Gross Margin
The Company's gross margin increased to 26.8% in the first quarter of
2000 up from 18.4% in the first quarter of 1999. The increase in the first
three months of 2000 from the first three months of 1999 was primarily due to a
change in the sales mix.
9
<PAGE>
Research and Development Expenses
Research and development expenses decreased to $909,000 in the first
quarter of 2000, down from $1.2 million in the first quarter of 1999,
representing a decrease of 25.8% in the first quarter of 2000 as compared to the
first quarter of 1999. Research and development expenses as a percentage of net
revenues decreased to 32.1% in the first quarter of 2000, down from 56.7% in the
first quarter of 1999. The decrease in research and development expenses in the
first quarter of 2000 from the first quarter of 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.
Sales and Marketing Expenses
Sales and marketing expenses increased to $1.3 million in the first
quarter of 2000 up from $1.2 million in the first quarter of 1999, representing
a 5.1% increase in the first quarter of 2000 as compared to the first quarter of
1999. Sales and marketing expenses decreased as a percentage of net revenues to
45.6% in the first quarter of 2000 down from 56.9% in the first quarter of 1999
due to the increase in sales.
General and Administrative Expenses
General and administrative expenses decreased to $359,000 in the
first quarter of 2000 from $539,000 in the first quarter of 1999, representing a
decrease of 33.4%. The decrease in general and administrative expenses is
primarily due to a decrease in bad debt expense of $128,000 and a decrease of
financial services expenses of $52,000. General and administrative expenses as a
percent of net revenues decreased to 12.7% in the first quarter of 2000 down
from 25.0% in the first quarter of 1999, primarily due to increased sales.
Interest expense and other charges
Interest expense and other charges increased to $1.4 million in the
first quarter of 2000 from $1,000 in the first quarter of 1999, due to the
beneficial conversion feature of $1.3 million associated with the promissory
notes issued February 22, 2000. Additional interest expense of $119,000 was
attributable to the convertible notes payable.
Provision for Income Taxes
For the first quarter 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, 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 will be accounted for using the
equity method commencing 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, 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 $2 17/32 per share. Shareholder approval had not been obtained as of
March 31, 2000. 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. Although shareholder approval
had not been obtained as of March 31, 2000, such approval is considered
perfunctory as the holders of the notes comprise 54% of the outstanding voting
stock of the Company at February 22, 2000. As a result, 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.
11
<PAGE>
For the first quarter ended March 31, 2000, cash and cash equivalents
increased by $69,000 to approximately $907,000. Also, during this period,
working capital increased by $419,000 to approximately $7.4 million.
The Company's operating activities used cash of approximately $1.8
million and $2.0 million for the three months ended March 31, 2000 and 1999,
respectively. Cash used in operating activities for 2000 was comprised primarily
of net loss and an increase in inventories and prepaid expenses and other
assets, offset partially by the non-cash charge for the beneficial conversion on
convertible notes payable and an increase in accounts payable. Cash used in
operating activities for 1999 was comprised primarily of net loss and an
increase in inventories, prepaid expenses and other assets and a decrease in
accrued liabilities, offset partially by an increase in accounts payable,
depreciation, and customer deposits and a decrease in accounts receivable.
The Company's investing activities used cash of $33,000 and provided
net cash of $222,000 for the three months ended March 31, 2000 and 1999,
respectively. In the first quarter of 2000, $33,000 was used to purchase
property and equipment. In the first quarter of 1999 the Company used $367,000
to purchase property and equipment, and the Company received $589,000 in
proceeds from the sales of short term investments.
The Company's financing activities provided cash of $1.8 million and
$1.3 million in the first quarter of 2000 and 1999, respectively. The Company
received $300,000 in proceeds from the sale of common stock to a new investor,
$1.5 million proceeds from the issuance of convertible notes and $42,000 from
the exercise of employee stock options during the first three months ended March
31, 2000. For the first three months ended March 31, 1999 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
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 System 5
digital console will continue to constitute a significant portion of the
Company's revenues. It is expected that for the foreseeable future that 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.
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 March 31, 2001 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 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.
12
<PAGE>
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.
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
13
<PAGE>
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 second quarter of its fiscal year ending
on December 31, 2000. At the current time it is not possible to determine the
effect this change will have on the results of operations of the Company.
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
14
<PAGE>
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.
15
<PAGE>
PART II. OTHER INFORMATION
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.
16
<PAGE>
SIGNATURE
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: May 10, 2000 By: /s/ BARRY L. MARGERUM
------------------ ----------------------
Barry L. Margerum, Chief Executive
Officer, President
17
<PAGE>
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 907
<SECURITIES> 0
<RECEIVABLES> 2,349
<ALLOWANCES> 120
<INVENTORY> 7,156
<CURRENT-ASSETS> 10,737
<PP&E> 1,452
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,680
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0
0
<COMMON> 12
<OTHER-SE> 5,624
<TOTAL-LIABILITY-AND-EQUITY> 12,680
<SALES> 2,835
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<INCOME-PRETAX> (3,198)
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<EXTRAORDINARY> 0
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<NET-INCOME> (3,198)
<EPS-BASIC> 0.27
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