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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 SEPTEMBER 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) dentification 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
September 30, 2000 was 12,165,000 ($0.001 par value).
<PAGE>
EUPHONIX, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999.........................3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and 1999..........4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999............5
Notes to Condensed Consolidated Financial Statements..............6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................10
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................16
Signatures................................................................17
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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EUPHONIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
September 30, December 31,
2000 1999
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..........................$ 1,677 $ 838
Accounts receivable, (net of allowance for doubtful
accounts of $102 in 2000 and $112 in 1999)....... 1,440 2,354
Inventories........................................ 6,800 6,964
Prepaid expenses and other current assets.......... 266 174
----------- ---------
Total current assets................................. 10,183 10,330
Property and equipment, net.......................... 1,149 1,881
Deposits and other assets............................ 785 89
----------- ---------
Total assets........................................$ 12,117 $12,300
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................$ 1,997 $ 2,007
Accrued liabilities................................ 1,075 1,090
Amount due to related party........................ 407 ----
Customer deposits.................................. 774 240
----------- ---------
Total current liabilities............................ 4,253 3,337
Convertible notes payable............................ 4,706 2,166
----------- ---------
Total liabilities................................... 8,959 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, $0.001 par value: 20,000,000 authorized
shares, 12,165,000 and 11,591,000 shares issued and
outstanding in 2000 and 1999, respectively.......... 12 12
Additional paid-in capital............................ 24,009 21,402
Accumulated other comprehensive income................ 42 42
Accumulated deficit...................................(20,905) (14,659)
---------- ---------
Total shareholders' equity............................ 3,158 6,797
---------- ---------
Total liabilities and shareholders' equity..........$ 12,117 $ 12,300
========== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
<TABLE>
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EUPHONIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- --------- -------- -------
Net revenues.......................... $ 3,568 $ 3,764 $ 10,645 $ 8,784
Cost of revenues....................... 2,634 2,183 7,462 5,772
--------- --------- -------- -------
Gross margin........................... 934 1,581 3,183 3,012
--------- --------- -------- -------
Operating expenses:
Research and development............. 834 1,084 2,590 3,452
Sales and marketing.................. 1,210 1,422 3,917 4,088
General and administrative........... 407 290 1,333 951
---------- --------- -------- -------
Total operating expenses............... 2,451 2,796 7,840 8,491
---------- --------- -------- -------
Operating loss......................... (1,517) (1,215) (4,657) (5,479)
Interest and other income.............. ---- ---- 41 12
Interest expense and other charges..... (105) (64) (1,604) (90)
----------- -------- -------- -------
Loss before equity in net income/(loss)
of investee........................... (1,622) (1,279) (6,220) (5,557)
Equity in net income/(loss) of investee 8 ---- (26) ----
----------- --------- --------- -------
Net loss...............................$ (1,614) $ (1,279) $(6,246) $(5,557)
=========== ========= ======== =======
Basic and diluted net loss per share...$ (0.13) $ (0.16) $ (0.52) $ (0.71)
=========== ========= ======== =======
Shares used in computing basic and
diluted net loss per share...........12,158,443 7,956,595 11,966,039 7,834,055
========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
<TABLE>
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EUPHONIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2000 1999
---- ----
Cash flows from operating activities:
Net loss............................................... $ (6,246) $ (5,557)
----------- ----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 454 470
Write-off of property and equipment.................. 30 ---
Allowance for doubtful accounts...................... (10) (210)
Beneficial conversion feature on convertible notes
payable............................................. 1,279 ---
Deferred compensation amortization................... 58 50
Transfer of demonstration equipment to inventory..... 253 ---
Transfer of property and equipment to investee....... 152 ---
Changes in assets and liabilities:
Accounts receivable................................ 924 31
Inventory.......................................... 164 (947)
Prepaid expenses, other current assets, deposits,
and other......................................... (429) (127)
Accounts payable................................... (10) (405)
Accrued liabilities................................ 233 (200)
Customer deposits.................................. 534 231
------------ ---------
Total adjustments...................................... 3,632 (1,107)
------------ ---------
Net cash used in operating activities.................. (2,614) (6,664)
------------ ---------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities... --- 601
Purchase of property and equipment..................... (157) (824)
------------ ---------
Net cash used in investing activities.................. (157) (223)
------------ ---------
Cash flows from financing activities:
Proceeds from issuance of convertible notes............ 2,300 4,100
Proceeds from sale of common stock..................... 800 1,304
Proceeds from exercise of stock options................ 110 ---
Proceeds from related party............................ 400 ---
------------ ---------
Net cash provided by financing......................... 3,610 5,404
------------ ---------
Net increase (decrease) in cash and cash equivalents... 839 (1,483)
Cash and cash equivalents at beginning of period....... 838 1,637
------------ ---------
Cash and cash equivalents at end of period............. $ 1,677 $ 154
============ =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
EUPHONIX, INC.
NOTES TO CONDENSED 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 condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q. According-
ly, 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 nine-month period ended September 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
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.
6
<PAGE>
EUPHONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -(Continued)
(unaudited)
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2. Balance Sheet Components (in thousands):
(a) Inventories:
September 30, December 31,
2000 1999
---- ----
Raw materials........................ $ 2,289 $ 2,878
Work-in-process...................... 1,785 1,494
Finished goods....................... 2,726 2,592
------------ ----------
$ 6,800 $ 6,964
============ ==========
(b) Accrued liabilities:
September 30, December 31,
2000 1999
---- ----
Accrued compensation and related............. $ 357 $ 429
Accrued warranty............................. 87 244
Accrued commissions.......................... 70 83
Sales tax payable............................ 93 91
Deferred revenue, net of deferred cost....... 264 ---
Other........................................ 204 243
------------- ----------
$ 1,075 $ 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 $ 2.531 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
7
<PAGE>
EUPHONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - -(Continued)
(unaudited)
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 $3.625 per
share. Shareholder approval had not been obtained as of September 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 the investee was $26,000
for the nine months ended September 30, 2000.
8
<PAGE>
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.
9
<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 decreased to $3.6 million in the third quarter in 2000
down from $3.8 million in the third quarter of 1999, representing a decrease of
5.2%. The decrease in the Company's net revenues for the third quarter of 2000
as compared to 1999, resulted primarily from the discounts in Japan sales.
Net revenues increased to $10.6 million in the first nine months of
2000 up from $8.8 million in the first nine months of 1999, representing an
increase of 21.2%. The increase in the Company's net revenues in the first nine
months of 2000 as compared to 1999, resulted primarily from the sale of System 5
digital consoles from 8 units in the first nine months of 1999 to 19 units in
the first nine months of 2000.
Domestic sales of the Company's products for the third quarter of 2000
and 1999 were $2.3 million and $2.7 million, respectively, comprising
approximately 63.9% and 72.2% of the Company's net revenues for the third
quarter of 2000 and 1999, respectively. Domestic sales of the Company's products
for the first nine months of 2000 and 1999 were $6.5 million and $6.0 million,
comprising approximately 60.7% and 68.8% of the Company's net revenues for the
first nine months of 2000 and 1999, respectively. Export sales were $1.3 million
and $1.1 million, comprising approximately 36.1% and 27.8% of the Company's
revenues for the third quarter of 2000 and 1999, respectively. Export sales were
$4.1 million and $2.8 million comprising approximately 39.3% and 31.2% of the
Company's revenues for the first nine months of 2000 and 1999, respectively.
Export sales as a percent of net revenues increased in the third quarter and
first nine months of 2000 due to increased sales in Asia Pacific, as compared to
the third quarter and first nine months of 1999.
Gross Margin
The Company's gross margin decreased to 26.2% in the third quarter of
2000 down from 42.0% in the third quarter of 1999. For the first nine months of
2000, gross margin was $3.2 million, or 29.9% of net revenues, compared with
$3.0 million, or 34.3% of net revenues, for the first nine months of 1999. The
decrease in gross margin for the third quarter was due to a write off of
inventory and higher discounts on sales with Japan and in the first nine months
in 2000 was primarily due to the change in sales mix.
10
<PAGE>
Research and Development Expenses
Research and development expenses decreased to $834,000 in the third
quarter of 2000, down 23.1% from $1.1 million in the third quarter of 1999. For
the first nine months in 2000, research and development expenses of $2.6 million
decreased 25.0% from $3.5 million in 1999. The decrease in research and
development expenses in the third quarter and first nine 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 first nine months in 2000.
Sales and Marketing Expenses
Sales and marketing expenses were $1.2 million and $1.4 million in the
third quarter of 2000 and 1999, respectively. Sales and marketing expenses
decreased by 14.9% in the third quarter of 2000 as compared to the third quarter
of 1999. Sales and marketing expenses were $3.9 million and $4.1 million
in the first nine months of 2000 and 1999, respectively. Sales and
marketing expenses decreased by 4.2% in the first nine months of 2000 as
compared with the first nine months of 1999, primarily due to the cessation
of sales out of the UK branch (which was replaced by Euphonix Europe).
General and Administrative Expenses
General and administrative expenses increased to $407,000 in the third
quarter of 2000 from $290,000 in the third quarter of 1999, representing an
increase of 40.3%. General and administrative expenses increased to $1.3 million
in the first nine months of 2000 from $951,000 in the first nine months of 1999,
representing an increase of 40.1%. The increase in the third quarter of 2000 as
compared with 1999 was attributable to an increase in legal and professional
fees. The increase in the first nine 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 1999, and an increase in legal and professional fees.
Interest expense and other charges
Interest expense and other charges increased to $105,000 in the third
quarter of 2000 from $64,000 in the third quarter of 1999, due to the interest
expense on additional convertible notes payable. Interest expense and other
charges increased to $1.6 million in the first nine months of 2000 from $90,000
in the first nine 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 income / loss in investee
The Company recorded a credit of $8,000 for equity in net income of
investee, Euphonix Europe, in the third quarter of 2000 and a charge of $26,000
for equity in net loss of investee, Euphonix Europe, in the first nine months of
2000. There was no such credit or charge for the third quarter and first nine
months of 1999.
11
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Provision for Income Taxes
For the first nine 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.
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 $2.531 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,
12
<PAGE>
will allow the holder to convert the note into common stock of the Company at a
rate of $3.625 per share. Shareholder approval had not been obtained as of
September 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. On
September 7, 2000, the Company received $400,000 from an existing investor.
For the third quarter ended September 30, 2000, cash and cash
equivalents increased by $839,000 to approximately $1.7 million. Also, during
this period, working capital decreased by $1.1 million to approximately $5.9
million.
The Company's operating activities used cash of approximately $2.6
million and $6.7 million for the nine months ended September 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, offset partially by depreciation and
amortization, a decrease in accounts receivable and inventory, and an
increase in 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 accounts payable and other accrued
liabilities, offset partially by depreciation and amortization, an increase in
accounts receivable, and customer deposits.
The Company's investing activities used cash of $157,000 and $223,000
in the first nine months ended September 30, 2000 and 1999, respectively. In the
first nine months of 2000, $157,000 was used to purchase property and equipment.
In the first nine months of 1999 the Company used $824,000 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 $3.6 million and
$5.4 million in the first nine 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, $110,000 from the exercise of
stock options and $400,000 from proceeds from related parties. For the first
nine months ended September 30, 1999 proceeds from the issuance of convertible
notes provided $4.1 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.
13
<PAGE>
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.
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 September 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
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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
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
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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.
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.
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 Filed on October 27, 2000
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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: November 13, 2000 By:/s/ STEVE VINING
------------------ ----------------
Steve Vining, Chief Executive
Officer
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