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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, 2001
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 NUMBER)
220 PORTAGE AVENUE, PALO ALTO, CALIFORNIA 94306
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 855-0400
Indicate by check mark whether the registrant (1) has filed 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,
2001 was 15,710,366 ($0.001 par value).
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EUPHONIX, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION..........................................................................1
Item 1. Condensed Consolidated Financial Statements....................................................1
Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000...............1
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2000.................................................................2
Condensed Consolidated Statements of Cash Flows................................................3
Notes to Condensed Consolidated Financial Statements...........................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........10
Item 3. Quantitative And Qualitative Disclosures About Market Risk....................................19
PART II. OTHER INFORMATION.............................................................................20
Item 4. Submission of Matters to a Vote of Security Holders...........................................20
Item 5. Other Information.............................................................................21
Item 6. Exhibits and Reports on Form 8-K..............................................................21
Signatures.............................................................................................22
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EUPHONIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
-------- ------------
2001 2000
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 547 $ 587
Accounts receivable (net of allowance for doubtful accounts of $131 ........ 1,289 2,389
in 2001 and $141 in 2000)
Inventories ................................................................ 7,009 6,969
Prepaid expenses and other current assets .................................. 419 406
-------- --------
Total current assets ................................................... 9,264 10,351
Property and equipment, net ................................................... 861 1,127
Deposits and other assets ..................................................... 238 522
-------- --------
Total assets ....................................................... $ 10,363 $ 12,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................................... $ 1,205 $ 1,841
Accrued liabilities ........................................................ 1,246 1,174
Short term notes payable ................................................... 6,945 --
Deferred revenue ........................................................... 206 374
Customer deposits .......................................................... 248 860
-------- --------
Total current liabilities .............................................. 9,850 4,249
Notes payable .............................................................. -- 6,531
-------- --------
Total liabilities .......................................................... 9,850 10,780
-------- --------
Contingencies (Note 3)
Shareholders' equity:
Common stock, $0.001 par value: 20,000,000 authorized shares, 15,710,366
and 12,190,099 shares issued and outstanding in 2001 and 2000,
respectively ............................................................... 16 12
Additional paid-in capital ................................................. 27,054 24,191
Unearned compensation ...................................................... (91) (53)
Accumulated other comprehensive income ..................................... 38 42
Accumulated deficit ........................................................ (26,504) (22,972)
-------- --------
Total shareholders' equity ................................................. 513 1,220
-------- --------
Total liabilities and shareholders' equity ............................. $ 10,363 $ 12,000
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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EUPHONIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net revenues ................................... $ 4,470 $ 4,208 $ 9,104 $ 6,043
Cost of revenues ............................... 3,049 2,754 5,948 4,493
------------ ------------ ------------ ------------
Gross margin ................................... 1,421 1,454 3,156 1,550
------------ ------------ ------------ ------------
Operating expenses:
Research and development .................... 713 847 1,610 1,757
Sales and marketing ......................... 1,531 1,414 2,935 2,706
General and administrative .................. 507 566 1,197 925
------------ ------------ ------------ ------------
Total operating expenses ....................... 2,751 2,827 5,742 5,388
------------ ------------ ------------ ------------
Operating loss ................................. (1,330) (1,373) (2,586) (3,838)
Other income/(expense), net .................... (287) (61) (600) (1,458)
------------ ------------ ------------ ------------
Loss before equity in net loss of investee ..... (1,617) (1,434) (3,186) (5,296)
Equity in net loss of investee ................. (305) (34) (346) (34)
------------ ------------ ------------ ------------
Net loss ....................................... $ (1,922) $ (1,468) $ (3,532) $ (5,330)
============ ============ ============ ============
Basic and diluted net loss per share ........... $ (0.13) $ (0.12) $ (0.26) $ (0.45)
============ ============ ============ ============
Shares used in computing net loss per share,
basic and diluted .............................. 15,197,495 12,021,111 13,726,133 11,869,837
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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EUPHONIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net loss ...................................................... $(3,532) $(5,330)
------- -------
Adjustments to reconcile net loss to net cash used in operating
activities:
Impairment charge ......................................... 213 --
Depreciation and amortization .............................. 325 317
Loss on disposal of fixed assets ........................... 102 30
Allowance for doubtful accounts ............................ (11) 29
Beneficial conversion on convertible note payable .......... 7 1,279
Interest accrued on notes payable .......................... 287 146
Amortization of unearned compensation ...................... 84 58
Changes in assets and liabilities:
Accounts receivable ........................................ 1,111 821
Inventory .................................................. (40) 634
Prepaid expenses and other assets (including current) ...... 359 (343)
Accounts payable ........................................... (636) (918)
Accrued liabilities ........................................ 68 (323)
Deferred revenue ........................................... (169) 750
Customer deposits .......................................... (611) 284
------- -------
Total adjustments ............................................. 1,089 2,764
------- -------
Net cash used in operating activities ......................... (2,443) (2,566)
------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment .................. -- 152
Purchase of property and equipment ............................ (101) (68)
------- -------
Net cash used in investing activities ......................... (101) 84
------- -------
Cash flows from financing activities:
Proceeds from issuance of convertible notes ................... 2,504 2,300
Proceeds from sale of common stock ............................ -- 800
Proceeds from exercise of stock options ....................... -- 102
------- -------
Net cash provided by financing activities ..................... 2,504 3,202
------- -------
Net (decrease) increase in cash and cash equivalents .......... (40) 720
Cash and cash equivalents at beginning of period .............. 587 838
------- -------
Cash and cash equivalents at end of period .................... $ 547 $ 1,558
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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EUPHONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 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 television post production, broadcast,
sound reinforcement and multimedia applications.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated on consolidation. Investments in which the
Company has between 20% and 50% ownership are accounted for using the equity
method.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reported period.
Significant estimates made by management include allowance for doubtful
accounts, inventory obsolescence, depreciation, amortization, taxes,
contingencies and product warranty. Actual results could differ from those
estimates.
BASIS OF PRESENTATION
The accompanying financial statements as of June 30, 2001 and for the three
and six months ended June 30, 2001 and 2000 are unaudited and have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The December 31, 2000 Condensed Consolidated Balance
Sheet was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. However, the
Company believes that the disclosures are adequate to make the information
presented not misleading. These Condensed Consolidated Financial Statements
should be read in conjunction with the Condensed Consolidated Financial
Statements and the notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000, filed with the SEC on March
28, 2001. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present a fair statement of financial
position as of June 30, 2001, results of operations for the three and six months
ended June 30, 2001 and 2000, and cash flows for the six months ended June 30,
2001 and 2000 have been made. The results of operations for the three and six
months ended June 30, 2001 are not necessarily indicative of the operating
results for the full fiscal year or any future periods.
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EUPHONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The Company believes that its available cash and cash equivalents, as well
as its current borrowing facility, will not be sufficient to meet its
anticipated needs for working capital and capital expenditures through the end
of 2001. The Company will have to raise additional funds above and beyond
current levels in order to meet its operating needs, to develop new or enhance
existing products, to respond to competitive pressures, or to acquire or invest
in complementary businesses, technologies, services or products, and the Company
will be assessing that requirement within the next three months. In addition, in
order to meet its long-term liquidity needs beyond the end of 2001, the Company
will need to raise additional funds, establish a credit facility or seek other
financing arrangements. Additional funding may not be available on favorable
terms or at all. Moreover, the maturity dates of the Company's outstanding
promissory notes will become due in early 2002. Although shareholders approved
the notes for conversion into shares of common stock, there is no assurance that
the investors will choose to convert their notes, and the Company may have to
repay these loans in 2002.
The financial statements have been presented on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
or the amount and classification of liabilities or any adjustments that might be
necessary should the Company be unable to continue as a going concern.
RECLASSIFICATIONS
Certain amounts from the previous periods have been reclassified to conform
to the current period presentation.
REVENUE RECOGNITION AND CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2000, the Company changed its method of accounting for
revenue recognition to comply with Securities and Exchange Commission Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.
Previously, the Company had recognized revenue generally upon shipment to
customers including cases when installation was a condition of payment, provided
all other revenue recognition criteria were met. Under the new accounting method
adopted retroactive to January 1, 2000, the Company now defers all revenue until
installation is complete (in those cases where installation is a condition of
payment), provided all other revenue recognition criteria are met.
The effect of the retroactive application for the quarter ended June 30,
2000 is as follows:
SECOND QUARTER ENDED
-------------------------------------------------
JUNE 30, 2000
AS PREVIOUSLY
REPORTED ADJUSTMENT AS RESTATED
------------- ---------- -----------
Revenue.......................................................... $ 4,241 $ (33) $ 4,208
--------- ---------
Gross margin..................................................... $ 1,488 $ (34) $ 1,454
--------- ---------
Net loss......................................................... $ (1,434) $ (34) $ (1,468)
========= =========
Basic and diluted loss per share................................. $ (0.12) $ (0.12)
========= =========
Shares used in computing basic and diluted net loss per share.... 12,021 12,021
========= =========
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EUPHONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities, and is effective for fiscal years beginning after June 15, 2000, as
amended by SFAS No. 137. In June 2000, the Financial Accounting Standards Board
issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities - An Amendment of FASB Statement No. 133." SFAS No. 138 amends the
accounting and reporting standards for certain derivatives and hedging
activities such as net settlement contracts, foreign currency transactions and
intercompany derivatives. The Company adopted SFAS No. 133 January 1, 2001. The
adoption of SFAS No. 133 did not have an impact on the Company's financial
position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase
method of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. Management believes that the
adoption of SFAS 141 will not have a significant impact on the Company's
financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
for fiscal years beginning after March 15, 2001. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing goodwill
and other intangibles. The Company will adopt SFAS 142 effective January 1,
2002. The adoption of SFAS 142 is not expected to have a material impact on the
Company's financial statements.
NOTE 2 - BALANCE SHEET COMPONENTS (IN THOUSANDS):
(a) Inventories:
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
Raw materials........................... $ 1,988 $ 2,474
Work-in-process......................... 1,244 1,084
Finished goods.......................... 3,777 3,411
---------- ----------
$ 7,009 $ 6,969
========== ==========
(b) Accrued liabilities:
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
Accrued compensation.................... $ 396 $ 445
Accrued warranty........................ 271 265
Accrued commissions..................... 91 91
Sales tax payable....................... 116 149
Other................................... 372 224
---------- ----------
$ 1,246 $ 1,174
========== ==========
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EUPHONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(c) Other assets
In accordance with FAS 121, the Company evaluates the recoverability of its
long lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Due to continuing losses
during the second quarter and other market conditions, the Company reviewed the
expected future cashflows of Euphonix Europe to determine whether the related
goodwill was impaired. Based on this review, the Company determined that future
cashflows were not sufficient to recover the remaining goodwill and accordingly
recorded a charge of $213,000.
(d) Convertible notes payable:
In July 1999, the Company executed a promissory note with an existing
investor and other parties under which the Company was authorized to draw up to
$2,100,000 through October 31, 1999. The note accrues interest at 7.75% per
annum with principal and accrued interest originally due at July 30, 2001. The
assets of the Company are pledged as collateral. The note contains a conversion
feature to allow the holder to convert the note into common stock of the Company
at a rate of $0.75 per share. At the date of issuance of the note, the quoted
market price of the Company's common stock was $0.969 per share, resulting in a
beneficial conversion feature charge in the amount of $613,000. The beneficial
conversion feature charge was recorded as a credit to equity and a charge to
interest expense. In March 2001, the Company and the investors agreed to extend
the due date of the principal and accrued interest until March 31, 2002. On
April 15, 2001, the investors in the July 1999 promissory note agreed to convert
the entire amount of the principal of $2.1 million and accrued interest
outstanding of $276,000 into 3,168,267 shares of common stock at the price of
$0.75 per share.
In February 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, 2002.
The assets of the Company are pledged as collateral. The note contains 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 feature charge was recorded as a credit to equity and
a charge to interest expense at the time the notes were issued in February 2000.
In April 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. An
amendment to the April 2000 note extended the due date to July 31, 2001. The
assets of the Company are pledged as collateral. The notes contain a conversion
feature, which was subject to shareholder approval allowing the holder to
convert the note into common stock of the Company at a rate of $3.625 per share.
Approval was obtained at the Company's annual meeting of shareholders' on June
19, 2001. There was no beneficial conversion feature charge, because the
accounting conversion rate was higher than the fair market value of the
Company's common stock on the date of shareholder approval. In March 2001, the
Company and the investors agreed to extend the due date of the principal and
accrued interest until March 31, 2002.
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EUPHONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In September 2000, the Company executed a promissory note with an existing
investor under which the Company borrowed $400,000. The note accrues interest at
8% per annum with principal and accrued interest due on July 31, 2001. The
assets of the Company are pledged as collateral. The notes contain a conversion
feature, which was subject to shareholder approval allowing the holder to
convert the note into common stock of the Company at a rate of $2.3562 per
share. Approval was obtained at the Company's annual meeting of shareholders' on
June 19, 2001. In addition this note provides that upon conversion, if such
conversion occurs, the Company will issue warrants to purchase 181,988 shares of
common stock at a rate of $2.3562 per share. The warrants, if issued, will be
exercisable at any time and from time to time in part or in full before
September 7, 2005. There was no beneficial conversion feature charge, because
the accounting conversion rate was higher than the fair market value of the
Company's common stock on the date of shareholder approval. In March 2001, the
Company and the investors agreed to extend the due date of the principal and
accrued interest until March 31, 2002.
In December 2000, the Company executed promissory notes with existing
investors under which the Company borrowed $1,800,000. The notes accrue interest
at 8% per annum with principal and accrued interest due on July 31, 2001. The
assets of the Company are pledged as collateral. The notes contain a conversion
feature, which was subject to shareholder approval allowing the holder to
convert the note into common stock of the Company at a rate of $1.26 per share.
Approval was obtained at the Company's annual meeting of shareholders' on June
19, 2001. In addition this note provides that upon conversion, if such
conversion occurs, the Company will issue warrants to purchase 1,502,963 shares
of common stock at a rate of $1.26 per share. The warrants, if issued, will be
exercisable at any time and from time to time in part or in full before December
29, 2005. There was no beneficial conversion feature charge, because the
accounting conversion rate was higher than the fair market value of the
Company's common stock on the date of shareholder approval. In March 2001, the
Company and the investors agreed to extend the due date of the principal and
accrued interest until March 31, 2002.
In March 2001, the Company issued convertible promissory notes to existing
investors under which the Company may borrow up to $3,500,000 in 2001. The notes
accrue interest at 10% per annum with principal and accrued interest due March
31, 2002. The notes contain a conversion feature, which was subject to
shareholder approval allowing the holder to convert the note into common stock
of the Company at a rate of $0.75 per share. Approval was obtained at the
Company's annual meeting of shareholders' on June 19, 2001. The Company will
record a beneficial conversion feature charge of $190,000 over the life of the
note, because the accounting conversion rate was lower than the fair market
value of the Company's common stock on the date of shareholder approval. The
beneficial conversion feature charged in the second quarter of 2001 was $7,000.
The Company also issued 350,000 shares of common stock to these investors
in return for their agreement to loan the Company $3,500,000. The commitment fee
was valued at the fair market value of the common stock and is being amortized
over the term of the loan commitment. As of June 30, 2001, $2,004,000 was drawn
down. In July 2001, an additional $800,000 was drawn down, leaving $696,000
available under the facility.
NOTE 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
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EUPHONIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 our expectations or beliefs concerning future events and include
statements, among others, concerning: our cash and cash equivalents as well as
our current borrowing facility will not be sufficient to meet our anticipated
need for working capital and capital expenditures through the end of 2001; we
will have to raise additional funds in order to meet our operating needs; and
the impact of SFAS No. 133 on our financial position or results of operations.
Our 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 "Risk Factors
That May Affect Results of Operations and Financial Condition."
RESULTS OF OPERATIONS
Net Revenues
Net revenues were $4.5 million in the second quarter in 2001 up from $4.2
million in the second quarter of 2000, representing an increase of 6.2%. The
increase resulted primarily from increased unit sales of System 5 all digital
mixing consoles into the film/post-production and broadcast segments of the
market.
International sales accounted for 56.5% of our second quarter 2001
revenues, compared to 41.4% in the second quarter of 2000. International sales
increased by approximately $782,000, or 44.8% in the second quarter of 2001, as
compared to the similar period in 2000. The increase was due to higher sales in
Europe, South America and Canada.
Net revenues were $9.1 million in the first half in 2001, up from $6.0
million in the first half of 2000, representing an increase of 50.7%. The
increase in our net revenues during this period resulted primarily from
increased unit sales of System 5 all digital mixing consoles in the first half
of 2001 into the film/post-production and broadcast segments of the market.
International sales accounted for 51.8% of our first half 2001 revenues,
compared to 40.2% in the first half of 2000. International sales increased by
approximately $2.3 million, or 94.2% in the first half of 2001. The increase
reflected higher sales in the Pacific Rim, Europe, South America and Canada.
Gross Margin
Gross margin decreased to 31.8% in the second quarter of 2001 as compared
to 34.6% in the second quarter of 2000. The decrease in gross margin was
primarily due to a write off of obsolete inventory in the second quarter of
2001. Gross margins increased to 34.7% in the first six months of 2001, as
compared to 25.6% in the first six months of 2000. The increase was primarily
due to greater unit sales of System 5 all digital mixing consoles which has a
higher gross margin.
Research and Development Expenses
Research and development expenses decreased 15.8% in the second quarter of
2001, as compared to the second quarter of 2000. The decrease was primarily due
to the termination of the E-Deck program in the
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second quarter in 2001. As a percentage of revenues, research and development
expenses decreased to 16.0% in the second quarter of 2001, down from 20.1% in
the second quarter of 2000. The decrease was attributable primarily to higher
revenues in the second quarter of 2001 as compared to 2000, as well as a
decrease in E-Deck costs.
Research and development expenses decreased 8.4% in the first half of 2001,
as compared to the first half of 2000. The decrease was primarily due to the
reduction in headcount at Spectral Inc., our wholly owned subsidiary, and the
cost savings from the termination of the E-Deck program. As a percentage of
revenues, research and development expenses decreased to 17.7% in the first half
of 2001, down from 29.1% in the first half of 2000. The decrease was
attributable primarily to higher revenues and lower costs in the first half of
2001 as compared to 2000.
Sales and Marketing Expenses
Sales and marketing expenses increased by approximately $117,000 in the
second quarter of 2001 as compared to the same period in 2000. This increase was
primarily due to increased expenditures on travel and tradeshows in the Pacific
Rim and Japan. As a percentage of revenues, sales and marketing expenses
increased to 34.3% in the second quarter of 2001, as compared to 33.6% in the
second quarter of 2000. The percentage increase in marketing and selling
expenses was due primarily to higher costs associated with international sales
in the second quarter of 2001, as compared to the same period in 2000.
Sales and marketing expenses increased by $229,000 in the first half of
2001 as compared to the first half of 2000. This increase was primarily due to
increased expenditures on activities related to international sales and sales
fees and commission. The increases were partially offset by the reduction in
costs due to the realization of savings relating to the joint venture with Audio
Export. As a percentage of revenues, marketing and selling expenses decreased to
32.2% in the first half of 2001, as compared to 44.8% in the first half of 2000.
The percentage decrease in marketing and selling expenses was due primarily to
higher revenues in the first half of 2001 as compared to 2000.
General and Administrative Expenses
General and administrative expenses decreased 10.5%, in the second quarter
of 2001, as compared to the same period in 2000. As a percentage of revenues,
general and administrative expenses decreased to 11.3% in the second quarter of
2001, as compared to 13.5% in the second quarter of 2000. The decrease resulted
primarily from a decrease in legal and professional fees in the second quarter
of 2001 compared to the second quarter of 2000.
General and administrative expenses increased 29.5%, in the first half of
2001, as compared to the same period in 2000. As a percentage of revenues,
general and administrative expenses decreased to 13.2% in the first half of
2001, as compared to 15.3% in the first half of 2000. The dollar increase in the
first half of 2001 was primarily due to higher salary and benefits, additional
personnel and bad debt expense, while the percentage decrease is attributable to
higher revenues in the first half in 2001.
Other Income/(Expense), Net
Other income/(expense) charges were $0.3 million in the second quarter of
2001, as compared to $0.06 million in the second quarter of 2000. This
represented an increase of 370.5% in the second quarter of 2001 as compared to
the similar period in 2000. The increase is due primarily to interest charges on
the notes payable and amortization of the commitment fee on the March 2001 notes
payable. Other income/(expense) for the
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first half of 2001, as compared to the first half of 2000, decreased by 60.0%,
which was primarily attributable to the charge of $1.3 million related to the
beneficial conversion feature associated with a convertible promissory note and
associated warrants issued on February 22, 2000.
Equity in Net Loss of Investee
The equity in net loss of investee for the three months ended June 30, 2001
is $305,000, as compared to $34,000 for the same period in 2000. The increase is
primarily the result of the impairment charge relating to Euphonix Europe of
$213,000, which we recorded during the three months ended June 30, 2001.
The equity in net loss of investee for the six months ended June 30, 2001
is $346,000, as compared to $34,000 for the same period in 2000. The increase is
primarily the result of the impairment charge relating to Euphonix Europe of
$213,000, which we recorded during the three months ended June 30, 2001 and the
fact that the joint venture in Euphonix Europe was entered into in the second
quarter of 2000.
Provision/(Benefit) for Income Taxes
No provision for federal and state income taxes was recorded for the first
half in 2001 and 2000 as we incurred net losses during the period.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily through the private sale of equity
and debt securities. For the first half ended June 30, 2001, cash and cash
equivalents decreased by $40,000 to approximately $547,000. In addition, during
this period working capital decreased by $6.9 million to approximately $(0.6)
million.
Our operating activities used cash of approximately $2.4 million in the
first half of 2001 and 2000. Cash used in operating activities for 2001 was
comprised primarily of a net loss, a decrease in accounts payable and customer
deposits offset partially by a decrease in accounts receivable. Cash used in
operating activities for the first half of 2000 was comprised primarily of a net
loss and a decrease in accounts payable and accrued liabilities.
Our investing activities used cash of $101,000 in the first half of 2001
due to the purchase of property and equipment, and provided cash of $84,000 in
the same period in 2000 due to the $152,000 sale offset by the $68,000 purchase
of property and equipment.
Our financing activities provided $2.5 million in the first half of 2001
and $3.2 million in the first half of 2000. We received proceeds from the
issuance of convertible notes in the first half of 2001 of $2.5 million, which
included $0.5 million from the December 2000 note and $2.0 million from the
March 2001 note, as compared to $2.3 million in proceeds from the issuance of
convertible notes and $800,000 from the sale of common stock in the first half
of 2000.
In March 2001, we issued convertible promissory notes to existing investors
under which we may borrow up to $3,500,000 in 2001. The notes accrue interest at
10% per annum with principal and accrued interest due March 31, 2002. The notes
contain a conversion feature, which was subject to shareholder approval allowing
the holder to convert the note into our common stock at a rate of $0.75 per
share. Approval was obtained at our annual meeting of shareholders' on June 19,
2001. We measured and will record a beneficial conversion feature charge of
$190,000 over the life of the note, because the accounting conversion rate was
lower than the fair market value of our common stock on the date of shareholder
approval. The beneficial conversion feature charged in the second quarter of
2001 was $7,000.
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We also issued 350,000 shares of common stock to these investors in return
for their agreement to loan us $3,500,000. The commitment fee was valued at the
fair market value of the common stock and is being amortized over the term of
the loan commitment. As of June 30, 2001, $2,004,000 was drawn down. In July
2001, an additional $800,000 was drawn down, leaving $696,000 available under
the facility.
We believe that our available cash and cash equivalents, as well as current
borrowing facility, will not be sufficient to meet our anticipated needs for
working capital and capital expenditures through the end of 2001. We will have
to raise additional funds above and beyond current levels in order to meet our
operating needs, to develop new or enhance existing products, to respond to
competitive pressures, or to acquire or invest in complementary businesses,
technologies, services or products, and we will be assessing that requirement
within the next three months. In addition, in order to meet our long-term
liquidity needs beyond the end of 2001, we will need to raise additional funds,
establish a credit facility or seek other financing arrangements. Additional
funding may not be available on favorable terms or at all. Moreover, the
maturity dates of our outstanding promissory notes will become due in early
2002. Although shareholders approved the notes for conversion into shares of our
common stock, there is no assurance that the investors will choose to convert
their notes, and we may have to repay these loans in 2002.
The financial statements have been presented on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
or the amount and classification of liabilities or any adjustments that might be
necessary should we be unable to continue as a going concern.
Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities, and is effective for fiscal years beginning after June 15, 2000, as
amended by SFAS No. 137. In June 2000, the Financial Accounting Standards Board
issued SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities - An Amendment of FASB Statement No. 133." SFAS No. 138 amends the
accounting and reporting standards for certain derivatives and hedging
activities such as net settlement contracts, foreign currency transactions and
intercompany derivatives. We adopted SFAS No. 133 January 1, 2001. The adoption
of SFAS No. 133 did not have an impact on our financial position or results of
operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase
method of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. We believe that the adoption of SFAS
141 will not have a significant impact on our financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
for fiscal years beginning after March 15, 2001. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing goodwill
and other
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intangibles. We will adopt SFAS 142 effective January 1, 2002. The adoption of
SFAS 142 is not expected to have a material impact on our financial statements.
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
A number of uncertainties exist that could affect our future operating
results, including, without limitation, the following:
IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND OUR OPERATIONS, WE MAY BE FORCED TO
IMPLEMENT SIGNIFICANT REDUCTIONS IN THE MANNER IN WHICH WE CONDUCT BUSINESS,
INCLUDING WORKFORCE REDUCTIONS, AND FOREGO ATTRACTIVE BUSINESS OPPORTUNITIES
We believe that our cash and cash equivalents, together with cash flow from
operations and investor financing that we expect to obtain, will not provide
sufficient capital to fund our operations through December 31, 2001 if our
assumptions about our revenues and expenses are generally accurate. Our actual
funding requirements may differ materially as a result of many factors,
including the development of new products and technologies and the continued
growth of the company. Even if we are successful funding our operations through
December 31, 2001, we do not expect to be profitable by the end of the year, so
we will likely need to raise additional funds in the future through public or
private financings or other similar arrangements. The capital markets have
become increasingly constrained since the beginning of this year, which has
adversely affected the ability of many companies to raise capital. Additional
financing may not be available on acceptable terms, if at all, and the inability
to obtain that financing could adversely affect the continued operation of our
business. Without the proceeds from future financings, we would likely continue
to implement material changes to our business plan to conserve cash resources,
including staff reductions and other spending reductions. If additional funds
are raised through the issuance of equity securities or securities convertible
into equity, dilution to existing stockholders may result and, if our stock
price remains depressed, could be significant. If insufficient funds are
available, we may not be able to continue to operate our business in an
effective manner or to compete effectively.
WE HAVE INCURRED SIGNIFICANT LOSSES FOR THE PAST FIVE YEARS, AND WILL NEED TO
RAISE ADDITIONAL FUNDING IN ORDER TO FUND OUR OPERATIONS
We incurred net losses of approximately $3.5 million in the first half of
2001, $8.3 million in 2000, $6.3 million in 1999, $5.2 million in 1998, $1.9
million in 1997, and $1.4 million in 1996, and we will continue to expend
substantial funds to increase the versatility and functionality of the System 5
digital console in fiscal 2001. Although we received commitments from existing
investors to loan us $3.5 million during 2001, we now believe that we will need
to raise additional capital in order to fund operations in 2001. Although we
believe that additional debt or equity financing will be available from existing
investors and others, 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 would cause a severe
negative impact, and we may be unable to fund operations.
OUR COMMON STOCK MAY BE DELISTED FROM NASDAQ
The shares of our common stock are currently listed on the Nasdaq SmallCap
Market. Currently, however, we are not in compliance with Nasdaq's net tangible
assets requirement because our net tangible
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assets are less than $2 million. In addition, we are not in compliance with
Nasdaq's minimum bid requirement because the minimum bid per share of our common
stock has been at or below $1.00 for over 30 consecutive business days.
Consequently, Nasdaq informed us of its intention to delist the stock. This
delisting, however, has been stayed pending the outcome of an oral hearing on
August 17, 2001. If this appeal is denied, our stock will be delisted from
Nasdaq. If our stock is delisted from Nasdaq, it would be much more difficult to
purchase or sell our stock or obtain accurate quotations as to our stock price.
OUR STOCK PRICE HAS RECENTLY TRADED FAR BELOW THE INITIAL OFFERING PRICE AND
COULD REMAIN AT THIS LOW PRICE, WHICH COULD AFFECT OUR ABILITY TO ACQUIRE OTHER
COMPANIES, LEAVE US VULNERABLE TO HOSTILE TAKE OVER ATTEMPTS AND RESULT IN
SECURITIES CLASS ACTION LITIGATION
The market price of our common stock has traded at or significantly below
the initial offering price of $8.00 per share. If the price per share does not
increase, our investors may incur a substantial loss on their investment. In
addition, the sustained depression of the market price of our common stock
hampers our ability to conduct business, and in particular, could make it more
difficult to pursue acquisitions of potential complementary businesses, leave us
vulnerable to hostile takeovers and result in securities class action
litigation.
OUR STOCK PRICE MAY CONTINUE TO BE DEPRESSED DUE TO BROAD ECONOMIC, MARKET AND
INDUSTRY FACTORS BEYOND OUR CONTROL
Until recently, the market demand, valuation and trading prices of high
technology companies was high. Recently, however, the share prices of
high-technology companies, such as ours, have significantly decreased, and these
stocks are now trading far below their historical highs. Our stock price may
continue to be depressed because the market may perceive us to be a
high-technology company. In addition, a variety of other factors beyond our
control, such as general economic conditions, could cause our stock price to
remain extremely low, regardless of our performance.
WE DERIVE ALL OF OUR REVENUES FROM SALES OF OUR DIGITALLY CONTROLLED AUDIO
MIXING CONSOLE AND RECORDING SYSTEMS, AND ANY FACTOR THAT ADVERSELY IMPACTS THIS
SYSTEM WILL SERIOUSLY HARM OUR BUSINESS
Historically, we have derived virtually all of our revenues from sales of
our digitally controlled audio mixing console system, which is based upon our
hardware platform. We believe that sales of these systems, along with
enhancements thereof, the System 5 digital console, CS3000 console and R-1
recorder will continue to constitute a significant portion of our revenues. It
is expected for the foreseeable future that a greater proportion of our revenue
will come from the System 5 digital console. Accordingly, any factor adversely
affecting our base system, whether technical, competitive or otherwise, could
significantly harm our business and results of operations.
WE DEPEND UPON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PERCENTAGE OF OUR
REVENUES. IF WE LOSE SIGNIFICANT CUSTOMERS, OR IF PURCHASES BY ONE OF OUR KEY
CUSTOMERS DECREASES, OUR NET SALES WILL DECLINE AND OUR BUSINESS WILL BE HARMED
Due to high average sales prices, we depend upon a limited number of
customers for a substantial proportion of our revenues. If we lose one or more
of our significant customers, or if purchases by one of our key customers
decreases, our net sales will decline and our business will be harmed. 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
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marketing expenditures, custom financing arrangements, production limitations
and international sales activity. Moreover, our expense levels are based in part
on our expectations of future revenue. Because our operating expenses are based
on anticipated revenue levels and because a high percentage of our 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.
IF WE RAISE ADDITIONAL CAPITAL THROUGH THE ISSUANCE OF NEW SECURITIES, EXISTING
STOCKHOLDERS WILL INCUR ADDITIONAL DILUTION
If we raise additional capital through the issuance of new securities, our
stockholders will be subject to additional dilution. In addition, any new
securities issued may have rights, preferences or privileges senior to those
securities held by our current stockholders.
WE RELY ON DISTRIBUTORS AND SALES REPRESENTATIVES FOR A SUBSTANTIAL PORTION OF
OUR INTERNATIONAL SALES
In regions outside of the United States and Japan, we rely on distributors
and sales representatives to sell our products. Any disruptions to these
personnel may adversely affect our revenue and gross margins.
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE AND THE INTENSE COMPETITION OF
THE HIGH TECH INDUSTRY IN ORDER TO SUCCEED
The markets for our products are characterized by changing technologies and
new product introductions. Our success will depend in part upon our continued
ability to enhance our 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. We are 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. There can be no
assurance that products or technologies developed by others will not render our
products or technologies non-competitive or obsolete. If this happens, our
revenues will likely be lower and our business will suffer.
CURRENT AND POTENTIAL COMPETITORS COULD DECREASE OUR MARKET SHARE AND HARM OUR
BUSINESS
The markets for our products are intensely competitive and characterized by
significant price competition. We believe that our ability to compete depends on
elements both within and outside our control, including the success and timing
of new product development and introduction by us and our competitors, product
performance and price, distribution, availability of lease or other financing
alternatives, resale of used systems and customer support. In addition, although
our products compete primarily with other mixing consoles in the high-end price
range of our targeted market segments, we also believe that, as technology in
the professional audio industry advances, prices for mixing consoles and other
audio equipment, including our products, will decrease. As a result, our
products may increasingly compete against lower-priced products, as well as
products in the high-end price range. Although we believe that our audio mixing
console has certain technological advantages over our competitors, maintaining
such advantages will require continued investment by us in research and
development, sales and marketing and customer service and support. There can be
no assurance that we will have sufficient resources to be able to maintain such
competitive advantages.
There are numerous companies that compete in the professional audio market.
Many of our competitors are larger and have greater financial, technical,
manufacturing and marketing resources, broader
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product offerings, more extensive distribution networks and larger installed
bases than ours. We believe that companies with large installed bases, in
particular, may have a competitive advantage since many potential customers in
our targeted markets are often reluctant to commit significant resources to
replace their current products and to retrain operators to use new products
despite technological advantages of such new alternative products. Some of our
competitors also offer customers leasing or refinancing packages in connection
with the purchase of their mixing consoles, which financing alternatives we do
not generally offer. Furthermore, we compete with resellers of used mixing
consoles and equipment who are able to sell high-end price range products at
generally lower prices.
WE DEPEND ON SINGLE AND LIMITED SOURCES FOR KEY COMPONENTS, AND IF WE LOSE ONE
OR MORE OF THESE SOURCES, DELIVERY OF OUR PRODUCTS COULD BE DELAYED OR PREVENTED
AND OUR BUSINESS COULD SUFFER
We and our manufacturing vendors are dependent upon single or limited
source suppliers, such as Analog Devices and Maxim Integrated Products, for
numerous components and parts used in our products. Currently, we use many sole
or limited source suppliers, some of which are critical to our continued
uninterrupted production because they supply key components, such as integrated
circuits, included in our base system. In particular, we rely on single vendors
to manufacture major subassemblies for our products, and other components are
critical to the integrated circuits included in our base system. There can be no
assurance that these suppliers will continue to be able and willing to meet our
requirements for any sole-sourced components. We generally purchase these single
or limited source components pursuant to purchase orders and have no guaranteed
supply arrangements with such suppliers. In addition, the availability of many
components to our subcontractors is dependent in part on our ability to provide
our subcontractors, and in turn the subcontractor's ability to provide their
suppliers, with accurate forecasts of their future requirements. Major delays or
terminations in supplies of such components could significantly adversely affect
our timely shipment of our products, which in turn would adversely affect our
business and results of operations. The process of qualifying suppliers or
designing out certain parts could be lengthy, and no assurance can be given that
any additional sources or product redesign would be available to us or
implemented on a timely basis. From time to time in the past, we have
experienced interruptions in the supply of certain key components from
suppliers, which delayed product shipments and there can be no assurance that we
will not experience significant shortages for these components in the future. We
do not maintain an extensive inventory of such components and any extended
interruption or reduction in the future supply or increases in prices of any key
components currently obtained from a single limited source supplier could have a
material adverse effect on our business and results of operations for any given
period. If we encounter shortages in component supply, we may be forced to
adjust our product designs and production schedules. The failure of one or more
of our key suppliers or vendors to fulfill our orders in a timely manner could
cause us to not meet our contractual obligations, could damage our customer
relationships and could harm our business.
OUR SUPPLIERS' ABILITY TO PRODUCE COMPONENTS IS DEPENDENT ON OUR AND OUR
SUPPLIERS' ABILITY TO GENERATE ACCURATE FORECASTS, AND THE PROCESS OF QUALIFYING
NEW SUPPLIERS IS LENGTHY
Our suppliers rely on subcontractors to provide them with components, and
their ability to timely procure such components is dependent in part on our
ability to provide our subcontractors, and in turn the subcontractor's ability
to provide their suppliers, with accurate forecasts of future requirements. The
process of qualifying suppliers or designing out certain parts could be lengthy,
and no assurance can be given that any additional sources or product redesign
would be available to us or implemented on a timely basis. If we are unable to
procure key components, shipments of our products would be delayed and revenues
would fall.
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NEW LAWS COULD RESULT IN INCREASED EXPENDITURES, WHICH WOULD HARM OUR RESULTS OF
OPERATIONS
If different electrical, radiation or other standards applicable to our
products are adopted in countries in which we sell our products, including the
United States, we may have to increase our expenditures in order to make our
products compliant with these laws. In addition, any failure to modify our
products, if necessary, to comply with such standards would potentially subject
us to fines and penalties, and would harm our business and results of
operations.
OUR INTELLECTUAL PROPERTY IS VERY IMPORTANT TO OUR BUSINESS, AND IF WE ARE
UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR BUSINESS WILL SUFFER
We generally rely on a combination of trade secret, copyright law and
trademark law, contracts and technical measures to establish and protect our
proprietary rights in our products and technologies. We believe, however, that
these measures provide only limited protection of our proprietary information,
and there is no assurance that they will be adequate to prevent
misappropriation. In addition, significant and protracted litigation may be
necessary to protect our 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 us in the future. Any such claims could seriously harm our
business and results of operations.
WE MUST CONTINUALLY ATTRACT AND RETAIN OUR MANAGEMENT AND TECHNICAL PERSONNEL OR
WE WILL BE UNABLE TO EXECUTE OUR BUSINESS STRATEGY
Our future success depends in part on our ability to attract, retain and
motivate key management and technical employees. Competition for such personnel
is intense in the high tech industry, especially in the Silicon Valley
employment market, and we may be unable to successfully attract, integrate or
retain sufficiently qualified personnel. We have experienced, and we expect to
continue to experience, difficulty in hiring and retaining highly skilled and
qualified employees.
WE MUST EFFECTIVELY MANAGE AND SUPPORT OUR GROWTH IN ORDER FOR OUR BUSINESS
STRATEGY TO SUCCEED
We will need to continue to increase revenues and grow in all areas of
operation in order to execute our business strategy. Managing and sustaining our
growth will place significant demands on management as well as on our
administrative, operational and financial systems and controls. If we are unable
to do this effectively, we would have to divert resources such as management
time away from the continued growth of our business and implementation of our
business strategy, and our business and results of operations will be adversely
affected.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the state of California fall below certain
critical levels, California has on some occasions implemented, and may in the
future continue to implement, rolling blackouts throughout California. We
currently do not have backup generators or alternate sources of power in the
event of a blackout, and our current insurance does not provide coverage for any
damages we or our customers may suffer as a result of any interruption in our
power supply. If blackouts interrupt our power supply, we would be temporarily
unable to continue operations at our California facilities.
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Any such interruption in our ability to continue operations at our facilities
could damage our reputation, harm our ability to retain existing customers and
to obtain new customers, and could result in lost revenue, any of which could
substantially harm our business and results of operations.
A DISASTER COULD SEVERELY DAMAGE OUR OPERATIONS
A disaster could severely damage our ability to deliver our products to our
customers. Our products depend on our ability to maintain and protect our
facilities, which are primarily located in or near our principal headquarters in
Palo Alto, California. Palo Alto may exist on or near a known earthquake fault
zone. Although the facilities in which we host our computer systems are designed
to be fault tolerant, the systems are susceptible to damage from fire, floods,
earthquakes, power loss, telecommunications failures, and similar events.
Although we maintain general business insurance against fires, floods and some
general business interruptions, there can be no assurance that the amount of
coverage will be adequate in any particular case.
CHANGES IN EXCHANGE RATES COULD HURT OUR REVENUES
Our wholly-owned sales and service subsidiary in Japan conducts its
business in the local currency. Changes in the value of the Yen relative to the
value of the U.S. dollar, therefore, could adversely affect future revenues and
operating results. We have not hedged transactions with external parties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Sales through our Japanese subsidiary are denominated in Japanese Yen. The
receivables denominated in Yen are subject to foreign exchange risk, and we do
not enter into hedging arrangements to mitigate the foreign currency risk with
respect to such arrangements. An adverse change in the foreign exchange rate
would have an effect on the price of our consoles sold in Japan and could result
in foreign currency transaction losses. We believe that such losses may be
material.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
At our Annual Stockholders' Meeting held on June 19, 2001, the following
proposals were adopted by the margins indicated.
Proposal 1: Election of Directors
Nominee For Withheld
Robert F. Kuhling Jr. 9,768,473 24,431
James Dobbie 9,767,073 25,831
Walter Bosch 9,768,373 24,531
The following directors, who were not up for election at the Annual
Meeting, continued to serve as directors after the Annual Meeting: Dieter Meier,
Richard Feldman and Steven Vining. Subsequent to the Annual Meeting, Messrs.
Feldman and Kuhling resigned from the Board of Directors, and Martin Kloiber was
appointed to the Board of Directors.
Proposal 2: Approval of the Convertibility Feature of the Secured Promissory
Note Issued in April 2000.
For Against Abstain Broker Non-Vote
7,681,097 20,989 9,286 2,081,532
Proposal 3: Approval of the Convertibility Feature of Secured Promissory Note
Issued in September 2000.
For Against Abstain Broker Non-Vote
7,681,387 20,999 8,986 2,081,532
Proposal 4: Approval of the Convertibility Feature of Secured Promissory Note
Issued in December 2000.
For Against Abstain Broker Non-Vote
7,680,437 22,549 8,386 2,081,532
Proposal 5: Approval of the Convertibility Feature of Secured Promissory Note
Issued in March 2001.
For Against Abstain Broker Non-Vote
7,680,287 22,699 8,386 2,081,532
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Proposal 6: Approval of the Increase in the Authorized Number of Shares of
Common Stock from 20,000,000 to 35,000,000
For Against Abstain Broker Non-Vote
9,718,936 30,887 43,081 0
Proposal 7: Ratification of Independent Public Accountants
For Against Abstain Broker Non-Vote
9,755,198 28,745 8,961 0
ITEM 5. OTHER INFORMATION.
In July 2001, directors Richard Feldman and Robert Kuhling resigned from
the Audit Committee and the Board of Directors. In July 2001, Martin Kloiber was
appointed to the Board of Directors and to the Audit Committee, and James Dobbie
was appointed to the Audit Committee.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
The exhibits listed in the accompanying Index to Exhibits immediately
following the signature page are incorporated by reference as part of this Form
10-Q.
(b) REPORTS ON FORM 8-K.
We did not file any reports on Form 8-K during the quarter ending June 30,
2001.
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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 14, 2001 By: /s/ JEFFREY CHEW
-----------------------------------------
Jeffrey Chew, Chief Executive Officer
(Principal Executive and Financial Officer)
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INDEX TO EXHIBITS
The following Exhibits are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-K:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ----------------------------------------------------------------------
3.1(1) Amended and Restated Articles of Incorporation of the Registrant.
3.2(1) Bylaws of the Registrant.
(1) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form SB-2 (File No. 33-994898-LA), effective
August 21, 1995.
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