-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KOIqTLlXpG0civnlKKUyfG4uMU0vB4nNjszEUT+dEAtrv4Y0r0/kgxxmSu42pniv wdTvERbfjqNF5IIUhAJ2Pw== 0000891618-01-502373.txt : 20020412 0000891618-01-502373.hdr.sgml : 20020412 ACCESSION NUMBER: 0000891618-01-502373 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20011127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EUPHONIX INC \CA\ CENTRAL INDEX KEY: 0000948640 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 770189481 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-26516 FILM NUMBER: 1800184 BUSINESS ADDRESS: STREET 1: 220 PORTAGE AVE CITY: PALO ALTO STATE: CA ZIP: 94306 BUSINESS PHONE: 6508461138 MAIL ADDRESS: STREET 1: 220 PORTAGE AVENUE CITY: PALO ALTO STATE: CA ZIP: 94306 10-Q/A 1 f77292ae10-qa.txt AMENDMENT NO. 1 TO FORM 10-Q (3/31/01) ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q/A (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 March 31, 2001 was 12,551,470 ($0.001 par value). ================================================================================ EUPHONIX, INC. FORM 10-Q/A TABLE OF CONTENTS
PAGE ---- Explanatory Note Regarding This Amendment on Form 10-Q/A......................... ii 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 for the three months ended March 31, 2001 and 2000............................................ 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 2. Changes in Securities and Use of Proceeds................................ 20 Item 6. Exhibits and Reports on Form 8-K......................................... 20 SIGNATURES....................................................................... 21
-i- EXPLANATORY NOTE REGARDING THIS AMENDMENT ON FORM 10-Q/A This quarterly report on Form 10-Q/A is being filed as a result of the restatement of our consolidated financial statements for the year ended December 31, 2000 as further described in Note 5 of the Notes to Condensed Consolidated Financial Statements (unaudited) in this Form 10-Q/A and in Note 16 of the Notes to Condensed Consolidated Financial Statements of our Annual Report on Form 10-K/A for the year ended December 31, 2000. This report still speaks as of the original filing date, and except as stated, no attempt has been made to update this report to reflect events occurring subsequent to the date of the original filing. -ii- PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS EUPHONIX, INC. CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2001 AND DECEMBER 31, 2000 (IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED)
DECEMBER 31, MARCH 31, 2001 2000 -------------- ------------ RESTATED RESTATED ASSETS Current assets: Cash and cash equivalents ............................... $ 2,427 $ 587 Accounts receivable (net of allowance for doubtful accounts of $131 in 2001 and $141 in 2000) ........... 926 2,389 Inventories ............................................. 7,417 6,969 Prepaid expenses and other current assets ............... 713 406 ------------ ------------ Total current assets .................................. 11,483 10,351 Property and equipment, net ............................... 1,024 1,127 Deposits and other assets ................................. 449 522 ------------ ------------ Total assets ......................................... $ 12,956 $ 12,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities: Accounts payable ........................................ $ 2,306 $ 1,841 Accrued liabilities ..................................... 1,361 1,174 Short term note payable ................................. 1,662 -- Deferred revenue, net ................................... 996 882 Customer deposits ....................................... 897 860 ------------ ------------ Total current liabilities ............................. 7,222 4,757 Notes payable ........................................... 6,260 6,531 ------------ ------------ Total Liabilities ....................................... 13,482 11,288 ------------ ------------ Contingencies (Note 3) Shareholders' equity (deficit): Common stock, $0.001 par value: 20,000,000 authorized shares, 12,548,000 and 12,190,099 shares issued and outstanding in 2001 and 2000, respectively ........................................... 12 12 Additional paid-in capital .............................. 24,553 24,191 Unearned compensation ................................... (39) (53) Accumulated other comprehensive income .................. 37 42 Accumulated deficit ..................................... (25,089) (23,480) ------------ ------------ Total shareholders' (deficit) equity .................... (526) 712 ------------ ------------ Total liabilities and shareholders' (deficit) equity .... $ 12,956 $ 12,000 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 1 EUPHONIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------ 2001 2000 ------------ ------------ RESTATED Net revenues ..................................................... $ 4,634 $ 1,513 Cost of revenues ................................................. 2,899 1,594 ------------ ------------ Gross margin (loss) .............................................. 1,735 (81) ------------ ------------ Operating expenses: Research and development ...................................... 896 909 Sales and marketing ........................................... 1,404 1,292 General and administrative .................................... 690 359 ------------ ------------ Total operating expenses ......................................... 2,990 2,560 ------------ ------------ Operating loss ................................................... (1,255) (2,641) Other expense, net ............................................... (314) (1,398) ------------ ------------ Loss before equity in net loss of investee ....................... (1,569) (4,039) Equity in net loss of investee ................................... (40) -- ------------ ------------ Net loss ......................................................... $ (1,609) $ (4,039) ============ ============ Basic and diluted net loss per share ............................. $ (0.13) $ (0.34) ============ ============ Shares used in computing net loss per share, basic and diluted .. 12,254,771 11,718,564 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements 2 EUPHONIX, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------------ 2001 2000 ------------ ------------ RESTATED Cash flows from operating activities: Net loss .................................................. $ (1,609) $ (4,039) ------------ ------------ Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization .......................... 165 176 Loss on disposal of fixed assets ....................... 4 30 Allowance for doubtful accounts ........................ (10) 8 Beneficial conversion on convertible note payable ................................................ -- 1,279 Interest accrued on notes payable ...................... 142 53 Amortization of deferred compensation .................. 16 57 Changes in assets and liabilities: Accounts receivable .................................... 1,473 (3) Inventory .............................................. (448) 65 Prepaid expenses and other assets (including current) .. 91 (195) Accounts payable ....................................... 464 106 Accrued liabilities .................................... 187 (68) Deferred revenue, net .................................. 114 841 Customer deposits ...................................... 37 (50) ------------ ------------ Total adjustments ......................................... 2,235 2,299 ------------ ------------ Net cash provided by (used in) operating activities ....... 626 (1,740) ------------ ------------ Cash flows from investing activities: Purchase of property and equipment ........................ (36) (33) ------------ ------------ Net cash used in investing activities ..................... (36) (33) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of convertible notes ............... 1,250 1,500 Proceeds from sale of common stock ........................ -- 300 Proceeds from exercise of stock options ................... -- 42 ------------ ------------ Net cash provided by financing ............................ 1,250 1,842 ------------ ------------ Net increase in cash and cash equivalents ................ 1,840 69 Cash and cash equivalents at beginning of period .......... 587 838 ------------ ------------ Cash and cash equivalents at end of period ................ $ 2,427 $ 907 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements 3 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 March 31, 2001 and for the three months ended March 31, 2001 and 2000 have been prepared by the Company, without audit, 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 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 amended Annual Report on Form 10-K/A for the fiscal year ended December 31, 2000, filed with the SEC on November 27, 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 March 31, 2001, results of operations for the three months ended March 31, 2001 and 2000, and cash flows for the three months ended March 31, 2001 and 2000 have been made. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the operating results for the full fiscal year or any future periods. 4 EUPHONIX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Unless the Company raises additional funds, the Company believes that its available cash and cash equivalents and its current borrowing facility will not be sufficient to meet its anticipated needs for working capital and capital expenditures through the end of 2001. Moreover, the Company's outstanding promissory notes will become due in early 2002. Although the notes may be converted into shares of the Company's 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. RECLASSIFICATIONS Certain amounts from the previous periods have been reclassified to conform with the current period presentation. REVENUE RECOGNITION PRODUCT REVENUE 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 ("SAB 101"). Previously, the Company has 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 of SAB 101 for the quarter ended March 31, 2000 is as follows (in thousands, except per share data):
FIRST QUARTER ENDED MARCH 31, 2000 ----------------------------------------- AS PREVIOUSLY REPORTED ADJUSTMENT AS RESTATED ---------- ---------- ---------- Net revenues .............................................. $ 2,835 $(1,000) $ 1,835 ---------- ---------- Gross margin .............................................. $ 760 $ (664) $ 96 ---------- ---------- Net loss .................................................. $ (3,198) $ (664) $ (3,862) ---------- ---------- Basic and diluted loss per share .......................... $ (0.27) $ (0.33) ========== ========== Shares used in computing basic and diluted net loss per share .................................................. 11,719 11,719 ========== ==========
REVENUE FOR CONTRACTS THAT INCLUDE SALES OF SOFTWARE AND SOFTWARE MODIFICATION The Company recognizes revenue for contracts which include future sales of software and software modification using the residual method in accordance with Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions." Under the residual method, revenue is recognized in a multiple element arrangement in which Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the 5 EUPHONIX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) arrangement. Company-specific objective evidence of fair value of maintenance and other services is based on the Company's customary pricing for such maintenance and/or services when sold separately. At the outset of the arrangement with the customer, the Company defers revenue for the fair value of its undelivered software and recognizes revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement when the basic criteria in SOP 97-2 have been met. If such evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all elements of the arrangement are delivered. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board 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. NOTE 2 - BALANCE SHEET COMPONENTS (IN THOUSANDS): (a) Inventories:
MARCH 31, 2001 DECEMBER 31, 2000 -------------- ----------------- Raw materials ............ $1,901 $2,474 Work-in-process .......... 1,567 1,084 Finished goods ........... 3,949 3,411 ------ ------ $7,417 $6,969 ====== ======
(b) Accrued liabilities:
MARCH 31, 2001 DECEMBER 31, 2000 -------------- ----------------- Accrued compensation and related ... $ 464 $ 445 Accrued warranty ................... 264 265 Accrued commissions ................ 92 91 Sales tax payable .................. 133 149 Other .............................. 408 224 ------------ ------------ $ 1,361 $ 1,174 ============ ============
6 EUPHONIX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (c) 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 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 Company and the investors agreed to convert the principal and accrued interest into 3,168,267 shares of common stock of the Company. See "Note 4 -- Subsequent Events." 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 Company recorded a charge for a beneficial conversion feature in the amount of $1,279,000 because the accounting conversion rate was lower than fair market value of the Company's common stock at the commitment date. 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 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. The Company expects that this note will be approved by the shareholders, and upon approval the Company will measure and record a beneficial conversion feature charge, if the accounting conversion rate is lower than the fair market value of the Company's common stock on that date (the commitment date). 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 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 is subject to shareholder approval, and if approved, will allow the holder to convert the note into common stock of the Company at a rate of $2.3562 per share. In addition this note provides that 7 EUPHONIX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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. The Company expects that this note will be approved by the shareholders, and upon approval the Company will measure and record a beneficial conversion feature charge, if the accounting conversion rate is lower than the fair market value of the Company's common stock on that date (the commitment date). 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 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 $1.26 per share. 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. The Company expects that this note will be approved by the shareholders, and upon approval the Company will measure and record a beneficial conversion feature charge, if the accounting conversion rate is lower than the fair market value of the Company's common stock on that date. 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 allows the holder to convert the principal and accrued interest into common stock of the Company at a rate of $0.75 per share at any time after the shareholders of the Company approve the notes. The Company expects that this note will be approved by the shareholders, and upon approval the Company will measure and record a beneficial conversion feature charge, if the accounting conversion rate is lower than the fair market value of the Company's common stock on that date. The Company also issued 350,000 shares of common stock to these investors in return for their agreement to loan $3,500,000 to the Company. The commitment fee was measured at the fair market value on the date of issuance of the shares and is being amortized over the term of the loan commitment. As of March 31, 2001, $750,000 was drawn down. In May 2001, an additional $804,000 was drawn down. The remaining amount to draw down is $1,946,000 as of May 15, 2001. 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 expenditures will be made and such expenditures can be reasonably estimated. In the opinion of 8 EUPHONIX, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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. NOTE 4 - SUBSEQUENT EVENTS 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 $276,201 into 3,168,267 shares of our common stock at the price of $0.75 per share. NOTE 5 - RESTATEMENT OF FINANCIAL RESULTS FOR 2000 The consolidated financial statements as of and for the year ended December 31, 2000 have been restated to reverse previously recognized revenue and related cost of revenues of $1,060,000 and $552,000, respectively. As a result, the previously reported net loss for the year and accumulated deficit at December 31, 2000 have each been increased by $508,000 and the loss per share for the year has been increased from $(0.69) to $(0.73). The restatement is the result of revenues of $322,000 and $738,000 from a contractual arrangement with a single customer that had been previously recognized upon the shipment or commissioning of the Company products at the customer's site in the quarters ended March 31, 2000 and June 30, 2000, respectively. However, it has since been determined that the Company had additional software delivery obligations that had not been fulfilled during the year ended December 31, 2000; generally accepted accounting principles preclude the recognition of any revenue from the arrangement until such obligations are satisfied. Those obligations were satisfied in the quarter ending December 31, 2001, and revenue of approximately $1 million and cost of revenue of $552,000 will be recognized in that quarter. Inasmuch as the entire amount of revenue due under the arrangement of $1,060,000 had been received at December 31, 2000, that amount and the related cost of revenues of $552,000 is deferred in the restated consolidated balance sheet as of that date. The effect of the restatement on previously reported revenue, net loss and loss per share for the quarter ended March 31, 2000 is as follows:
Three months ended March 31, 2000 --------------------------------- As reported* As restated USD '000 USD '000 ------------- ----------- Net revenues ............ 1,835 1,513 Net loss ................ (3,862) (4,039) Net loss per share ...... (0.33) (0.34)
* includes the effect of adopting SAB 101 retroactive to January 1, 2000 as described in notes 1 and 15 to the Company's Form 10-K/A. 9 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: whether our cash and cash equivalents will be sufficient to meet our anticipated need for working capital and capital expenditures through the end of 2001; and the impact of SFAS No. 133 on our financial position. 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 Restatement of financial results As we discuss in Note 5 of the interim consolidated financial statements for the quarter ended March 31, 2001 in this Form 10-Q/A, the consolidated financial statements as of and for the year ended December 31, 2000 have been restated to reverse previously recognized revenue and related cost of revenues of $1,060,000 and $552,000, respectively. As a result, the previously reported net loss for the year and accumulated deficit at December 31, 2000 have each been increased by $508,000 and the loss per share for the year has been increased from $(0.69) to $(0.73). The restatement is the result of revenues of $322,000 and $738,000 from a contractual arrangement with a single customer that had been previously recognized upon the shipment or commissioning of our products at the customer's site in the quarters ended March 31, 2000 and June 30, 2000, respectively. However, it has since been determined that we had additional software delivery obligations that had not been fulfilled during the year ended December 31, 2000; generally accepted accounting principles preclude the recognition of any revenue from the arrangement until such obligations are satisfied. Those obligations were satisfied in the quarter ending December 31, 2001, and revenue of approximately $1 million and cost of revenue of $552,000 will be recognized in that quarter. Inasmuch as the entire amount of revenue due under the arrangement of $1,060,000 had been received at December 31, 2000, that amount and the related cost of revenues of $552,000 is deferred in the restated consolidated balance sheet as of that date. The effect of the restatement on previously reported revenue, net loss and loss per share for the quarter ended March 31, 2000 is as follows:
Three months ended March 31, 2000 --------------------------------- As reported* As restated USD '000 USD '000 ------------- ----------- Net revenues................ 1,835 1,513 Net loss.................... (3,862) (4,039) Net loss per share.......... (0.33) (0.34)
* includes the effect of adopting SAB 101 retroactive to January 1, 2000 as described in notes 1 and 15 to the Company's Form 10-K/A. 10 Net Revenues Net revenues were $4.6 million in the first quarter in 2001 up from $1.5 million in the first quarter of 2000, representing an increase of 206.3%. The increase in our net revenues for the first quarter of 2001, as compared to the first quarter of 2000, resulted primarily from increased unit sales of System 5 all digital mixing consoles in the first quarter of 2001 into the film/post-production and broadcast segments of the market. International sales accounted for 47.2% of our first quarter 2001 revenues, compared to 45.2% in the first quarter of 2000. International sales increased by approximately $1.5 million, or 220.0% in the first quarter of 2001, as compared to 2000. The increase in international sales in 2001, as compared to the similar period in 2000, reflected higher sales in Japan and Canada in the first quarter of 2001. Gross Margin (Loss) Gross margins increased to 37.4% in the first quarter of 2001 as compared to -5.4% in the first quarter of 2000. The increase in gross margin in the first quarter of 2001, as compared to the first quarter of 2000, was primarily due to an increase in System 5 digital mixing console shipments, which carry a higher gross margin than the CS3000 (which was mainly sold in Q1 2000). The gross margin in the first quarter of 2000 was negative due to unabsorbed fixed and partially variable manufacturing costs. Research and Development Expenses Research and development expenses remained approximately the same in the first quarter of 2001, as compared to the first quarter of 2000. As a percentage of revenues, research and development expenses decreased to 19.3% in the first quarter of 2001, down from 60.1% in the first quarter of 2000. The decrease was attributable primarily to higher revenues in the first quarter of 2001 as compared to 2000. Sales and Marketing Expenses Sales and marketing expenses increased by approximately $112,000 in the first quarter of 2001 as compared to the same period in 2000. This increase was primarily due to increased expenditures on product marketing by increasing advertising expenditures and adding personnel and consultants. 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 30.3% in the first quarter of 2001, as compared to 85.4% in the first quarter of 2000. The percentage decrease in marketing and selling expenses was due primarily to higher revenues in the first quarter of 2001, as compared to the same period in 2000. General and Administrative Expenses General and administrative expenses increased by $0.3 million, or 92.2%, in the first quarter of 2001, as compared to the same period in 2000. As a percentage of revenues, general and administrative expenses decreased to 14.9% in the first quarter of 2001, as compared to 23.7% in the first quarter of 2000. The dollar increase in the first quarter of 2001 was primarily due to higher salary and benefits, additional personnel and bad debt expense. As compared to the first quarter of 2000, the percentage decrease is attributable to higher revenues in the first quarter in 2001. 11 Other expense, net Other expense, net charges were $0.3 million in the first quarter of 2001, as compared to $1.4 million in the first quarter of 2000. This represented a decrease of 77.5% in 2001 as compared to 2000. Other expense, net for 2000 included a charge of $1.3 million related to the beneficial conversion feature associated with the convertible promissory note and associated warrants issued on February 22, 2000. Provision/(benefit) for Income Taxes No provision for federal and state income taxes was recorded for the first quarter in 2001 and 2000 as we incurred net losses during the period. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations primarily through cash flows from operations and the private sale of equity and debt securities. For the first quarter ended March 31, 2001, cash and cash equivalents increased by $1.8 million to approximately $2.4 million. In addition, during this period working capital decreased by $1.3 million to approximately $4.3 million. Our operating activities provided cash of approximately $0.6 million in the first quarter of 2001, and used cash of $1.7 million in the same period in 2000. Cash provided by operating activities for 2001 was comprised primarily of a decrease in accounts receivable offset by a net loss. Cash used in operating activities for the first quarter of 2000 was comprised primarily of net loss offset partially by a non cash charge related to the beneficial conversion feature on convertible notes. Our investing activities used cash of $36,000 in the first quarter of 2001 and $33,000 in the same period in 2000 due to the purchase of property and equipment. Our financing activities provided $1.3 million in the first quarter of 2001 and $1.8 million in the first quarter of 2000. We received proceeds from the issuance of convertible notes in the first quarter of 2001 of $0.5 million from the December 2000 note and $0.8 million from the March 2001 note, as compared to $1.5 million in the first quarter of 2000. Proceeds from the sale of common stock were $0.3 million in the first quarter of 2000. In March 2001, we issued convertible promissory notes to existing investors under which we may borrow up to an aggregate of $3,500,000 during 2001. The notes accrue interest at 10% per annum with principal and accrued interest due March 31, 2002. As of March 31, 2001, $750,000 was drawn down. After that in May 2001, an additional $804,000 was drawn down. The remaining amount to draw down is $1,946,000 as of May 15, 2001. As of November 27, 2001, we believe that our available cash and cash equivalents will not be sufficient to meet our anticipated needs for working capital and capital expenditures through the end of 2001. We believe that failure to generate sufficient revenues, reduce certain discretionary spending or raise additional financing could have a material adverse effect on our ability to continue as a going concern and achieve our intended business objectives. In order to meet our long-term liquidity needs, we may need to raise additional funds, establish a credit facility or seek other financing arrangements. We are actively engaged in securing a new borrowing facility, although there is no assurance that we will be successful in doing so. Moreover, the maturity dates of our outstanding promissory notes will become due in early 2002. Although the notes may be converted 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. 12 Impact of Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board 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 on January 1, 2001. The adoption of SFAS No. 133 did not have an impact on our financial position or results of operations. 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: WE HAVE INCURRED SIGNIFICANT LOSSES FOR THE PAST FIVE YEARS, AND MAY NEED TO RAISE ADDITIONAL FUNDING IN ORDER TO FUND OUR OPERATIONS We incurred net losses of approximately $1.6 million in the first quarter of 2001, $8.8 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, if our operating needs change, we may need to raise additional capital in order to fund operations. 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. THE LOW PRICE OF OUR COMMON STOCK COULD RESULT IN OUR SHARES BEING SUSPENDED OR DELISTED FROM THE NASDAQ The shares of our common stock are currently listed on the Nasdaq SmallCap Market. Due to their decline in price, our stock could be suspended or delisted from Nasdaq, which requires a minimum bid per share of $1.00, a market capitalization of $35 million and net tangible assets of $2 million. 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. 13 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 hamper 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, and the R-1 recorder and new System 5 digital console 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. CHANGES IN GOVERNMENT REGULATION COULD LIMIT OUR INTERNET ACTIVITIES OR RESULT IN ADDITIONAL COSTS OF DOING BUSINESS ON THE INTERNET Edeck enables audio files to be moved via the Internet. Our business plans for, and the success of, Edeck is dependent upon the Internet, which is at a relatively early stage of development. The enactment of any additional laws or regulations may impede the growth of the Internet, and if this happens, our operating expenses could increase and we may not be able to achieve profitability. In addition, the movement of files via the Internet could subject us to claims for defamation, negligence, copyright or trademark infringement, personal injury, or other theories based on the nature, content, publication and distribution of such materials. 14 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 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, 15 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 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 16 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. 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. 17 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. 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. 18 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. Although 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 would not be material. 19 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (c) Recent Sales of Unregistered Securities. In March 2001, we issued convertible promissory notes to existing investors under which we may borrow up to an aggregate of $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 allows the holder to convert the principal plus interest into our common stock at a rate of $0.75 per share at any time after our shareholders approve the notes. We also issued 350,000 shares of common stock to these investors in return for their agreement to loan us up to $3,500,000. The foregoing securities were issued pursuant to an exemption from registration under Section 4(2) of the Securities Act. We made no public solicitation in connection with the issuance of the above-mentioned securities, nor were there any other offerees. None of the offerings were underwritten. We relied on representations from the recipients of the securities that they purchased the securities for investment for their own account and not with a view to, or for resale in connection with, any distribution thereof. The investors also indicated to us that they were aware of our business affairs and financial condition and had sufficient information to reach an informed and knowledgeable decision regarding their acquisition of the securities. 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 March 31, 2001. 20 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 27, 2001 By: /s/ Jeffrey Chew ------------------------------------------- Jeffrey Chew, Chief Executive Officer (Principal Executive and Financial Officer) 21 INDEX TO EXHIBITS The following Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K: EXHIBIT NUMBER DOCUMENT - -------------- -------- 3.1(1) Amended and Restated Articles of Incorporation of the Registrant. 3.2(1) Bylaws of the Registrant. 10.1(2) Secured Promissory Note dated March 15, 2001, by and between the Registrant and Dieter Meier and Walter Bosch (the "Note") 10.2(2) Stock Issuance Agreement dated March 15, 2001, by and between the Registrant and Dieter Meier and Walter Bosch (the "Stock Issuance Agreement") 10.3(2) Form of Registration Rights Agreement to be executed after the Registrant's Annual Meeting and in connection with the Note and the Stock Issuance Agreement (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. (2) Incorporated by reference to the exhibit filed with the Registrant's Quarterly Report on Form 10-Q filed on May 15, 2001. 22 -----END PRIVACY-ENHANCED MESSAGE-----