<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996, 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 chapter)
California 77-0189481
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 PORTAGE AVE.
PALO ALTO, CA 94306
(Address of principal executive offices,zip code)
(415) 855-0400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed (1) all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
_________ _________
The number of shares outstanding of the registrants common stock
as of September 30, 1996 was 5,551,658 ($.001 par value).
page 1 of 18
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EUPHONIX, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
ITEM 1. Condensed Consolidated Financial Statements
(Unaudited):
Condensed Consolidated Statements of Operations for
the three and nine months ended September 30, 1996 and 1995 3
Condensed Consolidated Balance Sheets as of
September 30, 1996 and December 31,1995 4
Condensed Consolidated Statements of Cash Flows
for the three and nine months ended September 30, 1996 and
1995 5
Notes to Condensed Consolidated Financial Statements
as of and for the nine months ended September 30, 1996 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 15
Signatures 16
page 2 of 18
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Euphonix, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
____ ____ ____ _____
Net revenues $ 3,561,606 $ 4,136,305 $ 14,104,716 $10,149,847
Cost of sales 1,861,992 2,028,068 6,753,385 4,981,683
----------- ------------ ------------ -----------
Gross profit 1,699,614 2,108,237 7,351,331 5,168,164
Operating expenses:
Research & development 666,565 372,621 1,907,576 1,076,932
In-process technology --- --- 1,445,839 ---
Sales & marketing 1,188,718 834,518 3,334,189 2,143,788
General & administrative 370,966 441,915 1,415,612 1,047,557
------------ ----------- ------------ -----------
Total operating
expenses 2,226,249 1,649,054 8,103,216 4,268,277
------------ ----------- ------------ -----------
Operating income (loss) (526,635) 459,183 (751,885) 899,887
Other income 96,135 57,044 348,307 118,998
------------ ----------- ----------- -----------
Income(loss) before
provision for income taxes (430,500) 516,227 (403,578) 1,018,885
Provision (benefit) for
income taxes (133,000) 90,475 323,706 180,953
----------- ---------- ----------- ----------
Net income (loss) $ (297,500) $ 425,752 $ (727,284) $ 837,932
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Net income (loss) per
share $ (0.05) $ 0.08 $ (0.13) $ 0.18
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Number of shares used in
computing per share
amounts (in thousands) 5,544 5,035 5,500 4,636
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
See accompanying notes
page 3 of 18
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Euphonix, Inc.
Condensed Consolidated Balance Sheets
September 30, December 31,
1996 1995
---------------- ---------------
(unaudited) (note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 379,448 $ 860,527
Short-term investments 6,558,377 11,947,046
Accounts receivable, net 2,117,474 1,358,672
Inventories 5,366,903 3,251,629
Prepaid expenses and other
current assets 578,568 187,840
-------------- --------------
Total current assets 15,000,770 17,605,714
Property and equipment, net 1,019,503 577,852
Deposits and other assets 868,573 95,486
-------------- --------------
Total assets $ 16,888,846 $ 18,279,052
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank loan $ 287,000 $ ----
Accounts payable 1,559,864 471,321
Accrued payroll and related
liabilities, including deferred
salary 207,971 484,497
Accrued warranty 354,242 156,398
Accrued commissions 182,743 246,568
Current portion of capital leases 44,997 ----
Income taxes payable ---- 366,339
Other accrued liabilities 472,538 434,899
Deferred income taxes 129,654 ----
Customer deposits 357,995 2,508,460
------------- --------------
Total current liabilities 3,597,004 4,668,482
LONG-TERM OBLIGATIONS:
Deferred rent 5,813 8,632
Deferred revenue 29,127 ----
Long-term portion of capital leases 74,867 ----
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock, $0.001 par value:
20,000,000 authorized shares,
5,551,658 and 5,410,284 shares
issued and outstanding in 1996 and
1995, respectively 5,552 5,410
Additional paid-in capital 13,915,068 13,675,329
Retained earnings (deficit) (486,585) 240,699
Deferred compensation (252,000) (319,500)
-------------- --------------
Total shareholders' equity 13,182,035 13,601,938
-------------- --------------
Total liabilities and shareholders'
equity $ 16,888,846 $ 18,279,052
--------------- --------------
--------------- --------------
Note: The balance sheet at December 31, 1995 has been
derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
See accompanying notes
page 4 of 18
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EUPHONIX, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---------- ------------
<S> <C>
Operating activities
Net income (loss) $ (727,284) $ 837,932
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 138,688 93,452
Amortization of technology and
goodwill 153,512 ----
Deferred compensation amortization 67,500 30,000
Loss on disposal of fixed assets ---- 24,504
Acquired research and development 1,445,838 ----
Changes in operating assets and
liabilities:
Prepaid expenses and other
current assets and other assets (682,534) (26,121)
Accounts receivable (314,482) (545,117)
Inventory (1,726,606) (1,469,091)
Accounts payable, accrued liabilities,
and deferred rent, and capital lease 315,123 1,486,672
Customer deposits (2,150,465) 431,852
------------ ------------
Total adjustments (2,753,426) 26,151
------------ -------------
Net cash provided by (used in)
operating activities (3,480,710) 864,083
Investing activities
Purchase of Spectral,Inc.
net of cash acquired (2,283,327) ----
Proceeds from sales of short-term
investment maturities 5,388,669 ----
Purchases of short-term investments ---- (10,460,196)
Purchase of property and equipment (319,593) (223,934)
------------ -------------
Net cash provided by (used in)
investing activities 2,785,749 (10,684,130)
Financing activities
Principal payments under capital lease
obligations (25,999) ----
Proceeds from sale of common stock 239,881 9,078,701
------------ -------------
Net cash provided by financing
activities 213,882 9,078,701
------------ -------------
Net increase (decrease) in cash and cash
equivalents (481,079) (741,346)
Cash and cash equivalents at
beginning of period 860,527 1,718,963
----------- -------------
Cash and cash equivalents at end of
period $ 379,448 $ 977,617
------------ -------------
------------ -------------
Supplemental disclosures of cash flow
information
Cash paid for income taxes $ 754,000 $ 66,800
</TABLE>
See accompanying notes.
page 5 of 18
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EUPHONIX, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September 30,
1996, are not necessarily indicative of the results that may be expected
for the entire year ending December 31, 1996.
For further information, refer to the audited financial statements and
footnotes thereto included in the Registrant Company's annual report on
Form 10-K for the year ended December 31, 1995, and the incorporation
by reference of the Registrant Company's subsidiary's annual report, in
the registration statement (No. 33-98130) on Form S-8, which report
appears in the Form 8-K/A, dated April 23, 1996.
2. Acquisition
On February 7, 1996, the Registrant entered into an agreement and
plan of reorganization with certain of the shareholders of Spectral,
Incorporated ("Spectral"), pursuant to which the Registrant acquired
in a merger 100% of the outstanding securities of Spectral on a fully
diluted basis.
The acquisition of Spectral, which was accounted for as a purchase,
has been recorded based upon available information and upon certain
assumptions that the Registrant believes are reasonable in the circum-
stances. The purchase price has been allocated to the acquired assets
and liabilities based on an independent appraisal of their respective fair
values. The aggregate purchase price was approximately $2,299,000,
which included the purchase of Spectral's stock for $1,500,000 and debt
reductions of $778,000. In 1995, Spectral's net revenues and net loss
were approximately $2,300,000 and $435,000, respectively.
Of the aggregate purchase price of approximately $2,299,000, approxi-
imately $1,446,000 was allocated to technology in the development stage,
approximately $417,000 to current technologies and approximately $183,000
to goodwill based on the fair market values of assets acquired and liabilities
assumed, and approximately $253,000 to working capital.
To determine the value of the existing technology, the expected future
cash flows of each existing technology product were discounted taking into
account risks related to the characteristics and applications of each product,
existing and future markets, and assessments of the life cycle stage of each
product. Based on this analysis the existing technology, which had reached
technological feasibility, was assigned a value of approximately $417,000,
and capitalized. This capitalized technology will be amortized over a three-
year period which began in February 1996.
page 6 of 18
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EUPHONIX, INC.
Notes to Condensed Consolidated Financial Statements - Continued
To determine the value of the technology in the development stage,
the Company considered, among other factors, the stage of development
of each project, the time and resources needed to complete each project,
expected income and associated risks. Associated risks included the
inherent difficulties and uncertainties in completing the project and
thereby achieving technological feasibility, and risks related to the via-
bility of and potential changes to future target markets. This analysis
resulted in a value of approximately $1,446,000 being assigned to
technology in the development stage that had not yet reached technological
feasibility and did not have alternative future uses. Therefore, in accord-
ance with generally accepted accounting principles, the $1,446,000 of
technology in the development stage was expensed.
The consolidated balance sheet includes the assets and liabilities
of Spectral at September 30, 1996. The consolidated statement of operations
includes Spectral's results of operations for the eight months ended
September 30, 1996, as Spectral was acquired on February 7, 1996.
The pro forma results of operations which follow assume that the
acquisition had occurred at the beginning of each period presented. In
addition to combining the historical results of operations of the two
companies, the pro forma calculations include adjustments for the
estimated effect on the Company's historical results of operations for
the loss of interest income as a result of making the acquisition.
<TABLE>
<S> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
----------- ----------- ------------- ------------
Revenues $ 3,561,606 $ 4,721,983 $ 14,161,263 $ 11,952,173
Net (loss) income (297,500) 354,458 607,497 771,943
Net (loss) income per
share (0.05) 0.07 0.11 0.17
</TABLE>
In-process research and development valued at approximately
$1,446,000 as of the acquisition date is excluded from the pro forma net
income for the nine months ended September 30, 1996 and 1995, as such
amount represents a non-recurring charge.
3. Net Income (Loss) per Common Share
Net income per share is computed using the weighted average number
of shares of common stock and common equivalent shares, when dilutive,
from convertible preferred stock (using the if-converted method) and from
stock options and warrants (using the treasury stock method). Pursuant to
the Securities and Exchange Commission (the "SEC") Staff Accounting
Bulletins, common and common equivalent shares issued by the Company
at prices below the initial public offering price during the twelve month
period prior to the August 1995 initial public offering have been included
in the calculation as if they were outstanding for all periods presented
(using the treasury stock method and the initial public offering price). Net
loss per share is computed using the weighted average number of shares
of common stock outstanding.
page 7 of 18
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EUPHONIX, INC.
Notes to Condensed Consolidated Financial Statements - Continued
4. Inventories
Inventories are stated at the lower cost (first-in, first-out) or market
(net realizable value). Inventories consist of the following:
<TABLE>
<S> <C>
September 30, December 31,
1996 1995
---------------- ----------------
Raw materials and work-in-process $ 3,607,994 $ 2,415,872
Finished goods 1,758,909 835,757
---------------- ----------------
$ 5,366,903 $ 3,251,629
---------------- ----------------
---------------- ----------------
</TABLE>
5. Income Taxes
The Company's provision for income taxes for the nine months ended
September 30, 1996 is based on the Company's estimate of the annual effective
tax rate for 1996 and includes the effect of in-process research and develop-
ment charges recorded in the three months ended March 31, 1996. The
Company's effective tax rate for the nine months ended September 30, 1996 was
31%, exclusive of the tax effect of in-process research and development
charges.
page 8 of 18
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Item 2. Management's Discussion & Analysis of Financial Condition
& Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking
statements that involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in the section entitled
"Factors Affecting Future Operating Results."
Results of Operations
Net Revenues. Net revenues decreased to $3.6 million in the third
quarter of 1996, from $4.1 million in the same period in 1995, represent-
ing a decrease of 13.9% from the third quarter of fiscal 1995. For the
first nine months of fiscal 1996, net revenues of $14.1 million increased
39.0% from the first nine months of fiscal 1995.
The $3.6 million decrease in net revenues in the third quarter of 1996,
representing a decrease of 13.9% from the third quarter of fiscal 1995,
results from a slower than anticipated product penetration into the post
production and broadcast markets, new competitive product offerings, and a
slow down in domestic and European industry demand.
The $4.0 million increase in sales of the Company's products for the
nine months ended September 30, 1996, representing a 39.0% increase as
compared to the same period in 1995, resulted from increased sales efforts,
increased market acceptance and enhanced product capabilities of the
Company's mixing consoles.
Sales of the Company's products in the United States were $1.7 million
and $2.8 million, comprising approximately 47.7% and 67.5% of the Company's
net revenues for the third quarter of 1996 and 1995, respectively. Export
sales were $1.9 million and $1.3 million, comprising approximately 52.3% and
32.5% of the Company's revenues for 1996 and 1995, respectively. Substantially
all sales are denominated in United States dollars to reduce the effect of
fluctuations in foreign currency exchange rates.
Gross Margin. Gross margin in the third quarter of fiscal 1996 was
$1.7 million, or 47.7% of net revenues, compared with $2.1 million, or
51.0% of net revenues, in the third quarter of fiscal 1995. For the first
nine months of fiscal 1996, gross margin was $7.4 million, or 52.1%
of net revenues, compared with $5.2 million, or 50.9% of net revenues, for
the first nine months of fiscal 1995. The decrease in gross margin for the
third quarter of 1996 was due primarily to higher material procurement and
manufacturing support costs in the third quarter. The increase in gross margin
for the first nine months of 1996 was due primarily to material procurement
and manufacturing support costs being lower, as a percentage of net revenues
for the same period.
page 9 of 18
<PAGE>
Research and Development Expenses. Research and development
expenses increased to $667,000 in the third quarter of fiscal 1996, an
increase of 78.9% from the third quarter of fiscal 1995. For the first nine
months in 1996, research and development expenses of $1.9 million increased
77.1% from $1.1 million in 1995. Research and development expenses consti-
tuted 18.7%, 9.0%, 13.5% and 10.6% of net revenues in the third quarter
of 1996 and 1995 and the first nine months of 1996 and 1995, respectively.
The dollar increases resulted primarily from additions to the Company's
engineering staff and the development of a number of product enhancements.
In-process Technology. In connection with the acquisition of Spectral,
Euphonix recorded a one-time charge to pre tax earnings for Spectral's in-
process technology, that had not reached technological feasibility and did
not have alternative future uses of $1.4 million in 1996. Excluding the one-
time in-process technology charge pro forma net income for the first nine
months was $718,000.
Sales and Marketing Expenses. Sales and marketing expenses increased
to $1.2 million in the third quarter of 1996, from $835,000 in the third
quarter of 1995, representing an increase of 42.4%. For the first nine months
of fiscal 1996, sales and marketing expenses of $3.3 million increased 55.5%
from $2.1 million in 1995. Sales and marketing expenses constituted 33.4%,
20.2%, 23.6% and 21.1% of net revenues in the third quarter of 1996 and
1995 and the first nine months of 1996 and 1995, respectively. The dollar
increase resulted primarily from investment in targeting new markets and
expanding the Company's international sales and marketing presence in
established, and new territories through increased advertising, trade shows,
and product demonstrations.
General and Administrative Expenses. General and administrative
expenses were $371,000 in the third quarter of 1996, a decrease
of 16.1% from the third quarter of 1995. This decrease is due primarily
to a reduction in the Company's required bad debt reserve. For the first
nine months of fiscal 1996, general and administrative expenses of $1.4
million increased 35.1% from $1.0 million in the first nine months of 1995.
General and administrative expenses constituted 10.4%, 10.7%, 10.0% and 10.3%
of net revenues in the third quarter of fiscal 1996 and 1995 and the first
nine months of fiscal 1996 and 1995, respectively. The dollar increases were
attributable primarily to staffing costs, legal, regulatory, accounting and
other expenses that result from being a publicly traded company.
Page 10 of 18
<PAGE>
Provision for Income Taxes. The Company's effective tax rate is
31% in 1996 and was 22.7% in 1995. The effective tax rate for 1996
and 1995 differs from the federal statutory rate of 34% primarily due
to utilization of tax loss carryforwards and the recognition of certain
deferred tax assets. The Company expects that its effective tax rate
will be higher in future years as the amount of unrecognized deferred
tax assets is reduced.
Future Operating Results
The Company continues to make progress in the sales of audio mixing
systems; however, there are a number of significant factors which the
Company believes have impacted the third quarter results and are likely
to continue to adversely impact the Company's fourth quarter results,
these factors include a slower than anticipated product penetration into
the post production and broadcast markets, new competitive product offerings,
and a slow down in domestic and European industry markets.
Euphonix is currently developing new products and product extensions
to further enhance its present line. At the AES (Audio Engineering Society)
conference in Los Angeles on November 8, 1996, the Company intends to unveil
the CS3000 mixing system. The CS3000 will provide new features and perfor-
mance to anticipate the increase in demand for multi-channel surround sound
mixing, and the use of sophisticated automation. The Company expects that
the CS3000 will further enhance its competitive position, however, delivery
of these systems is not currently scheduled until March 1997, which the
Company believes, may negatively impact fourth quarter 1996 and first
quarter 1997 results.
In 1997, the Company intends to announce products to integrate the
recording, editing and mixing functions of sound production as well as
digital audio processing and networking systems. The Company anticipates
that these new products will help strengthen its position in the mixing
and editing markets and its entrance into the random access recording
market. The Company expects that its software for these products will
utilize technology not previously used by the audio industry, but
successfully employed by the computer industry, to allow a high degree of
connectivity and integration among multiple users. The Company's planned
products are also being designed to enable upgrading from the Company's
present product line to allow hybrid digital and analog processing, a
feature that Euphonix believes will mirror customer's requirements for
sound quality as well as provide minimal conversion from one format to
another. It is intended that these new digital products will also have
file compatibility between editing and mixing functions, as well as high
speed digital routing for simple networking of multiple systems.
The substantial investment in these new developments may result in
higher research and development expenses to be incurred over the next
twelve months and therefore reduce operating profits. See "Factors
Affecting Future Operating Results" for a discussion of factors that
might cause results to differ materially from those included above.
page 11 of 18
<PAGE>
Liquidity and Capital Resources
The Company has funded its operations to date primarily through
cash flows from operations, the private sale of equity securities, and
the initial public offering of Common Stock completed in September
1995, which generated net proceeds of approximately $9.0 million.
For the first nine months ended September 30, 1996, cash, cash equivalents
and short-term investments decreased by $5.9 million to approximately
$6.9 million, mainly due to the acquisition and working capital needs
of Spectral. Also, during this period, working capital decreased by $1.5
million to approximately $11.4 million.
The Company's operating activities used cash of approximately $3.5
million in the first nine months of 1996, and generated cash of $864,000
in the same period in 1995. Cash used in operating activities for the first
nine months ended September 30, 1996 was comprised primarily of net loss, a
decrease in customer deposits, an increase in inventory, an increase in
prepaid expenses and other current assets and other assets, offset partially
by an increase in accounts payable and non cash items including acquired
research and development. Cash provided by operating activities for the
first nine months ended September 30, 1995 was comprised primarily of net
income, an increase in customer deposits, and an increase in accounts
payable, offset by an increase in inventory and an increase in accounts
receivable. The Company expects that its accounts receivable and inventory
will continue to grow and such increases are likely to increase the Company's
requirements for working capital.
On February 7, 1996, the Company used cash to acquire Spectral,
Incorporated, a Washington based company, that develops and markets PC-based
digital audio workstations. The cost of the acquisition was approximately
$2.3 million, which included the purchase of Spectral's stock for $1,500,000
and debt reduction of approximately $778,000.
As of September 30, 1996, the Company's sources of liquidity included
cash, cash equivalents and short-term investments totaling approximately $6.9
million, and an unsecured bank line of credit of up to $500,000. As of
September 30, 1996, $287,000 of borrowings were outstanding under such
line of credit.
Factors Affecting Future Operating Results
The Company has derived virtually all of its revenues from sales
of its digitally controlled audio mixing console system, which system is
based upon its proprietary software and hardware platform. The Company
believes that sales of this system, along with enhancements thereof, will
continue to constitute virtually all of the Company's revenues for the fore-
seeable future, with only limited sales of digital audio workstations by
Spectral. Accordingly, any factor adversely affecting the Company's base
system, whether technical, competitive or otherwise, could have a material
adverse effect on the Company's business and results of operations.
page 12 of 18
<PAGE>
A limited number of the Company's system sales typically account
for a substantial percentage of the Company's quarterly revenue because of
the relatively high average sales price of such systems. Moreover, the
Company's expense levels are based in part on its expectations of future
revenue. Therefore, if revenue is below expectations, the Company's operating
results are likely to be adversely affected. In addition, the timing of
revenue is influenced by a number of other factors, including the timing of
individual orders and shipments, industry trade shows, seasonal customer
buying patterns, changes in product development and sales and marketing
expenditures, custom financing arrangements, production limitations and
international sales activity. Because the Company's operating expenses are
based on anticipated revenue levels and a high percentage of the Company's
expenses are relatively fixed in the short term, variations in the timing of
recognition of revenue could cause significant fluctuations in operating
results from quarter to quarter and may result in unanticipated quarterly
earnings shortfalls or losses.
The markets for the Company's system are characterized by changing
technologies and new product introductions. The Company's future success
will depend in part upon its continued ability to enhance its base system
with features including new software and hardware add-ons and to develop
or acquire and introduce new products and features which meet new market
demands and changing customer requirements on a timely basis. In addition,
there can be no assurance that products or technologies developed by others
will not render the Company's products or technologies non-competitive or
obsolete.
To date, the Company's primary market success has been in the music
segment of the professional audio market. In order for the Company to grow,
the Company believes that it must continue to gain market share in the music
market segment, as well as in its other targeted market segments. There can
be no assurance that the Company will be able to compete favorably in any
other market segments. The Company's inability to compete favorably could
have a material adverse effect on its business and results of operations. The
markets for the Company's products are intensely competitive and charac-
terized by significant price competition. The Company believes that its
ability to compete depends on elements both within and outside its control,
including the success and timing of new product development (including the
development on a timely basis of a hybrid digital product, of which there can
be no assurance) and introduction by the Company and its competitors, product
performance and price, distribution, availability of lease or other financing
alternatives, resale of used systems and customer support.
Currently, the Company uses many sole or limited source suppliers,
certain of which are critical to the integrated circuits included in the Com-
pany's base system. Major delays or terminations in supplies of such
components could have a significant adverse effect on the Company's timely
shipment of its products, which in turn would adversely affect the Company's
business and results of operations. The Company also relies on single vendors
to manufacture major subassemblies for its products. Any extended interruption
in the future supply or increase in the cost of subassemblies manufactured by
its primary or other third party vendors could have a material adverse effect
on the Company's business and results of operations.
page 13 of 18
<PAGE>
In addition, as different electrical, radiation or other standards
applicable to the Company's products are adopted in countries, including the
United States, or groups of countries in which the Company sells its products,
the failure of the Company to modify its products, if necessary, to comply
with such standards would likely have an adverse effect on the Company's
business and results of operations.
The Company generally relies on a combination of trade secret,
copyright law and trademark law, contracts and technical measures to
establish and protect its proprietary rights in its products and technolo-
gies. However, the Company believes that such measures provide only
limited protection of its proprietary information, and there is no assurance
that such measures will be adequate to prevent misappropriation. In addition,
significant and protracted litigation may be necessary to protect the Com-
pany's intellectual property rights, to determine the scope of the proprietary
rights of others or to defend against claims of infringement. There can be no
assurance that third-party claims alleging infringement will not be asserted
against the Company in the future. Any such claims could have a material
adverse effect on the Company's business and results of operations.
The Company's success depends, in part, on its ability to retain key
management and technical employees and its continued ability to attract and
retain highly skilled personnel. In addition, the Company's ability to manage
any growth will require it to continue to improve and expand its management,
operational and financial systems and controls. If the Company's management
is unable to manage growth effectively, its business and results of operations
will be adversely affected.
The Company acquired Spectral in February 1996. The anticipated
benefits of the acquisition of Spectral by the Company will not be achieved
unless the operations of Spectral are successfully integrated into the opera-
tions of the Company in a timely manner. The integration of Spectral has,
and will continue to have at least in the short term, a diversion of manage-
ment time and resources and possibly negatively impact the Company's overall
performance. There can be no assurance that the integration of Spectral's
operations will be successful or that it will be achieved in a timely manner,
or at all. There can also be no assurance that the acquisition of Spectral
will not have an adverse material effect on the business of the Company.
As a result of these and other factors, the Company has experienced
significant quarterly fluctuations in operating results and anticipates that
these fluctuations will continue in future periods. There can be no assurance
that the Company will be successful in maintaining or improving its profita-
bility or avoiding losses in any future period. Further, it is likely that in
some future period the Company's net revenues or operating results will be
below the expectations of public market securities analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected. See "Future Operating Results".
page 14 of 18
<PAGE>
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11.1 - Statement Regarding Computation of Per Share
Earnings (page 17)
Exhibit 27 - Financial Data Schedule - electronic filing only
The exhibits listed on the accompanying index immediately
following the signature page are filed as part of this report.
(b) Report on Form 8-K
None.
page 15 of 18
<PAGE>
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 14, 1996 By: /s/ JEFFREY A. CHEW
--------------------- ------------------------------
Jeffrey A. Chew, Vice President
of Finance & Chief Financial
Officer
page 16 of 18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
11.1 Calculation of Earnings Per Share
page 17 of 18
<PAGE>
EXHIBIT 11.1 Statement re: Computation of Per Share Earnings (Loss)
<TABLE>
<S> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---------- --------- ---------- ----------
(in thousands, except per share data)
PRIMARY
Weighted average common
shares outstanding 5,544 3,042 5,500 1,801
Common equivalent shares
attributable to convertible
preferred stock ---- 1,525 ---- 2,273
Common equivalent shares attribu-
table to the net effect of
dilutive stock options based on
the treasury stock method using
average market price ---- 468 ---- 435
Shares related to SAB No. 55,
64 and 83 ---- ---- ---- 127
-------- --------- -------- --------
Number of shares used in
computing per share amounts 5,544 5,035 5,500 4,636
-------- --------- -------- --------
-------- --------- -------- --------
Net income (loss) $ (297) $ 426 $ (727) $ 838
-------- --------- -------- --------
-------- --------- -------- --------
Net income (loss) per share $ (0.05) $ 0.08 $ (0.13) $ 0.18
-------- --------- --------- --------
-------- --------- --------- --------
FULLY DILUTED
Weighted average common
shares outstanding 5,544 3,042 5,500 1,801
Common equivalents shares
attributable to convertible
preferred stock ---- 1,525 ---- 2,273
Common equivalent shares
attributable to the net effect
of dilutive stock options based
on the treasury stock method
using quarter-end price, if
higher than average market
price ---- 476 ---- 489
Shares related to SAB No. 55,
64 and 83 ---- ---- ---- 127
------- -------- -------- --------
Number of shares used in
computing per share
amounts 5,544 5,043 5,500 4,690
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) $ (297) $ 426 $ (727) $ 838
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share $ (0.05) $ 0.08 $(0.13) $ 0.18
-------- -------- -------- ---------
-------- -------- -------- ---------
</TABLE>
page 18 of 18
<TABLE> <S> <C>
<S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 379,448
<SECURITIES> 6,558,377
<RECEIVABLES> 2,117,474
<ALLOWANCES> 0
<INVENTORY> 5,366,903
<CURRENT-ASSETS> 15,000,770<F1>
<PP&E> 1,019,503
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,888,846
<CURRENT-LIABILITIES> 3,597,004
<BONDS> 0
<COMMON> 5,552
0
0
<OTHER-SE> 13,176,483<F2>
<TOTAL-LIABILITY-AND-EQUITY> 16,888,846
<SALES> 14,104,716
<TOTAL-REVENUES> 14,104,716
<CGS> 6,753,385
<TOTAL-COSTS> 8,103,216<F3>
<OTHER-EXPENSES> 348,307<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (37,523)
<INCOME-PRETAX> (403,578)
<INCOME-TAX> (323,706)
<INCOME-CONTINUING> (727,284)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (727,284)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
<FN>
<F1> Includes Current Assets $14,422,202; Prepaid expenses and other
current assets $578,568.
<F2>Includes Paid in Capital $13,915,068; Accumulated Deficit $<486,585>;
and Deferred Compensation $<252,000>.
<F3>Includes Research and Development $1,907,576; In-process Technology
$1,445,839; Sales and Marketing $3,334,188; and General and Administrative
$1,415,612.
<F4>Includes Interest Income $385,830.
</FN>
</TABLE>
