<PAGE>
__________________________________________________________________
__________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM __________ TO ___________
Commission File Number 0-26516
EUPHONIX, INC.
(Exact name of registrant as specified in its charter)
California 77-0189481
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Portage Avenue, Palo Alto, CA 94306
---------------------------------------
(Address of principal executives, zip code)
(650) 855-0400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed (1) all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the regis-
trant 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 Septem-
ber 30, 1998 was 6,634,957 ($.001 par value).
<PAGE>
EUPHONIX, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION ----
ITEM 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1998 and 1997..........3
Condensed Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997.........................4
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997............5
Notes to Condensed Consolidated Financial Statements..............6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................14
Signature................................................................15
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Euphonix, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Nets revenues.............$ 4,500,091 $ 3,754,347 $ 12,221,364 $ 13,198,284
Cost of sales............. 2,364,545 1,754,771 6,727,616 6,664,670
------------ ------------- ------------- ------------
Gross profit.............. 2,135,546 1,999,576 5,493,748 6,533,614
Operating expenses:
Research & development... 1,300,635 1,037,465 3,445,531 2,853,144
Sales & marketing........ 1,318,774 1,458,775 3,873,225 3,964,442
General & administrative. 527,540 355,055 1,819,923 1,575,171
------------ -------------- ------------ ------------
Total operating expenses.. 3,146,949 2,851,295 9,138,679 8,392,757
------------ -------------- ------------ ------------
Operating loss............ (1,011,403) (851,719) (3,644,931) (1,859,143)
Other income (loss)....... 3,538 (15,688) 45,517 145,426
------------ -------------- ------------ ------------
Loss before income taxes.. (1,007,865) (867,407) (3,599,414) (1,713,717)
Tax provision (benefit)... ---- (110,060) ---- (110,060)
------------ -------------- ------------ ------------
Net loss..................$(1,007,865) $ (757,347) $(3,599,414) $(1,603,657)
============ ============== ============ ============
Loss per share:
Basic....................$ (0.15) $ (0.14) $ (0.57) $ (0.29)
============ ============== ============ ============
Diluted..................$ (0.15) $ (0.14) $ (0.57) $ (0.29)
============ ============== ============ ============
Number of shares used in
computing per share
amounts:
Basic................... 6,633,057 5,577,211 6,326,849 5,571,329
============ ============== ============ ============
Diluted................. 6,633,057 5,577,211 6,326,849 5,571,329
============ ============== ============ ============
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
Euphonix, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
<S> <C> (unaudited) <C> (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......... $ 1,964,251 $ 1,880,093
Short-term investments............ 589,498 1,710,223
Accounts receivable, net.......... 1,298,231 1,911,095
Inventories....................... 5,584,656 5,309,818
Income tax receivable............. 300,000 544,000
Prepaid expenses and other current
assets........................... 180,411 306,308
---------------- ----------------
Total current assets............... 9,917,047 11,661,537
Property and equipment, net........ 1,550,202 1,425,709
Deposits and other assets.......... 340,158 120,829
---------------- ----------------
Total assets....................... $ 11,807,407 $ 13,208,075
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................. $ 963,946 $ 924,721
Accrued payroll and related
liabilities...................... 582,484 387,337
Accrued warranty.................. 416,816 347,850
Accrued commissions............... 62,930 155,708
Other accrued liabilities......... 520,455 461,614
Customer deposits................. 191,287 237,866
Short term portion capital leases. 13,480 51,565
---------------- ----------------
Total current liabilities.......... 2,751,398 2,566,661
Long term portion capital leases... 31,973 31,973
Deferred rent...................... 1,584 3,170
Deferred income taxes.............. 119,000 119,000
SHAREHOLDERS' EQUITY:
Preferred stock................... ---- ----
Common stock...................... 6,636 5,590
Additional paid-in capital........ 15,672,720 13,722,855
Accumulated deficit............... (6,703,904) (3,101,674)
Deferred compensation............. (72,000) (139,500)
---------------- ----------------
Total shareholders' equity......... 8,903,452 10,487,271
---------------- ----------------
Total liabilities and shareholders'
equity............................ $ 11,807,407 $ 13,208,075
================= ================
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date. See notes to condensed consolidated finan-
cial statements.
4
<PAGE>
Euphonix, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
-------------- --------------
<S> <C> <C>
Operating activities
Net loss...................................$ (3,599,414) $ (1,603,657)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization............. 348,209 293,495
Deferred compensation amortization........ 67,500 67,500
Changes in operating assets and liabilities:
Prepaid expenses, other current assets and
other assets............................ (101,427) (130,385)
Accounts receivable...................... 612,864 (551,799)
Inventories.............................. (274,838) (1,921,954)
Income tax receivable.................... 244,000 ----
Accounts payable, accrued liabilities,
and deferred rent....................... 264,999 419,071
Customer deposits........................ (46,579) (94,761)
--------------- --------------
Total adjustments.......................... 1,114,728 (1,918,833)
--------------- --------------
Net cash used in operating activities...... (2,484,686) (3,522,490)
Investing activities
Proceeds from sales of short-term investment
maturities................................ 1,120,725 4,082,530
Purchases of short-term investments........ ---- (1,044,889)
Purchase of property and equipment......... (464,707) (349,653)
--------------- --------------
Net cash provided by investing activities.. 656,018 2,687,988
Financing activities
Principal payments under capital lease
obligations............................... (38,085) (33,721)
Proceeds from sale of common stock......... 1,950,911 3,353
Proceeds from short term bank borrowings... ---- 500,000
--------------- --------------
Net cash provided by financing activities.. 1,912,826 469,632
--------------- --------------
Net increase (decrease) in cash and cash
equivalents............................... 84,158 (364,870)
Cash and cash equivalents at beginning of
period.................................... 1,880,093 1,428,095
--------------- --------------
Cash and cash equivalents at end of period.$ 1,964,251 $ 1,063,225
=============== ==============
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
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 infor-
mation 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, 1998 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 1998.
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, 1997.
2. Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assump-
tions that affect the amounts reported in the financial statements and accom-
panying notes. Actual results could differ from those estimates.
3. Net Loss per share
The Company has adopted SFAS 128 to compute earnings per share and has
restated all prior periods. The new requirements include a calculation of basic
earnings per share, from which the dilutive effect of stock options, warrants,
and convertible debt are excluded; and a calculation of diluted earnings per
share, which includes the dilutive effect of these securities. For the three
and nine month periods ended September 30, 1998 and 1997, the dilutive effect of
stock options were excluded from the calculation of common shares used in the
denominator for diluted loss per share because the stock options are anti-dilu-
tive. The Company adopted the provisions of SFAS 128 beginning with the finan-
cial statements for the year ended December 31, 1997, and all share and per
share data for prior periods have been adjusted retroactively to comply with the
new statement.
6
<PAGE>
EUPHONIX, INC.
Notes to Condensed Consolidated Financial Statements - Continued
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
<S> <C> 1998 <C> 1997 <C> 1998 <C> 1997
---- ---- ---- ----
Numerator:
Numerator for basic and diluted
loss per share.................. $(1,008) $ (757) $(3,599) $(1,604)
Denominator:
Denominator for basic and diluted
loss per share weighted-average
shares outstanding.............. 6,633 5,577 6,327 5,571
======== ======= ======== ========
Basic loss per share............. $ (0.15) $(0.14) $ (0.57) $ (0.29)
======== ======= ======== ========
Diluted loss per share........... $ (0.15) $(0.14) $ (0.57) $ (0.29)
======== ======= ======== ========
</TABLE>
4. Inventories
Inventories are stated at the lower cost (first-in, first-out) or market (net
realizable value). Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- --------------
<S> <C> <C>
Raw materials...... $ 1,859,766 $ 1,213,574
Work-in-process.... 1,726,123 1,281,064
Finished goods..... 1,998,767 2,815,180
--------------- -------------
$ 5,584,656 $ 5,309,818
=============== =============
</TABLE>
5. Income Taxes
The Company's provision for income taxes for the nine months ended Septem-
ber 30, 1998 is based on the Company's estimate of the annual effective tax rate
for 1998. The Company's effective tax rate for the nine months ended September
30, 1998 was 0%. The Company's effective tax benefit was 10.3% in 1997, prim-
arily due to the recognition of certain deferred tax assets based on available
carry-back potential.
7
<PAGE>
EUPHONIX, INC.
Notes to Condensed Consolidated Financial Statements - Continued
6. Comprehensive Loss
As of January 1, 1998, the Company adopted Statement of Financial Account-
ing Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
established new rules for the reporting and display of comprehensive income and
its components; however, the adoption of SFAS 130 had no material impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign cur-
rency translation adjustments, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income.
Total comprehensive loss for the three and nine month periods ended Sep-
tember 30, 1998 were $1,002,038 and $3,602,230, respectively. Total comprehen-
sive loss for the three and nine month periods ended September 30, 1997 were
$697,215 and $1,524,793.
7. Common Stock
In March 1998, the Company received proceeds of $1,950,000 from existing
investors in exchange for the issuance of 1,040,000 shares of $0.001 par value
common stock at $1.875 per share, the closing price of the Company's common
stock on the NASDAQ on the date the common stock purchase agreement was exe-
cuted. The authorized capital stock of the Company at September 30, 1998 is
20,000,000 shares of common stock and 2,000,000 shares of preferred stock, par
value $0.001. As of September 30, 1998, there were 6,634,957 shares of common
stock issued and outstanding, and there were no issued and outstanding shares of
preferred stock.
8
<PAGE>
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. Fac-
tors 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 were $4.5 million for the third quarter of
1998, which was 19.9% above third quarter 1997 revenues of $3.8 million. Net
revenues for the first nine months of 1998 were $12.2 million, which represents
a 7.4% decrease from net revenues of $13.2 million for the first nine months of
1997. The Company's increase in net revenues for the third quarter of 1998 as
compared to 1997, resulted primarily from increased sales in Japan. The Com-
pany's decrease in net revenues for the first nine months of 1998, as compared
to 1997 resulted primarily from reduced sales in the United States and in
Europe, due to increased competition from companies offering all digital con-
soles.
Domestic sales of the Company's products for the third quarter of 1998
and 1997 were $1.6 million and $2.0 million, respectively, comprising approxi-
mately 35.5% and 53.5% of the Company's net revenues for the third quarter of
1998 and 1997, respectively. Domestic sales were $6.3 million and $7.8 million
comprising approximately 51.9% and 59.1% of the Company's net revenues for the
first nine months of 1998 and 1997, respectively. Export sales were $2.9 million
and $1.7 million comprising approximately 64.5% and 46.5% of the Company's
revenues for the third quarter of 1998 and 1997, respectively. Export sales
were $5.9 million and $5.4 million comprising approximately 48.1% and 40.9% of
the Company's revenues for the first nine months of 1998 and 1997, respectively.
Export sales as a percent of net revenues increased in the first nine months of
1998 due to greater sales in Japan, as compared to the first nine months of
1997.
The Company anticipates that starting in the first quarter of 1999, a
significant portion of its revenues will come from its new R-1 multitrack
recorder which was announced in the second quarter of 1998.
Gross Margin. The Company's gross margin decreased from 53.3% in the
third quarter of 1997 to 47.5% in the third quarter of 1998. The decrease is
due to higher overhead expenses in 1998, caused by the decision not to capital-
ize any additional overhead into inventory such as was done in the third quarter
of 1997. In absolute dollars, the gross margin increased from $2.0 million in
the third quarter of 1997 to $2.1 million in the third quarter of 1998 as a
result of higher sales. For the first nine months of 1998, gross margin was
$5.5 million, or 45% of net revenues, compared with $6.5 million , or 49.5% of
net revenues, for the first nine months of 1997. The decrease in the first nine
months of 1998 from the first nine months of 1997 was primarily due to higher
production costs of selling off older/used inventory at lower margins.
Research and Development Expenses. Research and development expenses
increased to $1.3 million in the third quarter of 1998, up from $1 million in
the third quarter of 1997, representing an increase of 25.4% in 1998. For the
first nine months of 1998, research and development expenses of $3.4 million
increased 20.8% from $2.9 million in 1997. Research and development expenses
9
<PAGE>
constituted 28.9%, 27.6%, 28.2%, and 21.6% of net revenues in the third quarter
of 1998 and 1997 and the first nine months of 1998 and 1997, respectively. The
increases resulted primarily from new product development costs primarily re-
lated to next generation products, and additional personnel. The Company ex-
pects to continue its high research and development costs next quarter as it
develops its next generation products.
Sales and Marketing Expenses. Sales and marketing expenses decreased to
$1.3 million in the third quarter of 1998, from $1.5 million in the third quar-
ter of 1997, representing a decrease of 9.6%. For the first nine months of
1998, sales and marketing expenses of $3.9 million decreased 2.3% from $4.0 mil-
lion in 1997. Sales and marketing expenses constituted 29.3%, 38.9%, 31.7%, and
30% of net revenues in the third quarter of 1998 and 1997 and the first nine
months of 1998 and 1997, respectively. The decreases are due to lower sales
commissions and salary expense, caused by attrition.
General and Administrative Expenses. General and administrative expenses
increased to $528,000 in the third quarter of 1998 from $355,000 in the third
quarter of 1997, representing an increase of 48.6%. For the first nine months
of 1998, general and administrative expenses of $1.8 million increased 15.5%
from $1.6 million in the first nine months of 1997. General and administrative
expenses constituted 11.7%, 9.5%, 14.9%, and 11.9% of net revenues in the third
quarter of 1998 and 1997 and the first nine months of 1998 and 1997, respective-
ly. The increase from the third quarter and first nine months of 1997 to the
third quarter and first nine months of 1998 was attributable to an increase in
personnel.
Provision for Income Taxes. The Company's effective tax rate is 0% in
1998 and a 10.3% benefit in 1997. The effective tax rate for the third quarter
of 1998 and 1997 was 0% and 12.7%, respectively. The effective tax rate for the
first nine months of 1998 and 1997 was 0% and 6.4%, respectively. The effective
tax rates for the third quarter and first nine months of 1998 and 1997 differ
from the federal statutory rate primarily due to the limitations controlling the
timing for realization of net operating losses and tax credits established by
the Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
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. During the nine
months ended September 30, 1998 the Company sold common stock to existing inves-
tors and received proceeds of $1,950,000. For the nine months ended September
30, 1998, cash, cash equivalents and short-term investments decreased by $1.0
million to approximately $2.6 million, mainly due to operating cash require-
ments, and lower than anticipated sales in general. Also, during this period,
working capital decreased by $1.9 million to approximately $7.2 million.
The Company's operating activities used cash of approximately $2.5 mil-
lion and $3.5 million for the nine months ended September 30, 1998 and 1997,
respectively. Cash used in operating activities for 1998 was comprised primar-
ily of net loss, an increase in inventories, an increase in prepaid expenses,
other current assets and other assets, a decrease in customer deposits, offset
partially by an increase in accounts payable and other accrued liabilities, and
a decrease in accounts receivable. Cash used in operating activities for 1997
was comprised primarily of net loss, an increase in inventories and accounts
receivable, an increase in prepaid expenses, other current assets and other
assets, a decrease in customer deposits, offset partially by an increase in
accounts payable and other accrued liabilities.
10
<PAGE>
The Company's financing activities provided $2.0 million in cash from the
sale of common stock during the nine months ended September 30, 1998. For the
nine months ended September 30, 1997, proceeds from short-term borrowing pro-
vided cash of $500,000.
As of September 30, 1998, the Company's sources of liquidity included
cash, cash equivalents and short-term investments totaled approximately $2.6
million. The Company believes that its existing sources of liquidity will be
sufficient to finance operations in the foreseeable future. In the event that
the Company requires additional liquidity, the Company will acquire additional
funds through either debt or equity financing. There can be no assurance that
additional capital will become available on acceptable terms.
General Description of the Year 2000 Issue and the Nature and Effects of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company does not believe that the Year
2000 presents a material exposure as it relates to the Company's IT systems, non
- -IT systems, third parties and to the Company's products. The Company's IT sys-
tems, non-IT systems, and products all appear to be 100% Year 2000 compliant.
In addition, the Company has gathered information about the Year 2000 compliance
status of its significant suppliers and subcontractors and continues to monitor
their compliance. To date, the Company is not aware of any external agent with
a Year 2000 issue that would materially impact the Company's results of opera-
tions, liquidity, or capital resources. Costs incurred to date and anticipated
costs are not material. However, the Company has no means of ensuring that ex-
ternal agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion could materially
impact the Company. The effect of non-compliance by external agents is not
determinable. Costs incurred to date and anticipated costs are not material.
There is no material exposure related to significant customers of which the
Company is aware of.
In addition, disruptions in the economy generally resulting from Year
2000 issues could also materially adversely affect the Company. The type and
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.
The Company currently has no contingency plans in place for Year 2000
issues because our IT and non-IT systems, third party interfaces and products
all appear to be Year 2000 compliant. The Company feels confident that no con-
tigency plan is necessary, but will continue to monitor the situation.
This description of Year 2000 issues contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1993 and Section 21E
of the Securities Exchange Act of 1934, afforded "safe harbor" protection, and
is provided to avail the reader of current information regarding Year 2000
issues.
11
<PAGE>
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 hardware platform. The Company believes that sales of this system,
along with enhancements thereof, will constitute virtually all of the Company's
revenues for the foreseeable future. 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 opera-
tions. However the Company anticipates that starting in the first quarter of
1999, a significant portion of its revenues will come from its new R-1 multi-
track recorder which was announced in the second quarter of 1998.
A limited number of the Company's system sales typically account for a
substantial percentage of the Company's quarterly revenue because of the rela-
tively 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 quar-
terly earnings shortfalls or losses.
The markets for the Company's system are characterized by changing tech-
nologies and new product introductions. The Company's future success will
depend in part upon its continued ability to enhance its base system with fea-
tures, including new software and hardware add-ons, and to develop or acquire
and introduce new products and features which meet new market demands and chang-
ing customer requirements on a timely basis. The Company is currently designing
and developing new products, primarily in the areas of recording, editing and
mixing functions of sound production as well as digital audio processing and
networking systems. In addition, there can be no assurance that products or
technologies developed by others will not render the Company's products or tech-
nologies noncompetitive or obsolete.
To date, the Company's primary market success has been in the music seg-
ment 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 market seg-
ments. The Company's inability to compete favorably could have a material
adverse effect on its business and results of operations. The markets for the
Company's products are intensely competitive and characterized by significant
price competition. The Company believes that its ability to compete depends on
elements both within and outside its control, including the success and timing
of new product development (including 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, avail-
ability of lease or other financing alternatives, resale of used systems and
customer support.
Currently, the Company uses many sole or limited source suppliers, cer-
tain of which are critical to the integrated circuits included in the Company's
base system. Major delays or terminations in supplies of such components could
have a significant adverse effect on the Company's timely shipment of its
products, which in turn would adversely affect the Company's business and re-
sults of operations.
12
<PAGE>
The Company also relies on single vendors to manufacture major subassemblies for
its products. Any extended interruption in the future supply or increase in the
cost of subassemblies manufactured by its primary or other third party vendors
could have a material adverse effect on the Company's business and results of
operations.
In addition, as different electrical, radiation or other standards appli-
cable to the Company's products are adopted in countries, including the United
States, or groups of countries in which the Company sells its products, the
failure of the Company to modify its products, if necessary, to comply with such
standards would likely have an adverse effect on the Company's business and
results of operations.
The Company generally relies on a combination of trade secret, copyright
law and trademark law, contracts and technical measures to establish and protect
its proprietary rights in its products and technologies. However, the Company
believes that such measures provide only limited protection of its proprietary
information, and there is no assurance that such measures will be adequate to
prevent misappropriation. In addition, significant and protracted litigation may
be necessary to protect the Company's intellectual property rights, to determine
the scope of the proprietary rights of others or to defend against claims of in-
fringement. There can be no assurance that third-party claims alleging infringe-
ment 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 re-
tain highly skilled personnel. In addition, the Company's ability to manage any
growth will require it to continue to improve and expand its management, opera-
tional 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.
As a result of these and other factors, the Company has experienced sig-
nificant 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 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.
13
<PAGE>
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K/A
----------------------------------
(a) Exhibits.
Exhibit 27 - Financial Data Schedule (page 16)
The exhibit listed on the accompanying index immediately
following the signature page is filed as part of this report.
(b) Reports on Form 8-K
None.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the under-
signed thereunto duly authorized.
Euphonix, Inc.
Date: November 11, 1998 By: /s/ BARRY MARGERUM
----------------- -------------------
Barry L. Margerum, Chief Executive
Officer, President
15
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
[DESCRIPTION] EXHIBIT 27 Financial Data Schedule
<CAPTION>
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<PERIOD-TYPE> 9-MOS
<CASH> 1,964,251
<SECURITIES> 589,498
<RECEIVABLES> 1,298,231
<ALLOWANCES> 0
<INVENTORY> 5,584,656
<CURRENT-ASSETS> 9,917,047
<PP&E> 3,124,238
<DEPRECIATION> 1,574,036
<TOTAL-ASSETS> 11,807,407
<CURRENT-LIABILITIES> 2,751,398
<BONDS> 0
0
<COMMON> 6,636
<OTHER-SE> 8,896,816
<TOTAL-LIABILITY-AND-EQUITY> 11,807,407
<SALES> 12,221,364
<TOTAL-REVENUES> 12,221,364
<CGS> 6,727,616
<TOTAL-COSTS> 9,138,679
<OTHER-EXPENSES> (45,517)
<INCOME-PRETAX> (3,599,414)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,599,414)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,599,414)
<EPS-BASIC> (0.57)
<EPS-DILUTED> (0.57)
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-END] SEP-30-1997
[PERIOD-TYPE] 9-MOS
<EXHIBIT 27> Financial Data Schedule - Cont.
<EPS-BASIC> (0.29)
[EPS-DILUTED] (0.29)
