==================================================================
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 MARCH 31, 1999
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
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, 1999 was 7,956,521 ($.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 months ended March 31, 1999 and 1998.....................3
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998...........................4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1999 and 1998.............5
Notes to Condensed Consolidated Financial Statements ...........6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...............................14
Signatures..............................................................15
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Euphonix, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended
March 31,
1999 1998
------------------ -----------------
Net revenues.............................. $ 2,159,447 $ 4,280,167
Cost of sales............................. 1,762,000 2,118,852
------------------ -----------------
Gross profit.............................. 397,447 2,161,315
Operating expenses:
Research & development.................. 1,225,264 881,758
Sales & marketing....................... 1,228,730 1,215,927
General & administrative................ 539,545 679,937
------------------ -----------------
Total operating expenses.................. 2,993,539 2,777,622
------------------ -----------------
Operating loss............................ (2,596,092) (616,307)
Other income.............................. 12,484 19,776
------------------ -----------------
Loss before income taxes.................. (2,583,608) (596,531)
Tax (benefit)/provision................... ---- ----
------------------ -----------------
Net loss.................................. $ (2,583,608) $ (596,531)
================== =================
Net loss per share:
Basic and diluted........................ $ (0.34) $ (0.10)
================== =================
Number of shares used in computing per share amounts:
Basic and diluted........................ 7,589,063 5,716,935
================== =================
See accompanying notes.
3
<PAGE>
Euphonix, Inc.
Condensed Consolidated Balance Sheets
March 31, December 31,
1999 1998
-------------------- --------------------
(unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........ $ 1,108,313 $ 1,637,332
Short-term investments........... 12,619 601,146
Accounts receivable, net......... 1,388,585 1,543,335
Inventories...................... 6,525,771 5,558,637
Income tax receivable............ ---- ----
Prepaid expenses and other current
assets.......................... 330,448 237,512
-------------------- --------------------
Total current assets.............. 9,365,736 9,577,962
Property and equipment, net....... 1,588,649 1,360,186
Deposits and other assets......... 291,506 292,716
-------------------- --------------------
Total assets...................... $ 11,245,891 $ 11,230,864
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................. $ 3,141,966 $ 1,636,357
Accrued payroll and related
liabilities, including deferred
salary......................... 474,538 548,926
Accrued warranty................. 448,713 439,397
Accrued commissions.............. 41,006 126,094
Sales tax payable................ 26,729 187,687
Deferred revenues................ 220,391 185,344
Other accrued liabilities........ 422,732 401,118
Customer deposits................ 162,941 97,914
Short term portion capital leases 20,930 29,692
-------------------- --------------------
Total current liabilities........ 4,959,946 3,652,529
Long term portion capital leases. 2,282 2,282
Deferred rent.................... 703 1,055
Deferred income taxes............ 200,000 200,000
SHAREHOLDERS' EQUITY:
Preferred stock................. ---- ----
Common stock.................... 7,957 6,636
Additional paid-in capital...... 16,975,164 15,672,808
Accumulated Other Comprehensive
Income/(Loss).................. 40,368 74,975
Accumulated deficit............. (10,913,529) (8,329,921)
Deferred compensation........... (27,000) (49,500)
-------------------- --------------------
Total shareholders'equity........ 6,082,960 7,374,998
-------------------- --------------------
Total liabilities and shareholders'
equity.......................... $ 11,245,891 $ 11,230,864
==================== ====================
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date. See notes to condensed consolidated
financial statements.
See accompanying notes.
4
<PAGE>
Euphonix, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
March 31,
1999 1998
---------------- ----------------
Operating activities
Net loss................................ $ (2,583,608) $ (596,531)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization.......... 139,610 144,835
Deferred compensation amortization..... 22,500 22,500
Changes in operating assets and liabilities:
Prepaid expenses, other current assets
and other assets..................... (127,543) 141,596
Accounts receivable................... 154,750 (1,297,583)
Inventories........................... (967,134) (320,758)
Income tax receivable................. ---- 6,427
Accounts payable, accrued liabilities,
and deferred rent.................... 1,250,799 488,852
Customer deposits..................... 65,027 95,365
----------------- ----------------
Total adjustments....................... 538,009 (718,766)
----------------- ----------------
Net cash used in operating activities... (2,045,599) (1,315,297)
Investing activities
Proceeds from sales of available-for-sale
securities............................. 588,527 1,676,312
Purchases of available-for-sale securities ---- (1,044,889)
Purchase of property and equipment...... (366,863) (246,853)
----------------- ----------------
Net cash provided by (used in)investing
activities............................. 221,664 384,570
Financing activities
Principal payments under capital lease
obligations............................ (8,761) (14,574)
Proceeds from sale of common stock...... 1,303,677 1,949,998
----------------- ----------------
Net cash provided by (used in) financing 1,294,916 1,935,424
----------------- ----------------
Net increase (decrease) in cash and cash
equivalents............................ (529,019) 1,004,697
Cash and cash equivalents at beginning of
period................................. 1,637,332 1,880,093
----------------- ----------------
Cash and cash equivalents at end of
period................................. $ 1,108,313 $ 2,884,790
================= ================
Supplemental schedules of noncash investing
and financing activities
Translation adjustment gain/(loss) $ (34,607) $ ----
See accompanying notes.
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
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 three-month period
ended March 31, 1999 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1999.
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, 1998.
2. Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
3. Inventories
Inventories are stated at the lower cost (first-in, first-out) or market (net
realizable value). Inventories consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1999 1998
---------------- ----------------
Raw materials..................... $ 2,296,299 $ 2,112,349
Work-in-process................... 1,818,545 1,390,931
Finished goods.................... 2,410,928 2,055,357
----------------- ----------------
$ 6,525,771 $ 5,558,637
================= ================
</TABLE>
4. Total comprehensive loss for the three month periods ended
March 31, 1999 and 1998 was $2,618,215 and $603,392, respectively.
6
<PAGE>
EUPHONIX, INC.
Notes to Condensed Consolidated Financial Statements - Continued
5. Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standard Boards issued State-
ment of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is required to be
adopted in years beginning after June 15, 1999. The adoption of SFAS 133 is not
expected to materially impact the Company's results of operations, financial
position or cash flows.
The American Institute of Certified Public Accountants issued State-
ment of Position 98-1, "Accounting For the Costs of Computer Software Developed
or Obtained for Internal Use" ("SOP 98-1"), on March 4, 1998. SOP 98-1 provides
guidelines for accounting for costs of computer software developed for internal
use. SOP 98-1 is effective for financial statements for fiscal years begin-
ning after December 15, 1998. The adoption of SOP 98-1 is not expected to
materially impact the Company's results of operations, financial position or
cash flow.
6. Common Stock
In January 1999, the Company received proceeds of $1,303,676 from
existing investors in exchange for the issuance of 1,320,446 shares of $0.001
par value common stock at $0.987 per share, 90% of the average closing bid price
per share on the NASDAQ, for the ten days immediately preceding January 26,
1999. The authorized capital stock of the Company as of the date of this
agreement is 20,000,000 shares of common stock and 2,000,000 shares of preferred
stock, par value $0.001. As of March 31, 1999, there were 7,956,521 shares of
common stock issued and outstanding, and there were no issued and outstanding
shares of preferred stock.
7. Subsequent Event
In April 1999, the Company executed a secured promissory note with
existing investors under which the Company may draw up to $2 million through
July 31, 1999. The note is convertible into common stock of the Company under
certain circumstances and is secured by the assets of the Company.
7
<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.
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 $2.2 million in the first
quarter of 1999 down from $4.3 million in the first quarter of 1998,
representing a decrease of 49.5% in 1999 from 1998. The Company's decrease in
net revenues for the first quarter of 1999 as compared to 1998, resulted
primarily from reduced sales in the United States and the Pacific Rim.
Domestic sales of the Company's products for the first quarter of 1999
and 1998 were $1.1 million and $2.4 million, respectively, comprising
approximately 49.8% and 56.7% of the Company's net revenues for the first
quarter of 1999 and 1998, respectively. Export sales were $1.1 million and $1.9
million comprising approximately 50.2% and 43.3% of the Company's revenues for
the first quarter of 1999 and 1998, respectively. Export sales as a percent of
net revenues decreased in the first three months of 1999 due to reduced sales in
the Pacific Rim, Canada and South America, as compared to the first three months
of 1998.
The Company anticipates that continuing in the second 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, and began shipping
in the first quarter of 1999.
Gross Margin. The Company's gross margin decreased to 18.4% in the
first quarter of 1999 down from 50.5% in the first quarter of 1998, representing
a decrease of 81.6% in the first quarter of 1999 as compared to the first
quarter of 1998. The decrease in the first three months of 1999 from the first
three months of 1998 was primarily due to unfavorable absorption variances
which were caused by a significant decrease in sales volume during the quarter,
the Company selling a new product, R-1, in the first quarter which had lower
margins, selling off older/used inventory at lower margins, and to manufacturing
overhead investments associated with the new R-1 Recorder and other product
development activities.
Research and Development Expenses. Research and development expenses
increased to $1.2 million in the first quarter of 1999, up from $881,800 in the
first quarter of 1998, representing an increase of 39% in the first quarter of
1999 as compared to the first quarter of 1998. Research and development expenses
as a percentage of net revenues increased to 56.7% in the first quarter of 1999,
up from 20.6% in the first quarter of 1998. The increase in reasearch and
development expenses in the first quarter of 1999 from the first quarter of 1998
resulted primarily from new product development costs primarily related to next
generation products, and additional personnel. The Company expects research
and development costs next quarter to continue to increase as it develops its
next generation products.
Sales and Marketing Expenses. Sales and marketing expenses were $1.2
million in the first quarter of 1999 and 1998. Sales and marketing expenses
increased as a percentage of net revenues to 56.9% in the first quarter of 1999
from 28.4% in the first quarter of 1998 due to lower sales.
8
<PAGE>
General and Administrative Expenses. General and administrative expenses
decreased to $539,500 in the first quarter of 1999 from $680,000 in the first
quarter of 1998, representing a decrease of 20.6%. General and administrative
expenses as a percent of net revenues increased to 25% in the first quarter of
1999 from 15.9% in the first quarter of 1998, primarily due to lower sales. The
decrease in general and administrative expenses in absolute dollars is primarily
due to a decrease in insurance expense, rent expense due to a sublease of a
portion of the Palo Alto facility, lower bad debt expense due to lower receiv-
able balances as compared to the first quarter of 1998, and the reclassification
of Euphonix Japan's expenses from general and administrative expense to sales
and marketing expense.
Provision / (benefit) for Income Taxes. For the first quarter of 1999
and 1998, the Company did not recognize the tax benefit of its operating losses.
Management believes the resulting deferred tax assets are not realizable on a
more likely than not basis. The Company's effective tax rate was 0% in the first
quarter of 1999 and 1998, and differs 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. 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 executed. In January 1999, the Company
received proceeds of $1,303,676 from existing investors in exchange for the
issuance of 1,320,446 shares of $0.001 par value common stock at $0.987 per
share. In April 1999, the Company executed a secured promissory note with exist-
ing investors under which the Company may draw up to $2 million through July 31,
1999. The note is convertible into common stock of the Company under certain
circumstances and is secured by the assets of the Company. For the first quarter
ended March 31, 1999, cash, cash equivalents and short-term investments
decreased by $529,000 to approximately $1.1 million. Also, during this period,
working capital decreased by $1.5 million to approximately $4.4 million.
The Company's operating activities used cash of approximately $2.0
million and $1.3 million for the three months ended March 31, 1999 and 1998,
respectively. Cash used in operating activities for 1999 was comprised primarily
of net loss and an increase in inventories, prepaid expenses and other current
assets and other assets, offset partially by an increase in accounts payable and
other accrued liabilities, depreciation, and customer deposits and a decrease
in accounts receivable. Cash used in operating activities for 1998 was comprised
primarily of net loss, an increase in accounts receivable and inventories,
offset partially by an increase in accounts payable and other accrued liabili-
ties, depreciation and amortization, prepaid expenses, other current assets and
other assets, and customer deposits. The Company's investing activities of
$222,000 and $385,000 for the three months ended March 31, 1999 and 1998,
respectively, provided cash from the proceeds from sales of available-for-sale
securities, offset by the purchase of property and equipment.
The Company's financing activities provided $1.3 million in cash from
the sale of common stock to existing investors during the first three months
ended March 31, 1999. For the first three months ended March 31, 1998 proceeds
from the sale of common stock provided $1,949,998.
9
<PAGE>
As of March 31, 1999, the Company's sources of liquidity included cash,
cash equivalents and short-term investments totaling approximately $1.1 million.
Management believes that cash and short term investments of $1.1 million
combined with the equity financing received in January 1999, and the additional
$2.0 million of convertible debt financing from existing investors and others
received in the second quarter ended June 30, 1999, and a possible reduction in
operating expenses during the second half of 1999 will be sufficient to support
its operations through at least December 1999. In addition, the Company may need
to delay or significantly reduce other operating expenditures, which would have
a material adverse effect on its business, results of operations and business
prospects.
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.
Based on recent assessments, the Company determined that it would not be
required to upgrade, modify, and/or replace portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that the Year 2000 issue is resolved
without modifications or replacements of existing software and certain hardware.
The Company's plan in resolving the Year 2000 issue involved the following
four phases: inventory, assessment, remediation, and testing/implementation.
Both information technology ("IT") and non-information technology technology
("Non-IT") systems were addressed. The Company has completed its assessment of
IT and Non-IT systems that could have been significantly affected by the Year
2000. The completed assessment indicated that all of the Company's significant
IT systems would not be affected, particularly the order entry, general ledger,
billing, and inventory systems. The assessment also indicated that Non-IT sys-
tems would not be affected.
Based on a review of its product lines, the Company has determined that
most of the products it has sold and will continue to sell do not require
remediation to be Year 2000 compliant. Based on the results of product review
and testing completed, the Company believes its programming software for its
audio consoles and R-1 Multi-track Recorders to be compliant as defined by the
British Standards Institute DISC PC-2000-1 definition. Accordingly, the Company
does not believe that the Year 2000 presents a material exposure as it relates
to the Company's products.
The Company has queried all of its significant suppliers and
subcontractors systems with the Company ("suppliers"). To date, the Company is
not aware of any supplier with a Year 2000 issue that would materially impact
the Company's results of operations, liquidity, or capital resources. However,
the Company has no means of ensuring that its suppliers will be Year 2000 ready.
The inability of suppliers to complete their Year 2000 resolution process in a
timely fashion could materially and adversely impact the Company. However, many
significant suppliers have been second sourced and the Company is currently
taking steps to assess whether these suppliers are currently taking steps to
address any Year 2000 issues they may have.
10
<PAGE>
To date, the Company has incurred costs of less than $5,000 on the
Year 2000 project, and estimates that there will be no material future costs.
As noted above, the Company has completed all necessary phases of the Year
2000 program. The Company believes that it is more likely to experience Year
2000 problems with the systems of key suppliers rather than with the Company's
internal systems or products. The Company's Year 2000 program includes efforts
to assess the Year 2000 compliance of its key suppliers.
The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 program. The Company intends to
develop a contingency plan to deal with Year 2000 issues that may materially
adversely affect its business processes. The Company intends to have a
contingency plan in place no later than September 30, 1999.
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
hardware platform. The Company believes that sales of this system, along with
enhancements thereof, and the R-1 recorder will continue to 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 operations.
The Company has expended and will continue to expend substantial funds to
launch its new product developments in the second half of fiscal 1999. The
Company's ability to fund operations through December 31, 1999 is dependent upon
achievement of its operating plan and attainment of additional financing. The
Company believes that additional debt or equity financing will be available from
existing investors and others. However, there can be no assurance as to the
terms and conditions of any such financing and no certainty that funds would be
available when needed. The inability to obtain additional financing, when
needed, would be likely to curtail the Company's sales and marketing and product
development efforts and would be likely to have a material adverse effect on the
Company. To the extent that any future financing involves the sale of the
Company's equity securities, the Company's then existing shareholders could be
substantially diluted.
A limited number of the Company's system sales typically account for a
substantial percentage of the Company's quarterly revenue because of the
relatively high average sales price of such systems. Moreover, the Company's
expense levels are based in part on its expectations of future revenue.
Therefore, if revenue is below expectations, the Company's operating results are
likely to be adversely affected. In addition, the timing of revenue is
influenced by a number of other factors, including the timing of individual
orders and shipments, industry trade shows, seasonal customer buying patterns,
changes in product development and sales and marketing expenditures, custom
financing arrangements, production limitations and international sales activity.
Because the Company's operating expenses are based on anticipated revenue levels
and a high percentage of the Company's expenses are relatively fixed in the
short term, variations in the timing of recognition of revenue could cause
significant fluctuations in operating results from quarter to quarter and may
result in unanticipated quarterly earnings shortfalls or losses.
11
<PAGE>
The markets for the Company's system are characterized by changing
technologies and new product introductions. The Company's future success will
depend in part upon its continued ability to enhance its base system with
features including new software and hardware add-ons and to develop or acquire
and introduce new products and features which meet new market demands and
changing customer requirements on a timely basis. The Company is currently
designing and developing new products, primarily in the areas of recording,
editing and mixing functions of sound production as well as digital audio
processing and networking systems. In addition, there can be no assurance that
products or technologies developed by others will not render the Company's
products or technologies non-competitive or obsolete. See "Business".
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 market
segments. The Company's inability to compete favorably could have a material
adverse effect on its business and results of operations. The markets for the
Company's products are intensely competitive and characterized by significant
price competition. The Company believes that its ability to compete depends on
elements both within and outside its control, including the success and timing
of new product development (including development on a timely basis of digital
products, 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. See "Business--Competition".
Currently, the Company uses many sole or limited source suppliers, certain
of which are critical to the integrated circuits included in the Company's base
system. Major delays or terminations in supplies of such components could have a
significant adverse effect on the Company's timely shipment of its products,
which in turn would adversely affect the Company's business and results of
operations. The Company also relies on single vendors to manufacture major
subassemblies for its products. Any extended interruption in the future supply
or increase in the cost of subassemblies manufactured by its primary or other
third party vendors could have a material adverse effect on the Company's
business and results of operations. See "Business--Manufacturing and Suppliers".
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. See "Business--Sales and Distribution".
The Company generally relies on a combination of trade secret, copyright
law and trademark law, contracts and technical measures to establish and protect
its proprietary rights in its products and technologies. However, the Company
believes that such measures provide only limited protection of its proprietary
information, and there is no assurance that such measures will be adequate to
prevent misappropriation. In addition, significant and protracted litigation may
be necessary to protect the Company's intellectual property rights, to determine
the scope of the proprietary rights of others or to defend against claims of
infringement. There can be no assurance that third-party claims alleging
infringement will not be asserted against the Company in the future. Any such
claims could have a material adverse effect on the Company's business and
results of operations. See "Business--Proprietary Rights".
12
<PAGE>
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. Sale of Spectral products
for 1998, 1997 and 1996 were significantly below plan and below 1995 sales
levels. Spectral's pre-tax operating loss for 1998 decreased from 1997 and 1996
due primarily to transferring the general and administrative, and sales
functions to Palo Alto. In 1996, Spectral engineering, marketing and sales
activities were integrated into the respective Euphonix organizations. In 1997,
the Company further integrated Spectral activities by the transfer of their
manufacturing to Euphonix headquarters in Palo Alto, California. In 1998, the
Company sold Spectral's technology to Telos, Inc.
As a result of these and other factors, the Company has experienced
significant quarterly fluctuations in operating results and anticipates that
these fluctuations will continue in future periods. There can be no assurance
that the Company will be successful in maintaining or improving its
profitability or avoiding losses in any future period. Further, it is likely
that in some future period the Company's net revenues or operating results will
be below the expectations of public market securities analysts and investors. In
such event, the price of the Company's Common Stock would likely be materially
adversely affected. See "Factors Affecting Future Operating Results."
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>
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: May 15, 1999 By: /s/ BARRY L. MARGERUM
-------------------------
Barry L. Margerum, Chief Executive
Officer, President
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,108,313
<SECURITIES> 12,619
<RECEIVABLES> 1,388,585
<ALLOWANCES> 0
<INVENTORY> 6,525,771
<CURRENT-ASSETS> 9,365,736
<PP&E> 1,588,649
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,245,891
<CURRENT-LIABILITIES> 4,959,946
<BONDS> 0
0
0
<COMMON> 7,957
<OTHER-SE> 6,075,003
<TOTAL-LIABILITY-AND-EQUITY> 11,245,891
<SALES> 2,159,447
<TOTAL-REVENUES> 2,159,447
<CGS> 1,762,000
<TOTAL-COSTS> 2,993,539
<OTHER-EXPENSES> (12,484)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,583,608)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,583,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,583,608)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
