<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. ___)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted
by rule 14a-6(e) (2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
EUPHONIX, INC.
(Name of Registrant as Specified in its Charter)
--------------------
(Name of Person Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i) (1) and 0-11.
(1) Title of each class of securities to which transaction applies:
__________________________________________
(2) Aggregate number of securities to which which transaction applies:
__________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
__________________________________________
(4) Proposed maximum aggregate value of transaction:
__________________________________________
(5) Total fee paid:
__________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a) (2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ________________________
(2) Form, Schedule or Registration Statement No.:______________________
(3) Filing Party:____________________________
(4) Date Filed:______________________________
Page 1 of 1
<PAGE>
EUPHONIX, INC.
220 Portage Avenue
Palo Alto, California 94306
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 26, 1998
______________
The Annual Meeting of Shareholders of Euphonix, Inc., a California
corporation (the "Company"), will be held at the Company's offices located at
220 Portage Avenue, Palo Alto, California 94306 on Friday, June 26, 1998 at
9:00 a.m. California time, for the following purposes.
1. To elect three directors to serve for the ensuing two years or
until their successors are duly elected and qualified.
2. To ratify the appointment of Ernst & Young LLP as independent
auditors for the Company for the fiscal year ending December 31,
1998.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only shareholders of record at the close of business on April 28,
1998 are entitled to notice of and to vote at this meeting and any adjourn-
ment or postponement thereof. A list of such shareholders is kept at the
office of the Company's transfer agent, ChaseMellon Shareholder Services,
L.L.C. All shareholders are cordially invited to attend the meeting. How-
ever, to assure your representation at the meeting, you are urged to mark,
sign and return the enclosed proxy card as promptly as possible in the pos-
tage-prepaid envelope enclosed for that purpose.
Any shareholder attending the meeting may vote in person even if he
or she has returned a proxy.
By Order of the Board of Directors,
/s/JAMES DOBBIE
James Dobbie
Chairman of the Board of Directors
Palo Alto, California
May 20, 1998
IMPORTANT: Whether or not you plan to attend the meeting, you are requested
to complete and promptly return the enclosed proxy in the envelope provided.
<PAGE>
EUPHONIX, INC.
220 Portage Avenue
Palo Alto, California 94306
___________
PROXY STATEMENT
___________
Notice of Annual Meeting of Shareholders
June 26, 1998
INFORMATION CONCERNING SOLICITATION AND VOTING
Date, Time and Place
This Proxy Statement is furnished to the shareholders of Euphonix,
Inc., a California corporation (the "Company"), in connection with the soli-
citation of Proxies by the Board of Directors of the Company for use at the
Annual Meeting of Shareholders to be held at 9:00 a.m. on Friday, June 26,
1998, and any and all postponements or adjournments thereof. These proxy
solicitation materials were first mailed on or about May 20, 1998 to all
shareholders entitled to vote at the Annual Meeting.
Purposes of the Annual Meeting
The purposes of the Annual Meeting are to (1) elect a Board of Dir-
ectors of the Company, (2) ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the current fiscal year and (3) transact
such other business as may properly come before the meeting or any and all
postponements or adjournments thereof.
Revocability of Proxies
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before its use by delivering to the Secretary of
the Company a written notice of revocation or a duly executed proxy bearing a
later date or by attending the Annual Meeting and voting in person.
Record Date and Share Ownership
Shareholders of record at the close of business on April 28, 1998 (the
"Record Date") are entitled to notice of and to vote at the meeting. At the
Record Date, 6,631,390 shares of the Company's Common Stock were issued and out-
standing. For information regarding security ownership by management and by 5%
shareholders, see "Stock Ownership Table."
Voting and Solicitation; Quorum
Each share has one vote. The required quorum for the transaction of
business at the Annual Meeting is a majority of the shares of Common Stock is-
sued and outstanding on the Record Date. Shares that are voted "FOR", "AGAINST"
or "WITHHELD FROM" a matter are treated as being present at the meeting for the
<PAGE>
purposes of establishing a quorum and are also treated as shares "represented
and voting" at the Annual Meeting (the "Votes Cast") with respect to such mat-
ter.
The Company believes that abstentions should be counted for the purpose
of determining the presence or absence of a quorum for the transaction of busi-
ness, but should not be counted as Votes Cast with respect to a proposal as to
which the shareholder has expressly abstained from voting.
Broker non-votes will be counted for the purpose of determining the
presence or absence of a quorum for the transaction of business, but will not
be counted for the purpose of determining the number of Votes Cast with respect
to the proposal on which the broker has expressly not voted. Thus, abstentions
and broker non-votes will not affect the outcome of the voting on a proposal
that requires a majority of the Votes Cast.
The cost of this solicitation will be borne by the Company. In addi-
tion, the Company may reimburse brokerage firms and other persons representing
beneficial owners of shares for their expenses in forwarding solicitation mater-
ial to such beneficial owners. Proxies may also be solicited by certain of the
Company's directors, officers and regular employees, without additional compen-
sation, personally or by telephone, telegram or facsimile.
Shareholder Proposals for the Next Annual Meeting
Any proposal to be presented at the Company's next Annual Meeting of
Shareholders must be received at the Company's principal office no later than
January 20, 1999 in order to be considered for inclusion in the Company proxy
materials for such meeting. Any such proposals must be submitted in writing
and addressed to the attention of the Company's Corporate Secretary at 220
Portage Avenue, Palo Alto, California 94306.
PROPOSAL NO. 1--ELECTION OF DIRECTORS
There are currently authorized six seats on the Company's Board of
Directors (the "Board"). The Board is divided into two classes with each
director serving a two-year term and one class being elected at each year's
annual meeting of shareholders. Directors Chang, Dobbie and Kamath are in the
class of directors whose terms expire at the annual meeting of shareholders to
be held June 26, 1998, and Directors Kuhling, Margerum and Silfvast are in the
class of directors whose terms will expire at the 1999 annual meeting of share-
holders. Barry Margerum succeeded Guy Paul Nohra as one of the directors whose
term expires at the 1999 annual meeting of shareholders. The three nominees
receiving the highest number of affirmative votes of the shares present in
person or represented by proxy and entitled to vote for them, shall be elected
as directors. Only votes cast for a nominee will be counted in determining
whether that nominee has been elected as director. Shareholders may withhold
authority to vote for the entire slate as nominated or, by writing the name of
an individual nominee in the space provided on the proxy card, withhold the aut-
hority to vote for any individual nominee. Votes withheld from any director
are counted for purposes of determining the presence or absence of a quorum, but
have no other legal effect under California law.
The following three persons have been selected and appointed by the
Board of Directors as nominees for election to the Board: Milton M.T. Chang,
Jr., James Dobbie and B. Yeshwant Kamath. All of the nominees are incumbent
directors. If any of the nominees should decline or be unable to serve as a
director, the proxies will be voted for any nominee who shall be designated
by the present Board of Directors to fill the vacancy. It is not expected
that any nominee will be unable or will decline to serve as a director.
<2>
<PAGE>
The names of the directors of the Company, including the nominees, and
certain information about them, are set forth below.
<TABLE>
<CAPTION>
<S>
<C> Director Principal Occupation
Name Age Since or Employment
- --------------------------- --- ----- ----------------------------------------
Milton M.T. Chang, Ph.D.(1) 55 1988 Chairman of the Board of New Focus, Inc.
James Dobbie 67 1991 Chairman of the Board
B. Yeshwant Kamath(2) 50 1996 President of Videonics, Inc.
Robert F. Kuhling, Jr.(1)(2) 49 1990 General Partner of several venture capi-
tal partnerships managed by ONSET Ven-
tures Services Corp.
Barry L. Margerum 46 1997 President and Chief Executive Officer of
the Company
Scott W. Silfvast 35 1988 Senior Vice President of Product Market-
ing of the Company, Founder
- ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
</TABLE>
Milton M.T. Chang, Ph.D. has served on the Board of Directors since
the Company's inception in July 1988. Since April 1996, Dr. Chang has served
as Chairman of the Board of New Focus, Inc., a privately held manufacturer of
optic components which he co-founded, and from May 1990 to April 1996, Dr.
Chang served as its President. From 1988 to May 1990, Dr. Chang was self-
employed as a consultant. Dr. Chang also serves on the board of directors of
a number of privately held companies.
James Dobbie has served as Chairman of the Board of the Company since
March 1991 and served as Chief Executive Officer from March 1991 until June
1997. From 1988 to February 1991, Mr. Dobbie was a self-employed consultant
and consulted for the Company from November 1990 to February 1991. From 1984
to 1987, Mr. Dobbie was Chairman of the Board of Akashic Memories, a privately
held supplier of high density computer disks. From 1980 to 1983, Mr. Dobbie was
President of Avantek, an electronic component company.
B. Yeshwant Kamath has served as a director of the Company since Octo-
ber 1996. Since November 1997 Dr. Kamath has served as President of Videonics,
Inc. Prior to that he served as Division President of the KUB division of Vid-
eonics, Inc. KUB Systems, a company that manufactures video special effects
equipment was founded by Dr. Kamath in February 1992 and acquired by Videonics,
Inc. in May 1996. Previously, Dr. Kamath was a founder of Abekas Video Systems,
Inc., a subsidiary of Carlton Communications PLC, where he was President from
1982 to August 1990. Dr. Kamath is also a director of Elantec Semiconductor,
Inc. and Videonics, Inc.
Robert F. Kuhling, Jr. has served as a director of the Company since
October 1990. Since 1987, Mr. Kuhling has been a general partner of several
venture capital partnerships managed by ONSET Ventures Services Corp., a ven-
ture capital firm. Mr. Kuhling also serves on the board of directors of Concep-
tus, Inc. and serves as a director for a number of privately held companies.
<3>
<PAGE>
Barry L. Margerum was appointed Chief Executive Officer and President
of the Company in June 1997 and has served as a director of the Company since
August 1997. From 1994 to June 1997, he served as Vice President of Marketing
and then as President and General Manager of the CMS Division of Plantronics,
Inc. From 1989 to 1994, Mr. Margerum was President and Chief Executive Officer
of MITEM Corporation, a provider of middleware technology for enterprise distri-
buted systems. From 1980 to 1988, Mr. Margerum held a variety of executive
sales and marketing executive positions for GriD Systems Corporation, a pioneer
in the field of lap-top computers. Prior to that, Mr. Margerum was employed by
Apple Computer, Inc., Epsilon Data Management and International Business Mach-
ines Corporation.
Scott W. Silfvast founded the Company in July 1988. He has been a
director of the Company since its inception, has served as Senior Vice Presi-
dent since June 1997 and served as President from March 1990 until May 1997.
Mr. Silfvast also served as Chairman of the Board from July 1988 until February
1991. From 1983 to July 1988, he was an engineer for SRS, a measurement instru-
mentation company.
Vote Required; Recommendation of Board of Directors
The three nominees receiving the highest number of affirmative votes
of the shares entitled to be voted for them shall be elected as directors.
Votes withheld from any director are counted for purposes of determining the
presence or absence of a quorum, but have no other legal effect under California
law.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE
Board Meetings and Committees
The Board of Directors of the Company held a total of four meetings
during the fiscal year ended December 31, 1997 ("Fiscal 1997"). Each director
attended or participated in at least 75% of the aggregate of (i) the total num-
ber of meetings of the Board of Directors (held during the period for which
such director has been a director) and (ii) the total number of meetings of
committees of the Board of Directors on which such person served (during the
period that such director served).
Audit Committee. The Audit Committee did not meet during Fiscal 1997.
The Audit Committee currently consists of Dr. Kamath and Mr. Kuhling. Guy Paul
Nohra also served on the Audit Committee until his resignation from the Board
in August 1997. The Audit Committee reviews both audit and non-audit services
performed by the Company's independent accountants for the preceding year and
recommends engagement of the Company's independent auditors. The Audit Commit-
tee also reviews and evaluates the Company's accounting principles and its sys-
tems of internal accounting controls.
Compensation Committee. The Compensation Committee, consisting of Dr.
Chang and Mr. Kuhling, makes recommendations to the Board of Directors regarding
all forms of compensation to executive officers, and performs such other duties
as may from time to time be determined by the Board of Directors. The Compen-
sation Committee met four times during Fiscal 1997.
Nominating Committee. The Company does not have a nominating committee
or a committee performing the functions of a nominating committee.
<4>
<PAGE>
Compensation of Directors
Non-employee directors of the Company currently do not receive compen-
sation for each Board meeting attended. Reimbursement of expenses is allowed.
Officers of the Company do not receive additional compensation for attendance
at Board of Directors meetings or committee meetings. In addition, all non-
employee directors elected for the first time after July 20, 1995 are eligible
to participate in the Company's 1995 New Director Option Plan (the "Director
Plan"). The Director Plan provides for the automatic grant of a nonstatutory
stock option to purchase 10,000 shares of Common Stock of the Company to each
non-employee director of the Company's on the date which such person first be-
comes a director and an additional grant of a nonstatutory stock option to pur-
chase 2,000 shares of Common Stock of the Company on the date of each annual
meeting of the shareholders. All options granted under the Director Plan are
subject to a four-year vesting schedule.
PROPOSAL NO. 2--RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors has selected Ernst & Young LLP ("Ernst & Young")
as the Company's independent public accountants for the fiscal year ending
December 31, 1998 ("Fiscal 1998"). Ernst & Young (or one of its predecessor
firms) has been the Company's independent auditors since 1988. Audit services
of Ernst & Young during Fiscal 1997 included the examination of the consolida-
ted financial statements of the Company.
A representative of Ernst & Young is expected to be present at the An-
nual Meeting of Shareholders and will have an opportunity to make a statement if
such representative so desires. Moreover, Ernst & Young's representative will
be available to respond to appropriate questions from the shareholders.
Vote Required; Recommendation of Board of Directors
The affirmative vote of a majority of the Votes Cast will be required
to ratify the selection of Ernst & Young as the Company's independent auditors.
In the event that the shareholders do not approve the selection of Ernst &
Young, the appointment of the independent auditors will be reconsidered by the
Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL NO. 2
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's direc-
tors, executive officers, and any persons holding more than ten percent of the
Company's Common Stock ("Reporting Persons") are required to report, to the
Securities and Exchange Commission (the "SEC") and to the exchange upon which
the Common Stock is traded, their initial ownership of the Company's stock and
any subsequent changes in that ownership. Specific due dates for these reports
have been established, and the Company is required to disclose in this Proxy
Statement any failure to file these reports on a timely basis.
Based solely on its review of the copies of such reports received by
it or written representations from certain Reporting Persons that no Forms 3,
4 or 5 were required, the Company believes that as of the Record Date, all
<5>
<PAGE>
Reporting Persons complied with all applicable filing requirements, except that
the Form 3 required to be filed by each of Thomas C. Fristoe, Paul L. Hammel,
Barry Margerum and Steven H. Milne was filed late, and the Forms 4 required to
be filed by Thomas C. Fristoe for August 1997 and December 1997 were filed late.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was formed in April 1992 to review
and approve the compensation and benefits for the Company's key executive of-
ficers, administer the Company's stock option plans and make recommendations to
the board of directors regarding such matters. The committee is currently
composed of Dr. Chang and Mr. Kuhling, neither of whom is an officer of the Com-
pany. No interlocking relationship exists between any member of the Company's
Board of Directors or Compensation Committee and any member of the board of dir-
ectors or compensation committee of any other company, nor has any such inter-
locking relationship existed in the past.
<6>
<PAGE>
SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The table below indicates the number of shares of the Company's Common
Stock beneficially owned as of March 31, 1998 by: (i) each person or entity
known by the Company to be the beneficial owner of more than 5% of the Company's
outstanding stock, (ii) each of the Company's directors, (iii) each of the exec-
utive officers named in the Summary Compensation Table (the "Named Officers"),
and (iv) all directors and executive officers as a group. Except as otherwise
indicated, each person has sole investment and voting powers with respect to the
shares shown as beneficially owned. Ownership information is based upon infor-
mation furnished by the respective individuals.
<TABLE>
<CAPTION>
<S>
Number of Shares
Beneficially Owned(1)
<C>
Directors, Executive Officers and 5% Shareholders Number Percent
- ------------------------------------------------- ------ -------
Robert F. Kuhling, Jr. (2)....................... 1,744,922 26.3%
c/o ONSET Enterprise Associates
2490 Sand Hill Road
Menlo Park, CA 94025
ONSET Enterprise Associates...................... 1,744,335 26.3%
2490 Sand Hill Road
Menlo Park, CA 94025
Venture Capital Funds managed by or affiliated with 462,675 7.0%
Burr, Egan, Deleage & Company (3)
One Post Office Square
Suite 3800
Boston, MA 02109
Milton M. T. Chang, Ph.D......................... 368,800 5.6%
c/o New Focus, Inc.
2630 Walsh Avenue
Santa Clara, CA 95051
Scott W. Silfvast (4)............................ 315,556 4.6%
James Dobbie (4)................................. 167,230 2.9%
Barry L. Margerum (4)............................ 57,291 *
Steven H. Milne (4).............................. 25,000 *
B. Yeshwant Kamath (4)........................... 2,500 *
Thomas C. Fristoe (4)............................ -- --
All executive officers and directors as a group
(9 persons) (4)................................. 2,681,229 39.7%
_______________________
* Less than one percent.
(1) Based on 6,630,491 shares of Common Stock outstanding as of March 31, 1998.
<7>
<PAGE>
(2) Includes 1,744,335 shares held by ONSET Enterprise Associates
("ONSET"). Mr. Kuhling is a general partner of OEA Management, L.P.
("OEA"), which is the general partner of ONSET, and, together with
the other general partners of OEA, shares voting and investment power
with respect to such shares. Mr. Kuhling disclaims beneficial owner-
ship of the shares held by ONSET except to his proportionate partner-
ship interest therein. Also includes 587 shares held by a trust for
the benefit of Mr. Kuhling and his spouse.
(3) Based on Amendment No. 2 to Schedule 13G filed by Burr, Egan Deleage
& Co. with the SEC on February 12, 1998. Includes 391,285 shares
held by Alta IV Limited Partnership ("Alta") and 71,390 shares held
by C.V. Sofinnova Partners Five ("Sofinnova" and, together with Alta,
the "BED Funds"). The principals of Burr, Egan, Deleage & Co. are
general partners of Alta IV Management Partners, L.P. ("Alta IV MP")
(which is a general partner of Alta). As general partners of Alta IV
MP, they may be deemed to share voting and investment power for the
shares held by Alta IV MP. Burr, Egan, Deleage & Co. serves as an
advisor to Sofinnova. The principals of Burr, Egan, Deleage & Co.
disclaim beneficial ownership of all such shares held by the BED Funds,
except to the extent of their proportionate pecuniary interests there-
in.
(4) Includes 21,875 21,875, 57,291, 25,000, 2,500 and 128,541 shares which
Messrs. Silfvast, Dobbie, Margerum, Milne, Kamath and all present dir-
ectors and executive officers as a group, respectively, have the right
to acquire within 60 days of March 31, 1998 upon the exercise of stock
options.
COMPENSATION OF EXECUTIVE OFFICERS
Executive Compensation
The following table sets forth information concerning the compensa-
tion paid by the Company during the fiscal years ended December 31, 1997, 1996
and 1995, to the Named Officers.
</TABLE>
<TABLE>
<CAPTION>
<S>
Long-Term
Compensation
Annual Compensation Awards
------------------- ------------
Securities
<C> Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Options(#) Compensation($)
- --------------------------- ---- --------- -------- ---------- ---------------
Barry L. Margerum (2)...... 1997 105,000 36,750 250,000 3,540(3)
President and Chief 1996 --- --- --- ---
Executive Officer 1995 --- --- --- ---
James Dobbie............... 1997 146,667 0 0 14,594(4)
Chairman of the Board 1996 179,168 12,500 0 0
(Chief Executive Officer 1995 160,024 72,000 30,000 0
through May 1997)
Scott W. Silfvast.......... 1997 148,125 22,500 50,000 0
Senior Vice President of 1996 132,284 12,500 0 0
Product Marketing 1995 115,155 46,888 30,000 0
Steven H. Milne............ 1997 128,100 19,200 20,000 0
Vice President of Engineer-1996 90,901 20,000 60,000 0
ing 1995 --- --- --- ---
Thomas C. Fristoe (2)...... 1997 84,814(5) 35,000 70,000 14,484(6)
Vice President of World 1996 --- --- --- ---
Wide Sales and Marketing 1995 --- --- --- ---
Communications
___________________
(1) Includes bonus amounts earned in a fiscal year and paid in the subse-
quent fiscal year.
(2) Mr. Margerum and Mr. Fristoe commenced employment with the Company in
June 1997.
(3) Represents life insurance premium.
(4) Represents amount received in payment of surrendered accrued vacation
time.
(5) Includes salary of $75,000 and commission payment of 9,814.
(6) Represents relocation expense reimbursement.
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth, as to the Named Officers, certain
information relating to stock options granted during Fiscal 1997.
<TABLE>
<CAPTION>
<S> Potential Realizable
Value at Assumed
Annual Rates of Stock
Individual Grants Price Appreciation
----------------------------------------- for Option Term(4)
---------------------
Number of
Securities % of Total
Underlying Options
Options Granted to Exercise or
<C> Granted Employees in Base Price Expiration
Name (#) Fiscal Year(1) ($/Sh)(2) Date(3) 5% ($) 10% ($)
- --------------- ------- -------------- --------- ---------- ------ -------
Barry L. Margerum 250,000 33.9% 2.00 08/05/07 314,447 796,871
James Dobbie 0 -- -- -- -- --
Scott W. Silfvast 25,000 3.4% 1.125 12/10/07 17,688 44,824
Scott W. Silfvast 25,000 3.4% 1.125 12/10/07 17,688 44,824
(5)
Steven H. Milne 10,000 1.4% 1.125 12/10/07 7,075 17,930
Steven H. Milne(5) 10,000 1.4% 1.125 12/10/07 7,075 17,930
Thomas C. Fristoe 60,000 8.1% 2.00 08/05/07 75,467 191,249
Thomas C. Fristoe 10,000 1.4% 1.125 12/10/07 7,075 17,930
(5)
____________
</TABLE>
(1) The total number of shares subject to options granted to employees
during Fiscal 1997 was 737,950.
(2) The exercise price is equal to the closing price of the Company's
Common Stock on the date of grant.
(3) Options may terminate before their expiration date if the optionee's
status as an employee or consultant is terminated or upon optionee's
death.
(4) The Potential Realizable Value is calculated based on the fair market
value on the date of grant, which is equal to the exercise price of
options granted in Fiscal 1997, assuming that the stock appreciates in
value from the date of grant until the end of the option term at the
annual rate specified (5% and 10%). Potential Realizable Value is net
of the option exercise price. The assumed rates of appreciation are
specified in rules of the SEC, and do not represent the Company's est-
imate or projection of future stock price. Actual gains, if any, re-
sulting from stock option exercises and Common Stock holdings are de-
pendent on the future performance of the Common Stock, overall stock
market conditions, as well as the option holders' continued employment
through the exercise/vesting period. There can be no assurance that
the amounts reflected in this table will be achieved.
(5) All of the shares subject to the option shall vest in full on December
10, 2000; provided, however, that if at any time prior to December 10,
2000 such officer meets the performance targets set for such officer by
the Board for fiscal year 1998, 1999 or 2000, then all of the shares
subject to such executive officer's option shall vest upon the date
such targets are met.
<9>
<PAGE>
Aggregated Option Exercises in Fiscal 1997 and Fiscal 1997 Year-End Option
Values
The following table sets forth for each Named Officer certain informa-
tion concerning the number of shares subject to both exercisable and unexercis-
able stock options as of December 31, 1997. Also reported are values for "in-
the-money" options that represent the positive spread between the respective
exercise prices of outstanding stock options and the fair market value of the
Company's Common Stock as of December 31, 1997. No options were exercised by
the Named Officers during Fiscal Year 1997.
<TABLE>
<CAPTION>
<S>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Fiscal Year End(#) Fiscal Year End($)(1)
<C> ----------------------------- -----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- ----------- ------------- ----------- -------------
Barry L. Margerum 31,250 218,750 0 0
James Dobbie 18,750 11,250 0 0
Scott W. Silfvast 18,750 61,250 0 0
Steven H. Milne 20,000 60,000 0 0
Thomas C. Fristoe 0 70,000 0 0
___________
</TABLE>
(1) Market value of underlying securities based on the closing price of $1.00
of the Company's Common Stock on December 31, 1997, minus the exercise
price.
Employment Arrangements
In March 1997, the Company and Barry L. Margerum entered into an em-
ployment offer letter pursuant to which Mr. Margerum agreed to serve as Chief
Executive Officer and a director of the Company at an annual salary of $180,000,
with a target annual bonus of 40% of salary based upon mutually agreed upon
milestones. One-half of Mr. Margerum's targeted bonus amount is guaranteed at
the end of his first year of employment. The Company agreed to recommend to the
Board of Directors that Mr. Margerum be granted a 250,000 share stock option at
a per share exercise price equal to the fair market value of the Company's stock
on the date of grant and vesting over four years. Upon an acquisition of the
Company for at least $10 per share, Mr. Margerum's option shall become fully
vested and exercisable. In the event the Company terminates Mr. Margerum's
employment within the first year, he will be entitled to a severance arrange-
ment of nine months salary, a bonus amount equal to 30% of annual salary, nine
months vesting acceleration of his stock option and continuation of Company ben-
efits for nine months. In the event his employment is terminated after the
first year, he will be entitled to a severance arrangement of six months salary,
a bonus amount equal to 20% of annual salary, six months vesting acceleration
of his stock option and continuation of Company benefits for six months. The
Company also agreed to obtain $500,000 in life insurance for Mr. Margerum and
to cover 75% of commuting costs with a driver or local apartment rental of up
to $1,000 per month. Mr. Margerum is also eligible to participate in the Com-
pany's employee benefit plans.
In May 1997, the Company and Thomas C. Fristoe entered into an employ-
ment offer letter pursuant to which Mr. Fristoe agreed to serve as Vice Pres-
ident of Sales of the Company at an annual salary of $120,000. In addition,
upon Mr. Fristoe obtaining aggregate net order amounts of $14 million from end
users and distributors between his hire date and December 31, 1997, the Com-
pany agreed to pay Mr. Fristoe a bonus amount of $65,000 (the "Quota Bonus"),
to be increased by $10,000 for each additional $1 million in net orders
obtained. Payment of $30,000 of the Quota Bonus was guaranteed. The Company
<10>
<PAGE>
agreed to recommend to the Board of Directors that Mr. Fristoe be granted a
60,000 share stock option at a per share exercise price equal to the fair
market value of the Company's stock on the date of grant. Such option vests
at the rate of twenty-five percent (25%) of the shares on the first anniversary
of the date of grant with the remaining shares vesting ratably thereafter over
three years. The Company also agreed to pay relocation related expenses of up
to $15,000. In the event Mr. Fristoe's employment is terminated by the Company
within the first two years of employment, other than for cause, the Company will
continue to pay Mr. Fristoe's salary until the first to occur of (i) the date
six months following his termination date or (ii) the date Mr. Fristoe becomes
employed by, or commences serving as a consultant to, another company. Mr.
Fristoe is also eligible to participate in the Company's employee benefit plans.
CERTAIN TRANSACTIONS
Private Placement of Common Stock. On March 16, 1998, the Company
entered into a Common Stock Purchase Agreement (the "Purchase Agreement") with,
among others, ONSET, the Company's largest shareholder, and Milton M. T. Chang
and Scott W. Silfvast, directors of the Company. Under the Purchase Agreement,
a total of 1,039,999 shares of Common Stock were sold in a private placement
transaction at a per share purchase price of $1.875, which price is equal to the
closing price of the Company's Common Stock on March 16, 1998. 800,000 shares
were purchased by ONSET for $1,500,000, 80,000 shares were purchased by Mr.
Chang for $150,000 and 53,333 shares were purchased by Mr. Silfvast for
$100,000.
Option Grants to Executive Officers. In Fiscal 1997 and Fiscal 1998,
stock options under the Company's 1990 Stock Plan (the "1990 Plan"), 1995 Per-
formance Based Stock Option Plan (the "1995 Plan") and 1997 Nonstatutory Stock
Option Plan (the "1997 Plan") were granted to the following executive officers
as of the grant dates and for the number of shares of Common Stock and at the
exercise prices set forth below opposite their names:
<TABLE>
<CAPTION>
<S>
<C> Per Share
Officer Date of Grant Plan No. of Shares Exercise Price
- -------------- ------------- ---- ------------- --------------
Thomas C. Fristoe 08/05/97 1990 60,000 $ 2.00
Thomas C. Fristoe 12/10/97 1995 10,000 1.125
Paul L. Hammel 02/12/98 1990 100,000 1.5625
Barry L. Margerum 08/05/97 1990 250,000 2.00
Steven H. Milne 12/10/97 1990 10,000 1.125
Steven H. Milne 12/10/97 1997 10,000 1.125
Scott W. Silfvast 12/10/97 1990 25,000 1.125
Scott W. Silfvast 12/10/97 1997 25,000 1.125
</TABLE>
The per share exercise price of each of the above options is equal to
the closing price of the Company's Common Stock on the market date immediately
preceding date of grant. The 60,000 share option granted to Mr. Fristoe vests
as to 25% of the shares on June 16, 1998, with the balance of the shares vesting
ratably over three years. Mr. Hammel's option vests as to 25% of the shares on
February 12, 1999, grant, with the balance of the shares vesting ratably over
<11>
<PAGE>
three years. Mr. Margerum's option vests as to 1/24th of the shares on August
5, 1997, with the balance vesting at the rate of 1/48th per month thereafter.
The 10,000 share option and the 25,000 share option granted to Mr. Milne and Mr.
Silfvast, respectively, under the 1990 Plan vest as to 25% of the shares on
December 10, 1998, with the balance of the shares vesting ratably over three
years. The 10,000 share option granted to Mr. Fristoe under the 1995 Plan,
the 10,000 option granted to Mr. Milne under the 1997 Plan and the 25,000 share
option granted to Mr. Silfvast under the 1997 Plan vest in full on December 10,
2000; provided, however, that if at any time prior to December 10, 2000 such
officer meets the performance targets set for such officer by the Board for fis-
cal year 1998, 1999 or 2000, then all of the shares subject to such officer's
option shall vest upon the date such targets are met.
REPORT OF THE COMPENSATION COMMITTEE
Notwithstanding anything to the contrary set forth in any of the Com-
pany's previous filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate future
filings, including this Proxy Statement, in whole or in part, the following re-
port and the Performance Graph on page 11 shall not be incorporated by reference
into any such filings, nor shall they be deemed to be soliciting material or
deemed filed with the SEC under the Securities Act of 1933, as amended, or under
the Securities Exchange Act of 1934, as amended.
Compensation Philosophy. The Committee believes that the primary goal
of the Company's compensation program should be related to creating shareholder
value. The Committee seeks to offer the Company's executive officers competi-
tive compensation opportunities based upon their personal performance, the
financial performance of the Company and their contribution to that performance.
The executive compensation program is designed to attract and retain executive
talent that contributes to the Company's long-term success, to reward the
achievement of the Company's short-term and long-term strategic goals, to link
executive officer compensation and shareholder interests through equity-based
plans, and to recognize and reward individual contributions to Company perfor-
mance.
The compensation of the Company's executive officers consists of three
principal components: salary, bonus and long-term incentive compensation.
Salary. Salaries for the Company's executive officers are determined
primarily on the basis of the executive officer's responsibility, general salary
practices of peer companies and the officer's individual qualifications and ex-
perience. The base salaries are reviewed annually and may be adjusted by the
Committee in accordance with certain criteria which include (i) individual per-
formance, (ii) the functions performed by the executive officer, (iii) the scope
of the executive officer's on-going duties, (iv) general changes in the compen-
sation peer group in which the Company competes for executive talent, and (v)
the Company's financial performance generally. The weight given such factors
by the Committee may vary from individual to individual.
Bonus. In order to increase incentives for outstanding performance, a
portion of each executive officer's compensation may be paid in the form of con-
tingent cash bonuses which are paid annually. The bonus amounts for executive
officers are dependent in part on the Company's revenue performance, as well as
individualized criteria such as achievement of specified goals for the depart-
ment or divisions for which the executive has responsibility and satisfactory
completion of special projects supervised by the executive officer.
<12>
<PAGE>
Long-Term Incentive Awards. Stock options serve to further align the
interests of management and the Company's shareholders by providing executive
officers with an opportunity to benefit from stock price appreciation that can
be expected to accompany improved financial performance. Options also enhance
the Company's ability to attract and retain executives. The number of option
shares granted and the other option terms, such as vesting, are determined by
the Committee, based on recommendations of management in light of, among other
factors, each executive officer's level of responsibility, prior performance
and other compensation. However, the plan does not provide any quantitative
method for weighing these factors, and a decision to grant an award is primarily
based upon an evaluation of the past as well as the future anticipated perfor-
mance and responsibilities of the individual in question. See "Certain Transac-
tions-Option Grants to Executive Officers."
Chief Executive Officer Compensation. The compensation of the Chief
Executive Officer is reviewed annually on the same basis as discussed above for
all executive officers. The base salary of Barry L. Margerum, who commenced
employment with the Company as President and Chief Executive Officer effective
June 2, 1997, is $180,000 with a target annual bonus of 40% of salary based on
mutually agreed upon milestones. Mr. Margerum received a cash bonus of $36,750
for Fiscal 1997. Mr. Margerum's base salary was established in part by compar-
ing the base salaries of chief executive officers at other companies of similar
size using published compensation sources. In Fiscal 1997, Mr. Margerum was
granted an option to purchase 250,000 shares of Common Stock. See "Compensation
of Executive Officers-Employment Arrangements."
James Dobbie served as Chief Executive Officer of the Company until Mr.
Margerum succeeded him in that capacity in June 1997. His base salary for Fis-
cal 1997, while serving in the capacity of Chief Executive Officer, was
$180,000. Mr. Dobbie's base salary for 1997 was established in part by compar-
ing the base salaries of chief executive officers at other companies of similar
size using published compensation sources. Mr. Dobbie did not receive a cash
bonus or stock option grant in Fiscal 1997.
Policy Regarding Deductibility of Compensation. The Company is re-
quired to disclose its policy regarding qualifying executive compensation for
deductibility under Section 162(m) of the Internal Revenue Code of 1986, as
amended, which provides that, for purposes of the regular income tax, the other-
wise allowable deduction for compensation paid or accrued with respect to the
executive officers of a publicly-held company, which is not performance-based
compensation is limited to no more than $ 1 million per year. It is not expec-
ted that the compensation to be paid to the Company's executive officers for
Fiscal 1998 will exceed the $1 million limit per officer; however, to the extent
such compensation to be paid to such executive officers exceeds the $1 million
limit per officer, such excess will be treated as performance-based compensa-
tion.
COMPENSATION COMMITTEE
/s/ MILTON M.T. CHANG, PH.D.
/s/ ROBERT F. KUHLING, JR.
Milton M. T. Chang, Ph.D.
Robert F. Kuhling, Jr.
<13>
<PAGE>
COMPARISON OF CUMULATIVE TOTAL RETURN OF
EUPHONIX, INC., NASDAQ STOCK MARKET U.S. INDEX
AND THE H&Q TECHNOLOGY INDEX
The following graph shows a comparison of cumulative total return on
Common Stock for the Company, the Nasdaq Stock Market U.S. Index, and the Ham-
brecht & Quist Technology Index for the period commencing August 22, 1995
through December 31, 1997. The Company's Common Stock began trading on the
Nasdaq Stock Market on August 22, 1995. The stock price performance shown on
the graph below is not necessarily indicative of future price performance.
<TABLE>
<CAPTION>
<S>
HAMBRECHT & QUIST INDEX PRODUCTS AND SERVICES
1998 PROXY PERFORMANCE GRAPH DATA
Monthly Data Series
SCALED PRICES: Stock and index prices scaled to 100 at
<C>
Nasdaq Stock
------------
DATES Euphonix H&Q Technology Market-U.S.
- ----- -------- -------------- -----------
8/22/95 100.00 100.00 100.00
Aug-95 103.13 97.80 99.49
Sep-95 125.00 100.13 101.78
Oct-95 114.06 101.54 101.20
Nov-95 106.25 100.29 103.57
Dec-95 106.25 94.84 103.02
Jan-96 134.38 96.24 103.53
Feb-96 125.00 101.06 107.47
Mar-96 109.38 96.67 107.83
Apr-96 126.56 110.03 116.77
May-96 126.56 111.69 122.14
Jun-96 104.69 103.55 116.63
Jul-96 96.88 92.91 106.24
Aug-96 62.50 98.53 112.19
Sep-96 78.13 109.92 120.78
Oct-96 59.38 108.35 119.44
Nov-96 60.94 121.13 126.83
Dec-96 54.69 117.87 126.71
Jan-97 50.78 130.49 135.72
Feb-97 51.56 119.84 128.21
Mar-97 34.38 112.35 119.84
Apr-97 34.38 116.51 123.59
May-97 45.31 134.05 137.60
Jun-97 31.25 135.23 141.81
Jul-97 21.88 156.99 156.78
Aug-97 25.00 157.44 156.54
Sep-97 27.34 163.89 165.80
Oct-97 25.39 146.38 157.18
Nov-97 18.75 144.86 157.96
Dec-97 12.50 138.19 155.49
</TABLE>
The chart above assumes $100 invested in each of the Company's Common
Stock, the Nasdaq Stock Market U.S. Index and the Hambrecht & Quist Technology
Index on August 22, 1995, and the reinvestment of dividends.
<14>
<PAGE>
ANNUAL REPORT AND FINANCIAL STATEMENTS
The 1997 Annual Report of the Company, which includes its audited
financial statements for Fiscal 1997, is accompanying this Proxy Statement.
OTHER MATTERS
The Board of Directors knows of no other business which will be
presented at the Annual Meeting. If any other business is properly brought
before the Annual Meeting, it is intended that proxies in the enclosed form
will be voted in respect thereof in accordance with the judgments of the
persons voting the proxies.
It is important that the proxies be returned promptly and that your
shares be represented. Shareholders are urged to fill in, sign and promptly
return the accompanying proxy in the enclosed envelope.
By Order of the Board of Directors,
/s/ BARRY L. MARGERUM
Barry L. Margerum
President and Chief Executive Officer
May 20, 1998
Palo Alto, California
<15>
<PAGE>
This Proxy is solicited on behalf of the Board of Directors
EUPHONIX, INC.
1998 ANNUAL MEETING OF SHAREHOLDERS
June 26, 1998
The undersigned shareholder of EUPHONIX, INC., a California corporation, hereby
acknowledges receipt of the Notice of Annual Meeting of Shareholders and Proxy
Statement, each dated May 20, 1998, and hereby appoints Barry L. Margerum and
James Dobbie, and each of them, proxies with full power to each of substitution,
on behalf and in the name of the undersigned, to represent the undersigned at
the 1998 Annual Meeting of Shareholders of EUPHONIX, INC. to be held on Friday,
June 26, 1998, at 9:00 a.m., local time, at the offices of the Company, at 220
Portage Avenue, Palo Alto, California 94306 and at any adjournment(s) thereof,
and to vote all shares of Common Stock which the undersigned would be entitled
to vote if then and there personally present, on the matters set forth below:
(Continued, and to be marked, dated and signed, on the other side)
Page 1 of 1
<PAGE>
1. ELECTION OF DIRECTORS:
___ FOR all nominees listed below (except as indicated)
___ WITHHOLD AUTHORITY
If you wish to withhold authority to vote for any individual nominee, strike a
line through that nominee's name in the list below:
Milton M. T. Chang, James Dobbie, B. Yeshwant Kamath
2. PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS THE
INDEPENDENT AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING
DECEMBER 31, 1998.
--- FOR --- AGAINST --- ABSTAIN
| | | | | |
--- --- ---
and, in their discretion, upon such other matter or matters which may properly
come before the meeting and any adjournment(s) thereof.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED "FOR" THE ELECTION OF DIRECTORS, "FOR" EACH
PROPOSAL LISTED, AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS
AS MAY COME BEFORE THE MEETING.
(This Proxy should be marked, dated, signed by the shareholder(s) exactly as
his or her name appears hereon, and returned promptly in the enclosed envelope.
Persons signing in a fiduciary capacity should so indicate. If shares are held
by joint tenants or as community property, both should sign.)
Signature(s)____________________________ Dated____________________
Print Name(s)___________________________ Dated____________________
Page 1 of 1
