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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 (S) 240.14a-11(c) or (S) 240.14a-12
EUPHONIX, INC.
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(Name of Registrant as Specified In Its Charter)
________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] $125 per Exchange Act Rules 0-11-(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] 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 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:
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(5) Total fee paid:
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[_] 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>
EUPHONIX, INC.
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 26, 2000
----------------
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 Monday, June 26, 2000 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 and approve the reservation of an additional 1,000,000
shares of Common Stock for issuance under the 1999 Stock Plan.
3. To approve the conversions of the Secured Promissory Note issued by
the Company in February 2000 into Common Stock.
4. To ratify the appointment of PricewaterhouseCoopers LLP as
independent auditors for the Company for the fiscal year ending December
31, 2000.
5. 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 27, 2000 are
entitled to notice of and to vote at this meeting and any adjournment 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. However, 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 postage-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,
Barry L. Margerum
Chief Executive Officer
Palo Alto, California
May 8, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE ENCLOSED ENVELOPE
<PAGE>
EUPHONIX, INC.
220 Portage Avenue
Palo Alto, California 94306
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PROXY STATEMENT
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Notice of Annual Meeting of Shareholders
June 26, 2000
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 solicitation 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 Monday, June 26, 2000, and any and
all postponements or adjournments thereof. These proxy solicitation materials
were first mailed on or about May 8, 2000 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 Directors of
the Company, (2) ratify and approve the reservation of an additional 1,000,000
shares of Common Stock for issuance under the 1999 Stock Plan, bringing the
total number of shares of Common Stock authorized for issuance under the 1999
Stock Plan to 1,750,000 shares of Common Stock, (3) approve the conversions of
the Secured Promissory Note issued by the Company in February 2000 into Common
Stock, (4) ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year ending December 31, 2000 and
(5) 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 27, 2000 (the
"Record Date") are entitled to notice of and to vote at the meeting. At the
Record Date, 11,875,932 shares of the Company's Common Stock were issued and
outstanding. For information regarding security ownership by management and by
5% shareholders, see "Share Ownership by Principal Shareholders and
Management."
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 issued 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
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
matter.
The Company believes that abstentions should be counted for the purpose of
determining the presence or absence of a quorum for the transaction of
business, but should not be counted as Votes Cast with respect to a proposal as
to which the shareholder has expressly abstained from voting.
<PAGE>
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 addition, the
Company may reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation material to such
beneficial owners. Proxies may also be solicited by certain of the Company's
directors, officers and regular employees, without additional compensation,
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 26, 2001 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 Dobbie, Jackson and Meier are in the class of directors
whose terms expire at the annual meeting of shareholders to be held June 26,
2000, and Directors Kuhling, Margerum and Silfast are in the class of directors
whose terms will expire at the 2001 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 a director. Shareholders
may withhold authority to vote for the entire slate as nominated or, by
striking through the name of an individual nominee in the space provided on the
proxy card, withhold the authority 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. As
described in Proposal Three below, Stephen D. Jackson and Dieter W. Meier were
initially nominated to serve on the Board by a majority of the investors in the
Secured Promissory Note executed in February 2000 (the "February Note").
Pursuant to the terms of the February Note, the Company has agreed to use
commercially reasonable efforts to nominate two persons designated by a
majority of the investors in the February Note for election to the Board at the
Company's next election of directors, provided that each of the nominees
possesses the necessary qualifications and background to serve on the Board.
The following three persons have been selected and appointed by the Board of
Directors as nominees for election to the Board: James Dobbie, Stephen D.
Jackson and Dieter W. Meier. 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.
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The names of the directors of the Company, including the nominees, and
certain information about them, are set forth below.
<TABLE>
<CAPTION>
Director Principal Occupation or
Name Age(1) Since Employment
---- ------ -------- -----------------------
<C> <C> <C> <S>
Dieter W. Meier(2)............ 55 2000 Chairman of the Board of the
Company
James Dobbie.................. 69 1991 Director of the Company
Stephen D. Jackson(3)......... 51 2000 President of USA Products Group
Robert F. Kuhling, Jr.(2)(3).. 51 1990 General Partner of several
venture capital partnerships
managed by ONSET Ventures
Services Corporation
Barry L. Margerum............. 48 1997 President and Chief Executive
Officer of the Company
Scott W. Silfvast............. 37 1988 Chief Product Officer of the
Company
</TABLE>
- --------
(1) As of the Record Date
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
Dieter W. Meier has served as Chairman of the Board of the Company since
March 2000. Mr. Meier is a film director and the founder, manager and producer
of Yello. Yello created numerous soundtracks for movies and contributed songs
to films and television shows, including Ferris Buhler's Day Off, The Secret of
My Success, Ford Fairlane, Miami Vice and Miramax's Senseless. Mr. Meier is a
partner in Ulysse Nardin, a Swiss watch company, a partner and board member of
British Ceramic Tile in the U.K. and a partner in Servair, a company that owns
and operates private jet planes in Europe.
James Dobbie has served as a director 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.
Stephen D. Jackson has served as a director of the Company since February
2000. Since 1990, Mr. Jackson has been the President of USA Products, a
diversified manufacturing group in Hardware, Automotive and Golf products.
Prior to this, Mr. Jackson was General Manager of KB Farms, a diversified farm
operations group.
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 Corporation, a venture
capital firm. Mr. Kuhling also serves on the board of directors of Conceptus,
Inc. and Gadzoox, public companies, and serves as a director for a number of
privately held companies.
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 distributed
systems. From 1980 to 1988, Mr. Margerum held a variety of executive sales and
marketing 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 Machines 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 President 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 instrumentation
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
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<PAGE>
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 five meetings during
the fiscal year ended December 31, 1999 ("Fiscal 1999") and took action by
written consent on three occassions. Each director attended or participated in
at least 75% of the aggregate of (i) the total number 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 1999, but
took action by written consent on one occassion. The Audit Committee currently
consists of Mr. Kuhling and Mr. Stephen D. Jackson. 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 Committee also reviews and evaluates the
Company's accounting principles and its systems of internal accounting
controls.
Compensation Committee. The Compensation Committee, consisting of Mr.
Kuhling and Mr. Dieter W. Meier, 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. In Fiscal 1999, the Compensation Committee met three times and
took action by written consent on one occassion.
Nominating Committee. The Company does not have a nominating committee or a
committee performing the functions of a nominating committee.
Compensation of Directors
Non-employee directors of the Company currently do not receive compensation
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 (the "Non-employee
Directors") are eligible to participate in the Company's 1995 New Director
Option Plan (the "Director Plan"). The Director Plan, as amended in May 1999,
provides for the automatic grant of a fully vested nonstatutory stock option to
purchase 5,000 shares of Common Stock of the Company to each Non-employee
Director on the date which such person first becomes a director and an
additional grant of a fully vested nonstatutory stock option to purchase 5,000
shares of Common Stock of the Company on the date of each annual meeting of the
shareholders; provided, however, that on such date, such Non-employee Director
shall have served on the Board for at least the preceding six (6) months.
PROPOSAL NO. 2--APPROVAL OF RESERVATION OF 1,000,000 ADDITIONAL SHARES OF
COMMON STOCK FOR ISSUANCE UNDER THE 1999 STOCK PLAN
On April 14, 2000, the Board of Directors approved the reservation of an
additional 1,000,000 shares of Common Stock for issuance under the 1999 Stock
Plan (the "1999 Plan"). The 1999 Plan was adopted on March 24, 1999 by the
Board of Directors, and subsequently ratified and approved by the shareholders
at the annual meeting of shareholders held on June 25, 1999. The total number
of additional shares of Common Stock hereby reserved for issuance under the
1999 Plan is 1,000,000 shares of Common Stock, bringing the total number of
shares authorized for issuance under the 1999 Plan to 1,750,000 shares of
Common Stock. The Company believes that its ability to make awards under the
1999 Plan is critical to its success in attracting and retaining experienced
and qualified employees.
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At the Annual Meeting, the shareholders are being asked to approve the
reservation of additional shares thereunder.
Vote Required; Recommendation of Board of Directors
The affirmative vote of a majority of the Votes Cast will be required to
approve and ratify the reservation of additional shares of Common Stock for
issuance under the 1999 Plan. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A
VOTE "FOR" THIS PROPOSAL.
Summary of the 1999 Plan
General. The purposes of the 1999 Plan are to attract and retain the best
available personnel for positions of substantial responsibility with the
Company, to provide additional incentive to the employees, consultants and
directors of the Company and to promote the success of the Company's business.
Options, stock purchase rights and "common stock equivalents" may be granted
under the 1999 Plan. Options granted under the 1999 Plan may be either
"incentive stock options," as defined in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or nonstatutory stock options.
Administration. The 1999 Plan may generally be administered by the Board or
the Committee appointed by the Board. To the extent that options granted under
the 1999 Plan are intended to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the Code, the 1999 Plan will be
administered by a committee of two or more "outside directors" within the
meaning of Section 162(m). The administrators of the 1999 Plan are referred to
therein as the "Administrator."
Eligibility; Limitations. Nonstatutory stock options, stock purchase rights
and common stock equivalents may be granted under the 1999 Plan to employees,
directors and consultants of the Company and any parent or subsidiary of the
Company. Incentive stock options may be granted only to employees. The
Administrator, in its discretion, selects the employees, directors and
consultants to whom options, stock purchase rights and common stock equivalents
may be granted, the time or times at which such options, stock purchase rights
and common stock equivalents shall be granted, and the number of shares subject
to each such grant.
Section 162(m) of the Code places limits on the deductibility for federal
income tax purposes of compensation paid to certain executive officers of the
Company. In order to preserve the Company's ability to deduct the compensation
income associated with options and stock purchase rights granted to such
persons, the 1999 Plan provides that no employee, consultant or director may be
granted, in any fiscal year of the Company, options to purchase more than
400,000 shares of Common Stock. Notwithstanding this limit, however, in
connection with an employee's initial service, he or she may be granted options
to purchase up to an additional 200,000 shares of Common Stock.
Terms and Conditions of Options. Each option is evidenced by a stock option
agreement between the Company and the optionee, and is subject to the following
additional terms and conditions:
(a) Exercise Price. The Administrator determines the exercise price of
options at the time the options are granted. The exercise price of an
incentive stock option may not be less than 100% of the fair market value
of the Common Stock on the date such option is granted; provided, however,
the exercise price of an incentive stock option granted to a 10%
shareholder may not be less than 110% of the fair market value of the
Common Stock on the date such option is granted. The fair market value of
the Common Stock is generally determined with reference to the closing sale
price for the Common Stock as reported by the Nasdaq National Market (or
the closing bid if no sales were reported) on the last market trading day
prior to the date the option is granted.
(b) Exercise of Option; Form of Consideration.The Administrator
determines when options become exercisable and may, in its discretion,
accelerate the vesting of any outstanding option. Stock options granted
under the 1999 Plan generally vest and become exercisable over four years.
The means of payment for shares issued upon exercise of an option is
specified in each option agreement. The 1999 Plan permits payment to be
made by cash, check, promissory note, other shares of Common Stock of the
Company (with some restrictions), cashless exercises, a reduction in the
amount of any Company liability to the optionee, any other form of
consideration permitted by applicable law, or any combination thereof.
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<PAGE>
(c) Term of Option. The term of an incentive stock option may be no more
than ten (10) years from the date of grant; provided that in the case of an
incentive stock option granted to a 10% shareholder, the term of the option
may be no more than five (5) years from the date of grant. No option may be
exercised after the expiration of its term.
(d) Termination of Employment. In the event of an optionee's termination
of employment or consulting relationship for any reason other than death or
disability, an option may thereafter be exercised, to the extent it was
exercisable at the date of such termination, for such period of time as the
Administrator shall determine at the time of grant (not to exceed three
months in the case of incentive stock options) and to the extent that the
term of the option has not expired.
(e) Death or Disability. If an optionee's employment or consulting
relationship is terminated as a result of disability, the option will be
exercisable for twelve months following such termination, but only to the
extent it was exercisable at the date of termination and to the extent that
the term of the option has not expired. If an optionee's employment or
consulting relationship is terminated by reason of the optionee's death,
the option will be exercisable by the optionee's estate or successor for
twelve months following death, but only to the extent it was exercisable at
the date of death and to the extent that the term of the option has not
expired.
(f) Nontransferability of Options. Options granted under the 1999 Plan
are generally not transferable other than by will or the laws of descent
and distribution, and may be exercised during the optionee's lifetime only
by the optionee.
(g) Other Provisions. The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the 1999 Plan as may
be determined by the Administrator.
Stock Purchase Rights. A stock purchase right gives the purchaser a certain
period of time from the date of grant to purchase Common Stock. A stock
purchase right is accepted by the execution of a restricted stock purchase
agreement between the Company and the purchaser, accompanied by the payment of
the purchase price for the shares. Unless the Administrator determines
otherwise, the restricted stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment or consulting relationship with the Company for any
reason (including death and disability). The purchase price for shares
repurchased by the Company shall be the original price paid by the purchaser
and may be paid by cancellation of any indebtedness of the purchaser to the
Company. The repurchase option shall lapse at a rate determined by the
Administrator. Stock purchase rights generally may not be assigned or
transferred, voluntarily or involuntarily.
Common Stock Equivalents. Common stock equivalents awarded to a recipient
are credited to a bookkeeping account established by the Company in his or her
name. Each common stock equivalent entitles the recipient to a share of Common
Stock at such time as specified in the recipient's Common Stock Equivalent
Agreement. The Company's obligations with respect to common stock equivalents
are not funded or secured in any manner. A recipient's right to receive common
stock equivalents generally may not be assigned or transferred, voluntarily or
involuntarily.
Adjustments Upon Changes in Capitalization. In the event that the stock of
the Company changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar change in the capital
structure of the Company effected without the receipt of consideration,
appropriate adjustments will be made in the number and class of shares of stock
subject to the 1999 Plan, the number and class of shares of stock subject to
any option or stock purchase right outstanding under the 1999 Plan, the
exercise price of any such outstanding option or stock purchase right, and the
number of common stock equivalents credited to each account under the 1999
Plan.
In the event of a liquidation or dissolution, any unexercised options or
stock purchase rights will terminate. The Administrator may, in its discretion,
provide that each optionee shall have the right to exercise all of the
optionee's options and stock purchase rights, including those not otherwise
exercisable or convertible,
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<PAGE>
until the date ten (10) days prior to the consummation of the liquidation or
dissolution. In addition, the Administrator may in its discretion provide that
each common stock equivalent shall convert into shares of Common Stock.
Merger or Asset Sale. In connection with any merger, consolidation,
acquisition of assets or like occurrence involving the Company, the 1999 Plan
requires that each outstanding option, stock purchase right and common stock
equivalent be assumed or an equivalent award substituted by the successor
corporation. If the successor corporation refuses to assume or substitute the
options, stock purchase rights and common stock equivalents, (i) the optionee
will have the right to exercise the option or stock purchase right as to all
the optioned stock, including shares not otherwise exercisable, (ii) any
repurchase option of the Company applicable to any shares acquired upon
exercise of an option or stock purchase right shall lapse as to all such
shares, and (iii) common stock equivalents credited to a recipient's account
shall convert into shares of Common Stock immediately prior to the merger or
sale of assets. In such event, the Administrator is required to notify the
optionee that the option or stock purchase right is fully exercisable for
fifteen (15) days from the date of such notice and that the option or stock
purchase right terminates upon expiration of such period. If a common stock
equivalent converts to shares of Common Stock in such event, the Administrator
shall notify the holder thereof at least fifteen (15) days prior to the
consummation of the proposed transaction.
Amendment and Termination of the Plan. The Board may amend, alter, suspend
or terminate the 1999 Plan, or any part thereof, at any time and for any
reason. However, the Company shall obtain shareholder approval for any
amendment to the 1999 Plan to the extent necessary to comply with any
applicable rule or statute. No such action by the Board or shareholders may
alter or impair any award previously granted under the 1999 Plan without the
written consent of the optionee. Unless terminated earlier, the 1999 Plan shall
terminate on March 24, 2009.
Federal Income Tax Consequences
Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise may subject the optionee to the
alternative minimum tax. Upon a disposition of the shares more than two years
after grant of the option and one year after exercise of the option, any gain
or loss is treated as long-term capital gain or loss. Net capital gains on
shares held for more than 12 months are capped at 20%. Capital losses are
allowed in full against capital gains and up to $3,000 against other income. If
these holding periods are not satisfied, the optionee recognizes ordinary
income at the time of disposition equal to the difference between the exercise
price and the lower of (i) the fair market value of the shares at the date of
the option exercise or (ii) the sale price of the shares. Any gain or loss
recognized on such a premature disposition of the shares in excess of the
amount treated as ordinary income is treated as long-term or short-term capital
gain or loss, depending on the holding period. A different rule for measuring
ordinary income upon such a premature disposition may apply if the optionee is
also an officer, director, or 10% shareholder of the Company. The Company is
entitled to a deduction in the same amount as the ordinary income recognized by
the optionee.
Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes taxable income generally measured by the
excess of the then fair market value of the shares over the exercise price. Any
taxable income recognized in connection with an option exercise by an employee
of the Company is subject to tax withholding by the Company. The Company is
entitled to a deduction in the same amount as the ordinary income recognized by
the optionee. Upon a disposition of such shares by the optionee, any difference
between the sale price and the optionee's exercise price, to the extent not
recognized as taxable income as provided above, is treated as long-term or
short-term capital gain or loss, depending on the holding period. Net capital
gains on shares held for more than 12 months are capped at 20%. Capital losses
are allowed in full against capital gains and up to $3,000 against other
income.
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Stock Purchase Rights. Stock purchase rights will generally be taxed in the
same manner as nonstatutory stock options. However, restricted stock is
generally purchased upon the exercise of a stock purchase right. At the time of
purchase, restricted stock is subject to a "substantial risk of forfeiture"
within the meaning of Section 83 of the Code. As a result, the purchaser will
not recognize ordinary income at the time of purchase. Instead, the purchaser
will recognize ordinary income on the dates when a stock ceases to be subject
to a substantial risk of forfeiture. The stock will generally cease to be
subject to a substantial risk of forfeiture when it is no longer subject to the
Company's right to repurchase the stock upon the purchaser's termination of
employment with the Company. At such times, the purchaser will recognize
ordinary income measured as the difference between the purchase price and the
fair market value of the stock on the date the stock is no longer subject to a
substantial risk of forfeiture.
The purchaser may accelerate to the date of purchase his or her recognition
of ordinary income, if any, and the beginning of any capital gain holding
period by timely filing an election pursuant to Section 83(b) of the Code. In
such event, the ordinary income recognized, if any, is measured as the
difference between the purchase price and the fair market value of the stock on
the date of purchase, and the capital gain holding period commences on such
date. The ordinary income recognized by a purchaser who is an employee will be
subject to tax withholding by the Company. Different rules may apply if the
purchaser is also an officer, director, or 10% shareholder of the Company.
Common Stock Equivalents. A recipient generally will not recognize any
taxable income at the time he or she receives common stock equivalents. Upon
conversion of the common stock equivalents into shares of Common Stock, the
recipient will generally recognize taxable income equal to the then fair market
value of the shares of Common Stock received. Upon a disposition of such shares
by the recipient, any difference between the sale price and the fair market
value of the shares on the date of conversion is treated as long-term or short-
term capital gain or loss, depending on the holding period.
The foregoing is only a summary of the effect of federal income taxation
upon optionees, holders of stock purchase rights and holders of common stock
equivalents, and the Company with respect to the grant and exercise of options
and stock purchase rights and the conversion of common stock equivalents under
the 1999 Plan. It does not purport to be complete, and does not discuss the tax
consequences of the employee's or consultant's death or the provisions of the
income tax laws of any municipality, state or foreign country in which the
employee or consultant may reside.
PROPOSAL NO. 3--APPROVAL OF THE CONVERSIONS OF THE SECURED PROMISSORY
NOTE ISSUED BY THE COMPANY IN FEBRUARY 2000 INTO COMMON STOCK
In February 2000, the Company executed a Secured Promissory Note (the
"February Note") with certain persons under which the Company may draw up to an
aggregate of $1.5 million through February 22, 2001. Under the February Note,
Dieter W. Meier, Walter Bosch, Stephen D. Jackson, Milton M.T. Chang and ONSET
Enterprise Associates ("ONSET") (each a "February Note Investor" and
collectively, the "February Note Investors") have advanced $500,000, $300,000,
$100,000, $200,000 and $400,000, respectively, pursuant to the terms thereof.
Interest on the outstanding principal amount under the February Note accrues at
the rate of 10.00% per annum and such interest, together with the outstanding
principal amount, is due in February 2002. The Company may not prepay the
February Note. The February Note is secured by the assets of the Company.
Subject to obtaining the necessary approvals (including shareholder approval
as further explained below), the February Note is convertible into Common Stock
of the Company pursuant to the terms thereof. The number of shares of Common
Stock to be issued upon conversion of the February Note is determined by
dividing the then outstanding principal sum of the February Note, plus accrued
interest thereon, by the stock price of the Common Stock as traded on the
Nasdaq Stock Market on February 22, 2000, which was $2.53125.
8
<PAGE>
The Company is seeking shareholder approval to allow for conversions of the
February Note into Common Stock of the Company. If shareholder approval is not
obtained by June 30, 2000, the outstanding principal amount under the February
Note and the accrued interest thereon must be repaid in full upon demand
(rather than in February 2002) by February Note Investors representing two-
thirds of the then outstanding principal amount of the February Note. Such
demand by the February Note Investors may not be made until January 1, 2001.
In addition, the February Note provides that upon conversion, if such
conversion occurs, the Company will issue warrants to purchase 1,185,185 shares
of Common Stock of the Company at prices ranging from $3.00 to $5.00 per share.
The warrants, if issued, will be exercisable at any time and from time to time
in part or in full on or before February 1, 2003.
Further, the Company has agreed to use commercially reasonable efforts to
nominate two persons designated by a majority of the February Note Investors
for election to the Board at the Company's next election of directors, provided
that each of the nominees possesses the necessary qualifications and background
to serve on the Board. The two nominees are Stephen D. Jackson and Dieter W.
Meier and, pursuant to the terms of the February Note, the Board agreed to
appoint Mr. Jackson and Mr. Meier to serve on the Board prior to March 1, 2000.
Requiring the Company to nominate two persons designated by a majority of the
February Note Investors for election to the Company's Board will potentially
allow the February Note Investors to influence the Board for a period of time.
Background
Outside financing is critical to the Company in its current stage of
development because the Company does not yet generate sufficient cash from
operations to fund its operations and growth. Between January 1, 1999 and the
date of this Proxy Statement, the Company raised a total of $8,953,676 through:
(1) the sale of Common Stock to ONSET, Dieter W. Meier, Stephen D. Jackson,
Walter Bosch and Willy Gunther (each a "Common Stock Purchaser" and
collectively, the "Common Stock Purchasers"), in three private placements (the
"Common Stock Financings"); (2) the issuance of the February Note to the
February Note Investors (the "February Note Financing"); (3) the issuance of a
Secured Promissory Note in April 1999 (the "April Note") in the amount of
$2,000,000 (the "April Note Financing"), with ONSET, Milton M.T. Chang, Dieter
W. Meier, Stephen D. Jackson and Pegasus Capital II, L.P. ("Pegasus")
(collectively, the "April Note Investors"). In October 1999, the April Note
Investors converted the $2,000,000 principal amount and $67,000 accrued
interest into 1,981,014 shares of Common Stock; (4) the issuance of a Secured
Promissory Note in July 1999 (the "July Note") in the amount of $2,100,000 (the
"July Note Financing"), with Taurean Investments AG ("Taurean") and Pegasus
(collectively, the "July Note Investors"). The July Note is convertible into
shares of Common Stock of the Company as described in footnote (3) below. The
convertibility feature of the July Note was approved by the stockholders of the
Company at a Special Meeting of Stockholders held on October 22, 1999. The
security interests granted to the holders of the July Note are subordinate to
the security interests granted to the holders of the February Note.
9
<PAGE>
The chart below reflects the Common Stock Purchasers, February Note
Investors, April Note Investors and July Note Investors in the Common Stock
Financings, February Note Financing, April Note Financing and July Note
Financing, respectively, the funds raised by the Company in such financings and
the securities outstanding as a result thereof:
<TABLE>
<CAPTION>
Common
Stock
Issuable
Upon Total
Number of Conversion Consideration
Common Stock Purchaser Shares of the Received by Effective Date of
or Note Investor Issued Note the Company Issuance(1)
---------------------- --------- ---------- ------------- -----------------
<S> <C> <C> <C> <C>
ONSET Enterprise
Associates............. -- 991,051 $1,000,000 April 23, 1999(2)
451,916 -- 500,000 November 9, 1999
-- 158,024 400,000 February 22, 2000(4)
Milton M.T. Chang....... -- 395,741 400,000 April 23, 1999(2)
-- 79,012 200,000 February 22, 2000(4)
Dieter W. Meier......... 1,000,000 -- 987,300 January 26, 1999
-- 346,414 350,000 April 23, 1999(2)
451,916 -- 500,000 November 9, 1999
-- 197,530 500,000 February 22, 2000(4)
Stephen D. Jackson...... 320,446 -- 316,376 January 26, 1999
-- 148,553 150,000 April 23, 1999(2)
225,958 -- 250,000 November 9, 1999
-- 39,506 100,000 February 22, 2000(4)
Pegasus Capital II,
L.P.................... -- 99,255 100,000 April 23, 1999(2)
-- 133,333 100,000 July 30, 1999(3)
Taurean Investments AG
(5).................... -- 2,666,666 2,000,000 July 30, 1999(3)
Walter Bosch............ 451,916 -- 500,000 November 9, 1999
-- 118,518 300,000 February 22, 2000(4)
Willy Gunther........... 240,000 -- 300,000 February 7, 2000
</TABLE>
- --------
(1) Assumes the Notes were convertible on the dates of issuance, except for the
April Note as described in footnote (2) below..
(2) In October 1999, the April Note Investors converted the $2,000,000
principal amount and $67,000 accrued interest into 1,981,014 shares of
Common Stock, which are reflected in the table.
(3) The number of shares of Common Stock to be issued upon conversion of the
July Note is determined by dividing the principal sum of the July Note,
plus accrued interest thereon, by $0.75. Assumes conversion of the full
amount of the portion of the July Note held by the July Note Investors,
without taking into account any interest thereon.
(4) The number of shares of Common Stock to be issued upon conversion of the
February Note is determined by dividing the then outstanding principal sum
of the February Note, plus accrued interest thereon, by the stock price of
the Common Stock as traded on the Nasdaq Stock Market on February 22, 2000.
Such closing price per share was $2.53125. Assumes conversion of the full
amount of the portion of the February Note held by the February Note
Investors, without taking into account any interest thereon and based on
such closing price per share.
(5) Taurean Investments AG is a corporation which has a contractual arrangement
with a trust for the benefit of Dieter W. Meier, such that Dieter Meier
would be the beneficial owner of the stock issuable upon conversion of the
July Note.
10
<PAGE>
As noted above, the February Note by its terms is not convertible into
shares of Common Stock until shareholder approval of the conversion feature of
the February Note. However, if the conversion feature of the February Note is
not approved by the shareholders, the outstanding principal amount under the
February Note and accrued interest thereon must be repaid in full upon demand
by February Note Investors representing two-thirds of the then outstanding
principal amount of the February Note. Such demand by the February Note
Investors may not be made until January 1, 2001. As a result of the Common
Stock Financings, the Common Stock Purchasers (including the shares
beneficially owned by Dieter W. Meier) in the aggregate beneficially own in
excess of 62% of the sum of the Company's outstanding voting securities as of
March 31, 2000 and the number of shares which the Common Stock Purchasers have
the right to acquire within 60 days of March 31, 2000 upon the exercise of
stock options and stock purchase rights and upon the conversion of the July
Note. Upon approval of the conversion feature of the February Note, the
February Note Investors in the aggregate could potentially control 63% of the
sum of the Company's voting securities as of March 31, 2000 and the aggregate
of 592,592 shares issuable upon conversion of the February Note (without taking
into account shares issuable upon conversion of the interest thereon) and the
aggregate of 2,799,999 shares issuable upon conversion of the July Note by
Pegasus and Taurean (without taking into account shares issuable upon
conversion of the interest thereon); individually, each of ONSET, Milton M. T.
Chang, Dieter W. Meier, Stephen D. Jackson and Walter Bosch (none of whom hold
options to purchase shares of the Company) could potentially control 21.2%,
4.7%, 29.7%, 4.6% and 3.0% of the Company's voting securities, respectively. In
addition, as described under "Other Information,-- Certain Transactions--
February 2000 Note Financing", the Company has agreed to use commercially
reasonable efforts to cause the Board of Directors to nominate two persons
nominated by a majority of the February Note Investors to serve on the Board of
Directors at the Annual Meeting.
Under the Nasdaq National Market System corporate governance rules, Rule
4460(i)(1)(D) (the "20% Rule") requires shareholder approval of securities
issuances where (1) the securities issued are Common Stock or securities
convertible into or exercisable for Common Stock, (2) the price of the
securities is less than the market value of the Common Stock, and (3) the
proposed issuance would result in the issuance of 20% or more of the Common
Stock or voting power of the Company before the issuance. Additionally, Nasdaq
Rule 4460(i)(1)(B) (the "Control Rule") requires shareholder approval of the
adoption of a plan or the issuance of securities by the Company that would
result in a change of control of the Company. There is no concrete test to
determine the amount of securities that the Company may issue to a party
without triggering the Control Rule. Depending on the facts and circumstances,
the issuance by the Company of a small amount of securities may result in a
change of control of the Company where an investor already owns a sizable
portion of the Company's outstanding voting securities.
The Company is seeking shareholder approval to allow for conversions of the
February Note into Common Stock of the Company in order to ensure compliance
with Nasdaq's 20% Rule and the Control Rule, and to prevent the Company from
having to pay in full the outstanding principal amount of the February Note and
interest thereon upon demand (rather than in February 2002) by February Note
Investors representing two-thirds of the then outstanding principal amount of
the February Note.
Principal Effects of Approval or Nonapproval
In the event that shareholder approval is obtained, then the total number of
shares of Common Stock issuable to the February Note Investors in connection
with the February Note Financing would be 592,592 shares, assuming the
conversion of the full amount of the February Note (without taking into account
shares issuable upon conversion of the interest thereon). The issuance of this
number of shares to the February Note Investors, together with their current
holdings of the Company's voting securities, could be deemed to effectively
place the February Note Investors in control of the Company.
In the event that shareholder approval is not obtained, the Company would be
required to pay in full the outstanding principal amount of the February Note
and interest thereon upon demand (rather than in February 2002) by February
Note Investors representing two-thirds of the then outstanding principal amount
of the February Note. Such demand by the February Note Investors may not be
made until January 1, 2001.
11
<PAGE>
In the opinion of the Board of Directors a failure of the shareholders to
approve Proposal No. 3 will have a severely detrimental effect on the Company
and its future. The February Note Investors are fundamental to the ability of
the Company to raise funds to allow the Company to try to capitalize on market
opportunities for its products. A failure of the Company to obtain shareholder
approval would have a negative effect on the Company's future financing
activities, which are critical to the long-term success of the Company and
maximizing value for the Company's shareholders. Shareholder approval will also
relieve the Company from an obligation to pay in full the outstanding principal
amount of the February Note and interest thereon upon demand by February Note
Investors representing two-thirds of the then outstanding principal amount of
the February Note. If shareholder approval is obtained, the outstanding
principal amount of the February Note and interest thereon would become payable
in due course according to the February Note, specifically in February 2002.
Vote Required; Recommendation of Board of Directors
Shareholder approval to allow for conversions of the February Note into
Common Stock of the Company requires the affirmative vote of a majority of
Votes Cast. THE DISINTERESTED MEMBERS OF THE BOARD OF DIRECTORS (COMPRISED OF
JAMES DOBBIE, BARRY L. MARGERUM AND SCOTT W. SILFVAST) UNANIMOUSLY RECOMMEND A
VOTE "FOR" THIS PROPOSAL.
PROPOSAL NO. 4--RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors has selected PricewaterhouseCoopers LLP
("PricewaterhouseCoopers") as the Company's independent public accountants for
the fiscal year ending December 31, 2000 ("Fiscal 2000").
PricewaterhouseCoopers (or one of its predecessor firms) has been the Company's
independent auditors since November 15, 1999. Audit services of
PricewaterhouseCoopers during Fiscal 1999 included the examination of the
consolidated financial statements of the Company.
A representative of PricewaterhouseCoopers is expected to be present at the
Annual Meeting of Shareholders and will have an opportunity to make a statement
if such representative so desires. Moreover, PricewaterhouseCoopers'
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 PricewaterhouseCoopers as the Company's independent
auditors. In the event that the shareholders do not approve the selection of
PricewaterhouseCoopers, the appointment of the independent auditors will be
reconsidered by the Board of Directors. THE BOARD OF DIRECTORS RECOMMENDS A
VOTE "FOR" THIS PROPOSAL.
OTHER INFORMATION
Section 16(a) Beneficial Ownership Reporting Compliance
Under the securities laws of the United States, the Company's directors,
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 December 31,
12
<PAGE>
1999, all Reporting Persons complied with all applicable filing requirements,
except that the following Forms 3 and 4 were filed late. Milton M.T. Chang
filed a Form 5 in December 1999 for Form 4 transactions in June and October of
1999. Robert F. Kuhling filed a Form 5 in December 1999 for Form 4 transactions
in June, October and November of 1999. Dieter W. Meier filed a Form 5 in
February 2000 for Form 3 transactions for October and November of 1999. ONSET
filed a Form 5 in December 1999 for Form 4 transactions in June, October and
November of 1999.
Certain Transactions
1999 Private Placement of Common Stock. On January 26, 1999, the Company
entered into a Common Stock Purchase Agreement (the "1999 Purchase Agreement")
with Dieter W. Meier and Stephen D. Jackson. Under the 1999 Purchase Agreement,
a total of 1,320,446 shares of Common Stock were sold in a private placement
transaction at a per share purchase price of $0.9873, which price was equal to
90% of the average bid price per share for the ten days immediately preceding
January 26, 1999. 1,000,000 shares were purchased by Dieter W. Meier for
$987,300 and 320,446 shares were purchased by Stephen D. Jackson for $316,376.
Under certain circumstances, such persons have the right, to request on one
occasion that the Company register such shares, or to include such shares in a
registration effected by the Company, with the number of shares included in
each such registration subject to underwriter cutbacks. Under certain
circumstances, such persons have the right to designate one nominee for
election to the Company's Board of Directors.
April 1999 Note Financing. In April 1999, the Company executed a Secured
Promissory Note (the "April Note") with certain persons under which the Company
may draw up to $2,000,000 through July 31, 1999. Under the April Note, ONSET,
Milton M. T. Chang, Dieter Meier, Stephen D. Jackson and Pegasus have advanced
$1,000,000, $400,000, $350,000, $150,000 and $100,000, respectively, pursuant
to the terms thereof. In October 1999, the April Note Investors converted the
$2,000,000 principal amount and $67,000 accrued interest into 1,981,014 shares
of Common Stock.
July 1999 Note Financing. In July 1999, the Company executed a Secured
Promissory Note (the "July Note") with certain persons under which the Company
may draw up to an aggregate of $2,100,000 through October 31, 1999. Under the
July Note, Taurean and Pegasus have advanced $2,000,000 and $100,000,
respectively, pursuant to the terms thereof. Interest on the July Note accrues
at the rate of 7.75% per annum and such interest, together with the outstanding
principal amount, is due in July 2001. The Company may not prepay the July
Note. The July Note is convertible into Common Stock of the Company pursuant to
the terms thereof. Under certain circumstances (but not sooner than January 1,
2000), the July Note may become immediately due and payable. The July Note is
secured by the assets of the Company.
1999 Private Placement of Common Stock. On November 9, 1999, the Company
entered into a Common Stock Purchase Agreement (the "1999 Purchase Agreement")
with, among others, ONSET, Dieter W. Meier and Stephen D. Jackson. Under the
1999 Purchase Agreement, a total of 1,581,706 shares of Common Stock were sold
in a private placement transaction at a per share purchase price of $1.1064,
which price is equal to the average closing price per share of the Company's
Common Stock during the ten (10) consecutive trading days immediately preceding
November 9, 1999. 451,916 shares were purchased by ONSET for $500,000, 451,916
shares were purchased by Mr. Meier for $500,000 and 225,958 shares were
purchased by Mr. Jackson for $250,000. Holders of an aggregate of greater than
50% of the shares purchased under the 1999 Purchase Agreement may request the
Company register such shares pursuant to a "shelf" registration on Form S-1
under the Securities Act of 1933, as amended.
February 2000 Note Financing. In February 2000, the Company executed a
Secured Promissory Note (the "February Note") with certain persons under which
the Company may draw up to $1.5 million through February 22, 2001. Under the
February Note, ONSET, Milton M. T. Chang, Dieter W. Meier, Stephen D. Jackson
and Walter Bosch have advanced $400,000, $200,000, $500,000, $100,000 and
$300,000, respectively, pursuant to the terms thereof. Interest on the Note
accrues at the rate of 10.0% per annum and such interest, together with the
outstanding principal amount, is due in February 2002. The Company may not
prepay the
13
<PAGE>
Note. Subject to obtaining the necessary approvals, the Note is convertible
into Common Stock of the Company pursuant to the terms thereof. Under certain
circumstances (but not sooner than January 1, 2001), the Note may become
immediately due and payable. The Note is secured by the assets of the Company.
See "Proposal No. 3--Approval of the Conversions of the Secured Promissory Note
Issued by the Company in February 2000 into Common Stock."
Option Grants to Executive Officers. In Fiscal 1999, stock options under the
Company's 1999 Stock 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>
Per Share
Officer Date of Grant Plan No. of Shares Exercise Price
------- ------------- ---- ------------- --------------
<S> <C> <C> <C> <C>
Paul L. Hammel............... 08/12/99 1999 50,000 0.9375
Paul L. Hammel............... 12/22/99 1999 40,000 1.0300
Barry L. Margerum............ 08/12/99 1999 60,000 0.9375
Barry L. Margerum............ 12/22/99 1999 50,000 1.0300
Steven H. Milne.............. 08/12/99 1999 40,000 0.9375
Steven H. Milne.............. 12/22/99 1999 30,000 1.0300
Piers Plaskitt............... 09/13/99 1999 125,000 1.0000
Piers Plaskitt............... 12/22/99 1999 40,000 1.0300
Scott W. Silfvast............ 08/12/99 1999 50,000 0.9375
Scott W. Silfvast............ 12/22/99 1999 50,000 1.0300
</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 the date of grant. The options granted to Messrs. Hammel, Margerum,
Milne and Silfvast on August 12, 1999 vest ratably over four years. The options
granted to Mr. Plaskitt on September 13, 1999 vest as to 25% of the shares on
September 13, 2000, with the balance of the shares vesting ratably over three
years. The options granted to Messrs. Hammel, Margerum, Milne, Plaskitt and
Silfvast on December 22, 1999 vest as to 25% of the shares on December 22,
2000, with the balance of the shares vesting ratably over three years.
Bonus Payments to Executive Officers. See "Executive Compensation--Summary
Compensation Table" regarding bonuses paid to executive officers in recognition
of services rendered to the Company in Fiscal 1999.
14
<PAGE>
SHARE OWNERSHIP BY PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The table below indicates the number of shares of the Company's Common Stock
beneficially owned as of March 31, 2000 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
executive officers named in the Summary Compensation Table, 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 information
furnished by the respective individuals.
<TABLE>
<CAPTION>
Number of Shares
Beneficially
Owned(1)
-----------------
Directors, Executive Officers and 5% Shareholders Number Percent
- ------------------------------------------------- --------- -------
<S> <C> <C>
Dieter W. Meier(2).......................................... 4,464,996 38.4%
c/o Soundproof, Inc.
5180 Linwood Drive
Los Angeles, CA 90027
Robert F. Kuhling, Jr.(3)................................... 3,187,889 27.4%
c/o ONSET Enterprise Associates
2490 Sand Hill Road
Menlo Park, CA 94025
ONSET Enterprise Associates................................. 3,187,302 27.4%
2490 Sand Hill Road
Menlo Park, CA 94025
Pegasus Capital II, L.P.(4)................................. 927,545 8.0%
181 Elm Street
New Canaan, CT 06840
Milton M. T. Chang, Ph.D.................................... 700,741 6.0%
Stephen D. Jackson(5)....................................... 694,957 6.0%
Scott W. Silfvast(5)........................................ 370,104 3.1%
Barry L. Margerum(5)........................................ 284,171 2.4%
James Dobbie(5)............................................. 202,729 1.7%
Paul L. Hammel(5)........................................... 97,832 *
Steven H. Milne(5).......................................... 71,393 *
All executive officers and directors as a group (9
persons)(5)................................................ 6,707,405 57.7%
</TABLE>
- --------
* Less than one percent.
(1) Based on 11,622,542 shares of Common Stock outstanding as of March 31,
2000.
(2) Includes 2,666,666 shares issuable to Taurean Investments AG pursuant to
the conversion feature of the July Note, as approved by the shareholders on
October 22, 1999. Taurean is a corporation which has a contractual
arrangement with a trust for the benefit of Dieter W. Meier, such that Mr.
Meier is deemed the beneficial owner of the stock held by Taurean.
(3) Includes 3,187,302 shares held by 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 ownership of the shares held by ONSET except to his
proportionate partnership interest therein. Also includes 587 shares held
by a trust for the benefit of Mr. Kuhling and his spouse.
(4) Includes 133,333 shares issuable pursuant to the conversion feature of the
July Note.
(5) Includes 63,333, 257,990, 69,165, 71,393 and 461,881 shares which Messrs.
Silfvast, Margerum, Hammel and Milne and all present directors and
executive officers as a group, respectively, have the right to acquire
within 60 days of March 31, 2000 upon the exercise of stock options.
15
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning total
compensation received by the Chief Executive Officer and each of the four other
most highly compensated executive officers (collectively, the "Named Officers")
for services rendered to the Company in all capacities during Fiscal 1999 and
the fiscal years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Long-Term
Compensation
--------------------------
Annual Compensation Awards
---------------------- ----------
Securities
Name and Principal Underlying All Other
Position Year Salary($) Bonus ($)(1) Options(#) Compensation($)
------------------ ---- --------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C>
Barry L. Margerum....... 1999 180,000 42,350 110,000 6,316(3)
President and Chief
Executive Officer 1998 180,000 66,420(2) 147,297 4,195
1997 105,000 36,750 250,000 3,540
Thomas C. Fristoe(4).... 1999 81,800 22,845 0 0
Vice President of World 1998 124,992 83,583(2) 9,000 0
Wide Sales and
Marketing 1997 84,814 35,000 70,000 14,484
Communications
Scott W. Silfvast....... 1999 150,000 23,475 100,000 0
Senior Vice President
of Product Marketing 1998 150,000 32,873(2) 25,000 0
1997 148,125 22,500 50,000 0
Steven H. Milne......... 1999 136,100 20,000 70,000 0
Vice President of
Engineering 1998 128,100 22,720 25,000 0
1997 128,100 19,200 20,000 0
Paul L. Hammel.......... 1999 150,000 24,750 90,000 0
Senior Vice President
of Operations 1998 133,558 43,812(2) 100,000 0
1997 -- -- -- --
</TABLE>
- --------
(1) Includes bonus amounts earned in a fiscal year and paid in the subsequent
fiscal year.
(2) The Fiscal 1998 bonus amounts include amounts earned in Fiscal 1998, but
paid in Fiscal 1999, to account for a "gross up" for taxes, such that the
net effect to such officer, with respect to that portion of the bonus paid
in stock purchase rights for Fiscal 1998, is as if federal and state income
taxes did not apply to such portion of his bonus. The gross up amounts for
Messrs. Margerum, Fristoe, Silfvast and Hammel earned in Fiscal 1998 are
$12,420, $5,270, $5,873 and $14,249, respectively.
(3) Represents health insurance and dental insurance premiums.
(4) Mr. Fristoe's employment with the Company terminated as of July 19, 1999.
16
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth, as to the Named Officers, certain
information relating to stock options granted during Fiscal 1999.
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed
Annual Rates
of Stock
Price
Appreciation
for Option
Individual Grants Term(4)
------------------------------------------------ -------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(#) Fiscal Year(1) ($/Sh)(2) Date(3) 5%($) 10%($)
---- ---------- -------------- ----------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Barry L. Margerum....... 60,000 6.5% 0.9375 08/12/09 33,375 89,648
Barry L. Margerum....... 50,000 5.4% 1.0300 12/22/09 32,388 82,078
Scott W. Silfvast....... 50,000 5.4% 0.9375 08/12/09 29,479 74,707
Scott W. Silfvast....... 50,000 5.4% 1.0300 12/22/09 32,388 82,078
Steven H. Milne......... 40,000 4.3% 0.9375 08/12/09 23,584 59,765
Steven H. Milne......... 30,000 3.2% 1.0300 12/22/09 19,433 49,247
Paul L. Hammel.......... 50,000 5.4% 0.9375 08/12/09 30,611 77,575
Paul L. Hammel.......... 40,000 4.3% 1.0300 12/22/09 25,911 66,662
</TABLE>
- --------
(1) The total number of shares subject to options granted to employees during
Fiscal 1999 was 924,567.
(2) The exercise price is equal to the closing price of the Company's Common
Stock on the market date immediately preceding 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 1999, 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 estimate or projection of
future stock price. Actual gains, if any, resulting from stock option
exercises and Common Stock holdings are dependent 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.
Aggregated Option Exercises in Fiscal 1999 and Fiscal 1999 Year-End Option
Values
The following table sets forth for each Named Officer certain information
concerning the number of shares subject to both exercisable and unexercisable
stock options as of December 31, 1999. 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, 1999. No options were exercised by
the Named Officers during Fiscal 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Underlying Unexercised the-Money Options at
Options at Fiscal Year End(#) Fiscal Year End($)(1)
----------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Barry L.
Margerum......... 210,355 296,942 1,691 4,787
Scott W.
Silfvast......... 52,916 152,084 130 1,432
Steven H. Milne... 58,580 116,420 104 1,146
Paul L. Hammel.... 52,500 147,500 5 57
</TABLE>
- --------
(1) Market value of underlying securities based on the closing price of
$0.96875 of the Company's Common Stock on December 31, 1999, minus the
exercise price.
17
<PAGE>
Employment Arrangements
In March 1997, the Company and Barry L. Margerum entered into an employment
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. Pursuant to an
amendment to such option effected in September 1998, Mr. Margerum's option
shall become fully vested and exercisable upon the earlier of (i) six months
following a change of control of the Company or (ii) the date following a
change of control that Mr. Margerum's employment is terminated without cause
and, to the extent vested, shall be exercisable until the first to occur of (a)
three years following termination of employment or (b) August 5, 2007. In the
event the Company terminates Mr. Margerum's employment, 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. In addition, the Company
agreed to cover 75% of commuting costs with a driver or local apartment rental
of up to $1,000 per month; however, in September 1999, the Company's Board of
Directors determined that Mr. Margerum would receive a car allowance of $500
per month in lieu thereof. Mr. Margerum is also eligible to participate in the
Company's employee benefit plans.
In August 1999, the Company and Piers Plaskitt entered into an employment
offer letter pursuant to which Mr. Plaskitt agreed to serve as President of
Worldwide Sales and Marketing Communications of the Company at an annual salary
of $150,000. In addition, through Fiscal Year 1999, the Company agreed to pay
Mr. Plaskitt a non-recoverable draw of $2,291 per pay period, based on 24 pay
periods per year. The Company also agreed to a bonus plan based on sales. The
Company agreed to recommend to the Board of Directors that Mr. Plaskitt be
granted a 125,000 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 $18,000. In the event Mr. Plaskitt's employment is terminated
by the Company, other than for cause, the Company will continue to pay
Mr. Plaskitt's salary until the first to occur of (i) the date six months
following his termination date or (ii) the date Mr. Plaskitt becomes employed
by, or commences serving as a consultant to, another company. Mr. Plaskitt is
also eligible to participate in the Company's employee benefit plans.
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 officers,
administer the Company's stock option plans and make recommendations to the
board of directors regarding such matters. The committee is currently composed
of Mr. Kuhling and Dieter Meiers, neither of whom is an officer of the Company.
No interlocking relationship exists between any member of the Company's Board
of Directors or Compensation Committee and any member of the board of directors
or compensation committee of any other company, nor has any such interlocking
relationship existed in the past.
Report of the Compensation Committee
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 competitive
compensation opportunities based upon their personal performance, the financial
performance of the Company and their contribution to that performance. The
executive
18
<PAGE>
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 performance.
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 experience. The base salaries are reviewed annually and may be adjusted by
the Committee in accordance with certain criteria which include (i) individual
performance, (ii) the functions performed by the executive officer, (iii) the
scope of the executive officer's on-going duties, (iv) general changes in the
compensation 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
contingent 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 department or divisions for which the executive has responsibility and
satisfactory completion of special projects supervised by the executive
officer.
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 performance and responsibilities of the individual in question. See
"Certain Transactions--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. As of April 1, 2000, the base salary of Barry L.
Margerum is $200,000 with a target annual bonus of 40% of salary based on
mutually agreed upon milestones. Mr. Margerum's base salary was established in
part by comparing the base salaries of chief executive officers at other
companies of similar size using published compensation sources. In Fiscal 1999,
Mr. Margerum was granted an option to purchase 110,000 shares of Common Stock.
For Fiscal 1999, it was determined that Mr. Margerum would receive a bonus with
a total cash value of $39,420, to be paid in cash. Following shareholder
approval of the 1999 Plan, Mr. Margerum shall be paid an additional, as yet
undetermined, cash amount, such that he shall be "grossed up" for taxes so that
the net effect to him, with respect to that portion of his bonus paid in stock
purchase rights, is as if federal and state income taxes did not apply to such
portion of his bonus. In the event shareholder approval of the 1999 Plan is not
obtained at the Annual Meeting, the stock purchase rights shall be cancelled
and that portion of his bonus designated to be paid in stock purchase rights
shall instead be paid in cash. See "Executive CompensationCSummary Compensation
Table."
Policy Regarding Deductibility of Compensation. The Company is required 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
otherwise
19
<PAGE>
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
expected that the compensation to be paid to the Company's executive officers
for Fiscal 1999 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
compensation.
COMPENSATION COMMITTEE
Robert F. Kuhling, Jr.
Dieter W. Meier
20
<PAGE>
COMPARISON OF 52 MONTH CUMULATIVE TOTAL RETURN*
AMONG EUPHONIX, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE HAMBRECHT & QUIST 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 Hambrecht &
Quist Technology Index for the period commencing August 22, 1995 through
December 31, 1999. 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.
[PERFORMANCE GRAPH APPEARS HERE]
* $100 INVESTED ON 8/22/95 IN STOCK OR INDEX--INCLUDING REINVESTMENT OF
DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.
Euphonix Inc (EUPH)
<TABLE>
<CAPTION>
Cumulative Total Return
------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
8/22/95 12/95 12/96 12/97 12/98 12/99
EUPHONIX, INC....................... 100.00 106.25 54.69 12.50 12.89 12.11
NASDAQ STOCK MARKET (U.S.).......... 100.00 103.03 126.76 155.32 218.86 395.40
HAMBRECHT & QUIST TECHNOLOGY........ 100.00 94.84 117.87 138.19 214.95 480.05
</TABLE>
GRAPH ASSUMES $100 INVESTED ON 8/22/95 IN STOCK OR INDEX--INCLUDING
REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
21
<PAGE>
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed proxy card to vote the shares they represent as
the Board may recommend.
It is important that your shares be represented at the meeting, regardless
of the number of shares which you hold. You are therefore urged to execute and
return, at your earliest convenience, the accompanying proxy card in the
envelope which has been enclosed.
THE BOARD OF DIRECTORS
May 8, 2000
Palo Alto, California
22
<PAGE>
PROXY
This Proxy is solicited on behalf of the Board of Directors
EUPHONIX, INC.
2000 ANNUAL MEETING OF SHAREHOLDERS
June 26, 2000
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 8, 2000, 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 2000 Annual Meeting of Shareholders of EUPHONIX, INC. to be held on Monday,
June 26, 2000, 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. 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:
James Dobbie, Stephen D. Jackson, Dieter W. Meier
2. PROPOSAL TO APPROVE THE RESERVATION OF AN ADDITIONAL 1,000,000 SHARES
OF COMMON STOCK FOR ISSUANCE UNDER THE 1999 STOCK PLAN.
[_] FOR [_] AGAINST [_] ABSTAIN
3. PROPOSAL TO APPROVE THE CONVERSIONS OF THE SECURED PROMISSORY NOTE
ISSUED BY THE COMPANY IN FEBRUARY 2000 INTO COMMON STOCK.
[_] FOR [_] AGAINST [_] ABSTAIN
4. PROPOSAL TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS
THE INDEPENDENT AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING
DECEMBER 31, 2000.
[_] 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 _________________
-2-
