SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
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EUPHONIX, INC
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(Name of Registrant as Specified In Its Charter)
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EUPHONIX, INC.
220 Portage Avenue
Palo Alto, CA 94306
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STATEMENT FOR SOLICITATION OF
WRITTEN CONSENT
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GENERAL
The Board of Directors of the Euphonix, Inc. ("Euphonix," the "Company,"
"us," "we" or "our") is furnishing these materials to all holders of our common
stock as of January 2, 2002 (the "Record Date") to seek their consent in writing
to:
1. Ratify the terms of the Company's $6 million borrowing facility
(the "Financing");
2. Ratify the terms of the restructuring of our existing
convertible notes (the "Existing Notes") in connection with the
Financing and approve the issuance of shares of common stock
upon conversion of the amended Existing Notes;
3. Approve an amendment to our Amended and Restated Articles of
Incorporation to increase the authorized number of shares of our
common stock by 115 million shares to provide for a total of 150
million authorized shares of common stock; and
4. Approve the 2002 Stock Plan and the reservation of 3,000,000
shares of Common Stock for issuance thereunder.
For approval of each of the proposals we are seeking consents from
holders of a majority of the outstanding shares of our common stock as of the
Record Date. As of the Record Date we had 15,710,366 outstanding shares of
common stock. We are able to obtain the necessary shareholder approvals by
written consent without a meeting under Section 603 of the California
Corporations Code and provisions of our Bylaws. Holders of our common stock
representing in excess of 54% of our outstanding shares have entered into a
voting agreement whereby they have agreed to vote their shares in favor of the
first three proposals described in this Statement.
We expect to first mail or distribute this Statement and the
accompanying Written Consent to shareholders on or about January 18, 2002. This
Statement contains important information for you to consider when deciding
whether or not to execute the Written Consent.
By executing and returning the enclosed Action by Written Consent of the
Shareholders of Euphonix, Inc. (the "Written Consent") you may act to consent to
the four items described above. On the consent form that you will return to the
Company, you will be asked to give two separate consents. First, you will be
asked to consent to the first three proposals together, which concerns the
Financing (described in more detail below), and second, you will be asked to
give a separate consent for proposal four, which concerns the 2002 Stock Plan.
We request that you complete, sign and date the accompanying Written Consent and
return it to us as soon as possible, but no later than January 30, 2002, to our
principal executive office at 220 Portage Avenue, Palo Alto, CA 94306. If no
specific instructions are given, the shares represented by a properly signed and
dated Written Consent will be deemed to have consented to each of the proposed
actions. You may revoke your Written
Consent by delivering a written notification of such revocation to our Secretary
at any time prior to our receipt of the number of Written Consents required to
take the actions described in this Statement. Upon receipt of Written Consents
from a majority of the Company's shareholders of record, the proposals set forth
above shall be considered ratified and approved.
We will pay the costs of soliciting the Written Consents from
shareholders. We may also reimburse such brokers and nominees holding shares in
their names for the benefit of others for their reasonable expenses in
forwarding the materials to the beneficial owners. Certain of our directors,
officers and employees may solicit Written Consents on our behalf, without
additional compensation, personally or by written communication, telephone,
facsimile or other electronic means. Please read this Statement carefully.
BACKGROUND FOR PROPOSALS ONE, TWO AND THREE
Our business is not currently profitable and for some time we have
relied on external financing to fund our operations. For this reason at various
times in recent years we have raised funds by issuing to investors secured
convertible promissory notes and related warrants. During 2001 we again worked
very hard to seek additional capital to fund our continued operations and
execute our business plan. The investment climate has not been favorable and we
were unable to obtain new equity investors. However, in November 2001 we were
able to obtain a funding commitment from certain holders of our existing
convertible promissory notes to provide us with up to $6 million under the terms
of the Financing.
The Financing, which is more fully described under Proposal One below,
entails a commitment by Dieter Meier and Walter Bosch to lend us up to $6
million through monthly advances of up to $500,000. Messrs. Meier and Bosch are
members of our board of directors and each has a material interest in the
Financing and the restructuring of the Existing Notes. As of January 2, 2002
Messrs. Meier and Bosch had together loaned us $1.3 million under the terms of
the Financing. In addition, as of that date Mr. Meier held Existing Notes with
an aggregate principal amount of $4.9 million, and beneficially owned 15,594,765
shares of our common stock. Similarly, as of January 2, 2002 Mr. Bosch held
Existing Notes with an aggregate principal amount of $1.98 million, and
beneficially owned 2,829,149 shares of our common stock.
We offered participation in the Financing to other holders of Existing
Notes and no such persons or entities elected to participate in the Financing.
In connection with the Financing we agreed to seek a consent of shareholders to
ratify the terms of the Financing.
The commitment of Messrs. Meier and Bosch for the Financing was subject
to a number of conditions. Among the conditions was a condition that we and
holders of the Existing Notes agree to restructure the terms of the Existing
Notes to among other things extend the maturity date of the Existing Notes to
December 31, 2003. As described more fully in Proposal Two below, we extended
the maturity date of the Existing Notes and made additional modifications to the
Existing Notes in connection with the Financing. We also agreed to seek the
consent of shareholders to the restructuring of the Existing Notes.
Because the Financing and the restructuring of the Existing Notes may
result in the eventual issuance of a significant number of additional shares of
our common stock, as described in Proposal Three, we are seeking shareholder
approval of an amendment to our Certificate of Incorporation to increase our
authorized shares of common stock.
In connection with the Financing, Messrs. Meier and Bosch and other
holders representing in excess of 54% of our outstanding common stock have
entered into a voting agreement whereby they have agreed to vote their shares in
favor of Proposal One, Two and Three as described in this Statement. As a
result, these shareholders acting together have the ability to control the
outcome of the approvals sought by these proposals.
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Because Messrs. Meier and Bosch each have an interest in the Financing
and the restructuring of the Existing Notes, the board of directors appointed a
special committee comprised of disinterested board members, to independently
review the transaction and provide its recommendation to the board. The members
of the special committee were James Dobbie, Steven Vining and Martin Kloiber.
The special committee, after consideration of the extensive process in pursuing
financing alternatives from a variety of sources, and after a review of the
terms of the proposed Financing and the related transaction, approved the
Financing and related transaction, and found the transaction to be just and
reasonable and in the best interests of us and our shareholders. The full board
of directors ratified the actions of the special committee.
For a further description of the transactions underlying the proposals
we refer you to our report on Form 8-K filed with the U.S. Securities and
Exchange Commission on November 30, 2001. This filing describes the Financing
and the restructuring of the Existing Notes and includes copies of the primary
transaction documents in connection with that filing. You can find a copy of
this filing at no charge through the SEC website www.sec.gov. We will also
provide you with a copy of this report at no charge. To request a copy by mail
please contact our Investor Relations department at 650-855-0400.
PROPOSAL ONE
APPROVAL OF THE FINANCING
SUMMARY
Under the terms of the Financing Messrs. Meier and Bosch have agreed to
loan us up to a total of $6 million in monthly tranches of up to $500,000. Funds
lent in connection with the Financing are evidenced by a convertible promissory
note (the "Note") that is secured by all of our assets, including our
intellectual property. The Note bears interest at an annual rate of 10% and
matures on June 30, 2003. If our shareholders do not consent to the proposals
outlined in this Statement by January 31, 2001 the Note will immediately become
due. Similarly, the Note will become due if we are subject to a change in
control transaction, including if we are acquired by another entity. The
acceleration of amounts due in connection with a change of control may have the
effect of deterring offers to acquire our business.
The holders of the Note may elect to convert principal amounts owed
under the Note into shares of our common stock at prices determined at the time
of each advance. The conversion price for each advance is the lower of $0.35 per
share or the average of the closing price per share during the five trading days
prior to the advance, capped on the low end at $0.02. The conversion feature in
the Note could result in our issuance of a large number of shares and will cause
significant dilution to our existing shareholders. As of January 2, 2002 we had
received a total of $1.3 million in advances under the Note with a weighted
average conversion price of $0.206 per share.
Advances under the Note, are conditioned among other things, upon our
ability to make representations about our assets and business, there being no
legal prohibition on an advance, and there not being an "Event of Default" as
defined in the Note. An Event of Default will occur if we materially breach our
obligations under the Note and do not correct the breach within 30 days, our
seeking or being forced into bankruptcy protection, our election to liquidate or
dissolve or our materially breaching a representation or warranty that we do not
rectify within 30 days. We may seek advances until the maturity date of the
Note, which is June 30, 2003.
As partial consideration for their commitment to lend funds, we issued
to Messrs. Meier and Bosch warrants for the purchase of 642,857 shares of our
common stock with an exercise price of $0.01 per share. In addition, in
connection with advances under the Note we will issue additional warrants for
the purchase of up to 1,928,571 shares of our common stock with an exercise
price of $0.01 per share. The number of shares purchasable pursuant to warrants
issued in connection with an advance is proportional to the size of the advance
as compared to the total $6 million commitment. As of January 2, 2002 we had
issued warrants to purchase a
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total of 417,857 shares of our common stock in connection with advances under
the Note. If we borrow the full $6 million under the Financing we will have
issued warrants for the purchase of 2,571,428 shares of our common stock in
connection with the Financing. If the warrants are exercised, a significant
dilution to our existing shareholders will occur.
PRINCIPAL EFFECTS OF APPROVAL OR NONAPPROVAL OF PROPOSAL ONE
We are seeking shareholder approval of this proposal to satisfy a
condition of the Financing. If we obtain shareholder approval, we will have
satisfied this condition and the Note will not become due on January 31, 2002
for failure to receive shareholder approval. If we fail to obtain shareholder
approval, amounts owed under the Financing will become due and payable on
January 31, 2002. Given our current cash position, if we fail to obtain
shareholder approval we would be unable to pay amounts due under the Note.
Because the Note is secured by our assets, the holders of the Note could seize
our assets and sell them to satisfy our obligation under the Note and
effectively cause us to cease operations.
RECOMMENDATION OF THE BOARD
THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS AND THE FULL BOARD OF
DIRECTORS UNANIMOUSLY RECOMMEND THAT YOU TENDER YOUR CONSENT IN FAVOR OF THIS
PROPOSAL.
PROPOSAL TWO
APPROVAL OF THE AMENDMENTS
TO THE EXISTING NOTES
SUMMARY
As a condition to the Financing, we restructured the Existing Notes with
the holders of the Existing Notes. We are asking shareholders to ratify the
terms of the restructuring of the Existing Notes and to approve the issuance of
shares of our common stock upon conversion of the restructured Existing Notes.
The restructuring to the Existing Notes accomplished the following:
- an extension of the maturity date until December 31, 2003;
- a decrease in the interest rate to 8% per year for Existing
Notes initially bearing interest at a rate higher than 8%;
- a decrease in the price at which each Existing Note may be
converted into common stock from former conversion prices of the
five Existing Notes of $2.53125, $3.625, $2.3562, $1.26 and
$0.75 to $0.21 per share (the average of the closing price per
share for the three trading days immediately preceding the
initial closing date of the Financing);
- elimination of our obligation to issue warrants upon conversion
of certain of the Existing Notes;
- a change in the amendment provision of each Existing Note;
- the addition of a section providing that all principal and
interest becomes immediately due and payable in connection with
our business being acquired; and
- the addition of a section providing that each Existing Note is
not convertible until we receive shareholder approval of the
amendment of the Existing Notes and the amendment to our
Articles of
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Incorporation to authorize additional shares of common stock for
issuance upon conversion of the Existing Notes.
PRINCIPAL EFFECTS OF APPROVAL OR NONAPPROVAL OF PROPOSAL ONE
We are seeking shareholder approval of this proposal to satisfy our
obligations under the Existing Notes and the Financing. Approval of the Existing
Notes will benefit us by extending the maturity date of the Existing Notes, by
reducing the amount of interest payable and by eliminating our obligation to
issue warrants to the holders upon conversion of some of the Existing Notes. An
extension of the maturity date of the Existing Notes will provide us with a
longer period of time to develop our business plan before having to repay the
Existing Notes. However, please be aware that the reduction in the conversion
price of the Existing Notes to $0.21 per share may result in an eventual
issuance by us of a number of shares that will significantly dilute our other
shareholders.
If we fail to obtain shareholder approval, we may be subject to a claim
of default under the Existing Notes which may cause acceleration of payments
under the Existing Notes and the Note. Given our current cash position, if we
fail to obtain shareholder approval we would be unable to pay amounts due under
the Note. Because the Note is secured by our assets, the holders of the Note
could take possession of our assets and sell them to satisfy our obligation
under the Note and effectively cause us to cease operations.
RECOMMENDATION OF THE BOARD
THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS AND THE FULL BOARD OF
DIRECTORS UNANIMOUSLY RECOMMEND THAT YOU TENDER YOUR CONSENT IN FAVOR OF THIS
PROPOSAL.
PROPOSAL THREE
APPROVAL TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF
COMMON STOCK FROM 35,000,000 TO 150,000,000
INTRODUCTION
Our Amended and Restated Articles of Incorporation, as currently in
effect (the "Articles"), authorize us to issue up to 35 million shares of common
stock. We are seeking approval of an amendment to the Articles (the "Amendment")
to increase the number of shares of common stock authorized for issuance under
the Articles by 115 million shares to a total of 150 million shares. If the
Amendment is approved, it will become effective upon the filing of the Amendment
with the California Secretary of State and the text of the first paragraph of
Article III of the Articles would read in its entirety as follows:
This corporation is authorized to issue two classes of shares to be
designated respectively Common Stock and Preferred Stock. The total
number of shares of Common Stock this corporation shall have authority
to issue is 150,000,000, with a par value of $.001 per share. The total
of number of shares of Preferred Stock this corporation shall have
authority to issue is 2,000,000, with a par value of $.001 per share.
PURPOSE OF THE PROPOSED AMENDMENT
The authorization of an additional 115 million shares of common stock
will better allow for the issuance of shares of our common stock in the event
that Proposals One and Two of this Statement are approved by the shareholders.
Under the terms of the Financing and the amendments to the Existing Notes, we
agreed to seek the authorization of a total of 150 million shares of common
stock and to initially reserve 125 million shares of common stock for issuance
upon conversion of our outstanding promissory notes and the exercise of warrants
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issued in connection with the issuance of the promissory notes. If this
Amendment is not approved, there are currently not enough shares of common stock
authorized to satisfy our obligations under the Existing Notes described in
Proposals One and Two.
In addition, the board of directors believes that the availability of
additional authorized but unissued shares of common stock will provide us with
the flexibility to issue common stock for other proper corporate purposes which
may be identified in the future. Such future activities may include raising
equity capital, adopting additional employee stock plans or reserving additional
shares for issuance under our existing employee stock plans, splitting our stock
and making acquisitions through the use of stock. Other than as permitted or
required under our existing employee stock plans, the board of directors has no
immediate plans, understandings, agreements, or commitments to issue additional
shares of common stock for any purposes. The board of directors believes that
the proposed increase in the authorized common stock will make a sufficient
number of shares available should we decide to use our shares for one or more of
such previously mentioned purposes or otherwise. We reserve the right to seek a
further increase in authorized shares from time to time in the future as
considered appropriate by our board of directors.
POSSIBLE EFFECTS OF THE PROPOSED AMENDMENT
If the shareholders approve the proposed Amendment, the board of
directors may cause the issuance of additional shares of common stock without
further vote of the shareholders, except as provided under California corporate
law or under the rules of any national securities exchange on which our shares
are then listed. Under our Articles, our shareholders do not have preemptive
rights to subscribe to additional securities that we may issue, which means that
current shareholders do not have a prior right to purchase any new issue of
capital stock to maintain their proportionate ownership of our common stock. In
addition to the corporate purposes discussed above, the proposed Amendment
could, under certain circumstances, have an anti-takeover effect, although this
is not the intent of the board of directors. For example, it may be possible for
the board of directors to delay or impede a takeover or transfer of control of
Euphonix by causing such additional authorized shares to be issued to holders
who might side with the board of directors in opposing a takeover bid that the
board of directors determines is not in the best interests of Euphonix and our
shareholders. The Amendment therefore may have the effect of discouraging
unsolicited takeover attempts. By potentially discouraging initiation of any
such unsolicited takeover attempts, the proposed Amendment may limit the
opportunity for our shareholders to dispose of their shares at the higher price
generally available in takeover attempts or that may be available under a merger
proposal. The proposed Amendment may have the effect of permitting our current
management, including the current board of directors, to retain its position,
and place it in a better position to resist changes that shareholders may wish
to make if they are dissatisfied with the conduct of Euphonix's business.
However, the board of directors is not aware of any attempt to take control of
Euphonix and the board of directors has not presented this proposal with the
intent that it be utilized as a type of anti-takeover device.
If the proposals are approved by the shareholders and the Company issues
shares upon the conversion of the notes into shares of the Company's common
stock, such issuance could have a substantial dilutive effect on your current
ownership of the Company's common stock. The previous proposals discuss the
conversion rates for the new Note and the change to the Existing Notes. In
addition, if the board of directors elects to issue additional shares of common
stock, such issuance could have a dilutive effect on current shareholders.
Our failure to obtain shareholder approval of the proposed amendment
will result in a default under and result in the potential acceleration of
repayment of amounts owed under our outstanding secured convertible promissory
notes. In such an event we would be required to make payments that we would be
unable to satisfy with our currently available cash. In such a case the holders
of our secured promissory notes could take control of and sell our assets to
satisfy our obligations and effectively cause us to cease operations.
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RECOMMENDATION OF THE BOARD
THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS AND THE FULL BOARD OF DIRECTORS
UNANIMOUSLY RECOMMEND THAT YOU TENDER YOUR CONSENT IN FAVOR OF THIS PROPOSAL.
PROPOSAL FOUR
APPROVAL OF THE 2002 STOCK OPTION PLAN
Our board of directors determined that it is in our best interests and
the best interests of our shareholders to adopt the 2002 Stock Plan (described
below). On December 6, 2001, our board of directors adopted the 2002 Stock Plan
and reserved 3,000,000 shares of our common stock for issuance, subject to
shareholder approval. The Board of Directors believes that adoption of the 2002
Stock Plan is necessary in order to provide an effective method of recognizing
employee contributions to the success of the Company. The Company also believes
that its ability to grant options and stock purchase rights under the 2002 Stock
Plan is critical to its success in attracting and retaining experienced and
qualified employees. As of the date of this Statement for Written Consent, no
options had been granted pursuant to the 2002 Stock Plan.
For a description of the principal features of the 2002 Stock Plan, see
the Description of the 2002 Stock Plan below.
DESCRIPTION OF THE EUPHONIX 2002 STOCK PLAN
General. The purpose of the 2002 Stock Plan is to help us attract and
retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to our employees, directors and consultants and
the employees, directors and consultants of our parent and subsidiary companies
and to promote the success of our business. Options granted under the 2002 Stock
Plan may be either "incentive stock options," or nonstatutory stock options.
Stock purchase rights may also be granted under the 2002 Stock Plan.
Administration. The 2002 Stock Plan may generally be administered by our
board of directors or a committee appointed by the board, referred to as the
administrator. The administrator may make any determinations deemed necessary or
advisable for the 2002 Stock Plan. To the extent that options granted under the
2002 Plan are intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code, the 2002 Plan will be administered by a
committee of two or more "outside directors" within the meaning of Section
162(m).
Eligibility. Nonstatutory stock options and stock purchase rights may be
granted to our employees, directors and consultants and to employees, directors
and consultants of any of our parent or subsidiary companies. Incentive stock
options may be granted only to our employees and to employees of any of our
parent or subsidiary companies. The administrator, in its discretion, selects
which of our employees, directors and consultants to whom options and stock
purchase rights may be granted, the time or times at which such options and
stock purchase rights shall be granted, and the exercise price and number of
shares subject to each such grant.
Limitations. Section 162(m) of the Code places limits on the
deductibility for federal income tax purposes of compensation paid to certain of
our executive officers. In order to preserve our ability to deduct the
compensation income associated with options granted to such persons, the 2002
Stock Plan provides that no employee, director or consultant may be granted, in
any fiscal year of the Company, options to purchase more than 400,000 shares of
our common stock. Notwithstanding this limit, however, in connection with such
individual's initial employment with us, he or she may be granted options to
purchase up to an additional 200,000 shares of our common stock.
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Terms and Conditions of Options. Each option is evidenced by a stock
option agreement between us and the optionee, and is subject to the following
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 exercise price of a nonstatutory stock option may not be less than
85% of the fair market value of the common stock on the date such option is
granted, provided, however, that grants intended to qualify as "performance
based compensation" under Section 162(m) of the Code may not be less than 100%
of the fair market value of our common stock on the date such option is granted
and that a nonstatutory 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 our common stock is generally
determined with reference to the closing sale price for our common stock (or the
closing bid if no sales were reported) on 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. Except in cases of options
granted to officers, directors and consultants, options shall become exercisable
at a rate of no less than 20% per year over 5 years from the date the options
are granted. The means of payment for shares issued upon exercise of an option
is specified in each option agreement. The 2002 Stock Plan permits payment to be
made by cash, check, promissory note, other shares of our common stock (with
some restrictions), cashless exercises, any other form of consideration
permitted by applicable law, or any combination thereof.
(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, however, 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 Service. In the event of an optionee's termination of
service 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, provided the option may be exercised for at least thirty (30) days
following such termination and to the extent that the term of the option has not
expired. If an optionee's service has terminated as a result of disability, the
option will be exercisable for at least six 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 service is
terminated by reason of the optionee's death, the option will be exercisable by
the optionee's estate or successor at least six 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.
(e) Nontransferability of Options. Unless otherwise determined by the
administrator, options granted under the 2002 Stock Plan are 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. If the administrator in its
sole discretion makes an option transferable, such option may only be
transferred by (i) will, (ii) the laws of descent and distribution, (iii)
instrument to an inter vivos or testamentary trust in which the option is to be
passed to beneficiaries upon the death of the optionee, or (iv) gift to a member
of the optionee's "immediate family."
(f) Other Provisions. The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the 2002 Stock Plan as
may be determined by the administrator.
Stock Purchase Rights. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the
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voluntary or involuntary termination of the purchaser's employment with us for
any reason (including death or disability). The purchase price for shares we
repurchase pursuant to the restricted stock purchase agreement will be the
original price paid by the purchaser. Our repurchase option will lapse at a rate
determined by the administrator, but in no case at a rate of less than 20% per
year over five years from the date of purchase.
Adjustments Upon Changes in Capitalization. In the event that the common
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 2002 Stock Plan, the number and class of shares of stock subject
to any option or stock purchase right outstanding under the 2002 Stock Plan, and
the exercise price of any such outstanding option or stock purchase right.
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 or stock purchase rights, including those not otherwise
exercisable or convertible, until the date ten (10) days prior to the
consummation of the liquidation or dissolution and that any Company repurchase
option applicable to any shares purchase upon exercise of an option or stock
purchase right shall lapse as to all such shares, provided the proposed
dissolution or liquidation takes place at the time and in the manner
contemplated.
Merger or Asset Sale. In the event of our merger with or into another
corporation, or the sale of all or substantially all of our assets, the 2002
Plan requires that each outstanding option and stock purchase right be assumed
or an equivalent option or right substituted by the successor corporation. If
the successor corporation refuses to assume or substitute the options and stock
purchase rights, or to substitute substantially equivalent options or rights,
(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,
and (ii) any repurchase option we may have applicable to any shares acquired
upon exercise of an option or stock purchase right lapse as to all such shares.
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.
Amendment and Termination of the Plan. Our board of directors may amend,
alter, suspend or terminate the 2002 Stock Plan, or any part thereof, at any
time and for any reason. However, we will obtain shareholder approval for any
amendment to the 2002 Stock Plan to the extent necessary and desirable to comply
with applicable law. No such action by the board of directors or shareholders
may alter or impair any option or stock purchase right previously granted under
the 2002 Stock Plan without the written consent of the optionee. Unless
terminated earlier, the 2002 Stock Plan shall terminate ten (10) years from the
date the 2002 Stock Plan was adopted by our board of directors.
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 is an adjustment item for alternative
minimum tax purposes and may subject the optionee to the alternative minimum
tax. Upon a disposition of the shares more than two (2) years after grant of the
option and one (1) 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 more
than twelve (12) months may be taxed at a maximum federal rate of 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
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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
ours. Unless limited by Section 162(m) of the Code, we are 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 our employee
is subject to tax withholding by us. Unless limited by Section 162(m) of the
Code, we are 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 more than 12 months may be taxed at a maximum
federal rate of 20%. Capital losses are allowed in full against capital gains
and up to $3,000 against other income.
Stock Purchase Rights. Stock purchase rights will generally be taxed in
the same manner as nonstatutory stock options. However, restricted stock is
subject to a "substantial risk of forfeiture" within the meaning of Section 83
of the Code, because we may repurchase the stock when the purchaser ceases to
provide services to us. As a result of this substantial risk of forfeiture, the
purchaser will not recognize ordinary income at the time of purchase. Instead,
the purchaser will recognize ordinary income on the dates when the stock is no
longer subject to a substantial risk of forfeiture (i.e., when our right of
repurchase lapses). The purchaser's ordinary income is 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 right of repurchase.
The purchaser may accelerate to the date of purchase his or her
recognition of ordinary income, if any, and begin his or her capital gains
holding period by timely filing (i.e., within thirty (30) days of purchase), 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 our employee will be subject to tax withholding
by us. Different rules may apply if the purchaser is also an officer, director,
or 10% shareholder of ours.
The foregoing is only a summary of the effect of federal income taxation
upon us and optionees with respect to the grant and exercise of options under
the 2002 Stock Plan. It does not purport to be complete, and does not discuss
the tax consequences of the employee's, director's or consultant's death or the
provisions of the income tax laws of any municipality, state or foreign country
in which the employee, director or consultant may reside.
RECOMMENDATION OF THE BOARD
THE MEMBERS OF THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND THAT YOU TENDER YOUR
CONSENT IN FAVOR OF THIS PROPOSAL.
SHARE OWNERSHIP BY PRINCIPAL SHAREHOLDERS AND MANAGEMENT
To our knowledge, the following table sets forth certain information
with respect to beneficial ownership of our common stock, as of January 2, 2002,
for:
- each person who we know beneficially owns more than 5% of our
common stock;
- each of our directors;
- each of our named executive officers; and
- all of our directors and executive officers as a group.
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Unless otherwise indicated, the principal address of each of the
shareholders below is c/o Euphonix, Inc., 220 Portage Avenue, Palo Alto,
California 94306. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and includes voting or
investment power with respect to the securities. Except as indicated by
footnote, and subject to applicable community property laws, each person
identified in the table possesses sole voting and investment power with respect
to all shares of common stock shown held by them. The number of shares of common
stock outstanding used in calculating the percentage for each listed person
includes shares of common stock underlying options or warrants held by such
person that are exercisable within 60 calendar days of January 2, 2002, but
excludes shares of common stock underlying options or warrants held by any other
person. Percentage of beneficial ownership is based on 15,710,366 shares of
common stock outstanding as of January 2, 2002.
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
OWNED OWNED
-------------- --------------
5% SHAREHOLDERS:
Robert F. Kuhling, Jr.(1)
c/o ONSET Enterprise Associates
2490 Sand Hill Road
Menlo Park, CA 94025 .................................................. 3,773,718 19.4%
ONSET Enterprise Associates ................................................ 3,773,131 19.4%
Stephen D. Jackson(2) ...................................................... 893,193 5.4%
DIRECTORS AND EXECUTIVE OFFICERS:
Dieter W. Meier(3)
c/o Soundproof, Inc
5180 Linwood Drive
Los Angeles, CA 90027 ................................................. 15,594,765 49.8%
Walter Bosch(4) ............................................................ 2,829,149 15.3%
James Dobbie ............................................................... 168,355 1.1%
Martin Kloiber(5) .......................................................... 23,958 *
Jeffrey Chew(5) ............................................................ 314,083 2%
Paul L. Hammell(5) ......................................................... 189,499 1.2%
Steven H. Milne(5) ......................................................... 141,040 *
Rich Nevens(5) ............................................................. 28,445 *
Steven W. Vining(6) ........................................................ 642,857 3.9%
All executive officers and directors as a group (10 persons) (3-5) ......... 19,311,168 122.9%
- ----------
* Less than 1%.
(1) 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. Includes 158,024 shares
issuable pursuant to the conversion feature of the February 2000 Note, as
approved by the shareholders on June 26, 2000. Also includes 587 shares
held by a trust for the benefit of Mr. Kuhling and his spouse. Includes
110,345 and 317,460 shares issuable pursuant to the conversion feature of
the April 2000 Note and December 2000 Note, respectively, as approved by
the shareholders on June 19, 2001. Upon receipt of shareholder approval of
Proposal Two the shares beneficially held will be 1,904,762, 1,904,762 and
1,904,762 shares for the February 2000 Note, April 2000 Note and December
2000 Note, respectively, due to the reduction in the conversion price of
convertible notes held by ONSET.
(2) Includes 39,506 shares issuable pursuant to the conversion feature of the
February 2000 Note, as approved by the shareholders on June 26, 2000.
Includes 158,730 shares issuable pursuant to the conversion feature of the
December 2000 Note, as approved by the shareholders on June 19, 2001. Upon
receipt of shareholder approval of Proposal Two
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the shares beneficially held will be 476,190 and 952,381 shares for the
February 2000 Note and December 2000 Note, respectively, due to the
reduction in the conversion price of convertible notes held by Mr. Jackson
and the Jackson Trust.
(3) Includes 3,017,712 shares owned by Taurean Investments AG. 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. Includes 197,530 shares issuable
pursuant to the conversion feature of the February 2000 Note, as approved
by the shareholders on June 26, 2000. Includes 55,172, 634,921, and
3,033,333 shares issuable pursuant to the conversion feature of the April
2000 Note, December 2000 Note and March 2001 Note, respectively, as
approved by the shareholders on June 19, 2001. Upon receipt of shareholder
approval of Proposal Two the shares beneficially held will be 2,380,952,
952,381, 3,809,524 and 10,833,333 shares for the February 2000 Note, April
2000 Note, December 2000 Note and March 2001, respectively, due to the
reduction in the conversion price of convertible notes held by Mr. Meier.
Includes 5,582,525 shares issuable pursuant to the conversion feature of
the November 2001 Note and 916,071 shares upon exercise of immediately
exercisable warrants.
(4) Includes 118,518 shares issuable pursuant to the conversion feature of the
February 2000 Note, as approved by the shareholders on June 26, 2000.
Includes 55,172, 169,765, 317, 460 and 704,762 shares issuable pursuant to
the conversion feature of the April 2000 Note, September 2000 Note,
December 2000 Note and March 2001 Note, respectively, as approved by the
shareholders on June 19, 2001. Upon receipt of shareholder approval of
Proposal Two the shares beneficially held will be 1,428,571, 952,381,
1,904,762, 1,904,762 and 2,517,007 shares for the February 2000 Note, April
2000 Note, September 2000 Note, December 2000 Note and March 2001,
respectively, due to the reduction in the conversion price of convertible
notes held by Mr. Bosch. Includes 728,155 issuable pursuant to the November
2001 Note and 144,643 shares upon exercise of immediately exercisable
warrants.
(5) Includes 23,958, 312,500, 160,832, 141,040, 26,895 and 21,874 shares which
Messrs. Kloiber, Chew, Hammel, Milne, Nevens and Pelzar, and all present
directors and executive officers as a group, respectively, have the right
to acquire within 60 days of January 2, 2002 upon the exercise of stock
options.
(6) Mr. Vining's employment terminated with the Company on December 7, 2001.
Includes 642,857 shares which Messr. Vining has the right to acquire within
60 days of January 2, 2002 upon exercise of stock options.
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DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Our shareholders may submit proposals that they believe should be voted
upon at our next annual meeting or nominate persons for election to our Board of
Directors. Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended ("Rule 14a-8"), some shareholder proposals may be eligible for inclusion
in our Proxy Statement for our 2002 annual meeting of shareholders. Any such
shareholder proposals must be submitted in writing to the attention of the
Secretary, Euphonix, Inc., 220 Portage Avenue, Palo Alto, CA 94306, no later
than February 18, 2002. Shareholders interested in submitting such a proposal
are advised to contact knowledgeable legal counsel with regard to the detailed
requirements of applicable securities laws. The submission of a shareholder
proposal does not guarantee that it will be included in our 2002 Proxy
Statement.
It is important that your shares be represented, regardless of the
number of shares which you hold. You are therefore urged to execute and return,
at your earliest convenience, but no later than January 30, 2002, the
accompanying Consent Form in the envelope which has been enclosed.
THE BOARD OF DIRECTORS
Palo Alto, California
January __, 2002
WRITTEN CONSENT FORM
THIS WRITTEN CONSENT IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
EUPHONIX, INC. THIS WRITTEN CONSENT MAY BE REVOKED BY FILING A WRITTEN
INSTRUMENT REVOKING THE WRITTEN CONSENT WITH THE COMPANY'S SECRETARY AT ANY TIME
PRIOR TO THE RECEIPT BY THE COMPANY OF AFFIRMATIVE WRITTEN CONSENTS REPRESENTING
A MAJORITY OF THE COMPANY'S OUTSTANDING SHARES OF COMMON STOCK.
The undersigned record holder of _________________shares of Common Stock of
Euphonix, Inc. (the "Company"), hereby consents to, and does hereby ratify and
approve:
1. The terms of the Company's $6 million secured convertible debt
financing (the "Financing");
2. The terms of the restructuring of our existing convertible notes
(the "Existing Notes") in connection with the Financing and
approve the issuance of shares of common stock upon conversion
of the Existing Notes, as amended; and
3. The amendment to the Company's Amended and Restated Articles of
Incorporation to increase the authorized number of shares of our
common stock by 115 million shares to provide for a total of 150
million authorized shares of common stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. The 2002 Stock Plan and the reservation of 3,000,000 shares of Common
Stock for issuance thereunder.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
BY SIGNING THIS WRITTEN CONSENT, A SHAREHOLDER OF THE COMPANY SHALL BE DEEMED TO
HAVE VOTED ALL SHARES OF THE COMPANY'S COMMON STOCK WHICH HE OR SHE IS ENTITLED
TO VOTE IN ACCORDANCE WITH THE SPECIFICATIONS MADE ABOVE, WITH RESPECT TO THE
PROPOSALS DESCRIBED ABOVE.
PLEASE VOTE, SIGN, DATE AND RETURN THE CONSENT ELECTION FORM NO LATER THEN
WEDNESDAY, JANUARY 30, 2002 USING THE ENCLOSED ENVELOPE.
THIS CONSENT FORM, WHEN PROPERLY EXECUTED, SHALL BE VOTED AS DIRECTED.
IF NO DIRECTION IS INDICATED, A PROPERLY EXECUTED CONSENT FORM WILL BE VOTED FOR
THE PROPOSALS.
Dated ___________________, 2002
-------------------------------
Signature
-------------------------------
Signature
Please sign the Consent exactly
as the name appears hereon. If
shares are held by joint
tenants, both should sign.
Executors, administrators,
trustees or others signing in a
representative capacity should
indicate the capacity in which
signed.