UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM __________TO___________
Commission File Number 0-26516
EUPHONIX, INC.
(Exact name of registrant as specified in its charter)
California 77-0189481
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Portage Avenue, Palo Alto, CA 94306
(Address of principal executives, zip code)
(650) 855-0400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of class)
Indicate by check mark whether the registrant has filed (1) all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ____
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information state-
ments incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [X]
- --------------------------------------------------------------------------------
The aggregate market value of the voting stock held by non-
affiliates of the Registrant, based upon the closing sale price of the
Common Stock on February 15, 2000, as reported on the Nasdaq National Market,
was approximately $16,721,374. Shares of Common Stock held by each executive
officer and director and by each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may under certain
circumstances be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock as of February
15, 2000 was 11,595,974.
DOCUMENTS INCORPORATED BY REFERENCE
- --------------------------------------------------------------------------------
Portions of the Proxy Statement for the Registrant's 2000 Annual
Meeting of Stockholders to be held on June 30, 2000 are incorporated by
reference in Part III of this Form 10-K.
- --------------------------------------------------------------------------------
================================================================================
TABLE OF CONTENTS
Page
PART 1
Item 1. Business...........................................................3
Item 2. Properties........................................................20
Item 3. Legal Proceedings.................................................20
Item 4. Submission of Matters to a Vote of Security Holders...............20
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters...........................................................21
Item 6. Selected Financial Data...........................................22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........29
Item 8. Financial Statements and Supplementary Data.......................30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................52
PART III
Item 10. Directors and Executive Officers of the Registrant................53
Item 11. Executive Compensation............................................53
Item 12. Security Ownership of Certain Beneficial Owners and Management....53
Item 13. Certain Relationships and Related Transactions....................53
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K............54
SIGNATURES...................................................................57
2
PART I
The Business section and other parts of this Report contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors Affecting
Future Operating Results."
Item 1. Business.
Euphonix develops, manufactures and supports networked digital audio
systems for music, film & TV post-production, broadcast, sound reinforcement and
multimedia applications. Its core products today consist of high performance
digital audio consoles, digital-control analog audio consoles, disk-based
multi-track recorders and audio format converters. The Company's products
are used to produce audio content for entertainment industry markets
including music and CD's, film and television audio post-production,
television and radio broadcast, concert and theater sound reinforcement,
multimedia and the Internet. The Company is an industry leader in providing
software-driven functionality that serves to automate and streamline the audio
production process, while providing high quality audio and extended
functionality relative to the current audio industry standards. Euphonix high
performance audio systems play a major role in the production of popular music,
motion picture and television projects. Award winning artists, producers and
composers such as Carter Burwell, Steve Miller, Kenny G. David Foster, George
Duke, Teddy Riley and Glen Ballard have benefited from the power and versatility
of the Company's series of mixing console in their studios. Many current feature
films and television programs are scored and mixed on the Company's
digital-control analog CS Series and the new System 5 high-performance digital
audio console. The Company's business strategy is to supply digital solutions to
meet the entertainment industry's needs as they convert from analog to digital
production and distribution methods. Euphonix produces a variety of software,
scalable hardware, and services for recording, editing, and mixing audio for
high end professional use.
During the past fiscal year, the Company introduced a number of new
products. In April 1999, Euphonix launched a family of high-performance audio
format converters at the National Association of Broadcasters (NAB) Trade Show
in Las Vegas. These products were specifically designed to serve the demanding
needs of Broadcast customers. In September 1999, Euphonix debuted the System 5,
a 24-bit 96kHz all-digital recording and mixing system, and the 48-track 96kHz
version of the R-1 Multitrack Recorder System at the Audio Engineering Society
(AES) Trade Show in New York. The System 5 and the R-1 are the professional
audio industry's first products to offer a user-friendly transition from analog
or 16-bit 48 kHz digital to 24-bit 96 kHz recording and mixing. The product
received "Best in Show" awards at the New York AES, and Paris SATIS Trade Shows.
The Company believes this innovative product will establish new benchmarks in
price-performance, sound quality and ease of use. See "--Products."*
The Company was incorporated in California on July 1988. The Company's
principal executive offices are located at 220 Portage Avenue, Palo Alto,
California 94306, and its telephone number is (650) 855-0400.
* This paragraph contains forward-looking statements reflecting current ex-
pectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Factors Affecting
Future Operating Results" commencing on page 27 for a discussion of factors
that could affect future performance.
3
Industry Overview
Audio content for the entertainment industry is produced by professionals
in four primary applications: music (CD's, DVD-Audio, tapes, music for film and
television), post production (sound for film, video, DVD and television),
broadcast (sound for broadcast television), and live sound reinforcement (sound
for live concerts and theater). The market requiring audio production for
computer-based audio such as Internet web pages, interactive CD-ROM, DVD-ROM and
games, has developed and, the Company believes, may continue to grow in the
future.*
Mixing consoles serve as the central component of most professional audio
production studios, and are used by all applications of the professional audio
market throughout the production process, which includes recording, editing and
mixing. A mixing console electronically blends, routes and enhances sound from
musical instruments, voices, sound effects and pre-recorded material. Mixing
consoles that are used in each market during the different stages of production
share a high degree of common functionality. Professional mixing consoles are
used to process, combine, and reduce a large number of individual audio inputs
(typically 20-100) to produce a smaller number of outputs (typically 2-8) for
the audio engineer to hear or record. Audio inputs and outputs to mixing
consoles have traditionally been transmitted via analog methods. The
entertainment industry is rapidly replacing analog methods with digital methods.
Euphonix provides solutions for both analog and digital transmission and
processing as well as products to convert audio between analog and digital
formats. The Company also produces digital disk-based multi-track recorders to
replace tape-based systems used to record the many channels of sound that are
subsequently fed through the mixing console during typical professional audio
productions. The Company expects that as the complexity of audio production
increases in all market segments due to consumer demand for higher quality and
more captivating sound, including the audio requirements of High Definition
Television (HDTV), there will be an increased need for larger-scale mixing
consoles.*
Strategy
The Company's goal is to become the leading provider of sound production
tools for the entertainment industry through developing innovative, high value,
user oriented products. The Company's strategy includes the following key
elements:
Develop a family of products
The Company's goal is to leverage its reputation and substantial
investment in digital control technology, digital signal processing and
distributed computer processing to develop a family of digital product offerings
to support recording, editing and mixing functions. The Company plans to focus
on the needs of the high-end professional music recording, short and long form
post production and on-air broadcast facilities. In the long term, the Company
intends to develop, internally or through acquisitions or licensing, a range of
compatible audio production products that will enable the Euphonix system to
become the control center for automating and streamlining significant portions
of the audio production process.*
* This paragraph contains forward-looking statements reflecting current ex-
pectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Factors Affecting
Future Operating Results" commencing on page 27 for a discussion of factors
that could affect future performance.
4
Capitalize on Leading Edge Technology
Since its inception in 1988, the Company has dedicated itself to bringing
cost-effective digital and software technology to professional audio mixing. In
1991, the Company brought to market the first digitally controlled audio mixing
console with performance which the Company believes rivaled high-end products
from other manufacturers at a significantly lower price. In 1999, the Company
launched the System 5 high performance digital console and a 48-track 96 kHz
version of the R-1 Multitrack Recorder. The Company's product architecture and
technology have been designed to enable the professional user to express more
easily creative talents while reducing labor and time-intensive operations, at a
more favorable price-performance ratio than existing mixing systems.
Provide Complete Scalable Solutions
The Company offers modular systems that provide customers a range of
functionality and flexibility, allowing them to configure the Company's systems
to meet their professional needs and financial resources. A key focus of the
Company's product development efforts is to maintain compatibility of its new
products and features with its current products, enabling customers to make an
initial investment in a Euphonix system, and then upgrade their system as their
needs and finances permit.
Leverage Brand Name Recognition
The Company seeks to enhance its reputation for technical innovation, high
quality and superior price-performance. To date, as a result of the Company's
product architecture, customer satisfaction, excellent price-performance and
significant industry visibility, the Company believes it has generated brand
name recognition and loyalty, which will benefit the Company as it seeks to
increase its share of its target market.*
Increase Penetration into Other Market Segments
The Company seeks to leverage its success in the music market to continue
to expand into complementary market applications of the professional audio
market, including post production, broadcast, live sound reinforcement and
multimedia. The Company believes that the key features of the Euphonix systems,
including 24 bit 96 kHz resolution, its time-based automation, SnapShot Recall,
flexible architecture, compact design, and high fault tolerance are well-suited
to meet the needs of such complementary market segments. The Company is
increasing marketing efforts to aggressively target these market segments.
Build Global Presence
The Company's sales strategy is to build a worldwide presence in order to
fully address its target markets and to serve customers that operate on an
international basis. The Company's sales outside the United States as a
percentage of its net revenues were approximately 33%, 43%, and 39%, in fiscal
years 1999, 1998 and 1997, respectively. In addition to its New York, Los
Angeles, Nashville and Palo Alto offices in the United States, the Company has
offices in London and Tokyo and a network of sales representatives outside of
the United States.
* This paragraph contains forward-looking statements reflecting current ex-
pectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Factors Affecting
Future Operating Results" commencing on page 27 for a discussion of factors
that could affect future performance.
5
Products
The Company's products include the new System 5 High Performance Digital
Audio Console and the 48-track R-1 Multi-track Recorder, both introduced in
1999, the CS3000 Series Digital-Control Analog Console and a family of
high-performance multi-channel audio format converters as described below.
SYSTEM 5 HIGH-PERFORMANCE DIGITAL AUDIO CONSOLE
Introduced in September 1999 at the Audio Engineering Society
convention in New York City, the System 5 is the Company's new flagship
high-performance digital audio console. In development for over 3 years, the
System 5 is the first digital console to provide the following benefits to
customers: 24-bit, 96 kHz digital audio interfacing and processing, simple user
interface, and high degrees of modularity, scalability, and fault tolerance. The
Company believes that the adoption rate of digital technology by the audio
industry has been slow due to the perceived reduction in audio quality, ease of
use, and fault tolerance brought on by early generations of digital audio
consoles. System 5 was designed from inception to directly address these
concerns as significant investments were made in producing breakthroughs in
sound quality, ease of use, and fault tolerance.
The System 5 offers a modular, scalable architecture that is configurable
to a broad range of sizes and applications for the production of audio for music
CD's and DVD's, film and television soundtracks, live television broadcasts, and
live auditorium performances. Since the product's introduction, Euphonix has
delivered System 5's to customers for applications in all major segments of
professional audio production.
The System 5 is the only large-scale audio console to employ multiple
pentium-based computers connected with an Internet Protocol network and
Microsoft's Windows NT operating system. The Company believes this architecture
will benefit over time with performance increases and price reductions brought
on by the rapid technology development of standard computing and networking
platforms. The Company's most significant competitors' products use a high
degree of proprietary hardware and software to accomplish similar tasks to the
System 5.
CS3000 SERIES DIGITAL-CONTROL ANALOG CONSOLE
The Euphonix CS3000 has been designed for operational speed, high sound
quality and flexible configuration control and processing. CS3000 options and
upgrades may be factory installed or added in the field, allowing customers to
tailor the product to their exact requirements and then to subsequently modify
and upgrade their CS3000 as their needs change. The Company offers specific
features developed for individual market applications to all customers in order
to ensure compatibility between each CS3000 and to provide customers with the
ability to change applications across market applications. The CS3000 can use
the same version of software for various applications. The base CS3000 may
currently be specified with hardware variations to accommodate differences in
application of the product by the music ("D" & "M" Systems), post production
("P" & "F" Systems), and broadcast ("B" Systems) market applications.
6
CS3000 Options
The modular form of the Euphonix CS3000 System provides customers with a
range of functionality and flexibility that allows them to configure their
System to meet their professional needs and financial resources and to upgrade
their Systems as their needs change. Euphonix offers two primary options to
increase the amount of audio processing provided by the overall System -- the
Audio Cube and the Dynamics processors. The Company plans to continue developing
a range of options to allow the Systems to meet the changing needs in its market
applications.*
Audio Cube. The Audio Cube is a hardware option that provides
additional output capability to the base System. The flexible nature of
the System software allows the customer to determine the feature set
provided by the Audio Cube. Music applications typically require the
Audio Cube to expand the base system's Aux Send capability (allowing
more special effects). Post production applications require the Audio
Cube to be configured as a panning and stemming device (allowing users
to separate music, effects and dialog mixes with 4 or 6 channel
surround sound outputs). Broadcast customers can use the Audio Cube to
provide remote "mix minus" feeds to reporters and commentators through
telecom or satellite links. The Audio Cube is both modular and
scaleable so that it may be specified or upgraded according to the
number of channels required (4-48) and the number of outputs desired
for each channel (4-48).
Dynamic Processors. This option adds Dynamics to the base System
in sections of 8 channels at a time, up to 120 additional channels.
Traditional high-end consoles have been marketed with Dynamics built
into every channel as a standard feature. This practice has served to
increase the price of a standard console and forces the customer to pay
for a feature that is typically not used on every channel at the same
time. By providing Dynamics as a modular option, Euphonix has helped to
provide customers with a basic high-end System at a lower price.
CS3000 Packages
The Company also offers System packages configured for particular market
segments, including the following:
CS3000M Systems. The Company created the "M" (Music) System package to
provide commercial music customers the ability to offer a consistent
feature set to their clients when moving projects between different
Euphonix equipped studios. The Audio Cube and Dynamics options are
included in this configuration.
CS3000P Systems. The Company created the "P" (Post Production) System
package to provide the TV audio post production customer a totally
automated mixing System which is easily locked to video sources.
CS3000F Systems. The Company has designed the "F" (Film) System
package to provide multiple operator functionality as required for film
dubbing applications. The "F" System is designed as one, two or three
"P" Systems which can be physically joined together to allow for usage
by one, two or three operators.
CS3100B Systems. The Company added the "3100B" (Broadcast) System
package to provide broadcast customers the ability to increase the
quality of on-air and taped programming audio. With Euphonix digital
control technology, broadcast facilities can meet the demands of
multiple studios from a single audio control room. In remote broad-
* This paragraph contains forward-looking statements reflecting current ex-
pectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Factors Affecting
Future Operating Results" commencing on page 27 for a discussion of factors
that could affect future performance.
7
casting, the compact lightweight digital control surface provides
increased control in less space. Broadcast specific options such as
the MX464 add GPI (programmable relay closures), listenback,
multiple studio monitoring, and an input routing matrix to the base
system. Redundant power supplies are available to meet the demands of
live on-air broadcasting.
R-1 MULTI-TRACK RECORDER
The Company debuted the 24-track version of the R-1 Multi-track
Recorder (the "R-1") at the AES show in San Francisco during September 1998. The
R-1 shipments began in the first quarter of 1999. At the AES show in New York
during September 1999, the Company announced Version two of the R-1 Multitrack
Recorder in a 48-track 96 kHz configuration. It is the professional audio
industry's first product to offer a user-friendly transition from analog or
16-bit digital tape recording to 24-bit disk recording. The R-1 provides the
users of over 50,000 professional multi-track tape recorders with a replacement
product that significantly improves sound quality, reliability, and operational
efficiency while maintaining a user-interface that has remained an industry
standard since the early 1970's. Key features include:
Improved Sound Quality results from 24-bit, 96 kHz domain conversion,
transmission, and storage combined with 40-bit floating point Digital
Signal Processing. Almost 100% of the installed tape recorders are
either analog or 16-bit digital, providing significantly less audio
resolution than the R-1.
Operational Feel and Efficiency surpasses tape recorders where possible
yet emulates tape recorders where tradition dictates, to provide
recording engineers with a zero learning curve transition to disk
recording.
Solid Reliability is an essential attribute for equipment that is
required to capture performances that may only happen once in a
lifetime. The R-1 has been designed for equal or better fault tolerance
and endurance when compared with tape recorders.
Non-Degrading Storage has long been a desire for the audio industry.
Extremely low wear and tear and long shelf life are well known
attributes of hard-disk technology. Tape technology suffers from
constant media and component wear that occurs every time audio is
recorded and played back. Tape has a significantly shorter shelf life
than disk storage products.
Random Access to audio anywhere in a recording reduces waiting time for
recording artists and engineers. The R-1 provides instant locating and
looping capabilities. Tape is rewound and fast-forwarded hundreds of
times in a typical recording session while recording engineers and
artists wait.
Cut and Paste Editing is provided on the R-1 to permit sound
manipulation not possible on tape recorders. Basic editing functions
are provided so recording engineers do not have to spend time and money
transferring to editing equipment in order to implement a basic
adjustment or correction to a recorded track.
Non-Destructive Recording is possible on the R-1. When enabled, this
feature allows more than one take of a recording to be kept for every
track. In comparison, tape technology requires the destruction of a
previous recording every time an existing track is used to record a new
take. The R-1 reduces the risk of accidentally erasing or recording
over a once in a lifetime performance.
8
Modular, Scalable, and Open Architecture provides the ability to expand
or re-purpose systems over time in much the same way computer owners
can increase the size, performance, or feature sets of their PC's as
new technology and product offerings permit.
FUTURE INTERNET-BASED PRODUCTS
Euphonix announced in February 2000, plans to incorporate features into
future versions of the System 5 and R-1 to allow project and workflow transfers
and collaboration via the Internet. The Company believes it is well positioned
to take advantage of new opportunities offered by the Internet as one of the
only companies to employ an Internet Protocol based architecture.*
Technology
The Company's proprietary technology is central to its product offering
and its business strategy. The key elements of its technology are described
below.
Digital Signal Processing
The Company's products employ state-of-the-art digital signal processing
techniques and software in their digital subsystems. The Company intends to
continue to develop digital signal processing technology in order to improve
fidelity, simplify interfaces and reduce costs involved with digital audio
transmission and processing.
Digital Control of Analog Audio Processing
Traditionally, the predominant mode of audio processing and transmission
has been analog due to its simplicity, cost-effectiveness, high sound quality
and the extensive analog infrastructure which currently exists in the
professional audio market. Euphonix is a market leader in providing digital
control in conjunction with analog processing and transmission. Euphonix
believes that its hybrid digital control/analog processing technology has
allowed the acceptance of digital control because it is compatible with
potential customers' existing studio design and peripheral equipment.
The Company utilizes an architecture that physically separates the mixing
control surface from the audio processing hardware. The Company has replaced
manual (mechanically coupled) control methods with digital control technology so
that the audio processing hardware may be controlled remotely over a digital
link by the separated control surface. Because of this separation, it is
possible to insert a computer in the link between the controller and the
processing circuit so that audio may be manipulated either by the operator or
the computer. A high degree of computer automation can then be provided with the
appropriate software. The elimination of bulky and expensive mechanical
controls, the ability to share digital controls for different functions and the
relocation of the audio processing hardware to a separate enclosure has allowed
a substantial reduction in size, weight, heat generation and cost of the console
surface.
Hard Disk Recording and Editing
The Company utilizes technology to record and edit sound using
off-the-shelf computer hard disks.
Scalable, Distributed Computer Processing
The computer power required to instantly reconfigure and automate a mixing
console is proportional to the console's size (number of controls per channel
times the number of channels). Two approaches may be taken in order to provide
adequate computer power to reset and automate a large-scale mixing console. The
first is to use a large, fast and powerful central computer that has sufficient
* This paragraph contains forward-looking statements reflecting current ex-
pectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Factors Affecting
Future Operating Results" commencing on page 27 for a discussion of factors
that could affect future performance.
9
capacity to manipulate all of the console's controls in the required period of
time for the largest possible console. The second is to distribute the
processing load over multiple processors that have sufficient capacity to handle
their share of the processing load. Euphonix has chosen the distributed
processing method because it has the added benefit to being scalable. The
Euphonix system may be configured in and upgraded to a range of sizes. Euphonix
customers benefit because they only pay for computer power that is proportional
to the size of their systems, yet more computer power can be added as their
systems are upgraded. Because of the lighter demand placed on each individual
microprocessor in a distributed system, the use of low-cost components is
possible to further leverage price performance. Another benefit of the Company's
distributed processing architecture is its systemwide SnapShot(TM)Recall
performance within one video frame (1/30 of a second) which the Company believes
is superior to competitive commercial offerings.
Multi-Processor Communications and Real-time Operating Systems
Euphonix has developed real-time operating system technologies for
interfacing the multiple microprocessors required to support its large
distributed processing system. A typical large Euphonix console will contain as
many as 125 independent microprocessors of different varieties and functions all
working together as one system. In addition, the Euphonix system provides
interfaces to microprocessors in third-party peripheral studio equipment. This
seamless networking of internal processors (Euphonix components) and external
equipment (third-party digital audio workstations, tape machines and MIDI
devices) provides a powerful foundation to encourage new product development by
both Euphonix and third-party manufacturers.
Audio Format Conversion
The Company has developed proprietary technology to convert audio between
the various signal transmission formats that are used in Broadcast, Post
Production, and Music Studios. Euphonix has focused development on the primary
formats that are endorsed by the Audio Engineering Society including: Analog,
AES/EBU digital, and MADI (Multi-channel Audio Digital Interface). Sample Rate
Conversion technology is employed to convert digital audio between formats that
are operating at different sampling frequencies such as 44.1kHz for CD-Audio,
48kHz for professional audio production and 96kHz for emerging standards such as
DVD-Audio.
Advanced User Interface Methods for Audio Processing
Euphonix's digitally controlled system gives the user real-time feedback
of the system's performance, thereby enabling the user to evaluate and improve
the audio mix more effectively and efficiently. Euphonix has developed several
user interface methods for the professional audio market that are designed to
simplify and improve the user's understanding of how the mixing console is
affecting the sound. The Company's interface techniques are designed to allow
the operator to harness the power of digital control in a user-friendly manner.
For example, graphical user interfaces are used extensively to show views of
settings and parameters, enabling a "what you see is what you hear" display.
Such graphical comparisons and various archival, marking and retrieval methods
allow for greater operator efficiency.
Customers
The Euphonix product line has been adopted by many professional audio
facilities worldwide, with more than 456 Euphonix consoles currently installed.
The following table sets forth a partial list of Euphonix customers:
10
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CUSTOMER LOCATION SAMPLE PROJECT/OTHER
- --------------------------------------------------------------------------------
Music
- --------------------------------------------------------------------------------
The Hit Factory New York The world's largest commercial
recording facility
- -------------------------------- ---------- ---------------------------------
The Hit Factory Criteria - Miami Miami Part of The Hit Factory family
- -------------------------------- -------- ---------------------------------
Brandon's Way Los Angeles Ubiquitous producer, song writer
and artist, Babyface's commercial
studio houses four Euphonix consoles
- -------------------------------- ----------- ---------------------------------
Fleetwood Mobile London Mobile unit for concert recording
- -------------------------------- ----------- ---------------------------------
Jon Kelly London Independent music producer (Paul
McCartney, Kate Bush, Tori Amos)
- ------------------------------- ----------- ---------------------------------
Emerald Entertainment Group Nashville One of the largest recording and
production companies in the world
Twice named Billboard Magazine's
Country Recording Studio of the
Year
- ------------------------------- ----------- ---------------------------------
Cia. dos Technicos Brazil High end commercial recording
facility
- ------------------------------ ----------- ---------------------------------
Realsongs Los Angeles Studio of multiple Grammy-winning
songwriter, Diane Warren. (How Do
I Live, Because You Loved Me)
- ------------------------------ ----------- ---------------------------------
143 Records Los Angeles Studio of producer, arranger,
composer and musician, David
Foster (Because You Loved Me,
The Power of Love)
- ------------------------------ ----------- ---------------------------------
Banff Centre for the Arts Canada Music recording facility
- ------------------------------ ----------- ---------------------------------
Tiger Recording Australia High profile commercial music
facility
- ------------------------------ ----------- ---------------------------------
Seal Los Angeles Internationally renowned musician
purchased a CS3000 for home studio
- ------------------------------ ----------- ---------------------------------
Blow Torch Flats Los Angeles Studio of composer Basil Poledouris
For the Love of the Game and
Mickey Blue Eyes
- ------------------------------ ---------- -------------------------------------
Thrill Hill Recording New Jersey Studio of superstar Bruce Springsteen
- ------------------------------ ---------- -------------------------------------
Carter Burwell New York Film scores for Being John
Malkovich, Three Kings and The
General's Daughter. Upgraded
Euphonix CS series with System 5
- ------------------------------ ---------- ---------------------------------
Curb Records Nashville Second largest Country Music
record label in the USA
- -------------------------- ---------- ---------------------------------
11
- --------------------------------------------------------------------------------
CUSTOMER LOCATION SAMPLE PROJECT/OTHER
- --------------------------------------------------------------------------------
Music
- --------------------------------------------------------------------------------
John Debney Productions Burbank Award winning film scorer,credits
include End of Days and Dick
- -------------------------- ------------ ------------------------------------
Soundproof Studios Los Angeles First commercial recording facility
to install System 5 in Southern
California
- -------------------------- ----------- ------------------------------------
Laurent Voulzy France Internationally acclaimed vocalist
- -------------------------- ----------- ------------------------------------
Hans Zimmer/Media Ventures Los Angeles Academy Award Winning film scorer
whose credits include: Gladiator,
The Lion King and The Prince of Egypt
- -------------------------- ----------- ------------------------------------
James Newton Howard Los Angeles Academy Award Nominee film composer.
Scores include Dinosaur, The Sixth
Sense and Snow Falling on Cedars
- -------------------------- ----------- ------------------------------------
Snuffy Walden Productions Los Angeles BMI Film & TV Music Award winner
television scores include The West
Wing, Once and Again and Felicity
- -------------------------- ----------- ------------------------------------
Thomas Newman Los Angeles Dual 1996 Academy Award Nominee.
Scored Films such as The Green Mile
and American Beauty
- -------------------------- ----------- ------------------------------------
LDS Motion Pictures Salt Lake City Motion Picture facility houses two
CS series mixing consoles and one
System 5
- --------------------------- -------------- ------------------------------------
- --------------------------------------------------------------------------------
Post Production
- --------------------------------------------------------------------------------
The Idea Room at Warner Bros. Burbank Post Production for feature films
and film trailers
- --------------------------- ----------- ------------------------------------
Cool Beans Digital Audio New York Largest Post Facility in NYC.
Installed three Euphonix System 5's
- --------------------------- ----------- ------------------------------------
Sound Lounge New York Short form post production facility
- --------------------------- ----------- ------------------------------------
Avenue Edit Chicago Post production facility. Installed
two Euphonix CS series mixing consoles
- --------------------------- ----------- -------------------------------------
Deluxe Laboratories Toronto World's first dual operator System 5
for feature film dubbing.
- --------------------------- ----------- ------------------------------------
Aoi Studio Company, Ltd Tokyo Short-form post production facility
first in Japan to install System 5
and 48-track R-1
- --------------------------- ------------ ------------------------------------
Intersound Inc. Los Angeles TV post production facility
- --------------------------- ------------- ------------------------------------
One Union Recorders San Francisco High profile post production
facility clients include Microsoft,
Sattchi & Sattchi and Hal Riney.
- --------------------------- ------------- ------------------------------------
Brian Boyd Productions (BBP) Los Angeles Post production facility for TV
commercials. Clients include
Emusic.com, Radioshack and Nestle
- --------------------------------------------------------------------------------
12
- --------------------------------------------------------------------------------
CUSTOMER LOCATION SAMPLE PROJECT/OTHER
- --------------------------------------------------------------------------------
Post Production (Cont)
- --------------------------------------------------------------------------------
SPG Studios Burbank International post facility who
installed a second post-production
mixing console for expanded facility.
- ----------------------------- ------------ ------------------------------------
Monterey Post Sound Los Angeles Audio Post for Warner Bros.
Animation, DVD production, expanding
facility and adding a System 5
- ----------------------------- ------------ ------------------------------------
Damien France Post production facility
- ----------------------------- ------------ ------------------------------------
Warner Hollywood Los Angeles ADR/Foley on various Films
- ----------------------------- ------------ ------------------------------------
Music Annex San Francisco Post production facility with
multi-Euphonix studios
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Broadcast
- --------------------------------------------------------------------------------
WWF Entertainment Connecticut World Wrestling Federation Enter-
tainment installed System 5 for
rigorous post and ON-AIR broadcast
schedule
- ------------------------------ ----------- ------------------------------------
China Television People's Republic of China Various TV productions
- ----------------------------- ------------ ------------------------------------
KCNC CBS Denver On-Air Broadcaster
- ----------------------------- ------------ ------------------------------------
WPTV West Palm Beach On-Air Broadcaster
- ----------------------------- ------------ ------------------------------------
WDVR Denver On-Air Broadcaster
- ----------------------------- ------------ ------------------------------------
Fisher Broadcasting - KOMO TV Seattle Full Digital On-Air Broadcast Studio
- ----------------------------- ------------- ------------------------------------
NBC Los Angeles TV show Tonight Show with Jay Leno
- ----------------------------- ------------- ------------------------------------
KTVT Dallas/Fort Worth On-Air Broadcaster
- ----------------------------- ------------- ------------------------------------
Tokyo Arvic Japan On-Air Broadcaster
- ----------------------------- ------------- ------------------------------------
WMUR New Hampshire On-Air Broadcaster
- ----------------------------- ------------- ------------------------------------
Sky DTH Television Florida Direct TV for South America
- ----------------------------- ------------- ------------------------------------
- --------------------------------------------------------------------------------
Live Sound Reinforcement
- --------------------------------------------------------------------------------
The Gothenburg Opera House Sweden Live sound reinforcement
- ----------------------------- ------------ ------------------------------------
Royal Caribbean Cruise Lines Finland Live sound reinforcement
- ----------------------------- ------------ ------------------------------------
- --------------------------------------------------------------------------------
Multimedia
- --------------------------------------------------------------------------------
Bull Frog Music Studios France Sound for multimedia games
(a division of Electronic Arts)
- ------------------------------- ----------- -----------------------------------
Interplay California Sound for multimedia games
- ------------------------------- ----------- ------------------------------------
SEGA Tokyo Sound for multimedia games
- --------------------------------------------------------------------------------
Other
- --------------------------------------------------------------------------------
Eastman School of Music University of Rochester Sound recording education
- ----------------------------- ------------- -------------------------
Launch Media Los Angeles Internet Music Magazine
- ----------------------------- ----------- ------------------------------------
University of Michigan Ann Arbor Sound recording education
- ----------------------------- ----------- ------------------------------------
Citrus College Southern California Sound recording education
- ----------------------------- ----------- ------------------------------------
The Art Institute of Seattle Washington Sound recording education
- ----------------------------- ----------- ------------------------------------
Alchema College of the Arts London Sound recording education
- -------------------------------------------------------------------------------
13
Marketing
The Company's marketing strategy has been to create awareness of its
products and to differentiate its products from its competitors' products in
terms of performance and cost-effectiveness. The Company participates in trade
shows, direct-mail advertising and selective advertisements in industry
publications. The Company believes that its high quality products, technical
innovation, support and service result in significant industry awareness of its
products, and numerous word of mouth referrals for its products. The Company
differentiates its products through one-on-one sessions with the key decision
makers of its current and prospective customers during which the Company's
trained engineers and distributors perform product demonstrations.
Historically, the Company has focused its marketing efforts on the music
market application. In this market, most of the Company's sales were to
individual recording artists, composers, producers and independent record
companies who purchase the Company's systems for their own professional or
personal use. While the Company believes that there is continued substantial
opportunity for growth of the Company's sales in the music application of the
market, the Company's strategy is to continue to expand into post production,
broadcast, live sound reinforcement and multimedia. The past year proved to be
a successful year in selling the new System 5 to the on-air broadcasters,
post-production facilities as well as the Company's traditional music market.
The CS3000's flexible architecture, high performance and high quality at an
affordable price continues to make it the choice of many high profile end users
in these segments as well.
To address all markets during 1999 the Company produced market specific
product literature, broadened its base of publications in which it advertises,
attended trade shows and communicated through direct mail communications. *
Sales and Distribution
Euphonix sells its consoles through its direct sales organization in the
United States, the United Kingdom and Japan, and manages a network of
international sales representatives for sales in other countries. The Company
conducts its direct sales activity in the United States from its sales offices
in Los Angeles, New York and Nashville.
The Company's international distributors typically cover an exclusive
geographic region. Distributors generally order and purchase systems from the
Company based on orders they receive for Euphonix systems. Certain of the
Company's distributors provide direct customer support and installation, while
the other distributors receive customer support and installation from the
Company's international sales offices. There were no customers who accounted for
10.0% or more of the Company's net revenues in fiscal 1999, 1998 or 1997.
A key element of the Company's strategy is to continue to build a
worldwide presence through its international sales presence and its network of
sales representatives in order to address fully its target markets and to serve
customers that operate on an international basis. The Company believes that
revenues from customers outside the United States will begin to account for a
greater portion of its revenues, due to improving economic conditions in many
international countries. The Company will continue to maintain sales efforts of
the Company's console in international markets through its international sales
presence and its network of international distributors.
* This paragraph contains forward-looking statements reflecting current ex-
pectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Factors Affecting
Future Operating Results" commencing on page 27 for a discussion of factors
that could affect future performance.
14
Customer Service and Support
Providing excellent customer service and support is a key element of the
Company's strategy to maintain and build its reputation for high quality and
enhance brand name loyalty. The Company provides service, support and training
to its customers and sales representatives through a wide range of support
services, including on-site and telephone support and training in the use of the
Company's consoles.
The Company's customer service organization provides the following services:
Systems Installation and Training. The Company's systems installation
personnel assist customers in the configuration, installation and testing of
Euphonix systems at the customer's site. The systems can usually be installed in
less than one day, which the Company believes to be considerably less time than
required for other manufacturers' large format consoles. The Company provides
demonstration equipment for use by customers as well as prospective purchasers
at each of the Company's sales offices. The Company may also provide on-site
training following installation of its system, as well as advanced operations
documentation regarding the Euphonix system.
Technical Support. The Company's technical support personnel provide
telephone assistance to customers and sales representatives. These personnel
assist customers in the use of their systems, and diagnose and solve technical
hardware and application problems with the aid of self-diagnostic programs
within the Euphonix system. The Company provides a one-year warranty on the
Euphonix system covering defects in materials and workmanship. Such policy
provides that the Company may, at its option, repair, replace or refund the full
purchase price of any defective products sold to the customers. Technical
support personnel maintain a supply of similar or spare modules to deliver to
customers if necessary for repair, and in more complicated situations will
dispatch an on-site technician to assist the customer. The Company also offers
an on-line 24-hour computer bulletin board to maintain communications with its
customers.
Research and Development
The Company's research and development strategy is to develop high-quality
enhancements to its products, focusing on modularity and upgradeability of such
products, as well as new products for its target market segments. The Company's
research and development and engineering staff consists of highly trained
software, electronic and mechanical engineers and technicians with technical
backgrounds in computer software design, digital signal processing, analog audio
processing and high speed audio communications.
The Company's research and development expenses for the years ended Decem-
ber 31, 1999, 1998, and 1997 were $4.5 million, $4.6 million, and $3.7 million,
Proprietary Rights
The Company generally relies on a combination of trade secrets, copyright
law and trademark law, contracts and technical measures to establish and protect
its proprietary rights in its products and technologies. However, the Company
believes that such measures provide only limited protection of its proprietary
information, and there is no assurance that such measures will be adequate to
prevent misappropriation. The Company currently has two United States registered
trademarks, four issued United States patents and several applications for
United States patents pending with respect to certain elements of its hardware
and software. The Company has no foreign patents nor has it filed any
applications for any foreign patents.
15
The Company believes that, due to the rapid proliferation of new
technologies in the audio, video and general software industries, intellectual
property protection of the Company's proprietary technology will be less
influential on the Company's ability to compete in its target markets than the
ability of the Company's research and development personnel to design products
that continue to address evolving customer requirements, the ability of the
Company to enter new markets and the ability of Euphonix to service its
customers. *
Manufacturing and Suppliers
The Company focuses its manufacturing efforts on producing high quality
products in a cost-effective manner. The Company's manufacturing operations for
mixing consoles, located in Palo Alto, consist primarily of materials and
procurement management, testing and final assembly of products, quality
assurance and shipping. The Company subcontracts other functions, including the
production of printed circuit boards, specialized metal finishing and other
subassemblies, which currently are not cost-effective for the Company to
perform. The Company's systems undergo complete testing and quality inspection
at the board level and final assembly stages of production.
The Company and its manufacturing vendors are dependent upon single or
limited source suppliers, such as Analog Devices, Inc. and Maxim Integrated
Products, Inc., for numerous components and parts used in the Company's
products. Currently, the Company uses many sole or limited source suppliers,
certain of which are critical to the Company's continued uninterrupted
production because they supply key components, such as integrated circuits,
included in the Company's base system. Major delays or terminations in supplies
of such components could significantly adversely affect the Company's timely
shipment of its products, which in turn would adversely affect the Company's
business and results of operations. There can be no assurance that these
suppliers will continue to be able and willing to meet the Company's
requirements for any sole-sourced components. The Company generally purchases
these single or limited source components pursuant to purchase orders and has no
guaranteed supply arrangements with such suppliers. In addition, the
availability of many components to the Company's subcontractors is dependent in
part on the Company's ability to provide its subcontractors, and in turn the
subcontractor's ability to provide their suppliers, with accurate forecasts of
their future requirements. The process of qualifying suppliers or designing out
certain parts could be lengthy, and no assurance can be given that any
additional sources or product redesign would be available to the Company or
implemented on a timely basis. In the past, the Company has experienced
interruptions in the supply of certain key components from suppliers which
delayed product shipments and there can be no assurance that the Company will
not experience significant shortages for these components in the future. The
Company does not maintain an extensive inventory of such components and any
extended interruption or reduction in the future supply or increases in prices
of any key components currently obtained from a single limited source supplier
could have a material adverse effect on the Company's business and results of
operations for any given period.*
- ---------------------------
* This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual
future performance will meet the Company's current expectations.
Investors are strongly encouraged to review the section entitled
"Factors Affecting Future Operating Results" commencing on page 27 for
a discussion of factors that could affect future performance.
16
Competition
The markets for the Company's mixing products are intensely competitive
and characterized by significant price competition. The markets for mixing
consoles can be classified based on price, as follows: (1) low-end range
products with prices up to $30,000; (2) mid-range products with prices from
$30,000 to $100,000; and (3) high end range products with prices over $100,000.
Prices for mixing consoles generally vary based on the number of channels and
the processing power per channel, which directly affects the quality of the
sound output of the particular mixing consoles. The Company's products compete
primarily with other mixing consoles in the high end price range of the
Company's targeted market segments, although they may also compete with lower
priced products with fewer features. Competing companies in the high-end price
range include, among others, Solid State Logic, Ltd. (Owned by 3i, a venture
capital company), AMS Neve, GLW a.k.a. Harrison, Amek Technology Group, plc,
Sony Corporation, Calrec Ltd., Soundtracs, D&R, Trident, Cantus, Fairlight,
Studer, and Otari Corporation. In addition, the Company believes that, as
technology in the professional audio industry advances, prices for mixing
consoles and other audio equipment, including the Company's products, will
decrease, and as a result the Company's products may increasingly compete
against lower priced products, as well as products in the high-end price range.
There are numerous companies, in addition to those listed above, that compete in
the low-end and mid-range of the professional audio market. Many of the
Company's competitors are larger and have greater financial, technical,
manufacturing and marketing resources, broader product offerings, more extensive
distribution networks and larger installed bases than the Company. A number of
the Company's competitors currently offer all digital mixing consoles, as well
as analog control/analog processing mixing consoles, at least two competitors
(Harrison & Calrec) currently offer a hybrid digital control/analog processing
mixing console, and all such competitors are likely to have additional products
under development. The Company believes that companies with large installed
bases, in particular, may have a competitive advantage since many potential
customers in the Company's targeted markets are often reluctant to commit
significant resources to replace their current products and to retrain operators
to use new products despite technological advantages of such new alternative
products. Certain of the Company's competitors also offer customers leasing or
refinancing packages in connection with the purchase of their mixing consoles,
which financing alternatives the Company does not generally offer. Furthermore,
the Company competes with resellers of used mixing consoles and equipment who
are able to sell high-end price range products at generally lower prices.*
The introduction of the R-1 brings on new competitive issues for the
Company. The R-1 allows the Company to sell to largely the same customer base
that purchases the Company's large format consoles. Some of the traditional
console manufacturers sell traditional tape based multi-track tape machines. The
primary competing companies in the traditional tape based multi-track recorder
market segment include, among others, Studer, Otari and Sony. The R-1 is
targeted as a direct replacement of traditional tape based products.
Additionally, the R-1 will face competition from a number of disk based
competitors, that while technically similar, are less focused on the direct
replacement of a multi-track recorder and more focused on editing of the audio
than pure recording. These competitors include Digidesign, Fairlight and Augan.
Otari has been shipping the Radar and the Radar II disk based multi-track
recorder replacement and has helped establish a market for disk based
multi-track recorders.
- ---------------------------
* This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual
future performance will meet the Company's current expectations.
Investors are strongly encouraged to review the section entitled
"Factors Affecting Future Operating Results" commencing on page 27 for
a discussion of factors that could affect future performance.
17
The Company believes that its ability to compete depends on elements both
within and outside its control, including the success and timing of new product
development and introduction by the Company and its competitors, product
performance and price, distribution, availability of lease or other financing
alternatives, resale of used systems and customer support. There can be no
assurance that the Company will be able to compete successfully with respect to
these factors. In addition, there can be no assurance that the Company will
successfully differentiate its products from the products of its competitors or
that the marketplace will consider the Company's products to be superior to
competing products. Moreover, the Company's competitors may introduce additional
products that are competitive with those of the Company, and there can be no
assurance that the Company's products would compete effectively with such
products. Although the Company believes that its audio mixing console has
certain technological advantages over its competitors, maintaining such
advantages will require continued investment by the Company in research and
development, sales and marketing and customer service and support. There can be
no assurance that the Company will have sufficient resources to be able to
maintain such competitive advantages. *
Backlog
An order is booked into backlog when a deposit or a purchase order is
received from the customer. The Company's products are typically delivered to
customers two to three months after receipt of an order. However, because
shipment of the product is dependent upon other customer requirements or
changing situations, the product may not be delivered for more than a year after
the receipt of the order. All orders are subject to cancellation or rescheduling
by the customer. The Company does not believe that its backlog at any particular
point in time is indicative of future sales levels.
Employees
As of December 31, 1999, the Company had 113 full-time employees and
consultants. None of the Company's employees are represented by a labor union
and the Company has never experienced a work stoppage, slowdown or strike. The
Company considers its employee relations to be good.
- ---------------------------
* This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual
future performance will meet the Company's current expectations.
Investors are strongly encouraged to review the section entitled
"Factors Affecting Future Operating Results" commencing on page 27 for
a discussion of factors that could affect future performance.
18
MANAGEMENT
Executive Officers
The executive and other officers of the Company and their ages as of
December 31, 1999 are as follows:
Name Age Position
---- --- --------
Paul L. Hammel 54 Senior Vice President of Operations
Barry L. Margerum 48 President, Chief Executive Officer and Director
Steven H. Milne 41 Vice President of Engineering
Piers Plaskitt 45 President of Worldwide Sales and Marketing
Scott W. Silfvast 37 Chief Product Officer and Director
Paul L. Hammel joined the Company in February 1998 as Senior Vice
President of Operations. From 1994 to 1998, he was employed at Plantronics,
Inc. as Vice President Customer Services and President of Walker Equipment
Division of Plantronics, Inc. From 1989 to 1994, Mr. Hammel was Vice President
of Operations and Customer Services for GO Corporation.
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 executive positions for GRiD Systems Corporation, a pioneer
in the field of lap-top computers. Prior to that, Mr. Margerum was employed by
Apple Computer, Inc., Epsilon Data Management and International Business
Machines Corporation.
Steven H. Milne joined the Company in April 1996 as Vice President of
Engineering. From 1992 to 1996, he was employed at Taligent, Inc., most
recently as Director, Media Software Development. Taligent, Inc. is a
software joint venture owned by International Business Machines Corporation,
Hewlett-Packard Company, and Apple Computer, Inc. From 1986 to 1992, Mr. Milne
was an engineer and manager working on audio for Apple Computer, Inc. Prior
to that, Mr. Milne was employed by Sydis, Inc. and Wang Laboratories,
working on voice recording products.
Piers Plaskitt joined the Company in August 1999 as President of
Worldwide Sales and Marketing. From 1998 to 1999, he was employed at The New
York Media Group, Inc. as Vice President, Director Sales and Marketing. From
1997 to 1998, Mr. Plaskitt was Vice President, Worldwide Sales and Marketing
for Montage Group, Inc. From August 1983 to May 1997, Mr. Plaskitt was the
President and Chief Executive Officer of the US operation of Solid State Logic,
Inc.. Solid State Logic, Inc. is a manufacturer of audio consoles for the
broadcast, post-production, film and music industries.
19
Scott W. Silfvast founded the Company in July 1988. He has been a director
of the Company since its inception, has served as Chief Product Officer since
August 1999, 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.
Item 2. Properties.
The Company leases approximately a 40,000 square-feet space at its
headquarters located on Portage Avenue in Palo Alto, California, under leases
expiring in September 2004. Activities at this facility include engineering,
manufacturing, management information systems, customer service, distribution
and general administration. Euphonix also leases space for its sales and service
offices in Los Angeles, New York, Nashville and London, and its subsidiary in
Seattle. In addition, the Company rents an office for its subsidiary in Japan on
a month to month basis.
Item 3. Legal Proceedings.
The Company is not currently involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
20
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company effected the initial public offering of its Common Stock on
August 22, 1995, at a price to the public of $8.00 per share. The following
table sets forth, for the periods indicated, the high and low closing prices for
the Company's common stock:
Fiscal 1998 High Low
First quarter......................... $ 1.88 $ 1.06
Second quarter........................ 1.94 1.38
Third quarter......................... 1.38 0.94
Fourth quarter........................ 1.50 1.00
Fiscal 1999
First quarter......................... 1.44 1.03
Second quarter........................ 1.25 0.63
Third quarter......................... 2.13 0.75
Fourth quarter........................ 1.69 0.75
As of February 15, 2000, there were approximately 88 holders of record of
the Company's Common Stock. The Company's Common Stock is listed for quotation
in the Nasdaq National Market under the Symbol "EUPH".
The Company has not paid any cash dividends on its Common Stock and
currently intends to retain any future earnings for use in its business.
Accordingly, the Company does not anticipate that any cash dividends will be
declared or paid on the Common Stock in the foreseeable future. *
Recent Sales of Unregistered Securities
In November 1999 the Company issued 1,581,796 shares of common stock to
private investors at a price of $1.1064 per share for total proceeds of
$1,750,000.
All of the securities were issued pursuant to exemptions from registration
under Section 4(2) of the Securities Act. The Company made no public solicita-
tion in connection with the issuance of the above mentioned securities nor were
there any other offerees. The Company made no public solicitation in connection
with the issuance of the above mentioned securities nor were there any other
offerees. The Company relied on representations from the recipients of the
securities that they purchased the securities for investment for their own
account and not with a view to, or for resale in connection with, any distribu-
tion thereof. The investors also indicated to the Company that they were aware
of the Company's business affairs and financial condition and had sufficient
information to reach an informed and knowledgeable decision regarding their
acquisition of the securities.
- ---------------------------
* This paragraph contains forward-looking statements reflecting current
expectations. There can be no assurance that the Company's actual
future performance will meet the Company's current expectations.
Investors are strongly encouraged to review the section entitled
"Factors Affecting Future Operating Results" commencing on page 27 for
a discussion of factors that could affect future performance.
21
Item 6. Selected Financial Data.
The following selected financial data for the five-year period ended
December 31, 1999, should be read in conjunction with the Company's Financial
Statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operation" included in Item 7 of this report.
Year Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
Net revenues..............$ 13,806 $ 15,614 $ 18,093 $ 18,237 $ 14,681
Gross margin.............. 5,697 7,014 8,859 9,396 7,482
Operating income (loss)... (5,675) (5,306) (2,304) (1,836) 1,436
Net income (loss).........$ (6,329) $ (5,240) $ (1,932) $ (1,398) $ 1,346
Net income (loss) per share:
Basic...................$ (0.74) $ (0.82) $ (0.35) $ (0.25) $ 0.50
Diluted.................$ (0.74) $ (0.82) $ (0.35) $ (0.25) $ 0.28
Shares used in computing net
income (loss) per share:
Basic................ 8,541 6,404 5,576 5,515 2,702
Diluted.............. 8,541 6,404 5,576 5,515 4,827
----------------------------------------------------
December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital $6,993 $5,922 $9,095 $11,035 $12,937
Total assets 12,300 11,031 13,208 15,466 18,279
Long-term obligations 2,166 --- 32 66 ---
Shareholders' equity 6,797 7,375 10,487 12,338 13,602
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
Euphonix develops, manufactures and supports networked digital audio
systems for music, film & TV post-production, broadcast, sound reinforcement
and multimedia applications. As of December 31, 1999, the Company has shipped
over 456 of its mixing consoles worldwide.
The price of the Company's mixing consoles generally ranges from $100,000
to $1 million, and is often the most expensive piece of equipment in the studio.
The Company performs ongoing credit evaluations of its customers' financial
condition and prior to shipping the product, generally requires a substantial
deposit anywhere from $10,000 up to 50% of the console's value and a firm
purchase order. From time to time and depending on the financial condition of
the customer, the Company may require payment of a substantial portion of the
purchase price, an irrevocable letter of credit, or a purchase order from a
third-party lessor. The Company usually relies on new orders in the same quarter
22
to achieve its net revenues. The Company generally recognized revenue upon
shipment.
In December 1999, the SEC staff issued Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition." The SEC staff addresses several issues in
SAB No. 101, including the timing for recognizing revenue derived from
selling arrangements that involve contractual customer acceptance provisions
and installation of the product occurs after shipment and transfer of
title. The Company's existing revenue recognition policy is to recognize
revenue at the time the customer takes title to the product, generally
at the time of shipment, because the Company has routinely met its
installation obligations and obtained customer acceptance. Applying the
requirements of SAB No. 101 to the present selling arrangements used by the
Company for the sale of equipment may require a change in the Company's
accounting policy for revenue recognition and the deferral of the recognition
of revenue from such equipment sales until installation is complete and
accepted by the customer. The effect of such a change, if any, must be
recognized as a cumulative effect of a change in accounting no later than the
Company's second quarter of its fiscal year ending on December 31, 2000. At
the current time it is not possible to determine the effect this change will
have on the results of operations of the Company.
Annual Results of Operations
The following table sets forth certain operating data as a percentage of
net revenues for the periods indicated:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Net revenues................... 100.0% 100.0% 100.0%
Cost of revenues............... 58.7 55.1 51.0
----------- ------------- ------------
Gross margin.............. 41.3 44.9 49.0
----------- ------------- ------------
Operating expenses:
Research and development.... 32.5 29.4 20.4
Sales and marketing......... 40.4 34.9 30.0
General and administrative.. 9.5 14.6 11.3
----------- ------------- ------------
Total operating expenses 82.4 78.9 61.7
----------- ------------- ------------
Operating loss................. (41.1) (34.0) (12.7)
Interest income/(expense), net (4.7) 0.4 0.8
----------- ------------- ------------
Loss before income taxes....... (45.8) (33.6) (11.9)
Benefit for income taxes....... --- --- (1.2)
----------- ------------- ------------
Net loss....................... (45.8)% (33.6)% (10.7)%
============= ============ ============
Net Revenues
Net revenues decreased to $13.8 million in 1999 down from $15.6 million in
1998 and $18.1 million in 1997, representing a decrease of 11.6% in 1999 from
1998 and a decrease of 13.7% in 1998 from 1997. The decrease in net revenues
from 1998 to 1999 and from 1997 to 1998 was primarily due to not having a
digital product and to weakness in sales in the Pacific Rim and Europe
respectively. The decline in Asian sales in 1999 is due to a weakness in the
Asian economy. The decline in European sales in 1998 was the direct result of
23
employee turnover within the international sales department and the loss of
sales representatives, which limited the Company's ability to maintain existing
market share and penetrate new markets abroad. In 1999 the Company sold 16
System 5 digital consoles and 36 R-1 Multitrack recorders.
Sales of the Company's products in the United States were $9.2 million,
$8.9 million, and $11.0 million, comprising approximately 66.6%, 57.0%, and
60.9%, of the Company's net revenues for 1999, 1998, and 1997, respectively.
Export sales were $4.6 million, $6.7 million, and $7.1 million, comprising
approximately 33.4%, 43.1%, and 39.1%, of the Company's net revenues for 1999,
1998, and 1997 respectively.
Gross Margin
The Company's gross margin decreased to $5.7 million in 1999 from $7.0
million in 1998, and down from $8.9 million in 1997, representing a decrease of
18.8% from 1998 to 1999 and 21.3% from 1997 to 1998. Gross margin as a percent
of net revenue was 41.3% down from 44.9% in 1998 and 49.4% in 1997. The decrease
in the margin from 1998 to 1999 was primarily associated with start-up costs
related to the R-1 recorder which began shipping in the first quarter of 1999,
and the new System 5 digital console which began shipping in the second quarter
of 1999. The decrease in the margin from 1997 to 1998 was primarily due to
selling off older/used inventory at lower margins, a $238,000 charge for excess
and obsolete inventories, and to manufacturing overhead investments associated
with the new R-1 Recorder and other product development activities.
Research and Development
Research and development expenses decreased to $4.5 million in
1999 down from $4.6 million in 1998 up from $3.7 million in 1997, representing a
decrease in research and development expenses of 2.2% in 1999 as compared to
1998, and an increase of 24.3% in 1998 as compared to 1997. Research and
development expenses as a percentage of net revenues increased to 32.5% in 1999,
up from 29.4% in 1998, and up from 20.4% in 1997. The decrease in research and
development expenses in absolute dollars and as a percentage of net revenues
from 1998 to 1999 was primarily due to a winding down of the new R-1 Multitrack
Recorder and new System 5 digital console, both of which were under development
in 1998 and began shipment in the first and second quarter of 1999 respectively.
The increase in research and development expenses in absolute dollars and as a
percentage of net revenues from 1997 to 1998 was primarily due to substantial
investment in the development of next generation products.
Sales and Marketing
Sales and marketing expenses increased to $5.6 million in 1999 up from
$5.5 million in 1998 and $5.4 million in 1997, representing an increase in sales
and marketing expenses of 1.8% in 1999 as compared with 1998 and 1.8% in 1998 as
compared with 1997. Sales and marketing expenses also increased as a percentage
of net revenues to 40.6% in 1999 from 34.6% in 1998 and from 30.0% in 1997. In
1999, the Company increased it's spending for advertising, tradeshows, travel,
other professional fees, and product demonstrations to support the new R-1
recorder and System 5 digital console introductions. In late 1998, the Company
increased it's expenditures for advertising, trade shows and product
demonstrations to support the introduction of the R-1 Multitrack Recorder in
1999. This increase during 1998 was partially offset by allocating a management
fee for support services of the Company's subsidiary in Japan to general and
administrative expenses.
24
General and Administrative
General and administrative expenses were $1.3 million in 1999 down from
$2.3 million in 1998 and $2.0 million in 1997, representing a decrease in
general and administrative expenses of 43.5% in 1999 from 1998 and an increase
in general and administrative expenses of 15.0% in 1998 from 1997. General and
administrative expenses as a percent of net revenues decreased to 9.4% in 1999
from 1998 and increased to 14.7% in 1998 from 11.1% in 1997, respectively. The
decrease in general and administrative expenses in absolute dollars and as a
percentage of net revenues in 1999 is due to a decrease in the allowance for
doubtful accounts reserve due to the collection of previously reserved for
balances and a reduction in payroll expenses. The increase in general and
administrative expenses in absolute dollars and as a percentage of net revenues
in 1998 is due to increases in the allowance for doubtful accounts reserve to
cover inherent risk of carrying higher receivable balances and selling to new
customers.
Interest expense and other charges
Interest expense and other charges were $748,000 in 1999 up from $8,000 in
1998 and $209,000 in 1997, representing an increase in interest expense and
other charges of 9,250% in 1999 from 1998 and a decrease in interest expense and
other charges of 96% in 1998 from 1997. Interest expense and other charges as a
percent of net revenues increased to 5.4% in 1999 from 1998 and decreased to
0.005% in 1998 from 1.2% in 1997, respectively. Interest expense for 1999
included a charge of $613,000 related to the beneficial conversion feature
associated with the convertible promissory note issued in July 1999.
Provision / (benefit) for Income Taxes
The deferred tax assets valuation allowance at December 31, 1999 and 1998
is attributable to federal and state deferred tax assets. Management believes
that sufficient uncertainty exists with regard to the realizability of these
tax assets such that a full valuation allowance is necessary. These factors
include the lack of a significant history of consistent profits and the lack
of carryback capacity to realize these assets. Based on this absence of objec-
tive evidence, management is unable to assert that it is more likely than not
that the Company will generate sufficient taxable income to realize the
Company's net deferred tax assets.
Liquidity and Capital Resources
The Company has funded its operations primarily through cash flows from
operations, the private sale of equity securities, and the initial public
offering of Common Stock completed in September 1995. In March 1998, the Company
received proceeds of $1,950,000 from existing investors in exchange for the
issuance of 1,040,000 shares of $0.001 par value common stock at $1.875 per
share, the closing price of the Company's common stock on the NASDAQ on the date
the common stock purchase agreement was executed.
In January 1999, the Company received proceeds of $1,304,000 from new and
existing investors in exchange for the issuance of 1,320,446 shares of $0.001
par value common stock at $0.987 per share.
On April 23, 1999, the Company executed a promissory note with certain
new and existing investors for $2,000,000 due at April 23, 2001 that accrues
interest at 7.75% per annum. In October 1999, the Company converted the April
1999 promissory note of $2,000,000 principal and $67,000 accrued interest into
1,981,014 shares of common stock of the Company at $1.03 per share.
25
On July 30, 1999, the Company executed a promissory note with an
existing investor and other parties under which the Company was authorized to
draw up to $2,100,000 through October 31, 1999. The note accrues interest at
7.75% per annum with principal and accrued interest due at July 30, 2001. The
assets of the Company are pledged as collateral. The conversion feature of the
note allowed the holder to convert the note into common stock of the Company at
a rate of $0.75 per share, and was subject to shareholders' approval which was
obtained on October 22, 1999. At the date of issuance of the note, the quoted
market price of the Company's common stock was $0.969 per share, resulting in a
beneficial conversion feature of $613,000. The beneficial conversion was
recorded as a credit to equity and a charge to interest expense at the time of
shareholder approval.
On November 9, 1999, the Company entered into an agreement with existing
and new investors who, for $1,750,000, purchased 1,581,706 shares of common
stock of the Company at $1.1064 per share.
During 1999 the Company issued 72,558 shares upon exercise of stock
options and stock purchase rights of employees.
For the year ended December 31, 1999, cash, cash equivalents and
short-term investments decreased by $1.4 million to approximately $838,000. Also
during this period, working capital increased by $1.0 million to approximately
$6.9 million.
The Company's operating activities used cash of approximately $7.5 million
in 1999, $2.6 million in 1998 and $2.8 million in 1997, respectively. Cash used
in operating activities for 1999 was comprised primarily of a net loss, an
increase in inventory, an increase in accounts receivable, a decrease in
allowance for doubtful accounts, and a decrease in accrued liabilities, offset
partially by higher depreciation and amortization expense, an increase in
accounts payable, an increase in customer deposits and a decrease in prepaid
expenses and other assets. Cash used in operating activities for 1998 was
comprised primarily of a net loss, a decrease in customer deposits and an
increase in prepaid expenses and other assets, offset partially by higher
depreciation and amortization expense, a decrease in income tax receivable and a
decrease in accounts receivable.
The Company's investing activities used cash of $530,000 in 1999 and
provided cash of $452,000 in 1998. In 1998 the Company received $1.1 million in
proceeds from the sales of short term investments as compared to $601,000 in
proceeds received in 1999. In 1999 the Company purchased $1.1 million of
property and equipment as compared to $657,000 in 1998.
The Company's financing activities provided $7.2 million in 1999 and $1.9
million in 1998. Proceeds from the sale of common stock provided $3.1 million in
1999 and $1.9 million in 1998. Proceeds from the issuance of convertible
promissory notes provided $4.2 million in 1999.
Management intends to rely upon internally generated cashflows however
should there be a decline in revenues the Company would either have to cut
expenses or go to outside sources of financing. There can be no assurance that
outside sources of financing would be available to the Company.
26
Year 2000 Risks
We have addressed computer networks year 2000 compliance in our systems,
accounting software, computer hardware and existing products, and have
communicated with our significant third party vendors with respect to their
respective states of readiness. In order to assess year 2000 compliance of our
products and systems, we identified those systems critical to our operations and
the operations of our technologies and, based upon tests to such products and
systems, believed that all of our systems and technologies, to the extent
developed, were materially compliant. We expended approximately $5,000 to assess
and address the year 2000 problem. Although it is now past January 1, 2000, we
cannot assure you that we or our suppliers and customers have not been affected
in a manner that is not yet apparent. In addition, some computer programs that
were date sensitive to the year 2000 may not have been programmed to process the
Year 2000 as a leap year, and any negative consequential effects remain unknown.
As a result, we will continue to monitor our Year 2000 compliance and the year
2000 compliance of our suppliers and customers.
Impact of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which is required to be adopted in years
beginning after June 15, 1999. The adoption of SFAS 133 is not expected to
materially impact the Company's results of operations, financial position or
cash flows.
The American Institute of Certified Public Accountants issued Statement of
Position 98-1, "Accounting For the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"), on March 4, 1998. SOP 98-1 provides
guidelines for accounting for costs of computer software developed for internal
use. SOP 98-1 is effective for financial statements for fiscal years beginning
after December 15, 1998. The adoption of SOP 98-1 is not expected to materially
impact the Company's results of operations, financial position or cash flow
Factors Affecting Future Operating Results
Historically, the Company has derived virtually all of its revenues from
sales of its digitally controlled audio mixing console system, which system is
based upon its hardware platform. The Company believes that sales of this
system, along with enhancements thereof, and the R-1 recorder and new System 5
digital console will continue to constitute a significant portion of the
Company's revenues. It is expected for the foreseeable future that a greater
portion of the Company's revenue will come from the new System 5 digital
console. Accordingly, any factor adversely affecting the Company's base system,
whether technical, competitive or otherwise, could have a material adverse
effect on the Company's business and results of operations.
The Company has expended and will continue to expend substantial funds to
launch its new System 5 digital console in the first quarter of fiscal 2000. The
Company's ability to fund operations through December 31, 2000 is dependent upon
achievement of its operating plan. If the Company did not attain its operating
plan it would obtain additional financing or cut expenses. The Company believes
that additional debt or equity financing will be available from existing
investors and others. However, there can be no assurance as to the terms and
conditions of any such financing and no certainty that funds would be available
when needed. The inability to obtain additional financing, if needed, would be
likely to have a material adverse effect on the Company. To the extent that any
future financing involves the sale of the Company's equity securities, the
Company's then existing shareholders could be substantially diluted.
27
A limited number of the Company's system sales typically account for a
substantial percentage of the Company's quarterly revenue because of the
relatively high average sales price of such systems. Moreover, the Company's
expense levels are based in part on its expectations of future revenue.
Therefore, if revenue is below expectations, the Company's operating results are
likely to be adversely affected. In addition, the timing of revenue is
influenced by a number of other factors, including the timing of individual
orders and shipments, industry trade shows, seasonal customer buying patterns,
changes in product development and sales and marketing expenditures, custom
financing arrangements, production limitations and international sales activity.
Because the Company's operating expenses are based on anticipated revenue levels
and a high percentage of the Company's expenses are relatively fixed in the
short term, variations in the timing of recognition of revenue could cause
significant fluctuations in operating results from quarter to quarter and may
result in unanticipated quarterly earnings shortfalls or losses.
The markets for the Company's system are characterized by changing
technologies and new product introductions. The Company's future success will
depend in part upon its continued ability to enhance its base system with
features including new software and hardware add-ons and to develop or acquire
and introduce new products and features which meet new market demands and
changing customer requirements on a timely basis. The Company is currently
designing and developing new products, primarily in the areas of recording,
editing and mixing functions of sound production as well as digital audio
processing and networking systems. In addition, there can be no assurance that
products or technologies developed by others will not render the Company's
products or technologies non-competitive or obsolete. See "Business."
Historically, the Company's primary market success has been in the music
segment of the professional audio market. In order for the Company to grow, the
Company believes that it must continue to gain market share in the music market
segment, as well as in its other targeted markets. There can be no
assurance that the Company will be able to compete favorably in all markets.
segments. The Company's inability to compete favorably could have a material
adverse effect on its business and results of operations. The markets for the
Company's products are intensely competitive and characterized by significant
price competition. The Company believes that its ability to compete depends on
elements both within and outside its control, including the success and timing
of new product development and introduction by the Company and its competitors,
product performance and price, distribution, availability of lease or other
financing alternatives, resale of used systems and customer support. See
"Business--Competition".
Currently, the Company uses many sole or limited source suppliers, certain
of which are critical to the integrated circuits included in the Company's base
system. Major delays or terminations in supplies of such components could have a
significant adverse effect on the Company's timely shipment of its products,
which in turn would adversely affect the Company's business and results of
operations. The Company also relies on single vendors to manufacture major
subassemblies for its products. Any extended interruption in the future supply
or increase in the cost of subassemblies manufactured by its primary or other
third party vendors could have a material adverse effect on the Company's
business and results of operations. See "Business--Manufacturing and Suppliers".
In addition, as different electrical, radiation or other standards
applicable to the Company's products are adopted in countries, including the
United States, or groups of countries in which the Company sells its products,
the failure of the Company to modify its products, if necessary, to comply with
such standards would likely have an adverse effect on the Company's business and
results of operations. See "Business--Sales and Distribution".
28
The Company generally relies on a combination of trade secret, copyright
law and trademark law, contracts and technical measures to establish and protect
its proprietary rights in its products and technologies. However, the Company
believes that such measures provide only limited protection of its proprietary
information, and there is no assurance that such measures will be adequate to
prevent misappropriation. In addition, significant and protracted litigation may
be necessary to protect the Company's intellectual property rights, to determine
the scope of the proprietary rights of others or to defend against claims of
infringement. There can be no assurance that third-party claims alleging
infringement will not be asserted against the Company in the future. Any such
claims could have a material adverse effect on the Company's business and
results of operations. See "Business--Proprietary Rights".
The Company's success depends, in part, on its ability to retain key
management and technical employees and its continued ability to attract and
retain highly skilled personnel. In addition, the Company's ability to manage
any growth will require it to continue to improve and expand its management,
operational and financial systems and controls. If the Company's management is
unable to manage growth effectively, its business and results of operations will
be adversely affected.
As a result of these and other factors, the Company has experienced
significant quarterly fluctuations in operating results and anticipates that
these fluctuations will continue in future periods. There can be no assurance
that the Company will be successful in maintaining or improving its
profitability or avoiding losses in any future period. Further, it is likely
that in some future period the Company's net revenues or operating results will
be below the expectations of public market securities analysts and investors. In
such event, the price of the Company's Common Stock would likely be materially
adversely affected. See "Factors Affecting Future Operating Results."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1998, the Company's investment portfolio consisted of
money market funds. The Company does not invest for speculative or trading
purposes. The Company's primary objective with its investment portfolio is to
invest available cash while preserving principal and meeting liquidity needs. In
accordance with the Company's investment policy, the Company places investments
with high credit quality institutions and limits the amount of credit exposure
to any one issuer. Interest income for the year ended December 31, 1999 was
approximately $47,000. A decrease in interest rates could result in lower
interest income earned from its money market and other cash deposit investments.
However, based on the investment portfolio contents, the Company believes that
if a significant change in interest rates were to occur, it would not have a
material effect on the Company's results of operations, financial condition, or
cash flows, although there can be no assurance of this.
Sales through the Company's Japanese subsidiary are denominated in
Japanese Yen. The Company's receivables denominated in Yen are subject to
foreign exchange risk. The Company does not enter into hedging arrangements to
mitigate the foreign currency risk with respect to such arrangements. An adverse
change in the foreign exchange rate would have an effect on the price the
Company ultimately sells its consoles for in Japan and could result in foreign
currency transaction losses. An adverse change of 10% in the Yen exchange rate
would result in a decline in income before taxes of approximately $77,000.
29
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Report of Independent Accountants............................... 31
Report of Independent Auditors.................................. 32
Consolidated Balance Sheets as of December 31, 1999 and 1998 ... 33
Consolidated Statements of Operations for the years ended December
31, 1999, 1998, and 1997 ....................................... 34
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997................................ 35
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997......................................... 36
Notes to Consolidated Financial Statements...................... 37
30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Euphonix Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Euphonix, Inc. and its subsidiaries at December 31, 1999 and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 1, 2000
31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Euphonix, Inc.
We have audited the accompanying consolidated balance sheet of Euphonix, Inc. as
of December 31, 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the two years in the period
ended December 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted in the United
States auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Euphonix, Inc. at December 31, 1998, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 4, 1999
32
EUPHONIX, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
December 31,
------------------
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 838 $ 1,637
Short-term investments................................. -- 601
Accounts receivable, (net of allowance for doubtful
accounts of $112 in 1999 and $403 in 1998) 2,354 1,543
Inventories............................................ 6,964 5,559
Prepaid expenses and other current assets.............. 174 238
-------- ---------
Total current assets 10,330 9,578
Property and equipment, net............................ 1,881 1,360
Deposits and other assets.............................. 89 93
-------- ---------
Total assets.......................................... $12,300 $ 11,031
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 2,007 $ 1,636
Accrued liabilities.................................... 1,090 1,737
Deferred revenues...................................... -- 185
Customer deposits...................................... 240 98
-------- ---------
Total current liabilities 3,337 3,656
Convertible note payable................................ 2,166 --
-------- ---------
Total liabilities..................................... 5,503 3,656
-------- ---------
Commitments and contingencies (Note 3)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.001 par value: 2,000,000 authorized
shares, none issued and outstanding.................... -- --
Common stock, $0.001 par value: 20,000,000 authorized
shares, 11,591,000 and 6,635,000 shares issued and
outstanding in 1999 and 1998, respectively............. 12 7
Additional paid-in capital.............................. 21,402 15,673
Accumulated other comprehensive income.................. 42 75
Accumulated deficit..................................... (14,659) (8,330)
Deferred compensation................................... -- (50)
-------- ---------
Total shareholders' equity.............................. 6,797 7,375
-------- ---------
Total liabilities and shareholders' equity............. $12,300 $11,031
======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
33
EUPHONIX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
---- ---- ----
Net revenues.........................$ 13,806 $15,614 $18,093
Cost of revenues..................... 8,109 8,600 9,234
--------- --------- ---------
Gross margin......................... 5,697 7,014 8,859
--------- --------- ---------
Operating expenses:
Research and development......... 4,485 4,587 3,683
Sales and marketing.............. 5,588 5,450 5,443
General and administrative....... 1,299 2,283 2,037
---------- --------- ---------
Total operating expenses............ 11,372 12,320 11,163
---------- --------- ---------
Operating loss..................... (5,675) (5,306) (2,304)
Interest and other income........... 94 74 359
Interest expense and other charges (748) (8) (209)
---------- --------- ----------
Loss before income taxes ........... (6,329) (5,240) (2,154)
Provision (benefit) for income taxes ---- ---- (222)
---------- --------- ----------
Net loss............................ $(6,329) $(5,240) $(1,932)
============ ============ ============
Basic and diluted net loss per share $ (0.74) $ (0.82) $ (0.35)
============ ============ ============
Shares used in computing
basic and diluted net loss..... 8,541 6,404 5,576
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
34
EUPHONIX, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(in thousands)
Additional
Common Stock Paid-In Deferred
Shares Amount Capital Compensation
- --------------------------------------------------------------------------------
Balance at January 1, 1997 5,565 $ 6 $ 13,719 $ (230)
Exercise of stock options 25 --- 4 ---
Amortization of deferred compensation --- --- --- 90
Net loss --- --- --- ---
Foreign currency translation adjustment --- --- --- ---
Comprehensive loss
------------------------------------------
Balance at December 31, 1997 5,590 6 13,723 (140)
Sale of common stock 1,040 1 1,949 ---
Exercise of stock options 5 --- 1 ---
Amortization of deferred compensation --- --- --- 90
Net loss --- --- --- ---
Foreign currency translation adjustment --- --- --- ---
Comprehensive loss
------------------------------------------
Balance at December 31, 1998 6,635 7 15,673 (50)
Beneficial conversion on issuance of
convertible note payable --- --- 613 ---
Sale of common stock 2,903 3 3,051 ---
Conversion of note payable 1,981 2 2,065 ---
Exercise of stock options 72 --- --- ---
Amortization of deferred compensation --- --- --- 50
Net loss --- --- --- ---
Foreign currency translation adjustment --- --- --- ---
Comprehensive loss
=============================================
Balance at December 31, 1999 11,591 $ 12 $ 21,402 $ -
=============================================
(continued)
Other
Comprehensive Accumulated
Income (Loss) Deficit Total
------------------------------------------
Balance at January 1, 1997 $ --- $ (1,158) $ 12,337
Exercise of stock options --- --- 4
Amortization of deferred compensation --- --- 90
Net loss --- (1,932)
Foreign currency translation adjustment (12) ---
Comprehensive loss (1,944)
-----------------------------------------
Balance at December 31, 1997 (12) (3,090) 10,487
Sale of common stock --- --- 1,950
Exercise of stock options --- --- 1
Amortization of deferred compensation --- --- 90
Net loss --- (5,240)
Foreign currency translation adjustment 87 ---
Comprehensive loss (5,153)
-----------------------------------------
Balance at December 31, 1998 75 (8,330) 7,375
Beneficial conversion on issuance of
convertible note payable --- --- 613
Sale of common stock --- --- 3,054
Conversion of note payable --- --- 2,067
Exercise of stock options --- --- ---
Amortization of deferred compensation --- --- 50
Net loss --- (6,329)
Foreign currency translation adjustment (33) ---
Comprehensive loss (6,362)
=============================================
Balance at December 31, 1999 $ 42 $ (14,659) $ 6,797
=============================================
The accompanying notes are an integral part of these consolidated
financial statements.
35
EUPHONIX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net loss ($6,329) ($5,240) ($1,932)
--------------------------------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 625 595 422
Deferred income taxes --- 81 322
Loss on disposal of fixed assets --- 161 10
Allowance for doubtful accounts (291) 180 103
Beneficial conversion on convertible
note payable 613 --- ---
Deferred compensation amortization 50 90 90
Changes in operating assets and liabilities:
Accounts Receivable (520) 187 (387)
Inventory (1,405) (248) (636)
Prepaid expenses and other assets 53 (50) 167
Income tax --- 544 (544)
Accounts payable 371 712 188
Accrued liabilities (799) 482 (415)
Customer deposits 142 (140) (247)
---------------------------------------
Total adjustments (1,161) 2,594 (927)
----------------------------------------
Net cash used in operating activities (7,490) (2,646) (2,859)
----------------------------------------
Cash flows from investing activities:
Proceeds from sales of available-for-sale
securities 601 1,109 4,926
Purchases of available-for-sale securities --- --- (1,045)
Purchase of property and equipment, net
of retirements (1,131) (657) (574)
-----------------------------------------
Net cash provided by (used in) investing
activities (530) 452 3,307
-----------------------------------------
Cash flows from financing activities:
Proceeds from issuance of convertible notes 4,167 --- ---
Proceeds from sale of common stock 3,054 1,951 4
Proceeds from short-term borrowings --- 500 287
Repayment of short-term borrowings --- (500) (287)
------------------------------------------
Net cash provided by (used in) financing
activities 7,221 1,951 4
------------------------------------------
Net increase (decrease) in cash and cash
equivalents (799) (243) 452
Cash and cash equivalents at beginning
of year 1,637 1,880 1,428
-------------------------------------------
Cash and cash equivalents at end of year $ 838 $ 1,637 $1,880
===========================================
Supplemental schedules of noncash investing
and financing activities:
Conversion of notes payable into common
stock $2,000 $ --- ---
============ =========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
36
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Summary of Significant Accounting Policies
The Company
Euphonix, Inc. (the "Company") was incorporated on July 6, 1988 in the
state of California. Euphonix develops, manufactures and supports networked
digital audio systems for music, film & TV post-production, broadcast, sound
reinforcement and multimedia applications.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated on consolidation. The preparation of the
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Foreign Currency Translation
The functional currency for the Company's Japanese subsidiary is the
Yen. Assets and liabilities are translated at exchange rates prevailing
at the balance sheet dates. Revenues, costs and expenses are translated into
United States dollars at average exchange rates for the period. Gains and losses
resulting from translation are accumulated as a component of shareholders'
equity.
Foreign Currency Risk
The Company does not enter into hedging arrangements to mitigate
the foreign currency risk with respect to foreign currency denominated assets
and liabilities. An adverse change in the foreign exchange rate could
result in foreign currency transaction losses that could materially affect the
Company's operations, financial position and cash flows. Foreign exchange gains
were $48,000, $14,000 and $6,000 for the years ended December 31, 1999,
1998, and 1997 respectively.
Cash, Cash Equivalents, and Short-Term Investments
Cash equivalents consist of short-term financial instruments that are
readily convertible into cash with original maturities of less then ninety days
from the date of acquisition. The carrying amount reported in the balance sheets
for cash and cash equivalents approximates fair value. The fair values for
short-term investments are based on quoted market prices.
37
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company accounts for its investments in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." At December 31, 1998,
the Company has categorized its short term investments, which are substantially
money market funds, that invest in government obligations and corporate
securities, as available-for-sale, and has included them in short-term
investments. Available-for-sale securities are carried at fair value with
unrealized gains and losses, reported in a separate component of shareholders'
equity. Unrealized holding gains and losses at December 31, 1998 were not
material. Amortization is included in investment income. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
interest income.
Inventories
Inventories are stated at the lower of standard cost (which approximates
first-in, first-out) or market (net realizable value).
Property and Equipment, net
Property and equipment are carried at cost. The Company provides for
depreciation by charges to expense which are sufficient to write off the cost of
the assets over their estimated useful lives on the straight-line basis.
Revenue Recognition
The Company generally recognizes revenue upon shipment. A provision for
the estimated cost of installation and warranty is recorded at the time revenue
is recognized.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivables. The Company's investments consist of certificates of
deposits and money market funds, which invest in government obligations and
corporate securities. The Company is exposed to credit risks in the event of
default by the financial institutions or issuers of investments to the extent of
amounts recorded on the balance sheet. The Company manufactures and sells its
products to end-users, sales representatives, distributors and leasing companies
in the music, post production (film and television), and broadcast industries.
The Company performs ongoing credit evaluations of its customers' financial
condition and prior to shipping the product, generally requires a substantial
deposit anywhere from $10,000 up to 50% of the mixing console's value and a firm
purchase order. From time to time and depending on the financial condition of
the customer, the Company may require payment of a substantial portion of the
purchase price, an irrevocable letter of credit, or a purchase order from a
third-party lessor. The Company is exposed to credit risks in the event of
insolvency by its customers to the extent of amounts recorded on the balance
sheet. The Company maintains reserves for potential credit losses, and such
losses have historically been within management's expectations.
39
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warranty Accrual
The Company provides a one-year parts and labor warranty on its
products. The Company accrues for estimated warranty costs upon shipment.
Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of the Statement had no impact on the Company's net loss or
shareholders' equity. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
was approximately $457,000, $504,000 and $435,000 in 1999, 1998 and 1997
respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and complies with the disclosure provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Under APB No. 25, compensation expense is
recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to acquire
the stock. The compensation expense is recognized over the option vesting
period.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and the Emerging Issues Task
Force in Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or In Conjunction with Selling,
Goods or Services."
Net loss per share
Basic and diluted net loss per share is computed by dividing the net loss
available to holders of Common Stock for the period by the weighted average
number of shares of common stock outstanding during the period. The calcula-
tion of diluted net loss per share excludes potential shares of common stock
if their effect is anti-dilutive. Potential common stock consists of shares of
common stock issuable upon the exercise of stock options and shares issuable
upon the conversion of the convertible note payable.
39
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth potential shares of Common Stock that are
not included in the diluted net loss per share calculation above because to do
so would be anti-dilutive for the period indicated (in thousands):
December 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
Convertible note payable 2,888 --- ---
Common stock options 2,558 1,800 1,166
-------- --------- ---------
5,446 1,800 1,166
======== ========= =========
Segment Information
The Company follows the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No.131"). The Company identifies its operating segments
based on business activities, management responsibility and geographical
location. During the periods presented the Company operated in a single business
segment.
Reclassifications
The Company has reclassified the presentation of certain 1998 balance
sheet and 1998 and 1997 statement of cash flows information to conform to
current year presentation. The reclassifications had no effect on the previous-
ly reported financial position or results of operations.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is required to be
adopted in years beginning after June 15, 1999. The adoption of SFAS 133 is
not expected to materially impact the Company's results of operations,
financial position or cash flows.
The American Institute of Certified Public Accountants issued Statement
of Position 98-1, "Accounting For the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"), on March 4, 1998. SOP 98-1 provides
guidelines for accounting for costs of computer software developed for
internal use. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 is not expected to
materially impact the Company's results of operations, financial position or
cash flow.
In December 1999, the SEC staff issued Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition." The SEC staff addresses several
issues in SAB No. 101, including the timing for recognizing revenue derived
from selling arrangements that involve contractual customer acceptance
provisions and installation of the product occurs after shipment and
transfer of title. The Company's existing revenue recognition policy is to
recognize revenue at the time the customer takes title to the product,
generally at the time of shipment, because the Company has routinely met its
installation obligations and obtained customer acceptance. Applying the
requirements of SAB No. 101 to the present selling arrangements used by the
40
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company for the sale of equipment may require a change in the Company's
accounting policy for revenue recognition and the deferral of the recognition
of revenue from such equipment sales until installation is complete and
accepted by the customer. The effect of such a change, if any, must be
recognized as a cumulative effect of a change in accounting no later than the
Company's second quarter of its fiscal year ending on December 31, 2000.
2. Balance Sheet Components (in thousands):
(a) Inventories:
December 31,
-----------------------------------
1999 1998
---- ----
Raw materials.............................. $ 2,878 $ 2,112
Work-in-process............................ 1,494 1,391
Finished goods............................. 2,592 2,056
--------------- ---------------
$ 6,964 $ 5,559
=============== ===============
(b) Property and equipment:
Furniture and fixtures.....................$ 248 $ 225
Computer equipment and purchased software.. 2,226 1,849
Leasehold improvements..................... 326 321
Demonstration equipment.................... 1,059 333
-------------- ---------------
3,859 2,728
Accumulated depreciation................... (1,978) (1,368)
-------------- ---------------
Property and equipment, net................ $ 1,881 $ 1,360
============== ===============
Depreciation expense was $610,000, $536,000, and $359,000 for the three
years ended December 31, 1999, 1998 and 1997. The capital cost of assets
acquired under capital leases was $170,000 for the years ended December 31,
1999, 1998, and 1997. The accumulated depreciation for the assets acquired uner
capital lease was $168,000, $138,000 and $112,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
(c) Accrued liabilities:
December 31,
----------------------------------
1999 1998
---- ----
Accrued compensation and related...... $ 429 $ 549
Accrued warranty...................... 244 440
Accrued commissions................... 83 126
Sales tax payable..................... 91 188
Other................................. 243 434
--------------- ---------------
$ 1,090 $ 1,737
=============== ===============
41
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(d) Convertible long-term note payable:
On July 30, 1999, the Company executed a promissory note with an
existing investor and other parties under which the Company was
authorized to draw up to $2,100,000 through October 31, 1999. The note
accrues interest at 7.75% per annum with principal and accrued
interest due at July 30, 2001. The assets of the Company are pledged
as collateral. The conversion feature of the note allows the
holder to convert the note into common stock of the Company at a rate
of $0.75 per share, and was subject to shareholders' approval which
was obtained on October 22, 1999. At the date of issuance of the
note, the quoted market price of the stock was $0.969 per share,
resulting in a beneficial conversion feature in the amount of
$613,000. The beneficial conversion was recorded as a credit to
equity and a charge to interest expense at the time of shareholder
approval.
3. Commitments and contingencies
Contingencies
From time to time, the Company may have certain contingent liabilities
that arise in the ordinary course of its business activities. The Company
accrues contingent liabilities when it is probable that future expenditures will
be made and such expenditures can be reasonably estimated. In the opinion of
management, there are no pending claims of which the outcome is expected to
result in a material adverse effect in the financial position or results of
operations of the Company.
Lease Commitments
The Company leases facilities for its headquarters in Palo Alto,
California, its subsidiary in Woodinville, Washington, and its sales offices in
Los Angeles, Nashville, New York, London and Tokyo. These operating lease
agreements expire at various dates through August 2004, and all leases contain
renewal options. Certain leases contain provisions for rental adjustments and
require the Company to pay property taxes, insurance, and normal maintenance
costs. In September 1998, the Company sub-leased portions of its facilities in
Palo Alto, California and New York.
The aggregate future minimum lease payments under operating leases are as
follows (in thousands):
Net
Facilities Subleases Commitments
2000.... $ 1,002 $ 286 $ 716
2001.... 939 72 867
2002.... 966 ---- 966
2003.... 960 ---- 960
Thereafter 704 ---- 704
-------------- --------------- ------------
Total $ 4,571 $ 358 $ 4,213
============== =============== ============
42
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total rent expense was approximately $967,000, $744,000 and $652,000 in 1999,
1998 and 1997, respectively.
4. Shareholders' Equity
Preferred Stock
The Company is authorized to issue 2,000,000 shares of undesignated
preferred stock. Preferred stock may be issued from time to time in one or more
series. The Board of Directors is authorized to determine the rights,
preferences, privileges, and restrictions granted to and imposed upon any wholly
unissued series of preferred stock and to fix the number of shares of any series
of preferred stock and the designation of any such series without any vote or
action by the Company's shareholders.
Common Stock
In January 1999, the Company received proceeds of $1,304,000 from new
and existing investors in exchange for the issuance of 1,320,000 shares of
$0.001 par value common stock. On April 23, 1999, the Company executed a
convertible promissory note with certain new and existing investors for
$2,000,000, which was due on April 23, 2001, accrued interest at 7.75% per
annum, and was convertible at the rate of $1.03 per share. In October 1999,
the holders of the note converted the $2,000,000 principal amount and
$67,000 accrued interest into 1,981,000 shares of common stock. On Novem-
ber 9, 1999, the Company entered into an agreement with existing and
new investors who purchased 1,583,000 shares of common stock of the
Company at $1.1064 per share for aggregate proceeds of $1,750,000. During
1999 the Company issued 72,000 shares upon exercise of stock options and stock
purchase rights of employees.
1990 Stock Plan
The 1990 Stock Plan (the "1990 Plan") provides for the grant of
incentive stock options to employees of the Company and nonstatutory stock
options and stock purchase rights to employees of the Company. The Company has
authorized 2,042,281 shares of common stock for issuance under the 1990 Plan. At
December 31, 1999, 7,652 stock option shares were available for grant under the
Plan. Options issued under the 1990 Plan are exercisable upon vesting, which is
generally four to five years.
1995 Performance Based Stock Option Plan
The 1995 Performance Based Stock Option Plan (the "1995 Plan") provides
for the grant of incentive stock options and nonstatutory options to employees
of the Company. A total of 50,000 shares of common stock has been reserved for
issuance under the 1995 Plan. At December 31, 1999, 24,750 stock option shares
were available to grant under the Plan. Prior to 1997, options granted under the
1995 Plan during 1995 vest at the rate of one-third of the shares one year
following the vesting commencement date, with one thirty-sixth of the shares
vesting each month thereafter. All options granted under the 1995 Plan during
1997 shall vest on December 11, 2000; provided, however, that if any time prior
to December 11, 2000 the optionee meets the performance targets set for such
43
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
optionee by the Board of Directors for fiscal year 1998, 1999 or 2000, then all
of the shares subject to the option shall vest upon the date such targets are
met.
1995 New Director Option Plan
The 1995 New Director Option Plan (the "Directors' Plan") authorizes the
Company to issue nonstatutory stock options to purchase up to 50,000 shares of
the Company's common stock at an exercise price equal to the fair market value
of the common stock on the grant date. At December 31, 1999, 28,500 stock option
shares were available to grant under the Plan. The Directors' Plan provides that
each person who is an outside director on the effective date of the Directors'
Plan and each outside director who subsequently becomes a member of the Board of
Directors shall be automatically granted an option to purchase 5,000 shares.
Additionally, each outside director shall be automatically granted an option to
purchase 5,000 shares on the date of each annual shareholders' meeting provided
he is an outside director as of the date of such meeting and is reelected to the
Board of Directors at such meeting. Options under the plan are fully vested and
exercisable as of the date of grant.
1997 Nonstatutory Stock Option Plan
The 1997 Nonstatutory Stock Plan (the "1997 Plan") authorizes the
Company to issue nonstatutory stock options to employees of the Company. A total
of 750,000 shares of common stock have been reserved for issuance under the 1997
Plan. At December 31, 1999, 11,500 stock option shares were available to grant
under the Plan. Prior to 1998, options granted under the 1997 Plan during 1997
vest on December 11, 2000; provided, however, that if any time prior to December
11, 2000 the optionee meets the performance targets set for such optionee by the
Board of Directors for fiscal year 1998, 1999, or 2000, then all of the shares
subject to the option shall vest upon the date such targets are met.
1999 Stock Plan
The 1999 Stock Plan (the "1999 Plan") provides for the grant of
incentive stock options to employees of the Company and nonstatutory stock
options and stock purchase rights and common stock equivalents to employees of
the Company. The Company has authorized 750,000 shares of common stock for
issuance under the 1999 Plan. At December 31, 1999, 143,183 stock option shares
were available for grant under the Plan. Options issued under the 1999 Plan are
exercisable upon vesting, which is generally four years.
44
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the Company's stock option activity for all of its stock option
plans, is as follows (in thousands except per share amounts):
Outstanding
Options
---------------------------------
Shares Number of
Available Shares
For Grant Outstanding Price per share
-----------------------------------------------
Balance at January 1, 1997 722 654 $0.10 - $5.375
Options authorized 750 --- ---
Granted (731) 731 $1.125 - $3.00
Exercised --- (25) $0.10 - $1.25
Canceled 194 (194) $0.10 - $5.375
-----------------------------
Balance at December 31, 1997 935 1,166 $0.10 - $5.375
Granted (654) 654 $0.9375 - $2.50
Exercised --- (5) $0.15 - $0.20
Canceled 15 (15) $0.15 - $5.375
-----------------------------
Balance at December 31, 1998 296 1,800 $0.10 - $5.375
Authorized 750 --- ---
Granted (938) 938 $0.001 - $1.25
Exercised --- (72) $0.001 - $0.20
Canceled 108 (108) $0.20 - $5.375
------------------------------
Balance at December 31, 1999 216 2,558 $0.001 - $5.375
=============================
(continued)
---------------------------------
Weighted
Average
Exercise
Price
-----------------------------------------------
Balance at January 1, 1997 $4.08
Options authorized ---
Granted 1.59
Exercised 0.16
Canceled 3.06
Balance at December 31, 1997 2.77
Granted 1.27
Exercised 0.18
Canceled 2.13
Balance at December 31, 1998 2.25
Authorized ---
Granted 0.93
Exercised 0.003
Canceled 1.88
Balance at December 31, 1999 $2.77
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding
-----------------------------------
Weighted
Number of Average Weighted
Range of Shares Remaining Average
Exercise Outstanding Contractual Exercise
Prices (in thousands) Life (in years) Price
------------------ ----------------- -----------
$0.10-$0.15 13 2.3 $0.14
$0.16-$1.25 1,389 9.1 1.01
$1.26-$2.00 732 7.9 1.65
$2.01-$4.00 74 5.5 3.00
$4.01-$5.38 350 5.8 5.37
------------------
Total 2,558 8.2 $1.84
==================
(continued)
Options Exercisable
----------------------------------
Number of Weighted
Range of Options Average
Exercise Exercisable Exercise
Prices (in thousands) Price
------------------ ----------------
$0.10-$0.15 13 $0.14
$0.16-$1.25 241 0.99
$1.26-$2.00 339 1.77
$2.01-$4.00 69 3.00
$4.01-$5.38 304 5.37
------------------
Total 966 $2.77
==================
There were 528,000 and 244,000 outstanding options that were exercisable at
December 31, 1998 and 1997, respectively.
45
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma information regarding net loss and net loss per share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method. The fair value for options
granted prior to the initial public offering was estimated at the date of grant
using the minimum value method. The fair value for options granted subsequent to
the initial public offering was estimated at the date of grant using the
Black-Scholes option-pricing model. The minimum value method differs from the
Black-Scholes option-pricing model because it does not consider the effect of
expected volatility. The following weighted average assumptions were used for
1999, 1998, and 1997, respectively: risk-free interest rates of 6.44%, 5.59%,
and 6.27%; a dividend yield of 0%; volatility factors of the expected market
price of the Company's common stock of 78% in 1999, 90.0 % in 1998 and 80.0% in
1997; and a weighted average expected life of the option of 6 years.
The weighted-average grant-date fair value of options granted during the
years ended December 31, 1999, 1998 and 1997 were $0.93, $0.94 and $1.18,
respectively. The effects on pro forma disclosures of applying FAS 123 are not
likely to be representative of the effects on pro forma disclosures in future
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(in thousands, except per share amounts)
Pro forma net loss.................$ (7,213) $ (6,220) $ (2,501)
Pro forma net loss per share:
Basic and diluted.................$ (0.84) $ (0.97) $ (0.45)
5. Income Taxes
No provision for federal or state income taxes was recorded for the
years ended December 31, 1999 and 1998 as the Company incurred net operating
losses during the period. The provision for taxes in 1997 represents current
federal taxes.
46
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets consist of the following (in thousands):
December 31,
-------------------------------
1999 1998
Deferred tax assets:
Net operating loss carryforwards............... $ 4,185 $ 2,200
Credit carryforwards........................... 862 500
Capitalized research and development........... 514 400
Reserves and other............................. 737 500
-------------- ------------
Deferred tax assets............................. 6,298 3,600
Deferred tax liabilities:
Depreciation................................... --- (200)
-------------- ------------
Net deferred tax assets......................... 6,298 3,400
Valuation allowance............................. (6,298) (3,400)
-------------- ------------
Total........................................... $ ---- $ ----
============== ============
The deferred tax assets valuation allowance at December 31, 1999 and 1998
is attributable to federal and state deferred tax assets. Management believes
that sufficient uncertainty exists with regard to the realizability of these
tax assets such that a full valuation allowance is necessary. These factors
include the lack of significant history of consistent profits and the lack of
carryback capacity to realize these assets. Based on this absence of objective
evidence, management is unable to assert that it is more likely than not that
the Company will generate sufficient taxable income to realize the Company's
net deferred tax assets.
Reconciliation of the statutory federal income tax to the Company's
effective tax:
December 31,
------------------------
1999 1998 1997
---- ---- ----
Tax at federal statutory rate (34)% (34)% (34)%
State taxes (6)% (6)% ---
Research and development credits --- (10)% ---
Beneficial conversion of note payable 3 % --- ---
Other --- (4)% ---
Non recognition of tax benefit 37% 54% 24%
------ ------ -----
0% 0% (10)%
====== ====== =====
As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $11,947,000. The Company also had federal
research and development tax credit carryforwards of approximately $435,000. The
net operating loss and credit carryforwards will expire at various dates
beginning on 2005 through 2018, if not utilized.
47
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
6. Segment Disclosures
The Company operates in a single industry segment, designing, developing,
manufacturing and marketing of digitally controlled audio mixing consoles for
use in the production of audio content for the music, post production (film and
television) and broadcast industries. Net revenue from the sale of digitally
controlled audio mixing consoles accounted for 75%, 82%, and 78% of consolidated
revenues for the years ended December 31, 1999, 1998 and 1997, respectively.
These revenues were generated primarily from the CS3000 (which accounted for
51%, 93% and 45% of mixing console revenue for the years ended December 31,
1999, 1998 and 1997), and the System 5 digital console (which accounted for 47%
of mixing console revenue for 1999), and CS2000 (which accounted for 2%, 7% and
55% of mixing console revenue for the years ended December 31, 1999, 1998 and
1997). The Company also derives revenues from the sale of it's new R-1
multitrack recorder which accounted for 10% of consolidated revenues for the
year ended December 31,1999, and it's discontinued PC-based digital audio
workstations, which accounted for 1%, 4% and 7% of consolidated revenues for the
years ended December 31, 1999, 1998 and 1997, respectively. The remainder of the
Company's revenues for the years ended December 31, 1999, 1998 and 1997 were
derived from the sale of accessories to the consoles.
The Company markets its products in the United States and in foreign
countries through its sales personnel, sales representatives and distributors.
The Company's geographic information is as follows:
Revenues (in thousands):
- -----------------------
Year ended December 31,
--------------------------------------------------------
1999 1998 1997
---- ---- ----
United States $ 9,196 67 % $ 8,903 57 % $ 11,009 61 %
Export:
Europe 1,739 13 1,025 7 2,021 11
Japan 1,594 11 3,361 21 1,817 10
Other international 1,277 9 2,325 15 3,246 18
--------- ----- ------- ---- -------- -----
Total $ 13,806 100% $ 15,614 100% $ 18,093 100%
========== ===== ======== ==== ======== =====
Long-lived assets (in thousands):
- ---------------------------------
December 31,
------------------------------
1999 1998
---- ----
United States $ 1,772 $ 1,342
Europe 163 71
Japan 35 40
---------- ----------
Total $ 1,970 $ 1,453
=========== ==========
48
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Concentration of Other Risks
Products
The Company has derived substantially all of its revenues to date from
sales of its digitally controlled audio mixing console system. The Company
expects that its ability to maintain or expand its current levels of revenues
and profits, if any, in the future will depend upon, among other things, its
success in selling its new System 5 digital console and R-1 multitrack recorder,
enhancing its new System 5 digital system with features including new software
and hardware add-ons and developing and marketing new products and features
which meet new market demands and changing customer requirements on a timely
basis.
Markets
The markets for the Company's products are characterized by rapidly
changing technologies, significant price competition and frequent new product
introductions. The Company believes that it must continue to gain market share
in all markets. If, in the future, there should be a significant downturn in
any of the markets, the Company's business could be materially and adversely
affected.
Inventories
The Company makes inventory provisions for potentially excess and
obsolete inventory based on backlog and forecasted demand. Actual demand will
inevitably differ from such anticipated demand, and such differences may have a
material effect on the financial statements.
Customers
The Company markets and sells its products primarily to a broad base of
customers comprised of end-users and sales representatives. No one end-user or
distributor constituted 10% or more of net revenues in 1999, 1998, and 1997.
Export Sales
If in the future, there should be a downturn in the music, post
production (film and television) or broadcast industries, or in the economic
conditions abroad, the Company's business could be materially and adversely
affected. A substantial decline in export sales has occurred in Europe and Japan
over the last three years. With the exception of sales to customers through the
Japanese subsidiary, sales in all foreign countries are denominated in U.S.
dollars. Sales through the Japanese subsidiary are denominated in Yen.
Materials
Currently, the Company uses many sole or limited source suppliers, certain
of which are critical to integrated circuits included in the Company's base
system. If there were to be major delays or terminations in supplies of such
components, the Company could experience a delay in the shipment of its
products, which could have a materially adverse affect on its financial
statements. The Company generally purchases these single or limited source
49
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
components pursuant to purchase orders and has no guaranteed supply arrangements
with such suppliers.
9. Benefit Plans
Defined Contribution Plan
The Company has an employee 401(k) salary deferral plan (the "Plan")
that allows voluntary contributions by all full-time U.S. employees. Eligible
employees may contribute from 1% to 20% of their respective compensation. The
Company does not contribute to the Plan.
10. Related Party Transactions
On April 23, 1999, the Company issued a convertible promissory note
with certain new and existing investors for $2,000,000. As more fully described
in note 4, in October 1999, the note was converted into 1,981,000 shares of
common stock.
In connection with this transaction, a director who had loaned $400,000,
as part of the issuance of the note, converted his portion of the note into
395,741 shares of common stock.
Onset Enterprises Associates III L.P. also participated in this
convertible promissory note, and received 991,051 shares of common stock upon
conversion of its portion of the note. The managing director of Onset
Enterprises Associates III L.P. is also a director of the Company.
In December 1999, the Company sold a System 5 digital console and
R-1 multitrack recorder for $481,000 to Soundproof Studios, of which a
shareholder is the majority owner. A corresponding receivable for the same
amount is included on the balance sheet at December 31, 1999.
11. Subsequent Events
Joint Venture
On February 18, 2000, Euphonix, Inc. entered into a Shareholders
Agreement with Audio Exports and Euphonix UK Ltd. to set-up Euphonix Europe,
whose objective will be to carry on the business of distribution of Euphonix
products within Europe. In connection with the above, Euphonix Inc. entered
into an International Distributor Agreement with Audio Exports. Both of
these agreements will become effective on April 1, 2000.
Financing
In connection with the joint venture with Audio Exports, the President of
Audio Exports purchased 240,000 shares of common stock for $300,000.
50
EUPHONIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On February 22, 2000, the Company executed a promissory note with existing
investors under which the Company is authorized to draw up to $1,500,000 through
February 22, 2001. The note accrues interest at 10% per annum with principal
and accrued interest due at February 22, 2001. The assets of the company are
pledged as collateral. The note contains a conversion feature, which is
subject to shareholder approval, and if approved, will allow the holder to
convert the note into common stock of the Company at a rate of $2 17/32
per share. Shareholder approval had not been obtained as of March 1, 2000.
In addition this note provides that upon conversion, if such conversion occurs,
the Company will issue warrants to purchase 1,185,185 shares of common stock at
prices ranging from $3 to $5. 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.
51
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On November 15, 1999 the Company dismissed Ernst and Young LLP as its
independent accountants. The reports of Ernst & Young LLP on the financial
statements of the Company for each of the past two fiscal years contained no
adverse opinion or disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principle. The decision to
change independent accountants was approved by the Company's Audit Committee
and the Board of Directors. During the Company's two most recent fiscal
years and through the date of this Report, the Company has no disagreements
with Ernst & Young LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to the satisfaction of Ernst & Young LLP would
have caused it to make reference thereto in its report on the financial
statements, of the Company for such years. During the Company's two most
recent fiscal years and through the date of this Report, the Company has had
not reportable events (as defined in Item 304(a)(1)(v) of the Regulation S-K).
The Company engaged PricewaterhouseCoopers LLP as its new independent
accountants as of November 15, 1999.
52
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on June 26, 2000, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant.
(a) Executive Officers -- See the section entitled "Management--Executive
Officers" in Part I, Item 1 hereof.
(b) Directors -- The information required by this Item is
incorporated by reference to the section entitled "Election of Directors"
in the Proxy Statement.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to
the sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information requested by this Item is incorporated by reference to
the Section entitled " Principle Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information requested by this Item is incorporated by reference to the
section entitled "Certain Transactions" in the Proxy Statement.
53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K.
(a) 1. List of Financial Statement Schedules audited by Pricewaterhouse-
Coopers LLP
The following financial statements of Euphonix, Inc., are included
in Item 8:
Consolidated Balance Sheet as of December 31, 1999
Consolidated Statement of Operations for the year ended December
31, 1999
Consolidated Statement of Shareholders' Equity for the year ended
December 31, 1999
Consolidated Statement of Cash Flows for the year ended December
31, 1999
Notes to Consolidated Financial Statements
2. List of Financial Statement Schedules audited by Ernst & Young LLP
The following financial statements of Euphonix, Inc., are included
in Item 8:
Consolidated Balance Sheet as of December 31, 1998
Consolidated Statements of Operations for each of the two years in
the period ended December 31, 1998
Consolidated Statements of Shareholders' Equity for each of the
two years in the period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the two years in
the period ended December 31, 1998
Notes to Consolidated Financial Statements
3. Supplemental Schedule
Financial statement Schedules have been omitted because the
information required to be set forth therein is not applicable or
is shown in the financial statements or notes thereto.
54
3. Exhibits,
Exhibit
Number Description Of Document
3.1(1) Amended and Restated Articles of Incorporation of the
Registrant.
3.2(1) Bylaws of the Registrant.
10.1(1) Form of Indemnification Agreement between the Registrant
and each of its directors and officers.
10.2(3) 1990 Stock Plan and forms of stock option agreement and
restricted stock purchase agreement thereunder.
10.3(1) 1995 Performance Based Stock Option Plan and form of stock
option Agreement thereunder.
10.4(1) 1995 New Director Option Plan and form of stock option
agreement thereunder.
10.5(4) 1997 Nonstatutory Stock Option Plan and form of stock
option agreement thereunder.
10.6 1999 Stock Option Plan and form of agreements thereunder.
10.7(1) Modification Agreement dated November 6, 1991, among the
Registrant and certain shareholders of the Registrant.
10.8(1) Credit Agreement dated September 30, 1994 between the
Registrant and Bank of the West, as amended.
10.9(1) Lease Agreement dated December 31,1990, as amended May 14,
1993, by and between the Registrant and El Camino Center.
10.10(2) Agreement and Plan of Reorganization dated January 15,
1996 by and among the Registrant, Spectral, Incorporated,
Euphonix Acquisition Corporation and certain shareholders
of Spectral, Incorporated.
10.11(6) Common Stock Purchase Agreement dated March 16, 1998
between the Registrant and the purchasers thereunder.
10.12(6) Common Stock Purchase Agreement dated January 26, 1999
between the Registrant, Dieter Meier and Stephen D.
Jackson
10.13 Amendment dated October 11, 1999 to Common Stock Purchase
Agreement dated January 26, 1999 between Registrant,
Dieter Meier, Stephen D. Jackson, Onset Enterprise
Associates, Linda Wei-Lee Chang 1998 Trust, Michael M.
Chang 1998 Trust, Milton M.T. Chang, Scott Silfvast and
Amy Silfast.
10.14(6) Registration Rights Agreement dated January 26, 1999
between the Registrant and the purchasers thereunder.10.15
Amendment dated October 11, 1999 to Registration Rights
Agreement dated January 26, 1999 between the Registrant
and purchasers thereunder.
10.16(5) Secured Promissory Note dated April 23, 1999 between the
Registrant and the investors thereunder.
10.17 Secured Promissory Note dated July 30, 1999 between the
Registrant and investors thereunder.
10.18 Common Stock Purchase Agreement dated November 9, 1999
between the Registrant and D. Meier, Onset Enterprise
Associates, Stephen D. Jackson and Walter Bosch.
10.19 Registration Rights Agreement dated November 9, 1999
between the Registrant and Dieter Meier, Onset Enterprise
Associates, Stephen D. Jackson and Walter Bosch.
23.1 Consent of PricewaterhouseCoopers, LLP, Independent
Accountants
23.2 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 57)
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form SB-2 (File No. 33-994898-LA), effective
August 21, 1995.
(2) Incorporated by reference to the exhibit filed with the Registrant's current
report on Form 8-K filed on February 7, 1996.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on From S-8 (File No.333-17545), effective December
10, 1996.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-68425), effective
December 4, 1998.
55
(5) Incorporated by reference to the exhibit filed with the Registrant's current
report on Form 10-K filed on April 26, 1999.
(6) Incorporated by reference to the exhibit filed with the Registrant's current
report on Form 10-K/A filed on May 10, 1999.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Palo Alto, State of California, on the 15th day of March, 2000.
EUPHONIX, INC.
/s/ BARRY L. MARGERUM
-------------------------
Barry Margerum
Chief Executive Officer, President and Director
POWER OF ATTORNEY
KNOW ALL PERSON BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints James Dobbie and Barry Margerum,
and each of them acting individually, as his attorney-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ JAMES DOBBIE Chairman March 15, 2000
- ---------------------------
James Dobbie
/s/ BARRY L. MARGERUM Chief Executive Officer, March 15, 2000
- --------------------------- President, Director, (Principal
Barry L. Margerum Executive and Financial Officer)
/s/ SCOTT W. SILFVAST Director, Senior Vice President March 15, 2000
- ---------------------------
Scott W. Silfvast
/s/MILTON M.T. CHANG PH.D. Director March 15, 2000 .
- ---------------------------
Milton M.T. Chang, Ph.D.
/s/ ROBERT F. KUHLING Director March 15, 2000
- ---------------------------
Robert F. Kuhling
/s/ HARRIET N. DIETZ Controller, (Principal Accounting March 15, 2000
- --------------------------- Officer)
Harriet N. Dietz
57
EUPHONIX, INC.
1999 STOCK PLAN
1. Purposes of the Plan. The purposes of this 1999 Stock Plan are:
o to attract and retain the best available personnel for positions of
substantial responsibility, o to provide additional incentive to Employees,
Directors and Consultants, and o to promote the success of the Company's
business.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory
Stock Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights and Common Stock Equivalents may also be granted or awarded
under thePlan.
2. Definitions. As used herein, the following definitions shall apply:
"Administrator" means the Board or any of its Committees as shall be
administering the Plan, in accordance with Section 4 of the Plan.
"Applicable Laws" means the requirements relating to the administration of stock
option plans under U.S. state corporate laws, U.S. federal and state securities
laws, the Code, any stock exchange or quotation system on which the Common Stock
is listed or quoted and the applicable laws of any foreign country or
jurisdiction where Awards are, or will be, granted under the Plan.
"Award" means an award of Options, Stock Purchase Rights or Common Stock
Equivalents pursuant to the terms of the Plan.
"Board" means the Board of Directors of the Company. "Code" means the Internal
Revenue Code of 1986, as amended.
"Committee" means a committee of Directors appointed by the Board in accordance
with Section 4 of the Plan.
"Common Stock" means the common stock of the Company.
"Common Stock Equivalent" means an unfunded and unsecured right to receive
Shares in the future that may be granted to a Service Provider pursuant to
Section 12. "Common Stock Equivalent Agreement" means a written agreement
between the Company and a Service Provider evidencing the terms and conditions
of an individual Common Stock Equivalent grant or Award. The Common Stock
Equivalent Agreement is subject to the terms and conditions of the Plan.
"Company" means Euphonix, Inc., a California corporation.
"Consultant" means any person, including an advisor, engaged by the Company or a
Parent or Subsidiary to render services to such entity.
"Director" means a member of the Board.
"Disability" means total and permanent disability as defined in Section 22(e)(3)
of the Code.
"Employee" means any person, including Officers and Directors, employed by the
Company or any Parent or Subsidiary of the Company. A Service Provider shall not
cease to be an Employee in the case of (i) any leave of absence approved by the
Company or (ii) transfers between locations of the Company or between the
59
Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive
Stock Options, no such leave may exceed ninety (90) days, unless reemployment
upon expiration of such leave is guaranteed by statute or contract. If
reemployment upon expiration of a leave of absence approved by the Company is
not so guaranteed, on the 181st day of such leave any Incentive Stock Option
held by the Optionee shall cease to be treated as an Incentive Stock Option and
shall be treated for tax purposes as a Nonstatutory Stock Option. Neither
service as a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, as of any date, the value of Common Stock determined
as follows:
If the Common Stock is listed on any established stock exchange or a national
market system, including without limitation the Nasdaq National Market or The
Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall
be the closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such exchange or system for the last market trading day
prior to the time of determination, as reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
If the Common Stock is regularly quoted by a recognized securities dealer but
selling prices are not reported, the Fair Market Value of a Share of Common
Stock shall be the mean between the high bid and low asked prices for the Common
Stock on the last market trading day prior to the day of determination, as
reported in The Wall Street Journal or such other source as the Administrator
deems reliable; or
In the absence of an established market for the Common Stock, the Fair Market
Value shall be determined in good faith by the Administrator.
"Incentive Stock Option" means an Option intended to qualify as an incentive
stock option within the meaning of Section 422 of the Code and the regulations
promulgated thereunder.
"Nonstatutory Stock Option" means an Option not intended to qualify as an
Incentive Stock Option.
"Notice of Grant" means a written or electronic notice evidencing certain terms
and conditions of an Award.
"Officer" means a person who is an officer of the Company within the meaning of
Section 16 of the Exchange Act and the rules and regulations promulgated
thereunder.
"Option" means a stock option granted pursuant to the Plan.
"Option Agreement" means an agreement between the Company and an Optionee
evidencing the terms and conditions of an individual Option grant. The Option
Agreement is subject to the terms and conditions of the Plan and the Notice of
Grant.
"Option Exchange Program" means a program whereby outstanding Options are
surrendered in exchange for Options with a lower exercise price.
"Optioned Stock" means the Common Stock subject to an Option or Stock Purchase
Right.
"Optionee" means the holder of an outstanding Option or Stock Purchase Right
granted under the Plan.
"Parent" means a "parent corporation," whether now or hereafter existing, as
defined in Section 424(e) of the Code.
60
"Plan" means this 1999 Stock Plan.
"Restricted Stock" means shares of Common Stock acquired pursuant to a grant of
Stock Purchase Rights under Section 11 of the Plan.
"Restricted Stock Purchase Agreement" means a written agreement between the
Company and the Optionee evidencing the terms and restrictions applying to stock
purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement
is subject to the terms and conditions of the Plan and the Notice of Grant.
"Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule
16b-3, as in effect when discretion is being exercised with respect to the Plan.
"Section 16(b) " means Section 16(b) of the Exchange Act.
"Service Provider" means an Employee, Director or Consultant.
"Share" means a share of the Common Stock, as adjusted in accordance with
Section 14 of the Plan.
"Stock Purchase Right" means the right to purchase Common Stock pursuant to
Section 11 of the Plan, as evidenced by a Notice of Grant.
"Subsidiary" means a "subsidiary corporation", whether now or hereafter
existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 14 of the
Plan, the maximum aggregate number of Shares available under the Plan is 750,000
Shares. The Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, is surrendered pursuant to
an Option Exchange Program, or if a Common Stock Equivalent is forfeited prior
to conversion, the unpurchased or unissued Shares which were subject thereto
shall become available for future grant or sale under the Plan (unless the Plan
has terminated); provided, however, that Shares that have actually been issued
under the Plan, whether upon exercise of an Option or Right, shall not be
returned to the Plan and shall not become available for future distribution
under the Plan, except that if Shares of Restricted Stock are repurchased by the
Company at their original purchase price, such Shares shall become available for
future award under the Plan.
61
4. Administration of the Plan.
Procedure.
Multiple Administrative Bodies. The Plan may be administered by different
Committees with respect to different groups of Service Providers.
Section 162(m). To the extent that the Administrator determines it to be
desirable to qualify Options granted hereunder as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the Plan shall
be administered by a Committee of two or more "outside directors" within the
meaning of Section 162(m) of the Code.
Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt
under Rule 16b-3, the transactions contemplated hereunder shall be structured to
satisfy the requirements for exemption under Rule 16b-3.
Other Administration. Other than as provided above, the Plan shall be
administered by (A) the Board or (B) a Committee, which committee shall be
constituted to satisfy Applicable Laws.
Powers of the Administrator. Subject to the provisions of the Plan, and in the
case of a Committee, subject to the specific duties delegated by the Board to
such Committee, the Administrator shall have the authority, in its discretion:
o to determine the Fair Market Value;
o to select the Service Providers to whom Awards may be granted hereunder;
o to determine the number of shares of Common Stock to be covered by each
Award granted hereunder;
o to approve forms of agreement for use under the Plan;
o to determine the terms and conditions, not inconsistent with the terms of
the Plan, of any Award granted hereunder. Such terms and conditions
include, but are not limited to, the exercise price, the time or times when
Options or Stock Purchase Rights may be exercised (which may be based on
performance criteria), the time or times when Common Stock Equivalents may
be converted to Shares, any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Award or the
shares of Common Stock relating thereto, based in each case on such factors
as the Administrator, in its sole discretion, shall determine;
o to reduce the exercise price of any Option or Stock Purchase Right to the
then current Fair Market Value, or to adjust the number of Shares subject
to a Common Stock Equivalent, if the Fair Market Value of the Shares shall
have declined since the date the Award was granted;
o to institute an Option Exchange Program;
o to construe and interpret the terms of the Plan and Awards granted
pursuant to the Plan;
o to prescribe, amend and rescind rules and regulations relating to the Plan,
including rules and regulations relating to sub-plans established for the
purpose of qualifying for preferred tax treatment under foreign tax laws;
62
o to modify or amend each Award (subject to Section 16(c) of the Plan),
including the discretionary authority to extend the post-termination
exercisability period of Options longer than is otherwise provided for in
the Plan;
o to allow Optionees to satisfy withholding tax obligations by electing to
have the Company withhold from the Shares to be issued upon exercise of an
Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of
the Shares to be withheld shall be determined on the date that the amount
of tax to be withheld is to be determined. All elections by an Optionee to
have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
o to authorize any person to execute on behalf of the Company any
instrument required to effect an Award previously made by
the Administrator;
o to make all other determinations deemed necessary or advisable for
administering the Plan.
Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Awards.
5. Eligibility. Nonstatutory Stock Options, Stock Purchase Rights and Common
Stock Equivalents may be granted to Service Providers.
Incentive Stock Options may be granted only to Employees.
6. Limitations.
Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be
treated as Nonstatutory Stock Options. For purposes of this Section 6(a),
Incentive Stock Options shall be taken into account in the order in which they
were granted. The Fair Market Value of the Shares shall be determined as of the
time the Option with respect to such Shares is granted.
Neither the Plan nor any Award shall confer upon an Optionee any right
with respect to continuing the Optionee's relationship as a Service Provider
with the Company, nor shall they interfere in any way with the Optionee's right
or the Company's right to terminate such relationship at any time, with or
without cause.
The following limitations shall apply to grants of Options:
No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 400,000 Shares.
In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 200,000 Shares
which shall not count against the limit set forth in subsection (i) above.
The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 14.
If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 14), the cancelled Option will be counted against the
63
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 20 of the Plan, the Plan shall become
effective upon its adoption by the Board. It shall continue in effect for a term
of ten (10) years unless terminated earlier under Section 16 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
In the case of an Incentive Stock Option
granted to an Employee who, at the time the Incentive Stock Option is
granted, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the per
Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of grant.
granted to any Employee other than an Employee described in paragraph (A)
immediately above, the per Share exercise price shall be no less than 100% of
the Fair Market Value per Share on the date of grant.
In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
Notwithstanding the foregoing, Options may be granted with a
per Share exercise price of less than 100% of the Fair Market Value per Share on
the date of grant pursuant to a merger or other corporate transaction.
Waiting Period and Exercise Dates. At the time an Option is granted, the
Administrator shall fix the period within which the Option may be exercised and
shall determine any conditions which must be satisfied before the Option may be
exercised.
Form of Consideration. The Administrator shall determine the acceptable form of
consideration for exercising an Option, including the method of payment. In the
case of an Incentive Stock Option, the Administrator shall determine the
acceptable form of consideration at the time of grant. Such consideration may
consist entirely of:
cash;
check;
promissory note;
64
other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date
of surrender equal to the aggregate exercise price of the Shares as to which
said Option shall be exercised;
consideration received by the Company under a cash-
less exercise program implemented by the Company in connection with the Plan;
a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's partici-
pation in any Company-sponsored deferred compensation program or arrangement;
any combination of the foregoing methods of payment; or
such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 14 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
Termination of Relationship as a Service Provider. If an Optionee
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
Disability of Optionee. If an Optionee ceases to be a Service Provider
as a result of the Optionee's Disability, the Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement to the
65
extent the Option is vested on the date of termination (but in no event later
than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
Death of Optionee. If an Optionee dies while a Service Provider, the
Option may be exercised within such period of time as is specified in the Option
Agreement (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquires the right to exercise the Option by bequest or inheritance, but
only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
Buyout Provisions. The Administrator may at any time offer to buy out
for a payment in cash or Shares an Option previously granted based on such terms
and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Stock Purchase Rights.
Rights to Purchase. Stock Purchase Rights may be issued either alone,
in addition to, or in tandem with other Awards granted under the Plan and/or
cash awards made outside of the Plan. After the Administrator determines that it
will offer Stock Purchase Rights under the Plan, it shall advise the offeree in
writing or electronically, by means of a Notice of Grant, of the terms,
conditions and restrictions related to the offer, including the number of Shares
that the offeree shall be entitled to purchase, the price to be paid, and the
time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
Repurchase Option. 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
service with the Company for any reason (including death or Disability). The
purchase price for Shares repurchased pursuant to the Restricted Stock Purchase
Agreement 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.
Other Provisions. The Restricted Stock Purchase Agreement shall contain
such other terms, provisions and conditions not inconsistent with the Plan as
may be determined by the Administrator in its sole discretion.
Rights as a Shareholder. Once the Stock Purchase Right is exercised,
the purchaser shall have the rights equivalent to those of a shareholder, and
shall be a shareholder when his or her purchase is entered upon the records of
the duly authorized transfer agent of the Company. No adjustment will be made
for a dividend or other right for which the record date is prior to the date the
Stock Purchase Right is exercised, except as provided in Section 14 of the Plan.
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12. Common Stock Equivalents.
Award of Common Stock Equivalents. Common Stock Equivalents may be
awarded to Service Providers either alone, in addition to, or in tandem with
other awards granted under the Plan and/or cash awards made outside of the Plan.
An Award of Common Stock Equivalents shall be made pursuant to a Common Stock
Equivalent Agreement in such form as is determined by the Administrator.
Bookkeeping Account; Nontransferability. The number of Common Stock
Equivalents awarded pursuant to Section 12(a) to each Service Provider shall be
credited to a bookkeeping account established in the name of the Service
Provider. The Company's obligation with respect to such Common Stock Equivalents
shall not be funded or secured in any manner. A Service Provider's right to
receive Common Stock Equivalents may not be assigned or transferred, voluntarily
or involuntarily, except as expressly provided herein.
Dividends. If the Company pays a cash dividend with respect to the
Shares at any time while Common Stock Equivalents are credited to a Service
Provider's account, there shall be credited to the Service Provider's account
additional Common Stock Equivalents equal to (a) the dollar amount of the cash
dividend the Service Provider would have received had he or she been the actual
owner of the Shares to which the Common Stock Equivalents then credited to the
Service Provider's account relate, divided by (b) the Fair Market Value of one
Share on the dividend payment date. The Company will pay the Service Provider a
cash payment in lieu of fractional Common Stock Equivalents on the date of such
dividend payment.
Conversion. The Company shall deliver to the Service Provider (or his
or her designated beneficiary or estate) a number of Shares equal to the whole
number of Common Stock Equivalents then credited to the Service Provider's
account, at such time or times as specified in the Service Provider's Common
Stock Equivalent Agreement, or as otherwise provided herein.
Shareholder Rights. A Service Provider (or his or her designated
beneficiary or estate) shall not be entitled to any voting or other shareholder
rights as a result of the credit of Common Stock Equivalents to the Service
Provider's account, until certificates representing Shares are delivered to the
Service Provider (or his or her designated beneficiary or estate) upon
conversion of the Service Provider's Common Stock Equivalents pursuant to
Section 12(d).
13. Non-Transferability of Awards. Unless determined otherwise by the
Administrator, an Award may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Award
transferable, such Award shall contain such additional terms and conditions as
the Administrator deems appropriate.
14. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
Sale.
Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Award, the number of Common Stock Equivalents credited to a
Service Provider's account under Section 12(b) and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Awards have yet been granted or which have been returned to the Plan
upon cancellation, forfeiture or expiration of an Award, as well as the price
per share of Common Stock covered by each such outstanding Award, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
67
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Award.
Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, the Administrator shall notify each holder of an
Award as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide (i) for an Optionee
to have the right to exercise his or her Option until ten (10) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable; (ii) that any
Company repurchase option applicable to any Shares purchased 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; and (iii) that any Common Stock Equivalents credited to a Service
Provider's account under Section 12(b) shall convert into Shares (as provided in
Section 12(d)) immediately prior to the consummation of any such dissolution or
liquidation. To the extent not exercised or converted, an Award will terminate
immediately prior to the consummation of such proposed action.
Merger or Asset Sale. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the assets of the
Company, each outstanding Award shall be assumed or an equivalent award
substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to
assume or substitute for the Award, (i) each Optionee shall fully vest in and
have the right to exercise the Option or Stock Purchase Right as to all of the
Optioned Stock, including Shares as to which it would not otherwise be vested or
exercisable, (ii) any Company repurchase option 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 Service
Provider's account under Section 12(b) shall convert into Shares (as provided in
Section 12(d)) immediately prior to the merger or sale of assets. If an Option
or Stock Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. If a
Common Stock Equivalent converts to Shares in such event, the Administrator
shall notify the holder thereof at least fifteen (15) days prior to the
consummation of the proposed transaction. For the purposes of this paragraph, an
Award shall be considered assumed if, following the merger or sale of assets,
the award confers the right to purchase or receive, for each Share of Optioned
Stock subject to the Option or Stock Purchase Right or for each Common Stock
Equivalent, immediately prior to the merger or sale of assets, the consideration
(whether stock, cash, or other securities or property) received in the merger or
sale of assets by holders of Common Stock for each Share held on the effective
date of the transaction (and if holders were offered a choice of consideration,
the type of consideration chosen by the holders of a majority of the outstanding
Shares); provided, however, that if such consideration received in the merger or
sale of assets is not solely common stock of the successor corporation or its
Parent, the Administrator may, with the consent of the successor corporation,
provide for the consideration to be received upon the exercise of the Option or
Stock Purchase Right, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right, or upon conversion of each Common Stock Equivalent, to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common Stock
in the merger or sale of assets.
15. Date of Grant. The date of grant of an Award shall be, for all purposes, the
date on which the Administrator makes the determination granting such Award, or
such other later date as is determined by the Administrator. Notice of the
determination shall be provided to each Optionee within a reasonable time after
the date of such grant.
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16. Amendment and Termination of the Plan.
Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
Shareholder Approval. The Company shall obtain shareholder approval
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of the holder of
any Award, unless mutually agreed otherwise between the holder of such Award and
the Administrator, which agreement must be in writing and signed by the holder
of such Award and the Company. Termination of the Plan shall not affect the
Administrator's ability to exercise the powers granted to it hereunder with
respect to Awards granted under the Plan prior to the date of such termination.
17. Conditions Upon Issuance of Shares.
Legal Compliance. Shares shall not be issued pursuant to the exercise
or conversion of an Award unless the exercise or conversion of such Award and
the issuance and delivery of such Shares shall comply with Applicable Laws and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.
Investment Representations. As a condition to the exercise or
conversion of an Award, the Company may require the person exercising or
converting such Award to represent and warrant at the time of any such exercise
or conversion that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
18. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
19. Reservation of Shares. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
20 Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
69
EUPHONIX, INC.
1999 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have the
same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the
Company, subject to the terms and conditions of the Plan and this Option
Agreement, as follows:
Grant Number: _________________________
Date of Grant: _________________________
Vesting Commencement Date: _________________________
Exercise Price per Share: $________________________
Total Number of Shares Granted: _________________________
Total Exercise Price: $________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: ___ Years/_______________, _____*
o Or earlier, pursuant to the termination period set forth below.
Vesting Schedule:
This Option may be exercised, in whole or in part, in accordance with
the following schedule:
[Set forth vesting schedule here].
Termination Period:
This Option may be exercised for thirty (30) days after Optionee ceases
to be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for one year after Optionee ceases to be a Service
70
Provider. In no event shall this Option be exercised later than the
Term/Expiration Date as provided above.
II. AGREEMENT
A. Grant of Option.
The Plan Administrator of the Company hereby grants to the Optionee
named in the Notice of Grant attached as Part I of this Agreement (the
"Optionee") an option (the "Option") to purchase the number of Shares, as set
forth in the Notice of Grant, at the exercise price per share set forth in the
Notice of Grant (the "Exercise Price"), subject to the terms and conditions of
the Plan, which is incorporated herein by reference. Subject to Section 15(c) of
the Plan, in the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall prevail. If designated in the Notice of Grant as an
Incentive Stock Option ("ISO"), this Option is intended to qualify as an
Incentive Stock Option under Section 422 of the Code. However, if this Option is
intended to be an Incentive Stock Option, to the extent that it exceeds the
$100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock
Option ("NSO").
B. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Grant and
the applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery
of an exercise notice, in the form attached as Exhibit A (the "Exercise
Notice"), which shall state the election to exercise the Option, the number of
Shares in respect of which the Option is being exercised (the "Exercised
Shares"), and such other representations and agreements as may be required by
the Company pursuant to the provisions of the Plan. The Exercise Notice shall be
completed by the Optionee and delivered to Controller of the Company. The
Exercise Notice shall be accompanied by payment of the aggregate Exercise Price
as to all Exercised Shares. This Option shall be deemed to be exercised upon
receipt by the Company of such fully executed Exercise Notice accompanied by
such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this
Option unless such issuance and exercise complies with Applicable Laws. Assuming
such compliance, for income tax purposes the Exercised Shares shall be
considered transferred to the Optionee on the date the Option is exercised with
respect to such Exercised Shares.
C. Method of Payment.
Payment of the aggregate Exercise Price shall be by any of the
following, or a combination thereof, at the election of the Optionee:
1. cash; or
2. check; or
71
3. consideration received by the Company under a cashless exercise program
implemented by the Company in connection with the Plan; or
4. surrender of other Shares which (i) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six (6)
months on the date of surrender, and (ii) have a Fair Market Value on the date
of surrender equal to the aggregate Exercise Price of the Exercised Shares. D.
Non-Transferability of Option.
This Option may not be transferred in any manner otherwise than by will
or by the laws of descent or distribution and may be exercised during the
lifetime of Optionee only by the Optionee. The terms of the Plan and this Option
Agreement shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
E. Term of Option.
This Option may be exercised only within the term set out in the Notice
of Grant, and may be exercised during such term only in accordance with the Plan
and the terms of this Option Agreement.
F. Tax Consequences.
Some of the federal tax consequences relating to this Option, as of the
date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE
SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE
SHARES.
G. Exercising the Option.
1. Nonstatutory Stock Option. The Optionee may incur regular federal income
tax liability upon exercise of a NSO. The Optionee will be treated as
having received compensation income (taxable at ordinary income tax rates)
equal to the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If the
Optionee is an Employee or a former Employee, the Company will be required
to withhold from his or her compensation or collect from Optionee and pay
to the applicable taxing authorities an amount in cash equal to a
percentage of this compensation income at the time of exercise, and may
refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
2. Incentive Stock Option. If this Option qualifies as an ISO, the Optionee
will have no regular federal income tax liability upon its exercise,
although the excess, if any, of the Fair Market Value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price will be
treated as an adjustment to alternative minimum taxable income for federal
tax purposes and may subject the Optionee to alternative minimum tax in the
year of exercise. In the event that the Optionee ceases to be an Employee
but remains a Service Provider, any Incentive Stock Option of the Optionee
that remains unexercised shall cease to qualify as an Incentive Stock
Option and will be treated for tax purposes as a Nonstatutory Stock Option
on the date three (3) months and one (1) day following such change of
status.
72
3. Disposition of Shares.
(a) NSO. If the Optionee holds NSO Shares for at least one year,
any gain realized on disposition of the Shares will be treated as long-term
capital gain for federal income tax purposes.
(b) ISO. If the Optionee holds ISO Shares for at least one year
after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for
federal income tax purposes. If the Optionee disposes of ISO Shares within
one year after exercise or two years after the grant date, any gain
realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the excess, if any, of
the lesser of (A) the difference between the Fair Market Value of the Shares
acquired on the date of exercise and the aggregate Exercise Price, or (B) the
difference between the sale price of such Shares and the aggregate Exercise
Price. Any additional gain will be taxed as capital gain, short-term or long-
term depending on the period that the ISO Shares were held.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii)
one year after the exercise date, the Optionee shall immediately notify
the Company in writing of such disposition. The Optionee agrees that he or she
may be subject to income tax withholding by the Company on the compensation
income recognized from such early disposition of ISO Shares by payment in
cash or out of the current earnings paid to the Optionee.
H. Entire Agreement; Governing Law.
The Plan is incorporated herein by reference. The Plan and this Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
California.
I. NO GUARANTEE OF CONTINUED SERVICE.
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER
AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING
GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES
AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE
VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED
PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD,
FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE
COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT
ANY TIME, WITH OR WITHOUT CAUSE.
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and governed
by the terms and conditions of the Plan and this Option Agreement. Optionee has
73
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: EUPHONIX, INC.
Signature By
Print Name Title
Residence Address
- ------------------------------------
74
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the
terms and conditions of the Plan and this Option Agreement. In consideration of
the Company's granting his or her spouse the right to purchase Shares as set
forth in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
Spouse of Optionee
75
EXHIBIT A
1999 STOCK PLAN
EXERCISE NOTICE
Euphonix, Inc.
220 Portage Avenue
Palo Alto, CA 94306
Attention: Controller
1. Exercise of Option. Effective as of today, ________________, _____, the
undersigned ("Purchaser") hereby elects to purchase ______________ shares (the
"Shares") of the Common Stock of Euphonix, Inc. (the "Company") under and
pursuant to the 1999 Stock Plan (the "Plan") and the Stock Option Agreement
dated ___________, _____ (the "Option Agreement"). The purchase price for the
Shares shall be $_________, as required by the Option Agreement.
2. Delivery of Payment.
Purchaser herewith delivers to the Company the full purchase price for
the Shares.
3. Representations of Purchaser. Purchaser acknowledges that
Purchaser has received, read and understood the Plan and the Option Agreement
and agrees to abide by and be bound by their terms and conditions.
4. Rights as Shareholder.
Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company) of
the Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Shares so acquired shall be issued to the Optionee
as soon as practicable after exercise of the Option. No adjustment will be made
for a dividend or other right for which the record date is prior to the date of
issuance, except as provided in Section 13 of the Plan.
5. Tax Consultation.
Purchaser understands that Purchaser may suffer adverse tax consequences as a
result of Purchaser's purchase or disposition of the Shares. Purchaser
represents that Purchaser has consulted with any tax consultants Purchaser deems
advisable in connection with the purchase or disposition of the Shares and that
Purchaser is not relying on the Company for any tax advice.
6. Entire Agreement;
Governing Law. The Plan and Option Agreement are incorporated herein by
reference. This Agreement, the Plan and the Option Agreement constitute the
entire agreement of the parties with respect to the subject matter hereof and
supersede in their entirety all prior undertakings and agreements of the Company
and Purchaser with respect to the subject matter hereof, and may not be modified
76
adversely to the Purchaser's interest except by means of a writing signed by the
Company and Purchaser. This agreement is governed by the internal substantive
laws, but not the choice of law rules, of California.
Submitted by: Accepted by:
PURCHASER: EUPHONIX, INC.
Signature By
Print Name Its
Address: Address:
Euphonix, Inc.
220 Portage Avenue
Palo Alto, CA 94306
Date Received
77
EUPHONIX, INC.
1999 STOCK PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Notice of Grant.
[Grantee's Name and Address]
You have been granted the right to purchase Common Stock of the
Company, subject to the Company's Repurchase Option and your ongoing status as a
Service Provider (as described in the Plan and the attached Restricted Stock
Purchase Agreement), as follows:
Grant Number: _________________________
Date of Grant: _________________________
Price Per Share: $________________________
Total Number of Shares Subject
to This Stock Purchase Right: _________________________
Expiration Date: __________________, ______
YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE
OR IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES.
By your signature and the signature of the Company's representative below, you
and the Company agree that this Stock Purchase Right is granted under and
governed by the terms and conditions of the 1999 Stock Plan and the Restricted
Stock Purchase Agreement, attached hereto as Exhibit A-1, both of which are made
a part of this document. You further agree to execute the attached Restricted
Stock Purchase Agreement as a condition to purchasing any shares under this
Stock Purchase Right.
GRANTEE: EUPHONIX, INC.
Signature By
Print Name Title
78
EXHIBIT A-1
1999 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Restricted Stock Purchase Agreement.
WHEREAS the Purchaser named in the Notice of Grant, (the "Purchaser")
is a Service Provider, and the Purchaser's continued participation is considered
by the Company to be important for the Company's continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an
equity interest in the Company as an incentive for the Purchaser to participate
in the affairs of the Company, the Administrator has granted to the Purchaser a
Stock Purchase Right subject to the terms and conditions of the Plan and the
Notice of Grant, which are incorporated herein by reference, and pursuant to
this Restricted Stock Purchase Agreement (the "Agreement").
NOW THEREFORE, the parties agree as follows:
1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and the
Purchaser hereby agrees to purchase shares of the Company's Common Stock (the
"Shares"), at the per Share purchase price and as otherwise described in the
Notice of Grant.
2. Payment of Purchase Price. The purchase price for the Shares
may be paid by delivery to the Company at the time of execution of this
Agreement of cash, a check, or some combination thereof.
3. Repurchase Option.
(a) In the event the Purchaser ceases to be a Service Provider for any or no
reason (including death or disability) before all of the Shares are released
from the Company's Repurchase Option (see Section 4), the Company shall, upon
the date of such termination (as reasonably fixed and determined by the Company)
have an irrevocable, exclusive option (the "Repurchase Option") for a period of
sixty (60) days from such date to repurchase up to that number of shares which
constitute the Unreleased Shares (as defined in Section 4) at the original
purchase price per share (the "Repurchase Price"). The Repurchase Option shall
be exercised by the Company by delivering written notice to the Purchaser or the
Purchaser's executor (with a copy to the Escrow Holder) AND, at the Company's
option, (i) by delivering to the Purchaser or the Purchaser's executor a check
in the amount of the aggregate Repurchase Price, or (ii) by cancelling an amount
of the Purchaser's indebtedness to the Company equal to the aggregate Repurchase
Price, or (iii) by a combination of (i) and (ii) so that the combined payment
and cancellation of indebtedness equals the aggregate Repurchase Price. Upon
delivery of such notice and the payment of the aggregate Repurchase Price, the
Company shall become the legal and beneficial owner of the Shares being
repurchased and all rights and interests therein or relating thereto, and the
Company shall have the right to retain and transfer to its own name the number
of Shares being repurchased by the Company.
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(b) Whenever the Company shall have
the right to repurchase Shares hereunder, the Company may designate and assign
one or more employees, officers, directors or shareholders of the Company or
other persons or organizations to exercise all or a part of the Company's
purchase rights under this Agreement and purchase all or a part of such Shares.
If the Fair Market Value of the Shares to be repurchased on the date of such
designation or assignment (the "Repurchase FMV") exceeds the aggregate
Repurchase Price of such Shares, then each such designee or assignee shall pay
the Company cash equal to the difference between the Repurchase FMV and the
aggregate Repurchase Price of such Shares.
4. Release of Shares From Repurchase Option.
(a) _______________________ percent (______%) of the Shares shall be
released from the Company's Repurchase Option [one year] after the Date of Grant
and __________________ percent (______%) of the Shares [at the end of each month
thereafter], provided that the Purchaser does not cease to be a Service Provider
prior to the date of any such release.
(b) Any of the Shares that have not yet
been released from the Repurchase Option are referred to herein as "Unreleased
Shares."
(c) The Shares that have been released from the Repurchase Option shall
be delivered to the Purchaser at the Purchaser's request (see Section 6).
5. Restriction on Transfer. Except for the escrow described in Section 6 or the
transfer of the Shares to the Company or its assignees contemplated by this
Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until such Shares
are released from the Company's Repurchase Option in accordance with the
provisions of this Agreement, other than by will or the laws of descent and
distribution.
6. Escrow of Shares.
(a) To ensure the availability for delivery
of the Purchaser's Unreleased Shares upon repurchase by the Company pursuant to
the Repurchase Option, the Purchaser shall, upon execution of this Agreement,
deliver and deposit with an escrow holder designated by the Company (the "Escrow
Holder") the share certificates representing the Unreleased Shares, together
with the stock assignment duly endorsed in blank, attached hereto as Exhibit
A-2. The Unreleased Shares and stock assignment shall be held by the Escrow
Holder, pursuant to the Joint Escrow Instructions of the Company and Purchaser
attached hereto as Exhibit A-3, until such time as the Company's Repurchase
Option expires. As a further condition to the Company's obligations under this
Agreement, the Company may require the spouse of Purchaser, if any, to execute
and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-4.
(b) The Escrow Holder shall not be liable for any act it may do or omit to do
with respect to holding the Unreleased Shares in escrow while acting in good
faith and in the exercise of its judgment.
(c) If the Company or any assignee
exercises the Repurchase Option hereunder, the Escrow Holder, upon receipt of
written notice of such exercise from the proposed transferee, shall take all
steps necessary to accomplish such transfer.
80
(d) When the Repurchase Option has
been exercised or expires unexercised or a portion of the Shares has been
released from the Repurchase Option, upon request the Escrow Holder shall
promptly cause a new certificate to be issued for the released Shares and shall
deliver the certificate to the Company or the Purchaser, as the case may be.
(e)Subject to the terms hereof, the Purchaser shall have all the rights of a
shareholder with respect to the Shares while they are held in escrow, including
without limitation, the right to vote the Shares and to receive any cash
dividends declared thereon. If, from time to time during the term of the
Repurchase Option, there is (i) any stock dividend, stock split or other change
in the Shares, or (ii) any merger or sale of all or substantially all of the
assets or other acquisition of the Company, any and all new, substituted or
additional securities to which the Purchaser is entitled by reason of the
Purchaser's ownership of the Shares shall be immediately subject to this escrow,
deposited with the Escrow Holder and included thereafter as "Shares" for
purposes of this Agreement and the Repurchase Option.
7. Legends. The share
certificate evidencing the Unreleased Shares, if any, issued hereunder shall be
endorsed with the following legend (in addition to any legend required under
applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE
ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS
SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF
WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
8. Adjustment for Stock Split.
All references to the number of Shares and the purchase price of the
Shares in this Agreement shall be appropriately adjusted to reflect any stock
split, stock dividend or other change in the Shares which may be made by the
Company after the date of this Agreement.
9. Tax Consequences. The Purchaser has
reviewed with the Purchaser's own tax advisors the federal, state, local and
foreign tax consequences of this investment and the transactions contemplated by
this Agreement. The Purchaser is relying solely on such advisors and not on any
statements or representations of the Company or any of its agents. The Purchaser
understands that the Purchaser (and not the Company) shall be responsible for
the Purchaser's own tax liability that may arise as a result of the transactions
contemplated by this Agreement. The Purchaser understands that Section 83 of the
Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary income
the difference between the purchase price for the Shares and the Fair Market
Value of the Shares as of the date any restrictions on the Shares lapse. In this
context, "restriction" includes the right of the Company to buy back the Shares
pursuant to the Repurchase Option. The Purchaser understands that the Purchaser
may elect to be taxed at the time the Shares are purchased rather than when and
as the Repurchase Option expires by filing an election under Section 83(b) of
the Code with the IRS within thirty (30) days from the date of purchase. The
form for making this election is attached as Exhibit A-5 hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
81
10. General Provisions.
(a) This
Agreement shall be governed by the internal substantive laws, but not the choice
of law rules of California. This Agreement, subject to the terms and conditions
of the Plan and the Notice of Grant, represents the entire agreement between the
parties with respect to the purchase of the Shares by the Purchaser. Subject to
Section 15(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Agreement, the terms
and conditions of the Plan shall prevail. Unless otherwise defined herein, the
terms defined in the Plan shall have the same defined meanings in this
Agreement.
(b) Any notice, demand or request required or permitted to be given
by either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's
address with a copy to the other party hereto.
(c) The rights of the Company
under this Agreement shall be transferable to any one or more persons or
entities, and all covenants and agreements hereunder shall inure to the benefit
of, and be enforceable by the Company's successors and assigns. The rights and
obligations of the Purchaser under this Agreement may only be assigned with the
prior written consent of the Company.
(d) Either party's failure to enforce any
provision of this Agreement shall not in any way be construed as a waiver of any
such provision, nor prevent that party from thereafter enforcing any other
provision of this Agreement. The rights granted both parties hereunder are
cumulative and shall not constitute a waiver of either party's right to assert
any other legal remedy available to it.
(e) The Purchaser agrees upon request to
execute any further documents or instruments necessary or desirable to carry out
the purposes or intent of this Agreement.
(f) PURCHASER ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY
CONTINUING SERVICE AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT
THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER). PURCHASER
FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS
CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT
CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE
PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT
INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE PURCHASER'S
RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
By Purchaser's signature below, Purchaser represents that he or she is familiar
with the terms and provisions of the Plan, and hereby accepts this Agreement
subject to all of the terms and provisions thereof. Purchaser has reviewed the
Plan and this Agreement in their entirety, has had an opportunity to obtain the
advice of counsel prior to executing this Agreement and fully understands all
provisions of this Agreement. Purchaser agrees to accept as binding, conclusive
and final all decisions or interpretations of the Administrator upon any
questions arising under the Plan or this Agreement. Purchaser further agrees to
notify the Company upon any change in the residence indicated in the Notice of
Grant.
82
DATED:
PURCHASER: EUPHONIX, INC.
Signature By
Print Name Title
83
EXHIBIT A-2
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign
and transfer unto_________________________________________________ (__________)
shares of the Common Stock of Euphonix, Inc. standing in my name of the books of
said corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint ________________________________ to transfer
the said stock on the books of the within named corporation with full power of
substitution in the premises. This Stock Assignment may be used only in
accordance with the Restricted Stock Purchase Agreement (the "Agreement")
between________________________ and the undersigned dated ______________, _____.
Dated: _______________, _____
Signature:
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise the
Repurchase Option, as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
84
EXHIBIT A-3
JOINT ESCROW INSTRUCTIONS
----------, ----
Corporate Secretary
Euphonix, Inc.
220 Portage Avenue
Palo Alto, CA 94306
Dear ______________:
As Escrow Agent for both Euphonix, Inc., a California corporation (the
"Company"), and the undersigned purchaser of stock of the Company (the
"Purchaser"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Restricted Stock Purchase
Agreement ("Agreement") between the Company and the undersigned, in accordance
with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred to
collectively as the "Company") exercises the Company's Repurchase Option set
forth in the Agreement, the Company shall give to Purchaser and you a written
notice specifying the number of shares of stock to be purchased, the purchase
price, and the time for a closing hereunder at the principal office of the
Company. Purchaser and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments necessary
for the transfer in question, (b) to fill in the number of shares being
transferred, and (c) to deliver same, together with the certificate evidencing
the shares of stock to be transferred, to the Company or its assignee, against
the simultaneous delivery to you of the purchase price (by cash, a check, or
some combination thereof) for the number of shares of stock being purchased
pursuant to the exercise of the Company's Repurchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a shareholder of the Company while the
stock is held by you.
4. Upon written request of the Purchaser, but no more than once per calendar
year, unless the Company's Repurchase Option has been exercised, you shall
deliver to Purchaser a certificate or certificates representing so many shares
of stock as are not then subject to the Company's Repurchase Option. Within
ninety (90) days after Purchaser ceases to be a Service Provider, you shall
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's Repurchase
Option.
85
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to
Purchaser, you shall deliver all of the same to Purchaser and shall be
discharged of all further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in
relying or refraining from acting on any instrument reasonably believed by
you to be genuine and to have been signed or presented by the proper party
or parties. You shall not be personally liable for any act you may do or
omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser
while acting in good faith, and any act done or omitted by you pursuant to
the advice of your own attorneys shall be conclusive evidence of such good
faith.
8. You are hereby expressly authorized to disregard any and all warnings given
by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree,
you shall not be liable to any of the parties hereto or to any other
person, firm or corporation by reason of such compliance, notwithstanding
any such order, judgment or decree being subsequently reversed, modified,
annulled, set aside, vacated or found to have been entered without
jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting
to execute or deliver the Agreement or any documents or papers deposited or
called for hereunder.
10. You shall not be liable for the outlawing of any rights under the statute
of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts as you
may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may
pay such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign
by written notice to each party. In the event of any such termination, the
Company shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection with
these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect to
the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your
possession without liability to anyone all or any part of said securities
until such disputes shall have been settled either by mutual written
86
agreement of the parties concerned or by a final order, decree or judgment
of a court of competent jurisdiction after the time for appeal has expired
and no appeal has been perfected, but you shall be under no duty whatsoever
to institute or defend any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing and
shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage
and fees prepaid, addressed to each of the other parties thereunto entitled
at the following addresses or at such other addresses as a party may
designate by ten days' advance written notice to each of the other parties
hereto.
COMPANY: Euphonix, Inc.
220 Portage Avenue
Palo Alto, CA 94306
PURCHASER:
ESCROW AGENT: Corporate Secretary
Euphonix, Inc.
220 Portage Avenue
Palo Alto, CA 94306
16. By signing these Joint Escrow Instructions, you become a party hereto only
for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by, and construed and
enforced in accordance with, the internal substantive laws, but not the
choice of law rules, of California.
Very truly yours,
EUPHONIX, INC.
By
Title
PURCHASER:
Signature
87
Print Name
ESCROW AGENT:
Corporate Secretary
EXHIBIT A-4
CONSENT OF SPOUSE
I, ____________________, spouse of ___________________, have read and
approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In
consideration of the Company's grant to my spouse of the right to purchase
shares of Euphonix, Inc., as set forth in the Agreement, I hereby appoint my
spouse as my attorney-in-fact in respect to the exercise of any rights under the
Agreement and agree to be bound by the provisions of the Agreement insofar as I
may have any rights in said Agreement or any shares issued pursuant thereto
under the community property laws or similar laws relating to marital property
in effect in the state of our residence as of the date of the signing of the
foregoing Agreement.
Dated: _______________, _____
Signature of Spouse
88
EXHIBIT A-5
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer's gross income
for the current taxable year the amount of any compensation taxable to taxpayer
in connection with his or her receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows:__________ shares (the "Shares") of the Common Stock of
Euphonix, Inc. (the "Company").
3. The date on which the property was transferred is: __________________,
______.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, upon
certain events. This right lapses with regard to a portion of the
Shares based on the continued performance of services by the taxpayer
over time.
5. The fair market value at the time of transfer, determined without
regard to any restriction other than a restriction which by its terms
will never lapse, of such property is:
$---------------.
6. The amount (if any) paid for such property is:
$---------------.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.
Dated:___________________, ____
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated:___________________, ____
Spouse of Taxpayer
89
FIRST AMENDMENT TO THE
COMMON STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT (the "First Amendment") is made as of October 11,
1999, to the Common Stock Purchase Agreement, dated as of March 16, 1998 (the
"Original Agreement") by and among Euphonix, Inc., a California corporation (the
"Company") and the purchasers of Common Stock of the Company (the "Common
Purchasers"). This First Amendment is entered into by and among the Company, the
Common Purchasers and certain of the parties to the Secured Promissory Note
issued by the Company to such parties and dated as of April 23, 1999 (the
"Note") (the "Note Investors"). All capitalized terms used in this First
Amendment not otherwise defined herein shall be as defined in the Original
Agreement.
Background
A. Pursuant to the terms of the Note, the Note Investors may convert
the Note into shares of Common Stock of the Company (the "Common Stock").
B. Pursuant to a covenant in the Note, the Company is obligated to
amend the Original Agreement to provide for registration rights for the Common
Stock.
C. At the time of the execution of the Original Agreement, certain
parties (including certain Common Purchasers) to a Modification Agreement
between themselves and the Company dated as of November 6, 1991 (the
"Modification Agreement") waived (with respect to registration rights granted in
the Original Agreement) their right to prevent the Company from entering into
any subsequent agreement granting any holder or prospective holder of securities
of the Company registration rights that were senior to or on a pari passu basis
with the registration rights granted to them under the Modification Agreement
(the "Waiver").
D. For purposes of Section 5 of the Original Agreement (relating to
registration rights), the Company and the Common Purchasers desire to amend the
Original Agreement to add the Note Investors as parties thereto, and the Note
Investors desire to become parties to the Original Agreement. The Common
Purchasers further desire to extend the original Waiver also to apply to the
registration rights granted to the Note Investors under this First Amendment and
to the future private placement of up to one million dollars ($1,000,000) of the
Company's Common Stock, expected to close on or before December 1, 1999 (the
"Private Placement").
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. The Common Purchasers hereby extend the Waiver to this First
Amendment and to the Private Placement.
2. The term "Holder" in Section 5.1 of the Original Agreement is
hereby amended to include the Note Investors.
90
3. The term "Registrable Securities" in Section 5.1 of the
Original Agreement is hereby amended to include the Common Stock issuable to the
Note Investors.
4. The term "Closing Date," as it is used in Section 5.2 of the
Original Agreement, shall mean October 11, 1999 with respect to the Note
Investors exclusively.
5. The Note Investors agree to be bound by the terms and conditions of
the Original Agreement, as amended hereby.
6. Except as set forth herein, the Original Agreement shall remain in
full force and effect.
7. This First Amendment shall be governed by, and construed in
accordance with, the laws of the State of California.
8. This First Amendment may be executed in one or more counterparts,
each of which shall be deemed an original, but which shall together constitute
one and the same instrument.
91
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to the Original Agreement on the date first written above.
EUPHONIX, INC.
By: Barry Margerum
Title: Chief Executive Officer & President
COMMON PURCHASERS
/s/ ONSET ENTERPRISE ASSOCIATES
Onset Enterprise Associates
By: /s/ ROB KUHLING
Title: /s/ PRINCIPAL
Linda Wei-Lee Chang 1998 Trust:
By: /s/ MICHAEL MINHALL, TRUSTEE
Michael Minhall, Trustee
By: /s/ LINDA WEI-LEE CHANG, TRUSTEE
Linda Wei-Lee Chang, Trustee
Michael Minhall Chang 1998 Trust:
By: /s/ LINDA WEI-LEE CHANG, TRUSTEE
Linda Wei-Lee Chang, Trustee
By: /s/ MICHAEL MINHALL, TRUSTEE
Michael Minhall, Trustee
/s/ MILTON M. T. CHANG
Milton M. T. Chang
/s/ SCOTT SILFVAST
Scott Silfvast
/s/ AMY SILFVAST
Amy Silfvast
[10/99 - Signature Page to First Amendment to Common Stock Purchase Agreement]
92
NOTE INVESTORS
/s/ ONSET ENTERPRISE ASSOCIATES
Onset Enterprise Associates
By: /s/ ROB KUHLING
Title: /s/ PRINCIPAL
/s/ MILTON M.T. CHANG
Milton M. T. Chang
[10/99 - Signature Page to First Amendment to Common Stock Purchase Agreement]
93
FIRST AMENDMENT TO THE
REGISTRATION RIGHTS AGREEMENT
THIS FIRST AMENDMENT (the "First Amendment") is made as of October 11,
1999, to the Registration Rights Agreement, dated as of January 26, 1999 (the
"Original Agreement") by and among Euphonix, Inc., a California corporation (the
"Company") and the purchasers of Common Stock of the Company pursuant to the
Common Stock Purchase Agreement dated as of January 26, 1999 (the "Common
Purchasers"). This First Amendment is entered into by and among the Company, the
Common Purchasers and certain of the parties to the Secured Promissory Note
issued by the Company to such parties and dated as of April 23, 1999 (the
"Note") (the "Note Investors"). All capitalized terms used in this First
Amendment not otherwise defined herein shall be as defined in the Original
Agreement.
Background
A. Pursuant to the terms of the Note, the Note Investors may convert
the Note into shares of Common Stock of the Company (the "Common Stock").
B. Pursuant to a covenant in the Note, the Company is obligated to
amend the Original Agreement to provide for registration rights for the Common
Stock.
C. The Company and the Common Purchasers desire to amend the Original
Agreement to add the Note Investors as parties thereto, and the Note Investors
desire to become parties to the Original Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby amend the
Original Agreement as follows:
1. The term "Holder" in Section 1.2 of the Original Agreement is hereby
amended to include the Note Investors.
2. The term "Registrable Securities" in Section 1.2 of the Original
Agreement is hereby amended to include the Common Stock issuable upon conver-
sion of the Note.
3. The Note Investors agree to be bound by the terms and conditions of the
Original Agreement, as amended hereby.
4. Except as set forth herein, the Original Agreement shall remain in full
force and effect.
5. This First Amendment shall be governed by, and construed in accordance
with, the laws of the State of California.
6. This First Amendment may be executed in one or more counterparts, each
of which shall be deemed an original, but which shall together constitute one
and the same instrument.
94
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to the Original Agreement on the date first written above.
EUPHONIX, INC.
/s/ BARRY MARGERUM
By: Barry Margerum
Title: Chief Executive Officer & President
COMMON PURCHASERS
/s/ DEITER MEIER
Deiter Meier
/s/ STEPHEN D. JACKSON
Stephen D. Jackson
NOTE INVESTORS
/s/ DIETER MEIER
Deiter Meier
/s/ STEPHEN D. JACKSON
Stephen D. Jackson
/s/ PEGASUS CAPITAL II. L.P.
Pegasus Capital II, L.P.
By: /s/ MARK LANIER
Title: Principal
[10/99 - Signature Page to First Amendment to Registration Rts Agreement]
95
THE SECURITY EVIDENCED BY THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION
OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE
SALE, TRANSFER OR ASSIGNMENT IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT,
OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES
REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER OR
ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS
OF SUCH ACT.
SECURED PROMISSORY NOTE
Two Million One Hundred Thousand Dollars
($2,100,000.00) July 30, 1999
FOR VALUE RECEIVED, the undersigned, Euphonix, Inc., a California
corporation ("Borrower"), hereby promises to pay to Taurean Investments AG,
a Swiss corporation and Pegasus Capital II, L.P.
(individually an "Investor" and collectively, the "Investors" or "Lender"), or
registered assigns, the principal sum of Two Million One Hundred Thousand
Dollars ($2,100,000) or so much of such principal sum as may from time to time
have been advanced by each investor and be outstanding, together with accrued
interest, as provided herein, with the maximum principal sum hereof (or lesser
amount, to the extent that less than the full amount of such principal sum is
advanced and outstanding) allocable among the Investors as follows:
Name of Investor Maximum Principal Amount
- ---------------------------------- -------------------------
Taurean Investments AG $ 2,000,000
Pegasus Capital II, L.P. $ 100,000
---------------------
Total $ 2,100,000
A. Principal.
1. Advances. From the date hereof until 5:00 p.m. Pacific Standard Time on
October 31, 1999, Borrower may from time to time request advances from Lender
(individually an "Advance" and collectively the "Advances") by giving written
notice to the Investors in accordance with the terms hereof, which notice shall
indicate the amount of the Advance requested; provided, however, that no advance
shall be in the aggregate less than $525,000. Subject to the satisfaction or
waiver of the conditions set forth in Section A.3 below, and provided that the
requested Advance would not cause an Event of Default (as defined in Section E
below) to occur, Lender shall make the Advance to Borrower within three (3)
business days of receipt of Borrower's notice for each Advance. Lender shall not
be obligated to make an Advance to the extent that such Advance, when aggregated
with all prior Advances, would exceed Two Million One Hundred Thousand Dollars
($2,100,000).
2. Commitments. Each Investor shall advance to Borrower its pro rata portion of
each Advance based on its proportionate share of the principal sum hereof set
forth above besides its name. Each Investor shall be severally but not jointly
liable to make its pro rata portion of the Advances hereunder. Failure by any
Investor to fund its pro rata portion of any Advance shall not relieve any other
Investor from its obligation to fund its pro rata portion thereof.
3. Conditions to Advances. Borrower's right to request, and Lender's obligation
to make, each Advance shall be subject, in each case, to the satisfaction of the
following conditions, any or all of which may be waived by Lender, in its sole
and exclusive discretion, to the extent permitted by law:
(a) The representations and warranties contained in Section D.2 and D.3
shall be true and correct in all material respects on and as of the date of such
request for an Advance and on the effective date of each Advance as though made
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at and as of each such date, and no Event of Default shall have occurred and be
continuing, or would result from such Advance.
(b) There shall be no law, order, rule or regulation of any governmental
authority in effect which has the effect of prohibiting, making unlawful or
hindering any of the transactions contemplated by this Note.
(c) There shall be no outstanding Event of Default and no condition which,
with notice or passage of time or both would constitute an Event of Default.
(d) The Board of Directors of Borrower shall have approved this Note and
the transactions evidence by this Note, including without limiting the
conversion feature of this Note.
(e) Certain shareholders of Borrower shall have signed and delivered to
Lender a written agreement in a form acceptable to Lender evidencing their
agreement to vote their shares of common stock of Borrower in favor of the
approval of the convertibility of this Note as set forth below.
4. Use of Proceeds. The proceeds of Advances shall be used for general corporate
purposes, including for working capital. The proceeds of Advances shall not be
used for payments or distributions to shareholders, directors, officers or
affiliates of the Borrower. Notwithstanding the foregoing, such proceeds may be
used for payment of salaries and accrued bonuses of officers and employees of
the Borrower.
B. Interest. Interest shall accrue with respect to Advances on the principal sum
hereunder at the per annum rate of seven and three quarters percent (7.75%), net
of any deductions or withholding taxes. Interest payable hereunder shall be
calculated on the basis of a three hundred sixty (360) day year for actual days
elapsed. Interest shall be due and payable (or converted as set forth in Section
C below) upon payment or conversion of the principal sum of this Note pursuant
to Section C below. Notwithstanding the foregoing to the contrary, during any
period for which an Event of Default shall have occurred and be continuing,
interest shall accrue with respect to Advances on the principal sum hereunder at
the per annum rate of eleven and three quarters percent (11.75%), net of any
deductions or withholding taxes.
C. Payment or Conversion.
1. Scheduled Payment. Subject to other provisions of this Note, the
outstanding principal sum of this Note, together with the accrued interest
thereon, shall be due and payable on July 12, 2001.
2. No Prepayment. Borrower shall not have the right at any time to time to
prepay, in whole or in part, the outstanding principal sum of this Note and/or
any accrued interest thereon.
3. Form of Payment. Unless converted pursuant to the terms set forth
below, the outstanding principal sum and accrued interest thereon are to be paid
in lawful money of the United States of America in federal or other immediately
available funds.
4. Immediate Payment. Notwithstanding anything herein to the contrary, in
the event that all necessary shareholder, regulatory and other approvals or
consents for the convertibility of this Note as set forth below are not obtained
by October 31, 1999, (i) the outstanding principal sum from all Advances as of
the date thereof and all future Advances from the date thereof and (ii) accrued
interest thereon, shall be repaid in full upon demand by the Investors
representing two-thirds (2/3) of the then outstanding principal sum of this
Note; provided, however, no such demand may be made until January 1, 2000; and
provided, further, that the Investors must provide at least one (1) month prior
written notice to the Borrower prior to such demand. To the extent the approvals
or consents contemplated herein are obtained after October 31, 1999, this Note
shall not be subject to repayment upon demand as set forth herein but rather in
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accordance with the scheduled payment as set forth in Section C.1 above. In
addition, such demand may not be made if shareholder approval for the
convertibility of this Note is not obtained as a result of the Investors failing
to vote or consent for such convertibility.
5. Conversion.
(a) Subject to obtaining all necessary shareholders, regulatory and
other approvals or consents and further subject to Section C.5 (c) hereof, all
or part of the principal sum of this Note, together with the accrued interest
thereon (including any principal amounts which have not been advanced under this
Note), shall be convertible at the option of the Lender into shares of common
stock of the Borrower (the "Common Stock"). The number of shares of Common Stock
to be issued upon such conversion(s) shall be equal to the quotient obtained by
dividing (i) such part (or all) of the principal sum of this Note (including any
principal amounts which have not been advanced under this Note) plus accrued
interest thereon by (ii) Seventy-Five Cents ($.75). In the event that Investors
(or either of them) exercise this conversion right and the full amount of
principal under this Note has not been advanced, then as part of such
conversion, such Investor(s) shall pay to Borrower such Investor's unadvanced
portion of the principal amount of this Note.
(b) No fractional share of Common Stock will be issued upon such
conversion(s) of this Note. In lieu of any fractional share to which the Lender
would otherwise be entitled, the Borrower will pay to the Lender in cash the
amount of the unconverted principal and interest balance of this Note that would
otherwise be converted into such fractional share. At its expense, the Borrower,
will as soon as practicable thereafter, issue and deliver to each Investor, at
its principal office, or other address notified by each Investor to the Borrower
from time to time, a certificate or certificates for the number of shares
(representing its pro rata portion) to which the Investor is entitled upon such
conversion(s). Upon such conversion(s) of this Note, the Borrower will be
forever released from all of its obligations and liabilities under this Note, to
the extent of the conversion. Such conversions may be exercised individually by
each Investor but notwithstanding anything herein to the contrary, each such
conversion must be for the full amount of the outstanding principal and accrued
interest thereon payable to the Investor exercising its rights under Section 5
hereunder at the time of such exercise.
(c) Notwithstanding anything herein to the contrary, Section C.5(a) of
this Note shall not apply and this Note shall not be convertible into shares of
Common Stock as contemplated herein upon the occurrence of the following: the
consummation of any transaction or series of transactions (collectively, the
"Transaction"), including without limitation, the sale, transfer or disposition
of all or substantially all of the Borrower's assets or the merger of the
Borrower with or into, or consolidation with, any other corporate entity,
whereby the holders of the Borrower's voting securities prior to the Transaction
do not hold more than 50% of the voting securities of the surviving entity
following the consummation of the Transaction. Notice of any such Transaction
shall be provided to the Investors fourteen (14) calendar days prior to the
consummation of any such Transaction and, notwithstanding anything to the
contrary contained elsewhere in this Note, Investors may exercise their rights
of conversion during such 14-day period.
D. Security Interest.
1. Grant of Security Interest. Upon the first Advance hereunder,
Borrower grants to Lender a security interest in the Collateral, as defined
herein, to secure the payment of all of the outstanding indebtedness hereunder
(the "Secured Obligations") including, without limitation, principal, accrued
interest, other advances made under this Note and any attorneys' fees to which
Lender is entitled under this Note. The amounts payable under this Note and the
security interest granted hereunder shall be senior in right to payment and lien
priority to the rights and security interest granted to the holders of the
Secured Promissory Note dated April 23, 1999 in the original principal amount of
$2,000,000 (the "April 23, 1999 Note"), subject to the consent of such holders
as provided in Section G below.
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2. Representations and Warranties Regarding Collateral. On the date of
this Note and as of the date of each Advance under this Note, Borrower does and
shall represent and warrant to Lender, that as of each such date:
(a) Borrower is the true and lawful owner of the Collateral,
having good and marketable title thereto, free and clear of any and all Liens
other than the Lien and security interest granted to Lender hereunder and
Permitted Liens.
(b) The lien against the Collateral granted hereunder is and
shall be a first-priority lien against the collateral and each portion thereof,
subject to Permitted Liens.
(c) Borrower shall not create or assume or permit to exist any
such Lien on or against any of the Collateral except as created or permitted by
this Note and Permitted Liens, and Borrower shall promptly notify Lender of any
such other Lien against the Collateral and shall defend the Collateral against,
and take all such action as may be reasonably necessary to remove or discharge,
any such Lien.
(d) Borrower shall take all commercially reasonable actions
necessary to protect and preserve the Collateral which is used in its business
in good condition and repair, subject to ordinary wear and tear, and to preserve
its value and usefulness.
(e) No part of the Intellectual Property Collateral has been
judged invalid or unenforceable, in whole or in part.
(f) No claim has been made that any part of the Intellectual
Property Collateral violates the rights of any third party.
(g) The Collateral consists of all assets which are required
for the conduct and operation of the business of Borrower as of the date of this
Note.
(h) The Intellectual Property Collateral includes all of the
technology, know-how and proprietary information which are required for the
conduct and operation of the business of borrower as of the date of this Note.
3. General Representations and Warranties. On the date of this Note and
as of the date of each Advance under this Note, Borrower does and shall
represent and warrant to Lender, that as of each such date:
(a) Organization and Qualification. Borrower is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California. Borrower has the requisite corporate power and authority to
own, operate or lease its properties and to carry on its business as it is now
being conducted and is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction in which the nature of its business or the
properties owned, operated or leased by it makes such qualification, licensing
or good standing necessary, except where the failure to have such power or
authority, or the failure to be so qualified, licensed or good standing
necessary, except where the failure to have such power or authority, or the
failure to be so qualified, licensed or in good standing, would not have a
Material Adverse Effect.
The term "Material Adverse Effect", as used in this Note,
means any change in or effect (or any development that is reasonably likely to
result in any change or effect) on the business, business prospects, properties,
assets, operations, financial condition or results of operations of Borrower
that is materially adverse to Borrower taken as a whole.
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(b) Authority Relative to this Note. This Note has been duly
and validly authorized, executed and delivered by Borrower and constitutes a
valid and binding obligation of Borrower enforceable against Borrower in
accordance with its terms, except that such enforceability (i) may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting or relating
to the enforcement of creditors' rights generally and (ii) is subject to general
principles of equity.
(c) No Conflict; Required Filings and Consents. Except for the
approval of Shareholders contemplate under Section C, none of the execution and
delivery of this Note by Borrower, the consummation by Borrower of the
transactions contemplated hereby or compliance by Borrower with any of the
provisions hereof will (i) conflict with or violate the certificate of
incorporation or by-laws of Borrower, (ii) conflict with or violate any material
statute, ordinance, rule, regulation, order, judgment or decree applicable to
Borrower, or by which Borrower or its properties or assets may be bound, or
(iii) result in a violation or breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in any loss of any material benefit, or the creation
of any lien on any of the property or assets of Borrower pursuant to any
material agreement, a copy of which would be required to be filed as an exhibit
to the Company's Form 10-K or Form 10-Q filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
(d) Consents. None of the execution and delivery of this Note
by Borrower, the consummation by Borrower of the transactions contemplated
hereby or compliance by Borrower with any of the provisions hereof will require
any consent, waiver, approval, authorization or permit of, or registration or
filing with or notification to (any of the foregoing being a "Consent"), any
government or subdivision thereof, or any administrative, governmental or
regulatory authority, agency, commission, tribunal or body, domestic, foreign or
supranational (a "Governmental Entity"), except for Consents the failure of
which to obtain or make would not have a Material Adverse Effect or adversely
affect the ability of Borrower to consummate the transactions contemplated
hereby; provided that the convertibility feature of this Note as set forth in
Section C which requires shareholder approval pursuant to the Nasdaq Stock
Market's shareholder approval provisions is obtained.
(e) Material Adverse Change. Since the date of the latest
financial statements filed by Borrower with the Commission prior to the date of
this Note, there has not been any event, occurrence or development that has
resulted or, to the Company's knowledge, is reasonably likely to result in a
Material Adverse Effect.
4. Perfection of Security Interest. Borrower agrees to take all actions
required or requested by Lender and reasonably necessary to perfect, to continue
the perfection of, and to otherwise give notice of, the Lien granted hereunder,
including, but not limited to, execution and filing of financing statements and
the filing of notices of security interests with the United States Patent and
Trademark Office.
E. Events of Default.
1. Definition of Event of Default. The occurrence of any one
or more of the following events shall constitute an "Event of Default"
hereunder:
(a) Borrower's failure to perform, keep or observe any
obligation under this Note or any of the covenants contained in this Note which
failure is not cured within 30 days from the notice of the occurrence thereof
delivered by Lender to Borrower; or
(b) 60 days' lapse following the institution of proceedings
against Borrower, or Borrower's filing of a petition or answer or consent
seeking reorganization or release, under the federal Bankruptcy Code, or any
100
other applicable federal or state law relating to creditor rights and remedies,
or Borrower's consent to the filing of any such petition or the appointment of a
receiver, liquidator, assignee, trustee or other similar official of Borrower or
of any substantial part of its property, or Borrower's making of an assignment
for the benefit of creditors, or the taking of corporate action in furtherance
of such action.
(c) Any representation or warranty of the Borrower made in
this Note proves untrue in any material respect as of the date of the issuance
or making thereof.
(d) The occurrence of any default under the April 23, 1999
Note which is not remedied within any applicable grace period provided therein.
2. Rights and Remedies on Event of Default.
(a) During the continuance of an Event of Default, Lender
shall have the right, itself or through any of its agents, with notice to
Borrower (as provided below), as to any or all of the Collateral, by any
available judicial procedure, or without judicial process (provided, however,
that it is in compliance with the UCC), declare all obligations evidenced by
this Note immediately due and payable, cease advancing money or extending credit
to or for the benefit of Borrower under this Note, and to exercise any and all
rights afforded to a secured party under the UCC or other applicable law.
Without limiting the generality of the foregoing, Lender shall have the right to
sell or otherwise dispose of all or any part of the Collateral, either at public
or private sale, in lots or in bulk, for cash or for credit, with or without
warranties or representations, and upon such terms and conditions, all as
Lender, in its reasonable discretion, may deem advisable, and it shall have the
right to purchase at any such sale. Borrower agrees that a notice sent at least
fifteen (15) days before the time of any intended public sale or of the time
after which any private sale or other disposition of the Collateral is to be
made shall be reasonable notice of such sale or other disposition. The proceeds
of any such sale, or other Collateral disposition shall be applied, first to the
expenses of retaking, holding, storing, processing and preparing for sale,
selling, and the like, and to Lender's reasonable attorneys' fees and legal
expenses, and then to the Secured Obligations and to the payment of any other
amounts required by applicable law, after which Lender shall account to Borrower
for any surplus proceeds. If, upon the sale or other disposition of the
Collateral, the proceeds thereof are insufficient to pay all amounts to which
Lender is legally entitled, Borrower shall be liable for the deficiency,
together with interest thereon, and the reasonable fees of any attorneys Lender
employs to collect such deficiency; provided, however that the foregoing shall
not be deemed to require Lender to resort to or initiate proceedings against the
Collateral prior to the collection of any such deficiency or other amount
directly from Borrower.
(b) Borrower appoints Lender, and any officer, employee or
agent of Lender, with full power of substitution, as Borrower's true and lawful
attorney-in-fact, effective as of the date hereof, with power, in its own name
or in the name of Borrower, during the continuance of an Event of Default, to
endorse any notes, checks, drafts, money orders, or other instruments of payment
in respect of the Collateral that may come into Lender's possession, to sign and
endorse any drafts against debtors, assignments, verifications and notices in
connection with accounts, and other documents relating to Collateral; to pay or
discharge taxes or Liens at any time levied or placed on or threatened against
the Collateral; to demand, collect, issue receipt for, compromise, settle and
sue for monies due in respect of the Collateral; to notify persons and entities
obligated with respect to the Collateral to make payments directly to Lender;
and, generally, to do, at Lender's option and at Borrower's expense, at any
time, or from time to time, all acts and things which Lender deems necessary to
protect, preserve and realize upon the Collateral and Lender's security interest
therein to effect the intent of this Note, all as fully and effectually as
Borrower might or could do; and Borrower hereby ratifies all that said attorney
shall lawfully do or cause to be done by virtue hereof. This power of attorney
shall be irrevocable as long as any of the Secured Obligations are outstanding.
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(c) All of Lender's rights and remedies with respect to the Collateral,
whether established hereby or by any other agreements, instruments or documents
or by law shall be cumulative and may be exercised singly or concurrently.
(d) The rights of Lender under this Note with respect to any Collateral
and the enforcement of the security interests and associated rights hereunder
may be exercised jointly by Investors or singly by any Investor representing
two-thirds (2/3) of the then outstanding principal sum of this Note.
(e) Upon the occurrence of an Event of Default, either Investor may
bring suit against Borrower to collect amounts due such Investor under this
Note.
(f) Either Investor may bring suit against Borrower to enforce the
provisions of this Note.
F. Restrictions on Transfer and Compliance with Securities Act.
1. Certificates. Certificates representing any of the shares of Common
Stock acquired pursuant to the provisions of this Note shall have endorsed
thereon the following legends, as appropriate.
(a) Such shares of Common Stock will not be registered under
the Securities Act of 1933, as amended (the "Securities Act"), nor qualified (if
necessary) under applicable state securities laws and consequently will have the
following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED
OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER
THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT."
(b) Any legend required to be placed thereon by any applicable
state securities laws.
(c) Each Investor, by acceptance hereof, agrees that this Note
and the shares of Common Stock to be issued upon conversion pursuant to the
terms hereof are being acquired solely for its own account and not as a nominee
for any other party and not with a view toward the resale or distribution
thereof and that it will not offer, sell or otherwise dispose of this Note or
any shares of Common Stock to be issued upon conversion pursuant to the terms
hereof except under circumstances which will not result in a violation of the
Securities Act or of applicable state securities laws.
(d) Each Investor, by acceptance hereof, represents that it is
(i) an accredited investor within the meaning of Rule 501 under the Securities
Act and has such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of the purchase of the Note;
(ii) aware of the Company's business affairs and financial condition; and (iii)
aware that the Note has not been registered under the Securities Act of 1933, as
amended, in reliance upon a specific exemption therefrom.
(e) Subject to the preceding, this Note may be transferred
only upon surrender of the original Note for registration of transfer, duly
endorsed, or accompanied by a duly executed written instrument of transfer in
form satisfactory to Borrower. Thereupon, a new Note for like principal amount
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and interest will be issued to, and registered in the name of, the transferee.
Interest and principal are payable only to the registered holder of the Note.
G. Covenants.
(a) Registration Rights. Upon receipt of the necessary
approvals for the convertibility feature of this Note set forth in Section C.5
above, the Borrower hereby covenants to enter into a registration rights
agreement substantially similar to the Registration Rights Agreement dated
January 26, 1999 with Deiter Meier and Stephen Jackson, with each of the
Investors to provide for the registration of the shares of Common Stock into
which the Note is then convertible.
(b) Subordination. Borrower shall use commercially reasonable
efforts to obtain the consent of the holders of the April 23, 1999 Note to the
subordination of the right to payment under and the security interest granted
pursuant to such promissory note as described in Section D.1 above. Failure to
obtain such consent by October 31, 1999 shall constitute an Event of Default
hereunder. Notwithstanding anything to the contrary contained elsewhere in this
Note, Lender shall not be required to make any advances under this Note unless
and until such consent is obtained and delivered to Lender.
H. Prior Note. This Note shall supersede the Promissory Note by Borrower in
favor of Taurean Investments AG dated July 13, 1999 in the amount of $500,000,
and the principal amount of $500,000 borrowed thereunder shall be considered an
Advance pursuant to Section A.1 above.
I. Right of First Offer: Subject to the rights of other stockholders of the
Borrower, Investors shall have a right of first offer to participate, on a
pro-rata basis (assuming the conversion of the Note as provided herein), in all
future private placements of equity securities and debt instruments convertible
into equity securities of the Borrower, in accordance with the Right of First
Offer Agreement executed concurrently herewith.
J. Other Provisions.
1. Definitions. As used herein, the following terms shall have
the following meanings:
"Collateral" means the property described on Exhibit A
attached hereto.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Intellectual Property Collateral" means:
(a) Copyrights, Trademarks and Patents;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software
products now or hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to Borrower
now or hereafter existing, created, acquired or held;
103
(d) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and
(g) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
"Lien" means any lien (statutory or other), mortgage, pledge,
hypothecation, assignment, deposit arrangement, security interest, charge, claim
or other encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest) and any agreement to give or refrain from giving a lien,
mortgage, pledge, hypothecation, assignment, deposit arrangement, security
interest, charge, claim or other encumbrance of any kind.
"Patents" means all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations in part of the same.
"Permitted Liens" means: (i) Liens imposed by law, such as
carriers', warehousemen's, materialmen's and mechanics' liens, or Liens arising
out of judgments or awards against Borrower with respect to which Borrower at
the time shall currently be prosecuting an appeal or proceedings for review;
(ii) Liens for taxes not yet subject to penalties for nonpayment and Liens for
taxes the payment of which is being contested in good faith and by appropriate
proceedings and for which, to the extent required by generally accepted
accounting principles then in effect, proper and adequate book reserves relating
thereto are established by Borrower; (iii) purchase money security interests and
liens in connection with capital leases incurred in the ordinary course of
business (to the extent such liens are only on the leased property) or existing
on after acquired property at the time of its acquisition by the Borrower; (iv)
liens existing on property as of the date of this Note; (v) liens securing the
performance of bids, trade contracts, leases, surety bonds and the like; (vi)
leases and sublicenses granted to others in the ordinary course of business;
(vii) liens consisting of rights of set-off or bankers liens of a customary
nature; (viii) liens in connection with the establishment of receivable lines of
credit with commercial banks or other institutional lenders; (ix) liens
consisting of agreements to refrain from giving or creating Liens (other than
the Lien and security interest granted to Lender hereunder) in connection with
joint venture agreements, strategic alliances and the like; and (x) liens
granted in all of the Company's assets pursuant to the secured Promissory Note
date April 23, 1999.
"Trademarks" means any trademark and servicemark rights,
whether registered or not, applications to register and registrations of the
same and like protections, and the entire goodwill of the business of Borrower
connected with and symbolized by such trademarks.
"UCC" means the Uniform Commercial Code in effect from time to
time in the relevant jurisdiction.
2. Governing Law; Venue. This Note shall be governed by the
laws of the State of California, without giving effect to
conflicts of law principles. Borrower and Lender agree that all actions or
proceedings arising in connection with this Note shall be tried and litigated
only in the state and federal courts located in the City and County of San
Francisco, State of California or, at Lender's option, any court in which Lender
determines it is necessary or appropriate to initiate legal or equitable
proceedings in order to exercise, preserve, protect or defend any of its rights
104
and remedies under this Note or otherwise or to exercise, preserve, protect or
defend its Lien, and the priority thereof, against the Collateral, and which has
subject matter jurisdiction over the matter in controversy. Borrower waives any
right it may have to assert the doctrine of forum non conveniens or to object to
such venue, and consents to any court ordered relief Borrower waives personal
service of process and agrees that a summons and complaint commencing an action
or proceeding in any such court shall be promptly served and shall confer
personal jurisdiction if served by registered or certified mail to Borrower. The
choice of forum set forth herein shall not be deemed to preclude the enforcement
of any judgment obtained in such forum, or the taking of any action under this
Note to enforce the same, in any appropriate jurisdiction.
3. Notices. Any notice or communication required or desired to be
served, given or delivered hereunder shall be in the form and manner specified
below, and shall be addressed to the party to be notified as follows:
If to Investors: Taurean Investments AG
Grienbachstrasse 17
CH-6300 Zug, Switzerland
With a copy to: Thomas Rinderknecht, Esq.
Rinderknecht Klein & Stadelhoffer
Beethovenstrasse 7
P.O. Box 4451
Ch-8022 Zurich, Switzerland
Fax: 011-41-01-287-24-00
Pegasus Capital II, L.P.
181 Elm Street
New Canaan, CT 06840
Attention: Mark Lanier
Fax: (203) 966-4788
With a copy to: Thomas Rinderknecht, Esq.
Rinderknecht Klein & Stadelhoffer
Beethovenstrasse 7
P.O. Box 4451
Ch-8022 Zurich, Switzerland
Fax: 011-41-01-287-24-00
and to: Vern S. Bothwell, Esq.
Feldman, Waldman & Kline
3 Embarcadero Center, 28th Floor
San Francisco, CA 94111
Fax: (415) 981-1350
If to Borrower: Euphonix, Inc.
220 Portage Avenue
Palo Alto, California 94306
Attention: Barry Margerum
Fax: (650) 846-1131
With a copy to: Wilson Sonsini Goodrich & Rosati,
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: John Roos, Esq.
Fax: (650) 493-6811
105
or to such other address as each party designates to the other by notice in the
manner herein prescribed. Notice shall be deemed given hereunder if (i)
delivered personally or otherwise actually received, (ii) sent by overnight
delivery service, (iii) mailed by first-class United States mail, postage
prepaid, registered or certified, with return receipt requested, or (iv) sent
via telecopy machine with a duplicate signed copy sent on the same day as
provided in clause (ii) above. Notice mailed as provided in clause (iii) above
shall be effective upon the expiration of three (3) business days after its
deposit in the United States mail, and notice telecopied as provided in clause
(iv) above shall be effective upon receipt of such telecopy if the duplicate
signed copy is sent under clause (iv) above. Notice given in any other manner
described in this section shall be effective upon receipt by the addressee
thereof, provided , however, that if any notice is tendered to an addressee and
delivery thereof is refused by such addressee, such notice shall be effective
upon such tender unless expressly set forth in such notice.
4. Lender's Rights; Borrower Waivers. Lender's acceptance of partial or
delinquent payment from Borrower hereunder, or Lender's failure to exercise any
right hereunder, shall not constitute a waiver of any obligation of Borrower
hereunder, or any right of Lender hereunder, and shall not affect in any way the
right to require full performance at any time thereafter. Except as otherwise
expressly provided herein, Borrower waives presentment, diligence, demand of
payment, notice, protest and all other demands and notices in connection with
the delivery, acceptance, performance, default or enforcement of this Note. In
any action on this Note, Lender need not produce or file the original of this
Note, but need only file a photocopy of this Note certified by Lender be a true
and correct copy of this Note in all material respects.
5. Severability. Whenever possible each provision of this Note shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision is prohibited by or invalid under applicable law, it shall
be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of the provision or the remaining provisions of this
Note.
106
6. Amendment Provisions. This Note may not be amended or modified, nor
may any of its terms be waived, except by written instruments signed by Borrower
and Lender.
7. Binding Effect. This Note shall be binding upon, and shall inure to
the benefit of, Borrower and the holder hereof and their respective successors
and assigns; provided , however, that Borrower's rights and obligations shall
not be assigned or delegated without Lender's prior written consent, given in
its sole discretion, and any purported assignment or delegation without such
consent shall be void ab initio.
8. Time of Essence. Time is of the essence of each and every provision
of this Note.
9. Headings. Section headings used in this Note have been set forth
herein for convenience of reference only. Unless the contrary is compelled by
the context, everything contained in each section hereof applies equally to this
entire Note.
10. No Usury. This Note is subject to the express condition that at no
time shall the Borrower be obligated or required to pay interest hereunder at a
rate which could subject Lender to either civil or criminal liability as a
result of being in excess of the maximum rate which the Borrower is permitted by
law to contract or agree to pay. If, by the terms of this Note, the Borrower is
at any time required or obligated to pay interest at a rate in excess of such
maximum rate, the rate of interest under this Note shall be deemed to be
immediately reduced to such maximum rate and interest payable hereunder shall be
computed at such maximum rate and the portion of all prior interest payments in
excess of such maximum rate shall be applied and shall be deemed to have been
payments in reduction of the principal balance of this Note.
11. Attorneys' Fees. Should any litigation, enforcement or collection
action be commenced between any of the parties to this Note under or in
connection with this Note, the prevailing party in such litigation, enforcement
or collection action shall be entitled, in addition to such other relief as may
be granted, to a reasonable sum as and for its attorneys' fees in such
litigation, enforcement or collection action which shall be determined by the
court in such litigation, enforcement or collection action or in a separate
action brought for that purpose. The provisions of this Section shall survive
the entry of any judgement or award and shall continue to apply with respect to
any action to collect or recover any such judgment or award.
107
IN WITNESS WHEREOF, the Borrower and each of the Investors has caused this Note
to be duly executed on the date first written above.
EUPHONIX, INC.
By: /s/ BARRY MARGERUM
Name: Barry Margerum
Title: Chief Executive Officer
"INVESTORS":
TAUREAN INVESTMENTS AG
By: /s/ DIETER MEIER
Name: Dieter Meier
Title: Principal
PEGASUS CAPITAL II, L.P.
By: /s/ MARK LANIER
Name: Mark Lanier
Title: Principal
108
EXHIBIT "A"
COLLATERAL DESCRIPTION ATTACHMENT
TO SECURED PROMISSORY NOTE
All personal property of Borrower (herein referred to as "Borrower" or
"Debtor") whether presently existing or hereafter created, written, produced or
acquired, including, but not limited to: (1) all accounts receivable, accounts,
chattel paper, contract rights (including, without limitation, royalty
agreements, license agreements and distribution agreements), documents,
instruments, money, deposit accounts and general intangibles, including, without
limitation, returns, repossessions, books and records relating thereto, and
equipment containing said books and records, all investment property, including
securities and securities entitlements; (2) all software, computer source codes
and other computer programs (collectively, the "Software Products"), and all
common law and statutory copyrights and copyright registrations, applications
for registration, now existing or hereafter arising, United States of America
and foreign, obtained or to be obtained on or in connection with the Software
Products, or any parts thereof or any underlying or component elements of the
Software Products together with the right to copyright and all rights to renew
or extend such copyrights and the right (but not the obligation) of Lender
(herein referred to as "Lender" or "Secured Party") to sue in its own name
and/or the name of the Debtor for past, present and future infringements of
copyright; (3) all goods, including, without limitation, equipment and inventory
(including, without limitation, all export inventory); (4) all guarantees and
other security therefor; (5) all trademarks, service marks, trade names and
service names and the goodwill associated therewith including, without
limitation, the following:
Reel Feel(TM)
Clear Displays(TM)
Track Panner(TM)
SnapShot Recall(TM)
DSC(TM) (Digital Studio Controller)
Hyper-Surround(TM)
Total Automation(TM)
Mixview(TM)
(6) (a) all patents and patent applications filed in the United States Patent
and Trademark Office or any similar office of any foreign jurisdiction, and
interests under patent license agreements, including, without limitation, the
inventions and improvements described and claimed therein, (including, without
limitation, United States Patents Nos. 5524060, 5402501, 5399820 and 5677959 and
applications for United States patents for (i) Computer-Mirrored Panel Input
Devices, (ii) Multiple Driver Rotary Control for Audio Processors or Other Uses,
(iii) Functional Panel for Audio Mixer, and (iv) Cont. and Amendment of
"Computer-Mirrored Panel Input Devices"), (b) licenses pertaining to any patent
109
whether Debtor is licensor or licensee, (c) all income, royalties, damages,
payments, accounts and accounts receivable now or hereafter due and/or payable
under and with respect thereto, including, without limitation, damages and
payments for past, present or future infringements thereof, (d) the right (but
not the obligation) to sue for past, present and future infringements thereof,
(e) all rights corresponding thereto throughout the world in all jurisdictions
in which such patents have been issued or applied for, and (f) the reissues,
divisions, continuations, renewals, extensions and continuations-in-part with
any of the foregoing (all of the foregoing patents and applications and
interests under patent license agreements, together with the items described in
clauses (a) through (f) in this paragraph are sometimes herein individually and
collectively referred to as the "Patents");
(7) all rights in and to (i) the
on-air mixing consoles of the Series CS3000B, (ii) mixer hardware software
designs, (iii) Real Time(TM) software design, and (iv) analog and digital audio
hardware design expertise; and
(8) all products and proceeds, including, without
limitation, insurance proceeds, of any of the foregoing.
Notwithstanding the foregoing, the grant of a security interest as provided
herein shall not extend to, and the term "Collateral" shall not include, any
contractual, license or lease rights or interests in which Borrower is the
grantee, licensee or lessee thereunder to the extent that Borrower, whether by
law or by the terms of such contract, license or lease, is not permitted to
assign or grant a security in interest in its rights thereunder without the
consent of the other party thereto.
110
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EUPHONIX, INC.
220 Portage Avenue
Palo Alto, California 94306
COMMON STOCK PURCHASE AGREEMENT
November 9, 1999
================================================================================
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111
TABLE OF CONTENTS
Page
SECTION 1 Authorization and Sale of Common Stock...........................1
1.1 Authorization...............................................1
1.2 Purchase and Sale of Shares.................................1
SECTION 2 Closing Date; Delivery............................................1
2.1 Closing.....................................................1
2.2 Delivery....................................................1
SECTION 3 Representations and Warranties of the Company....................2
3.1 Organization and Standing...................................2
3.2 Corporate Power.............................................2
3.3 Capitalization..............................................3
3.4 Authorization...............................................3
3.5 Financial Statements........................................3
3.6 No Material Adverse Change..................................3
3.7 No Undisclosed Liabilities..................................3
3.8 Title to Assets.............................................4
3.9 Actions Pending.............................................4
3.10 Compliance with Law.........................................4
3.11 Certain Fees................................................4
3.12 Disclosure..................................................4
3.13 Material Agreements.........................................4
3.14 Employees...................................................5
3.15 Intellectual Property, Trademarks, etc......................5
SECTION 4 Representations and Warranties of the Purchasers.................5
4.1 Experience; Speculative Nature of Investment................5
4.2 Investment..................................................5
4.3 Rule 144....................................................5
4.4 Access to Data..............................................6
4.5 Authorization...............................................6
4.6 Brokers or Finders..........................................6
4.7 Tax Liability...............................................6
4.8 Recent Transfers............................................6
SECTION 5 Conditions to Purchasers'Obligations to Close....................6
` 5.1 Representations and Warranties Correct......................7
5.2 Covenants...................................................7
5.3 Blue Sky....................................................7
5.4 Rights Agreement............................................7
5.5 Compliance with Law.........................................7
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SECTION 6 Conditions to Company's Obligations to Close.....................7
6.1 Representations.............................................7
6.2 Covenants...................................................7
6.3 Blue Sky....................................................7
6.4 Rights Agreement............................................7
6.5 Compliance with Law.........................................7
SECTION 7 Miscellaneous....................................................8
7.1 Governing Law...............................................8
7.2 Survival....................................................8
7.3 Successors and Assigns......................................8
7.4 Entire Agreement; Amendment.................................8
7.5 Notices, etc................................................8
7.6 Delays or Omissions.........................................8
7.7 California Corporate Securities Law.........................9
7.8 Counterparts................................................9
7.9 Severability................................................9
7.10 Titles and Subtitles........................................9
7.11 Expenses....................................................9
7.12 Limitation on Liability.....................................9
7.13 Attorney's Fees.............................................9
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EXHIBITS
A Schedule of Purchasers
B Registration Rights Agreement
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EUPHONIX, INC.
COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT (the "Agreement") is made as of
November 9, 1999 by and among Euphonix, Inc., a California corporation (the
"Company"), and the individuals on the Schedule of Purchasers attached as
Exhibit A hereto (the "Purchasers").
SECTION 1
Authorization and Sale of Common Stock
1.1 Authorization. The Company has authorized the sale of up to a
number of shares of Common Stock of the Company (the "Shares"), which shall have
an aggregate market value equal to $1,750,000, based upon a cash price per share
equal to the average closing bid price per share for the ten (10) days
immediately preceeding the Closing Date ($1.1064) (as defined below), subject to
the satisfaction or waiver of the conditions set forth in Sections 5 and 6
below.
1.2 Purchase and Sale of Shares. Subject to the terms and conditions of
this Agreement, each Purchaser agrees to purchase and the Company agrees to sell
and issue to each Purchaser the number of Shares set forth opposite its name on
Exhibit A. The Company's agreement with each Purchaser is a separate agreement,
and the sale of the Shares to each Purchaser is a separate sale.
SECTION 2
Closing Date; Delivery
2.1 Closing. The purchase and sale of the Shares hereunder shall take place at
one closing ("the Closing") on November 9, 1999, (the "Closing Date"). The
Closing shall be held at the offices of Wilson Sonsini Goodrich & Rosati, 650
Page Mill Road, Palo Alto, California, at 9:00 a.m. local time, on the Closing
Date, or at such other time and place upon which the Company and the Purchaser
shall agree.
2.2 Delivery. At the Closing, the Company will deliver to each Purchaser a
certificate registered in each Purchaser's name representing the number of
Shares that each Purchaser is purchasing for payment of the purchase price
therefor as set forth in Section 1.2 above, by check payable to the Company or
by wire transfer per the Company's instructions.
SECTION 3
Representations and Warranties of the Company
Except as set forth in writing in the disclosure letter supplied by the
Company to the Purchaser (the "Disclosure Letter") the Company represents and
warrants to the Purchasers as of the date of this Agreement as follows:
3.1 Organization and Standing. The Company is a corporation duly
organized and existing under, and by virtue of, the laws of the State of
California and is in good standing under such laws. The Company has requisite
corporate power and authority to own and operate its properties and assets, and
to carry on its business. The Company is presently qualified to do business as a
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foreign corporation in each jurisdiction where the failure to be so qualified
would have a material adverse effect on the Company's business.
3.2 Corporate Power. The Company has all requisite legal and corporate
power and authority to execute and deliver this Agreement and that certain
Registration Rights Agreement substantially in the form attached hereto as
Exhibit B (the "Rights Agreement"), to sell and issue the Shares hereunder, and
to carry out and perform its obligations under the terms of this Agreement and
the Rights Agreement (together the "Agreements").
3.3 Capitalization. The authorized capital stock of the Company and the
shares thereof issued and outstanding as of the date hereof are set forth in the
Disclosure Letter. All of the outstanding shares of the Company's Common Stock
have been duly and validly authorized. Except as set forth in this Agreement and
the Rights Agreement and as set forth in the Company's most recent Form 10-K,
including the accompanying financial statements, or in the Company's most recent
Form 10-Q, filed with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act")
in other public filings made by the Company with the Commission pursuant to the
Exchange Act (collectively, the "Commission Filings"), or the Disclosure Letter,
no shares of Common Stock are entitled to preemptive rights or registration
rights and there are no outstanding options, warrants, scrip, rights to
subscribe to, call or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company. Furthermore, except as set forth in this Agreement and the Rights
Agreement and as set forth in the Commission Filings, or the Disclosure Letter,
there are no contracts, commitments, understandings, or arrangements by which
the Company is or may become bound to issue additional shares of the capital
stock of the Company or options, securities or rights convertible into shares of
capital stock of the Company. Except for registration rights contained in
agreements entered into by the Company in order to sell restricted securities as
provided in the Commission Filings or the Disclosure Letter, the Company is not
a party to any agreement granting registration rights to any person with respect
to any of its equity or debt securities. The Company is not a party to, and it
has no knowledge of, any agreement restricting the voting or transfer of any
shares of the capital stock of the Company. Except as set forth in the
Commission Filings or in the Disclosure Letter, the offer and sale of all
capital stock, convertible securities, rights, warrants, or options of the
Company issued prior to the Closing complied with all applicable federal and
state securities laws, and no stockholder has a right of rescission or damages
with respect thereto which would have a material adverse effect on the Company's
financial condition or operating results.
3.4 Authorization. All corporate action on the part of the Company and
its directors necessary for the authorization, execution, delivery and
performance of the Agreements by the Company, the authorization, sale, issuance
and delivery of the Shares, and the performance of all of the Company's
obligations under the Agreements has been taken or will be taken prior to the
Closing. The Agreements, when executed and delivered by the Company, shall
constitute valid and binding obligations of the Company, enforceable in
accordance with their terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies, except that
the indemnification provisions of Section 1.9 of the Rights Agreement may
further be limited by principles of public policy. The Shares, when issued in
compliance with the provisions of this Agreement, will be validly issued, will
be fully paid and nonassessable, and will be free of any liens or encumbrances,
other than any liens or encumbrances created by the Purchaser; provided,
however, that the Shares are subject to restrictions on transfer under state
and/or federal securities laws as set forth herein and in the Rights Agreement.
3.5 Financial Statements. The financial statements of the Company
included in the Commission Filings comply as to form in all material respects
with applicable accounting requirements and the published rules and regulations
of the Commission or other applicable rules and regulations with respect
thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent basis
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during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed or summary statements), and fairly present in all material respects
the financial position of the Company and its subsidiaries as of the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
3.6 No Material Adverse Change. Since June 30, 1999, the date through
which the most recent quarterly report of the Company on Form 10-Q has been
prepared and filed with the Commission, the Company has not experienced or
suffered any event or condition which has materially affected the business
operations, assets or financial condition of the Company.
3.7 No Undisclosed Liabilities. Except as disclosed in the Commission
Filings or the Disclosure Letter, the Company has no liabilities, obligations,
claims or losses that would be required to be disclosed on a balance sheet of
the Company (including the notes thereto), other than those incurred in the
ordinary course of the Company's business since June 30, 1999 and which,
individually or in the aggregate, do not or would not have a material adverse
effect on the Company's financial condition or operating results.
3.8 Title to Assets. The Company has good and marketable title to all
of its property and assets, free of any mortgages, pledges, charges, liens,
security interests or other encumbrances, except for those indicated in the
Commission Filings or the Disclosure Letter or such that could not reasonably be
expected to cause a material adverse effect on the Company's financial condition
or operating results.
3.9 Actions Pending. There is no action, suit, claim, investigation or
proceeding pending or, to the knowledge of the Company, threatened against the
Company, which questions the validity of this Agreement or the transactions
contemplated hereby or any action taken or to be taken pursuant hereto or
thereto. Except as set forth in the Commission Filings or the Disclosure Letter,
there is no action, suit, claim, investigation or proceeding pending or, to the
knowledge of the Company, threatened, against or involving the Company, any
subsidiary or any of their respective properties or assets and which, if
adversely determined, is reasonably likely to result in a material adverse
effect on the Company's financial condition or operating results.
3.10 Compliance with Law. To the knowledge of the Company, the business
of the Company has been and is presently being conducted in accordance with all
applicable federal, state and local governmental laws, rules, regulations and
ordinances, except as set forth in the Commission Filings or the Disclosure
Letter, or such that do not cause a material adverse effect. The Company has all
franchises, permits, licenses, consents and other governmental or regulatory
authorizations and approvals necessary for the conduct of its business as now
being conducted by it unless the failure to possess such franchises, permits,
licenses, consents and other governmental or regulatory authorizations and
approvals, individual or in the aggregate, could not reasonably be expected to
have a material adverse effect on the Company's financial condition or operating
results.
3.11 Certain Fees. No brokers, finders or financial advisory fees or
commissions will be payable by the Company with respect to the transactions
contemplated by this Agreement.
3.12 Disclosure. To the best of the Company's knowledge, neither this
Agreement nor any other documents furnished to the Purchaser by or on behalf of
the Company in connection with the transactions contemplated by this Agreement
contain any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements made herein or therein, in the
light of the circumstances under which they were made herein or therein, not
misleading.
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3.13 Material Agreements. Except as set forth in the Commission Filings
or the Disclosure Letter, the Company is not a party to any written or oral
contract, instrument, agreement, commitment, obligation, plan or arrangement, a
copy of which would be required to be filed with the Commission as an exhibit to
a registration statement or applicable form (collectively, "Material
Agreements") if the Company were registering securities under the Securities Act
of 1933, as amended (the "Securities Act"). The Company has in all material
respects performed all the obligations required to be performed by it under the
foregoing agreements, has received no notice of default and, to the best of the
Company's knowledge, is not in default under any Material Agreement now in
effect, the result of which could reasonably be expected to cause a material
adverse effect on the Company's financial condition or operating results.
3.14 Employees. Except as set forth in the Commission Filings or the
Disclosure Letter or as otherwise disclosed by the Company to the Purchaser, the
Company has no collective bargaining arrangements or agreements covering any of
its employees.
3.15 Intellectual Property, Trademarks, etc. The Company has the right
to use, free and clear of all liens, charges, claims and restrictions, all
intellectual property, patents, trademarks, service marks, trade names,
copyrights, licenses and rights necessary to the business of the Company as
presently conducted. To the best of the Company's knowledge, the Company is not
infringing upon or otherwise acting adversely to the right or claimed right of
any other person under or with respect to the foregoing.
SECTION 4
Representations and Warranties of the Purchasers
Each Purchaser hereby represents and warrants to the Company, as to
himself only and not with respect to any other Purchaser, with respect to the
purchase of Shares as follows:
4.1 Experience; Speculative Nature of Investment. Each Purchaser (or
its principals or advisors) has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar
to the Company so that it is capable of evaluating the merits and risks of its
investment in the Company and has the capacity to protect its own interests.
Each Purchaser acknowledges that its investment in the Company is highly
speculative and entails a substantial degree of risk and each Purchaser is in a
position to lose the entire amount of such investment.
4.2 Investment. Each Purchaser is acquiring the Shares for investment
for its own account, not as a nominee or agent, and not with the view to, or for
resale in connection with, any distribution thereof. Each Purchaser understands
that the Shares to be purchased hereby have not been, and will not be,
registered under the Securities Act (except as provided in Section 3 of the
Rights Agreement) by reason of a specific exemption from the registration
provisions of the Securities Act, the availability of which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
the Purchasers' representations as expressed herein. Each Purchaser is an
"accredited investor" within the meaning of Regulation D, Rule 501(a),
promulgated by the Securities and Exchange Commission.
4.3 Rule 144. Each Purchaser acknowledges that the Shares must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from such registration is available. Each Purchaser is aware of the
provisions of Rule 144 promulgated under the Securities Act which permit limited
resale of shares purchased in a private placement subject to the satisfaction of
certain conditions, including, among other things, the existence of a public
market for the shares, the availability of certain current public information
about the Company, the resale occurring not less than one year after a party has
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purchased and paid for the security to be sold, the sale being effected through
a "broker's transaction" or in transactions directly with a "market maker" and
the number of shares being sold during any three-month period not exceeding
specified limitations. Each Purchaser understands that the certificates
evidencing the Shares will be imprinted with a legend that prohibits the
transfer of such securities unless they are registered or such registration is
not required.
4.4 Access to Data. Each Purchaser has had an opportunity to discuss
the Company's business, management and financial affairs with its management.
Each Purchaser has also had an opportunity to ask questions of officers of the
Company, which questions were answered to its satisfaction. Each Purchaser
understands that such discussions, as well as any written information issued by
the Company, were intended to describe certain aspects of the Company's business
and prospects but were not a thorough or exhaustive description.
4.5 Authorization. The Agreements, when executed and delivered by the
Purchasers, will constitute valid and legally binding obligations of each
Purchaser, enforceable in accordance with their terms, except as the
indemnification provisions of Section 1.9 of the Rights Agreement may be limited
by principles of public policy, and subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
4.6 Brokers or Finders. The Purchasers have not engaged any brokers,
finders or agents, and the Company has not, and will not, incur, directly or
indirectly, as a result of any action taken by Purchasers, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with the Agreements. In the event that the preceding sentence is in
any way inaccurate, each Purchaser agrees to indemnify and hold harmless the
Company and each other Purchaser from any liability for any commission or
compensation in the nature of a finder's fee (and the costs and expenses of
defending against such liability) for which the Company, any other Purchaser, or
any of their officers, directors, employees or representatives, is responsible.
4.7 Tax Liability. Each Purchaser has reviewed with its own tax
advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by the Agreements. With respect to
such matters, each Purchaser relies solely on such advisors and not on any
statements or representations of the Company or any of its agents other than the
representations and warranties set forth herein. Each Purchaser understands that
it (and not the Company) shall be responsible for its own tax liability that may
arise as a result of this investment or the transactions contemplated by the
Agreements.
4.8 Recent Transfers. The Purchasers have not purchased, sold or
transferred any security of the Company within the sixty days immediately
preceding the date of this Agreement.
SECTION 5
Conditions to Purchasers' Obligations to Close
The Purchasers' obligations to purchase the Shares are, unless waived
by the Purchasers, subject to the fulfillment of the following conditions:
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5.1 Representations and Warranties Correct. The representations and
warranties made by the Company in Section 3 hereof shall be true and correct in
all material respects as of the Closing Date.
5.2 Covenants. All covenants, agreements and conditions contained in
the Agreements to be performed by the Company on or prior to the Closing shall
have been performed or complied with in all material respects.
5.3 Blue Sky. The Company shall have obtained all necessary Blue Sky
law permits and qualifications, or have the availability of exemptions
therefrom, required by any state for the offer and sale of the Shares.
5.4 Rights Agreement. The Company and the Purchasers shall have
executed and delivered the Rights Agreement.
5.5 Compliance with Law. No provision of any applicable law or
regulation and no judgment, injunction, order or decree shall prohibit the sale
and issuance of the Shares and the consummation of the transactions contemplated
hereby.
SECTION 6
Conditions to Company's Obligations to Close
The Company's obligation to sell and issue the Shares is, unless waived
by the Company, subject to the fulfillment of the following conditions:
6.1 Representations. The representations and warranties made by the Purchasers
in Section 4 hereof shall be true and correct as of the Closing Date.
6.2 Covenants. All covenants, agreements and conditions contained in the
Agreements to be performed by Purchasers on or prior to the Closing Date shall
have been performed or complied with in all material respects.
6.3 Blue Sky. The Company shall have obtained all necessary Blue Sky law
permits and qualifications, or have the availability of exemptions therefrom,
required by any state for the offer and sale of the Shares.
6.4 Rights Agreement. The Company and the Purchasers shall have executed and
delivered the Rights Agreement.
6.5 Compliance with Law. No provision of any applicable law or
regulation and no judgment, injunction, order or decree shall prohibit the sale
and issuance of the Shares and the consummation of the transactions contemplated
hereby.
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SECTION 7
Miscellaneous
7.1 Governing Law. This Agreement shall be governed in all respects by
the internal laws of the State of California, without regard to its choice of
law rules.
7.2 Survival. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by the Purchasers and the
closing of the transactions contemplated hereby.
7.3 Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto;
provided, however, that the rights of the Purchasers to purchase the Shares
shall not be assignable without the prior written consent of the Company.
7.4 Entire Agreement; Amendment. This Agreement and the other documents
delivered pursuant hereto at the Closing constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof, and no party shall be liable or bound to any other party in
any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the Company and holders
of a majority of the Shares.
7.5 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (a) if to Purchasers, at each Purchaser's address, as shown below, or
at such other address as such Purchaser shall have furnished to the Company in
writing, or (b) if to any other holder of any Shares, at such address as such
holder shall have furnished the Company in writing, or, until any such holder so
furnishes an address to the Company, then to and at the address of the last
holder of such Shares who has so furnished an address to the Company, or (c) if
to the Company, one copy should be sent to its address set forth on the cover
page of this Agreement and addressed to the attention of the Chief Executive
Officer, or at such other address as the Company shall have furnished to the
Purchaser.
Each such notice or other communication shall for all purposes
of this Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid.
7.6 Delays or Omissions. Except as expressly provided herein, no delay
or omission to exercise any right, power or remedy accruing to any party to this
Agreement upon any breach or default of any other party under this Agreement,
shall impair any such right, power or remedy of such non-defaulting party nor
shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Agreement, or any waiver on the part
of any party of any provisions or conditions of this agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any party to this Agreement, shall be cumulative and not
alternative.
7.7 California Corporate Securities Law. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
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SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
7.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
7.9 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
7.10 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
7.11 Expenses. The Company and the Purchaser shall each bear their own
fees, costs and expenses incurred on their behalf with respect to the Agreements
and the transactions contemplated hereby and any amendments or waiver thereto;
provided, however, the Company shall pay the attorney's fee of one (1) counsel
to the Purchasers not to exceed $5,000 in the aggregate.
7.12 Limitation on Liability. Notwithstanding anything in this
Agreement to the contrary, no Purchaser shall have any liability for any
misrepresentation, breaches of representations or warranties or breaches of
covenants made by any other Purchaser under or in connection with this
Agreement.
7.13 Attorney's Fees. In any action brought or maintained by either
party asserting a cause of action arising under or relating in any way to this
Agreement, the prevailing party shall be entitled to recover its reasonable
costs and attorney's fees.
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The foregoing Agreement is hereby executed as of the date first above written.
EUPHONIX, INC.
a California corporation
By: /s/ BARRY MARGERUM
Barry Margerum, Chief Executive Officer
PURCHASER
By:
Title:
[Signature Page to 11/99 Purchase Agreement]
124
EXHIBIT A
SCHEDULE OF PURCHASERS
Name Number of Shares Purchase Price
Dieter Meier 451,916 $500,000
c/o Soundproof, Inc.
5180 Linwood Drive
Los Angeles, CA 90027
Onset Enterprise Associates III, LP 451,916 $500,000
c/o Robert Kuhling
Onset Ventures
2490 Sand Hill Road
Menlo Park, CA 94025
Stephen D. Jackson 225,958 $250,000
c/o Fashion Magic
1307 East Pine Street
Lodi, CA 95240
Walter Bosch 451,916 $500,000
Fraumunsterstr. 9
8001 Zurich
Switzerland
Total 1,581,706 $1,750,000
125
================================================================================
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EUPHONIX, INC.
220 Portage Avenue
Palo Alto, California 94306
REGISTRATION RIGHTS AGREEMENT
November 9, 1999
================================================================================
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126
TABLE OF CONTENTS
Page
SECTION 1 Restrictions on Transferability of Securities; Compliance with
Securities Act; Registration Rights.........................1
1.1 Restrictions on Transferability.............................1
1.2 Certain Definitions.........................................1
1.3 Restrictive Legend..........................................3
1.4 Restrictions on Transfer; Notice of Proposed Transfers......4
1.5 Requested Registration......................................5
1.6 Company Registration........................................6
(a) Notice of Registration......................................7
1.7 Expenses of Registration....................................7
1.8 Registration Procedures.....................................8
1.9 Indemnification............................................10
1.10 Information by Holder......................................10
1.11 Rule 144 Reporting..................................................10
1.12 Transfer of Registration Rights............................11
1.13 Termination of Registration Rights.........................11
SECTION 2 Miscellaneous..............................................11
2.1 Governing Law..............................................11
2.2 Survival...................................................11
2.3 Successors and Assigns.....................................11
2.4 Entire Agreement; Amendment................................11
2.5 Notices, etc...............................................11
2.6 Delays or Omissions........................................12
2.7 Counterparts...............................................12
2.8 Severability...............................................12
2.9 Titles and Subtitles.......................................12
2.10 Attorney's Fees............................................12
127
EUPHONIX, INC.
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made as of
November 9, 1999 between Euphonix, Inc., a California corporation (the
"Company") and the Purchasers of the Company's Common Stock (the "Common
Purchasers") pursuant to the Company's Common Stock Purchase Agreement dated
November 9, 1999 (the "Common Stock Agreement").
The Common Purchasers agree to be bound by all of the terms and
conditions of this Agreement.
NOW, THEREFORE, the parties agree as follows:
SECTION 1
Restrictions on Transferability of Securities;
Compliance with Securities Act; Registration Rights
1.1 Restrictions on Transferability. The Common Stock purchased
pursuant to the Common Stock Agreement shall not be sold, assigned, transferred
or pledged except upon the conditions specified in this Section 1, which
conditions are intended to ensure compliance with the provisions of the
Securities Act (as defined below). The Common Purchasers will cause any proposed
purchaser, assignee, transferee, or pledgee of any such shares held by the
Common Purchasers to agree to take and hold such securities subject to the
provisions and upon the conditions specified in this Section 1.
1.2 Certain Definitions. As used in this Agreement, the following
terms shall have the following respective meanings:
"Closing Date" shall mean the date of the first purchase and
sale of Common Stock pursuant to the Common Stock Agreement.
"Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock of the Company, par
value $0.001 per share.
"Holder" shall mean (i) any Common Purchaser holding
Registrable Securities and (ii) any person holding Registrable Securities to
whom the rights under this Section 1 have been transferred in accordance with
Section 1.12 hereof.
"Initiating Holders" shall mean Holders or transferees of any
Holders under Section 1.12 hereof who in the aggregate are Holders of greater
than 50% of the Registrable Securities.
"Registrable Securities" means (i) the Common Stock issued
pursuant to the Common Stock Agreement and (ii) any Common Stock of the Company
issued or issuable in respect of such Common Stock upon any stock split, stock
dividend, recapitalization, or similar event, or any Common Stock otherwise
issuable with respect to such Common Stock; provided, however, that shares of
Common Stock, or other securities shall only be treated as Registrable
Securities if and so long as they have not been (A) sold to or through a broker
or dealer or underwriter in a public distribution or a public securities
transaction, whether in a registered offering, Rule 144 or otherwise, or (B)
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sold or are, in the opinion of counsel for the Company, available for sale in a
single transaction exempt from the registration and prospectus delivery
requirements of the Securities Act so that all transfer restrictions and
restrictive legends with respect thereto are removed upon the consummation of
such sale.
The terms "register," "registered" and "registration" refer to
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, except as
otherwise stated below, incurred by the Company in complying with Sections 1.5
and 1.6 hereof, including, without limitation, all registration, qualification
and filing fees, printing expenses, escrow fees, fees and disbursements of
counsel for the Company, blue sky fees and expenses, the expense of any special
audits incident to or required by any such registration (but excluding the
compensation of regular employees of the Company which shall be paid in any
event by the Company), and the reasonable fees and disbursements if one counsel
for all Holders not to exceed $20,000.
"Restricted Securities" shall mean the securities of the
Company required to bear the legend set forth in Section 1.3 hereof.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the securities
registered by the Holders and all reasonable fees and disbursements of counsel
for any Holder.
"Total Voting Power" of the Company shall mean the total
number of the votes which may be cast in the election of directors of the
Company at any meeting of stockholders if all securities entitled to vote in
this election of directors were present and voted at such meeting.
"Voting Securities" shall mean all securities of the Company
entitled to vote in the election of directors of the Company and all securities
of the Company convertible into, exchangeable or exercisable for shares of
Common Stock.
1.3 Restrictive Legend. Each certificate representing (i) the Common
Stock issued pursuant to the Common Stock Agreement and (ii) any other
securities issued in respect of such Common Stock upon any stock split, stock
dividend, recapitalization, merger, consolidation or similar event, shall
(unless otherwise permitted by the provisions of Section 1.4 below) be stamped
or otherwise imprinted with a legend in the following form (in addition to any
legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION UNLESS THE
COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE
TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN THE
REGISTRATION RIGHTS AGREEMENT BETWEEN THE ISSUER AND THE
ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE
OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER
RESTRICTIONS ARE BINDING ON TRANSFEREES OF THESE SHARES.
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Each Holder consents to the Company making a notation on its
records and giving instructions to any transfer agent of the Common Stock in
order to implement the restrictions on transfer established in this Section 1.
1.4 Restrictions on Transfer; Notice of Proposed Transfers. The holder
of each certificate representing Restricted Securities by acceptance thereof
agrees to comply in all respects with the provisions of this Section 1.4. Prior
to any proposed sale, assignment, transfer or pledge of any Restricted
Securities (other than (i) a transfer not involving a change in beneficial
ownership, (ii) in transactions involving the distribution without consideration
of Restricted Securities by the Holder to any of its partners, or retired
partners, or to the estate of any of its partners or retired partners, (iii) any
transfer by any Holder to (A) any individual or entity controlled by,
controlling, or under common control with, such Holder or (B) any individual or
entity with respect to which such Holder (or any person controlled by,
controlling, or under common control with, such Holder) has the power to direct
investment decisions, (iv) to the spouse of a holder of Restricted Securities,
or (v) in transactions in compliance with Rule 144, provided, in each case, that
the transferee agrees in writing to be subject to the terms hereof), and unless
there is in effect a registration statement under the Securities Act covering
the proposed transfer, the holder thereof shall give written notice to the
Company of such holder's intention to effect such transfer, sale, assignment or
pledge. Each such notice shall describe the manner and circumstances of the
proposed transfer, sale, assignment or pledge in sufficient detail, and, if
requested by the Company, shall be accompanied, at such holder's expense, by an
unqualified written opinion of legal counsel who shall be, and whose legal
opinion shall be, reasonably satisfactory to the Company addressed to the
Company, to the effect that the proposed transfer of the Restricted Securities
may be effected without registration under the Securities Act, whereupon the
holder of such Restricted Securities shall be entitled to transfer such
Restricted Securities in accordance with the terms of the notice delivered by
the holder to the Company. It is agreed that the Company will not request an
opinion of counsel for the Holder for transactions made in reliance on Rule 144
under the Securities Act except in unusual circumstances, the existence of which
shall be determined in good faith by the Board of Directors of the Company. Each
certificate evidencing the Restricted Securities transferred as above provided
shall bear, except if such transfer is made pursuant to Rule 144, the
appropriate restrictive legend set forth in Section 1.3 above, except that such
certificate shall not bear such restrictive legend if in the opinion of counsel
for such holder and the Company such legend is not required in order to
establish compliance with any provision of the Securities Act.
1.5 Requested Registration.
(a) Request for Registration. In case the Company shall
receive from Initiating Holders a written request that the Company effect any
registration, qualification or compliance with respect to the Registrable
Securities, the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts
to effect such registration, qualification or
compliance (including, without limitation, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act and any other
governmental requirements or regulations) as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders joining in
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such request as are specified in a written request received by the Company
within twenty (20) days after receipt of such written notice from the Company;
Provided, however, that the Company shall not be obligated to
take any action to effect any such registration, qualification or compliance
pursuant to this Section 1.5:
(A) In any particular jurisdiction in
which the Company would be required to execute a
general consent to service of process in effecting such registration,
qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act;
(B) Prior to six (6) months after the
Closing Date;
(C) During the period starting with the date
sixty (60) days prior to the Company's estimated
date of filing of, and ending on the date six (6) months immediately following
the effective date of, any registration statement pertaining to securities of
the Company (other than a registration of securities in a Rule 145 transaction
or with respect to an employee benefit plan), provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective;
(D) Unless the aggregate number of
shares of Registrable Securities sought to be registered
by all Initiating Holders and other Holders pursuant to this Section 1.5 is
greater than one (1) million shares;
(E) After the Company has effected one
(1) such registration pursuant to this subparagraph
1.5(a), and such registration has been declared or ordered effective; or
(F) If the Company shall furnish to
such Holders a certificate signed by the President of the
Company stating that in the good faith judgment of the Board of Directors it
would be seriously detrimental to the Company or its shareholders for a
registration statement to be filed in the near future, then the Company's
obligation to use its best efforts to register, qualify or comply under this
Section 1.5 shall be deferred for a period not to exceed 120 days from the date
of receipt of written request from the Initiating Holders; provided that the
Company may not exercise this deferral right more than once per twelve (12)
month period.
Subject to the foregoing clauses (A) through (F), the Company
shall file a registration statement covering the Registrable Securities so
requested to be registered as soon as practicable, after receipt of the request
or requests of the Initiating Holders, but in any event within 120 days of such
request.
(b) Underwriting. In the event that a registration pursuant to
Section 1.5 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Section 1.5(a)(i). In such event, the right of any Holder to registration
pursuant to Section 1.5 shall be conditioned upon such Holder's participation in
the underwriting arrangements required by this Section 1.5, and the inclusion of
such Holder's Registrable Securities in the underwriting to the extent requested
shall be limited to the extent provided herein.
The Company shall (together with all Holders
proposing to distribute their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by a majority in interest of
the Initiating Holders, but subject to the Company's reasonable approval.
Notwithstanding any other provision of this Section 1.5, if the managing
underwriter advises the Initiating Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, then (i) any
securities requested to be registered by persons other than Holders (as defined
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herein) or the Holders of Registrable Securities (as such terms are defined in
that certain Modification Agreement, dated November 6, 1991 (the "Modification
Agreement"), by and between the Company, the First Series A Purchasers, the
Second Series A Purchasers, the Series B Purchasers, the Series C Purchasers and
the Affiliates (each as defined in the Modification Agreement)) shall be limited
(or excluded entirely) on a pro rata basis from such registration, and (ii) if
the managing underwriter determines that a further limitation is required, the
Company shall so advise all Holders of Registrable Securities under this
Agreement and the Holders of Registrable Securities under the Modification
Agreement and the number of shares of Registrable Securities (including those
under the Modification Agreement) that may be included in the registration and
underwriting shall be allocated among all Holders under this Agreement and
Holders under the Modification Agreement in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the registration statement. No Registrable
Securities (including those under the Modification Agreement) excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. To facilitate the allocation of shares in
accordance with the above provisions, the Company or the underwriters may round
the number of shares allocated to any Holder (both under this Agreement and the
Modification Agreement) to the nearest 100 shares.
If any Holder of Registrable Securities disapproves
of the terms of the underwriting, such person may elect
to withdraw therefrom by written notice to the Company, the managing underwriter
and the Initiating Holders. The Registrable Securities and/or other securities
so withdrawn shall also be withdrawn from registration, and such Registrable
Securities shall not be transferred in a public distribution prior to 120 days
after the effective date of such registration, or such other shorter period of
time as the underwriters may require.
1.6 Company Registration.
(a) Notice of Registration. If at any time or from time to time the Company
shall determine to register any of its securities, either for its own account
or the account of a security holder or holders, other than a (i) registration
relating solely to employee benefit plans, or (ii) a registration relating
solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof;
and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within twenty (20) days after receipt of such written notice
from the Company, by any Holder.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.6(a)(i). In such event, the right of any Holder to
registration pursuant to Section 1.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Section 1.6, if
the managing underwriter determines that marketing factors require a limitation
of the number of shares to be underwritten, the managing underwriter may limit
(or exclude entirely) on a pro rata basis the Registrable Securities of the
Affiliates (as each term is defined in the Modification Agreement) to be
included in such registration. If all Registrable Securities of the Affiliates
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(as each term is defined in the Modification Agreement) have been excluded from
such registration and the managing underwriter determines that a further
limitation is required, the managing underwriter may limit the remaining
Registrable Securities (including those under the Modification Agreement) to be
included in such registration; provided, however, that the managing underwriter
may not reduce the amount of Registrable Securities of the Holders under the
Modification Agreement to be included in the registration to less than 25% of
the total shares so included; provided further, however, that such percentage
may be reduced or waived by the Holders of a majority of the Registrable
Securities under the Modification Agreement, excluding Registrable Securities
held by the Affiliates (each as defined under the Modification Agreement). The
Company shall so advise all Holders under this Agreement and under the
Modification Agreement and other holders distributing their securities through
such underwriting and the number of shares of Registrable Securities (including
those under the Modification Agreement) and other securities that may be
included in the registration and underwriting shall be allocated among all the
Holders under this Agreement and under the Modification Agreement and such other
holders exercising their registration rights in proportion, as nearly as
practicable, to the respective amounts of securities entitled to inclusion in
such registration held by such Holders and such other holders exercising their
registration rights at the time of filing the registration statement. To
facilitate the allocation of shares in accordance with the above provisions, the
Company may round the number of shares allocated to any Holder (both under this
Agreement and the Modification Agreement) or holder to the nearest 100 shares.
If any Holder or holder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to the
Company and the managing underwriter. Any securities excluded or withdrawn from
such underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to 120 days after the effective date
of the registration statement relating thereto, or such other shorter period of
time as the underwriters may require.
(c)......Right to Terminate Registration. The Company shall
have the right to terminate or withdraw any registration initiated by it under
this Section 1.6 prior to the effectiveness of such registration whether or not
any Holder has elected to include securities in such registration.
1.7 Expenses of Registration. All Registration Expenses incurred in
connection with (i) one (1) registration pursuant to Section 1.5 and (ii) all
registrations pursuant to Section 1.6 shall be borne by the Company. Unless
otherwise stated, all Selling Expenses relating to securities registered on
behalf of the Holders and all other Registration Expenses shall be borne by the
Holders of such securities, and by the Company, in the event the Company
participates in the registration, pro rata on the basis of the number of shares
so registered. Notwithstanding the above, the Company shall not be required to
pay for any expenses of any registration proceeding begun pursuant to Section
1.5 above if the registration request is subsequently withdrawn at the request
of the Holders of a majority of the Registrable Securities to be registered
(which Holders shall bear such expenses).
1.8 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least one hundred
eighty (180) days or until the distribution described in the registration
statement has been completed;
(b) Furnish to the Holders participating in such registration
and to the underwriters of the securities being registered such reasonable
number of copies of the registration statement, preliminary prospectus, final
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prospectus and such other documents as such underwriters may reasonably request
in order to facilitate the public offering of such securities;
(c) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statements as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions; and
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
1.9 Indemnification.
(a) The Company will indemnify each Holder, each of its
officers and directors and partners, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 1, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading, or any violation by the Company of the Securities Act, the
Exchange Act, state securities law or any rule or regulation promulgated under
such laws applicable to the Company in connection with any such registration,
qualification or compliance, and within a reasonable period the Company will
reimburse each such Holder, each of its officers and directors, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action; provided that the Company will not be liable in any
such case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder, controlling person or underwriter and stated to be specifically for use
therein.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers and directors
and each person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
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alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and within a
reasonable period will reimburse the Company, such Holders, such directors,
officers, persons, underwriters or control persons for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein.
Notwithstanding the above, the liability of each Holder under this subsection
(b) shall not exceed such Holder's net proceeds from the sale of securities
pursuant to such registration statement, unless such liability arises out of or
is based on willful misconduct by such Holder.
(c) Each party entitled to indemnification under this Section
1.9 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense, and provided further that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 1 unless the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action
and provided further, that the Indemnifying Party shall not assume the defense
for matters as to which there is a conflict of interest or separate and
different defenses. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. No Indemnifying Party shall be liable for indemnification hereunder
with respect to any settlement or consent to judgment, in connection with any
claim or litigation to which these indemnification provisions apply, that has
been entered into without the prior consent of the Indemnifying Party (which
consent will not be unreasonably withheld).
1.10 Information by Holder. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 1.
1.11 Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to use its best efforts to:
(a) Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act, at all times
during which the Company is subject to the reporting requirements of the
Securities Act or the Exchange Act;
(b) File with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act; and
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(c) So long as a Holder owns any Restricted Securities, to
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144, and of
the Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company and other information in the possession of or reasonably obtainable by
the Company as the Holder may reasonably request in availing itself of any rule
or regulation of the Commission allowing the Holder to sell any such securities
without registration.
1.12 Transfer of Registration Rights. The rights to cause the Company
to register securities granted Holders under Sections 1.5 and 1.6 may be
assigned to a transferee or assignee reasonably acceptable to the Company (which
consent shall not be unreasonably withheld) in connection with any transfer or
assignment of Registrable Securities by a Holder, provided that (i) such
transfer may otherwise be effected in accordance with applicable securities
laws, and (ii) such assignee or transferee acquires at least 50,000 shares of
Registrable Securities (adjusted for stock splits, stock dividends, stock
recombinations and the like after the date of this Agreement). Notwithstanding
the above, the rights to cause the Company to register securities may be
assigned to any partner, shareholder, equity holder or officer of a Holder
without compliance with item (ii) above, provided written notice thereof is
promptly given to the Company.
1.13 Termination of Registration Rights. The registration rights
granted pursuant to Section 1 shall terminate as to each Holder at such time as
a public market for the Company's Common Stock exists and all Registrable
Securities held by such Holder may, in the opinion of counsel to the Company
(which opinion shall be addressed and rendered to Holder), be sold within a
given three month period pursuant to Rule 144 or any other applicable exemption
that allows for resale free of registration.
SECTION 2
Miscellaneous
2.1 Governing Law. This Agreement shall be governed in all respects by
the internal laws of the State of California.
2.2 Survival. The covenants and agreements made herein shall survive
any investigation made by the Common Purchasers and the closing of the
transactions contemplated hereby.
2.3 Successors and Assigns. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
2.4 Entire Agreement; Amendment. This Agreement, the Common Stock
Agreement and the other documents delivered pursuant hereto on the Closing Date
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof, and no party shall be liable or
bound to any other party in any manner by any warranties, representations or
covenants except as specifically set forth herein or therein. Except as
expressly provided herein, neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the Company and the holders of a majority of the Registrable
Securities.
2.5 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (a) if to a Common Purchaser, at such Common Purchaser's address, as
shown on the stock records of the Company, or at such other address as such
Common Purchaser shall have furnished to the Company in writing, or (b) if to
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any other holder of the Common Stock, at such address as such holder shall have
furnished the Company in writing, or, until any such holder so furnishes an
address to the Company, then to and at the address of the last holder of such
Common Stock who has so furnished an address to the Company, or (c) if to the
Company, one copy should be sent to its address set forth on the cover page of
this Agreement and addressed to the attention of the President and Chief
Executive Officer, or at such other address as the Company shall have furnished
to the Common Purchasers.
Each such notice or other communication shall for all purposes
of this Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid.
2.6 Delays or Omissions. Except as expressly provided herein, no delay
or omission to exercise any right, power or remedy accruing to any party to this
Agreement upon any breach or default of any other party under this Agreement,
shall impair any such right, power or remedy of such nondefaulting party nor
shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of any
party of any breach or default under this Agreement, or any waiver on the part
of any holder of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to any party to this Agreement, shall be cumulative and not
alternative.
2.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
2.8 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
2.9 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
2.10 Attorney's Fees. In any action brought or maintained by either
party asserting a cause of action arising under or relating in any way to this
Agreement, the prevailing party shall be entitled to recover its reasonable
costs and attorney's fees.
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The foregoing agreement is hereby executed as of the date first above written.
EUPHONIX, INC.
/s/ BARRY L. MARGERUM
By: Barry L. Margerum
Title: Chief Executive Officer and President
COMMON PURCHASERS
By:
Title:
[Signature Page to 11/99 Registration Rights Agreement]
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to incorporation by reference in the Registration Statements
on Form S-8 (No. 333-17545, No. 333-98130, No. 333-68425) of Euphonix Inc. of
our report dated March 1, 2000 relating to the financial statements which
appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Jose, California
March 29, 2000
139
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-17545 pertaining to the 1990 Stock Plan, the Registration
Statement (Form S-8 No. 333-98130) pertaining to the 1990 Stock Plan, 1995
Performance Based Stock Option Plan and 1995 New Director Option Plan, and the
Registration Statement (Form S-8 No. 333-68425) pertaining to the 1997 Non-
statutory Stock Option Plan of our report dated March 4, 1999, with respect to
the consolidated financial statements of Euphonix, Inc. for the two years ended
December 31, 1998 included in its Annual Report (Form 10-K) for the year ended
December 31, 1999, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
San Jose, California
March 29, 2000
140