<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
e.Digital Corporation
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
DIGITAL CORPORATION
13114 Evening Creek Drive South, San Diego, California 92128
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held November 9, 2000
TO THE STOCKHOLDERS OF
E.DIGITAL CORPORATION
Notice is hereby given that the Annual Meeting of Stockholders (the "Annual
Meeting") of e.Digital Corporation, a Delaware corporation (the "Company"), will
be held at California Center for the Arts, Concert Hall, located at 340 N.
Escondido Blvd., Escondido, California 92025, on Thursday, November 9, 2000,
beginning at 2:00 p.m. local time. The Annual Meeting will be held for the
following purpose:
1. To elect directors of the Company to serve as directors until the
annual meeting of stockholders to be held in 2001, until such directors'
successor has been duly elected and qualified or until such directors have
otherwise ceased to serve as directors.
2. To approve an amendment to the Company's 1994 Stock Option Plan to
increase the aggregate number of shares of Common Stock authorized for issuance
under the plan by 4,000,000 shares.
3. To approve the Company's 2000 Employee Stock Compensation Plan.
4. To ratify the appointment of Ernst & Young LLP as independent
accountants for the Company for the fiscal year ending March 31, 2001.
5. To transact such other business as may properly come before the meeting
or any postponements or adjournments thereof.
The Board of Directors has fixed September 11, 2000 as the record date for
the determination of stockholders entitled to notice of and to vote at the
Annual Meeting and any postponements or adjournments thereof, and only
stockholders of record at the close of business on that date are entitled to
such notice and to vote at the Annual Meeting. A list of stockholders entitled
to vote at the Annual Meeting will be available at the offices of the Company
for ten (10) days prior to the Annual Meeting.
We hope that you will use this opportunity to take an active part in the
affairs of the Company by voting on the business to come before the Annual
Meeting either by executing and returning the enclosed Proxy Card or by casting
your vote in person at the Annual Meeting.
STOCKHOLDERS UNABLE TO ATTEND THE ANNUAL MEETING IN PERSON ARE REQUESTED TO
DATE AND SIGN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE. A STAMPED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. IF A STOCKHOLDER RECEIVES MORE THAN
ONE PROXY CARD BECAUSE HE OR SHE OWNS SHARES REGISTERED IN DIFFERENT NAMES OR
ADDRESSES, EACH PROXY CARD SHOULD BE COMPLETED AND RETURNED.
By Order of the Board of Directors
/s/ ALFRED H. FALK
------------------
ALFRED H. FALK
President and Chief Executive Officer
San Diego, California Telephone - (858) 679-1504
September 22, 2000 Facsimile - (858) 486-3922
<PAGE>
e.Digital Corporation
13114 Evening Creek Drive South
San Diego, California 92128
ANNUAL MEETING OF STOCKHOLDERS
To Be Held November 9, 2000
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of e.Digital Corporation, a Delaware
corporation (the "Company"), for use at the Annual Meeting of Stockholders (the
"Annual Meeting") to be held at 2:00 p.m., local time, on November 9, 2000, and
any postponements or adjournments thereof for the purposes set forth in the
accompanying Notice of Annual Meeting. The telephone number of the Company is
(858) 679-1504 and its facsimile number is (858) 486-3922. This Proxy Statement
and the accompanying form of proxy were first mailed to stockholders on or about
September 22, 2000.
RECORD DATE AND VOTING
September 11, 2000 has been fixed as the record date (the "Record Date")
for the determination of stockholders entitled to notice of and to vote at the
Annual Meeting, and any postponements or adjournments thereof. As of September
11, 2000, there were 126,530,256 shares of the Company's common stock, $.001 par
value per share (the "Common Stock"), issued and outstanding. A majority of the
shares entitled to vote, present in person or represented by proxy, will
constitute a quorum at the meeting.
Each share of Common Stock issued and outstanding on the Record Date is
entitled to one vote on any matter presented for consideration and action by the
stockholders at the Annual Meeting. There are no shares of the Company's Series
A Redeemable Convertible Preferred Stock (the "Series A Stock") or 7% Series B
Convertible Preferred Stock (the "Series B Stock") outstanding. With respect to
all matters other then the election of directors, the affirmative vote of a
majority of the shares of the Company's Common Stock present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
will be the act of the stockholders. Directors will be elected by a plurality of
the votes of the shares of the Company's Common Stock present in person or
represented by proxy and entitled to vote on the election of directors.
Abstentions will be treated as the equivalent of a negative vote for the purpose
of determining whether a proposal has been adopted and will have no effect for
the purpose of determining whether a director has been elected. Unless otherwise
instructed, proxies solicited by the Company will be voted "FOR" the nominees
named herein for election as directors, "FOR" the approval of an amendment to
the Company's 1994 Stock Option Plan to increase the aggregate number of shares
of Common Stock authorized for issuance under the plan by 4,000,000 shares,
"FOR" the approval of the Company's 2000 Employee Stock Compensation Plan and
"FOR" the ratification of the selection of Ernst & Young LLP to provide audit
services to the Company for the fiscal year ending March 31, 2001.
New York Stock Exchange Rules ("NYSE Rules") generally require that when
shares are registered in street or nominee name, its member brokers must receive
specific instructions from the beneficial owners in order to vote on certain
proposals. However, the NYSE Rules do not require specific instructions in order
for a broker to vote on the election of directors. If a member broker indicates
on the proxy that such broker does not have discretionary authority as to
certain shares to vote on any proposal that does require specific instructions,
those shares will not be considered as present and entitled to vote with respect
to that matter. Pursuant to Delaware law, a broker non-vote will not be treated
as present or voting in person or by proxy on the proposal. A broker non-vote
will have no effect for the purpose of determining whether a director has been
elected.
A stockholder giving a proxy has the power to revoke it at any time before
it is exercised by giving written notice of revocation to the Secretary of the
Company, by executing a subsequent proxy, or by attending the Annual Meeting and
voting in person. Subject to any such revocation, all shares represented by
properly executed proxies will be voted in accordance with the specifications on
the enclosed proxy card.
<PAGE>
ELECTION OF DIRECTORS
(Proposal One)
The Company's bylaws state that the Board of Directors shall consist of not
less than four nor more than seven members. The specific number of Board
members within this range is established by the Board of Directors and is
currently set at six. A Board of six directors, will be elected at the Annual
Meeting. Unless otherwise instructed, proxy holders will vote the proxies
received by them for the Company's six nominees named below. In the event that
any nominee of the Company is unable or declines to serve as a director at the
time of the Annual Meeting, the proxies will be voted for any nominee who shall
be designated by the present Board of Directors to fill the vacancy. In the
event that additional persons are nominated for election as directors, the proxy
holders intend to vote all proxies received by them in such a manner as will
assure the election of as many of the nominees listed below as possible, and, in
such event, the specific nominees to be voted for will be determined by the
proxy holders. It is not expected that any nominee will be unable or will
decline to serve as a director. The term of office of each person elected as a
director will continue until the next annual meeting of stockholders and such
time as his or her successor is fully elected and qualified or until his or her
earlier resignation, removal or death. The nominees have supplied the following
background information to the Company:
Name Age Principal Occupation Director Since
---- --- -------------------- --------------
Alfred H. Falk 45 President and Chief Executive 1997
Officer of the Company since 1997
Robert Putnam 42 Sr. Vice President and Secretary of
the Company since 1988 1995
Walter "Skip" Matthews 55 Retired Intel Corp. August 1, 1999 1999
(Manager Marketing Audio Applications,
Flash Memory)
Allen Cocumelli 50 Chairman of the Board of Directors 1999
of the Company since 2000; Chief
Operating Officer of Simple Network
Communications Inc. since 1997
Victor G. Ramsauer 45 Shareholder of Levitz, Zacks and
Ciceric, CPAs since 1985 2000
Robert Jecmen 51 Retired Intel Corp. August 2000 2000
(Vice President of the Intel
Architecture Group, General Manager
of the Mobile Products Group)
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE "FOR" THE ELECTION OF
THE ABOVE NOMINEES.
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MANAGEMENT
Set forth below is certain information with respect to each of the nominees
for the office of director, each director whose term of office will continue
after the Annual Meeting and each executive officer and key employee of the
Company:
Name Age Position
---- --- --------
Allen Cocumelli 50 Chairman of the Board, Director,
Audit Committee
Alfred H. Falk 45 President, Chief Executive Officer and
Director
Robert Putnam 42 Sr. Vice President, Secretary and
Director
Renee Warden 36 Controller
Walter "Skip" Matthews 54 Director, Audit Committee
Victor G. Ramsauer 45 Director, Audit Committee
Robert Jecmen 51 Director
____________
Allen Cocumelli - Mr. Cocumelli was appointed to the Board of Directors on
August 25, 1999 and was elected as the Chairman of the Board in April 2000. Mr.
Cocumelli has been General Counsel of Simple Network Communications Inc.
("Simplenet") since 1996 and Chief Operating Officer of Simplenet since November
1997. Prior to joining Simplenet, Mr. Cocumelli was in the private practice of
law. From 1978 to 1986 Mr. Cocumelli served as a manager in the Components
Manufacturing Group and as Director of Corporate Training and Development at
Intel. Mr. Cocumelli obtained a B.S. degree in Industrial Psychology from the
University of California, Los Angeles in 1972 and a J.D. from Thomas Jefferson
University in 1991. Mr. Cocumelli is a member of the California Bar
Association.
Alfred H. Falk - Mr. Falk was appointed President and a Director of the
Company in January 1997 and on July 1, 1998 he was also appointed as Chief
Executive Officer. From March, 1995, prior to his appointment as President, he
served as Vice President, Business Development and Vice President of OEM and
International Sales of the Company. Before joining the Company, Mr. Falk was
with Resources Internationale where he served as Director of U.S. Sales from
1993 to 1995. From 1988 to 1993, Mr. Falk was the Manager of OEM Sales and
Technology Licensing for Personal Computer Products, Inc. in San Diego. From
1978 to 1988 Mr. Falk held several management positions at DH Technology and was
instrumental in its successful start up. Mr. Falk attended Palomar College in
San Marcos and Foothill College in Los Altos, California.
Robert Putnam - Mr. Putnam was appointed Secretary of the Company in March
1988, and Vice President in April 1993. He was appointed a director of the
Company in 1995. He served as a director of the American Technology Corporation
("ATC") from 1984 to September 1997 and served as Secretary/Treasurer until
February 1994, President and Chief Executive Officer from February 1994 to
September 1997 and currently serves as Vice President, Investor Relations of
ATC. He has also served as Secretary/Treasurer of Patriot Scientific Corporation
("Patriot") since 1989 and from 1989 to March 1998 was a director of Patriot.
Mr. Putnam obtained a B.A. degree in mass communications/advertising from
Brigham Young University in 1983. Mr. Putnam devotes only part-time services to
the Company, approximately twenty hours per week.
Renee Warden - Ms. Warden was appointed Controller of the Company in June
1997. From November 1991 to June 1997 she was Accounting Manager for the
Company. Ms. Warden obtained a B.S. degree in business accounting from the
University of Phoenix in 1999. In March 1999, she also was appointed Chief
Accounting Officer, Treasurer and Secretary of ATC. Ms. Warden devotes only
part-time service to the Company, approximately twenty-five hours per week.
Walter "Skip" Matthews - Dr. Matthews was appointed to the Board of
Directors on August 1, 1999. From July 1974 until August 1999, Dr. Matthews was
employed by Intel Corporation ("Intel") in various management
3
<PAGE>
capacities until his retirement in August 1999. Initially in charge of
development of equipment for manufacturing at Intel, Dr. Matthews worked the
last eight years marketing Intel's flash memory products. Dr. Matthews last
position with Intel was senior Project Development Manager. Dr. Matthews
obtained his B.S. in Chemistry from Duke University in 1966 and his Ph.D. in
organic chemistry from Southern Illinois University in 1972. Prior to joining
Intel in 1974, Dr. Matthews also completed a National Science Foundation Post-
Doctoral Fellowship at Northwestern University.
Victor G. Ramsauer -- CPA - Mr. Ramsauer was appointed to the Board of
Directors on April 12, 2000. Mr. Ramsauer has been a shareholder at Levitz,
Zacks and Ciceric, CPA's since 1985. Prior to joining Levitz, Zacks and
Ciceric, Mr. Ramsauer held a manager level position with Price Waterhouse from
1977 to 1985. Mr. Ramsauer received his B.S. degree in Business Administration
from California State Polytechnic University, Pomona in 1976. Mr. Ramsauer
obtained his CPA license in both California and Nevada in 1980 and 1999,
respectively. Mr. Ramsauer is a member of the American Institute of Certified
Public Accountants, the California Society of Certified Public Accountants and
the Nevada Society of Certified Public Accountants.
Robert Jecmen - Mr. Jecmen was appointed to the Board of Directors on
September 11, 2000. From June 1976 to August 2000, Mr. Jecmen was employed by
Intel in various management capacities until his retirement in August 2000.
During this period, Mr. Jecmen held positions of Vice President of the
Technology and Manufacturing Group, General Manager of the California Technology
and Manufacturing Group and most recently managed Intel's mobile PC business as
Vice President of the Intel Architecture Group. Mr. Jecmen obtained his M.S. in
Materials Science from the University of California, Berkeley in 1973.
For information concerning beneficial ownership of Common Stock by
directors and executive officers, see "Security Ownership of Certain Beneficial
Owners and Management" below. The Board of Directors met seven times during
fiscal 2000. During such fiscal year, each Board member attended all of the
meetings of the Board held during the period for which he was a director.
INFORMATION ABOUT THE BOARD OF DIRECTORS AND
COMMITTEES OF THE BOARD OF DIRECTORS
Committees of the Board
During the fiscal year ended March 31, 2000 or subsequent thereto, the
Company established the following committees of the Board of Directors:
Audit Committee - The Audit Committee, currently consisting of Messrs.
Cocumelli, Matthews and Ramsauer, reviews the audit and control functions of the
Company, the Company's accounting principles, policies and practices and
financial reporting, the scope of the audit conducted by the Company's auditors,
the fees and all non-audit services of the independent auditors and the
independent auditors' opinion and letter of comment to management and
management's response thereto. The Audit Committee was designated on June 7,
2000 and held two meetings during the fiscal year ended March 31, 2000. A copy
of the Audit Committee Charter and adopting resolutions are attached hereto as
Exhibit A.
Compensation Committee - The Compensation Committee, currently consisting
of Messrs. Cocumelli, Matthews and Ramsauer, reviews and recommends to the Board
the salaries, bonuses and prerequisites of the Company's executive officers.
The Compensation Committee also reviews and recommends to the Board any new
compensation or retirement plans and administers the Company's 1992 and 1994
Stock Option Plans. The Compensation Committee was designated on June 7, 2000
and held no meetings during the fiscal year ended March 31, 2000.
Director Compensation
4
<PAGE>
Stock Options - Directors have received in the past and may receive in the
future stock options pursuant to the Company's stock option plans.
Standard Compensation - The Company has no other arrangements to pay any
direct or indirect remuneration to any directors of the Company in their
capacity as directors other than in the form of reimbursement of expenses for
attending directors' or committee meetings.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth for the years ended March 31, 2000, 1999 and
1998, the cash compensation of Mr. Falk, the Company's current Chief Executive
Officer (the "Named Executive Officer"). No other executive officer of the
Company received compensation in excess of $100,000 in that year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long Term
Compensation Compensation
------------ ------------
Name and Fiscal Options All Other
Principal Position Year Salary Bonus Other (# of Shares) Compensation
------------------ ---- ------ ----- ----- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Alfred H. Falk, President and 2000 $154,558 $54,250 -0- 2,000,000 -0-
Chief Executive Officer 1999 $101,885 -0- -0- 882,000 -0-
1998 $ 84,307 -0- -0- 648,316/(1)/ -0-
</TABLE>
________________
/(1)/ A total of 148,316 of these options were voluntarily canceled during
fiscal 1998 to allow warrant exercise by prepaid warrant holders.
Option Grants
Shown below is further information on grants of stock options to the Named
Executive Officers reflected in the Summary Compensation Table shown above.
Option Grants for Fiscal Year Ended March 31, 2000
<TABLE>
<CAPTION>
Percent of Total
Number of Options Granted Exercise Expiration
Name Options Granted to Employees in Fiscal Year Price Date
---- --------------- --------------------------- ----- ----
<S> <C> <C> <C> <C>
Alfred H. Falk 2,000,000/(1)/ 57% $5.46 1/10/2004
</TABLE>
________________
(1) These options vested 25% at issue and 25% each year thereafter from issue
until fully vested.
Aggregated Option Exercises and Fiscal Year-end Values
The following table provides information on exercised and unexercised
options of the Named Executive Officer at March 31, 2000:
Fiscal Year-End Option Values
5
<PAGE>
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options At In-the-Money Options At
March 31, 2000 March 31, 2000
-------------- --------------
Number of Shares
----------------
Name Acquired on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alfred H. Falk 751,684 $6,962,470 1,148,316 1,500,000 $8,763,202 $6,903,750
</TABLE>
The Company has not awarded stock appreciation rights to any employee of
the Company and has no long-term incentive plans, as that term is defined in
Securities and Exchange Commission regulations. The Company has no defined
benefit or actuarial plans covering any person.
Employment Agreements
In May 1999, the Company entered into an employment agreement with Alfred
H. Falk, the Company's President and Chief Executive Officer. The employment
agreement provides for a base salary of $155,000 per year and certain bonuses as
approved by the Board of Directors. The agreement is for a two-year term. In the
event of a non-voluntary termination other than for cause, the employee is
entitled to six months severance payment. In the event of a change of control (a
new owner controls more than 51% of the Company's Common Stock) and employee is
terminated within 12 months of the change, other than cause, then the employee
shall receive a termination payment equal to one year's then annual
compensation.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Common Stock
The following security ownership information is set forth, as of September
11, 2000, with respect to certain persons or groups known to the Company to be
beneficial owners of more than 5% of the Company's outstanding Common Stock and
with respect to each director of the Company, each of the executive officers
named in the Summary Compensation Table currently employed by the Company, and
all current directors, nominees and executive officers as a group (seven
persons). Other than as set forth below, the Company is not aware of any other
person who may be deemed to be a beneficial owner of more than 5% of the
Company's Common Stock.
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner/(1)/ Beneficial Ownership(2) Percent of Class
----------------------------------------- ----------------------- -----------------
<S> <C> <C>
Alfred H. Falk 1,615,000 /(3)/ 1.3%
Robert Putnam 1,325,000 /(4)/ 1.0%
Walter "Skip" Matthews 102,129 /(5)/ *
Allen Cocumelli 101,000 /(5)/ *
Victor G. Ramsauer 50,000 /(6)/ *
Robert Jecman 50,000 /(6)/ *
All executive officers, directors
and nominees as a group (7 persons) 3,280,129/(7)/ 2.3%
</TABLE>
* Less than 1%
/(1)/ The address of each beneficial owner is 13114 Evening Creek Drive South,
San Diego, California 92128.
/(2)/ Unless otherwise noted, sole voting and dispositive power are possessed
with respect to all shares of Common Stock owned.
/(3)/ Includes options exercisable within 60 days to purchase 1,148,316 shares.
Excludes unvested options to purchase 1,350,000 shares.
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<PAGE>
/(4)/ Includes options exercisable within 60 days to purchase 200,000 shares
and warrants to purchase 500,000 shares. Excludes unvested options to
purchase 450,000 shares.
/(5/) Includes options exercisable within 60 days to purchase 100,000 shares
per director.
/(6)/ Includes options exercisable within 60 days to purchase 50,000 shares per
director. Excludes unvested options to purchase 50,000 shares per
director.
/(7)/ Includes options exercisable within 60 days to purchase 1,673,316 shares
and warrants on 500,000 shares.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors, executive officers and persons who own more
than 10% of the Common Stock to file initial reports of ownership (Forms 3) and
reports of changes in ownership of Common Stock (Forms 4 and Forms 5) with the
Securities and Exchange Commission.
Based solely on a review of copies of such reports furnished to the Company
and written representation that no other reports were required during the fiscal
year ended March 31, 2000, the Company believes that all persons subject to the
reporting requirements pursuant to Section 16(a) filed the required reports on a
timely basis with the Securities and Exchange Commission.
CERTAIN TRANSACTIONS
Commencing July 11, 1997, the Company jointly leased with ATC an aggregate
of 18,056 square feet of engineering office space at 13114 Evening Creek Drive
South, San Diego, California of which the Company occupies approximately 11,000
square feet at a cost of $12,950 per month. The Company believes that the terms
of these arrangements are no less favorable than could be obtained from an
independent and unaffiliated party.
On June 12, 1998, the Company granted to Robert Putnam a stock purchase
warrant to purchase 500,000 shares at $0.10 per share until June 12, 2003 in
consideration of Mr. Putnam providing purchasers of notes an option to purchase
up to 25,000 shares of ATC stock owned by him to facilitate the offering and
sale of such notes by the Company. The Company believes the Company would have
been unable to obtain the note financing without the inducement provided by Mr.
Putnam.
Conflicts of Interest. Certain conflicts of interest now exist and will
continue to exist between the Company and its officers and directors due to the
fact that they have other employment or business interests to which they devote
some attention and they are expected to continue to do so. The Company has not
established policies or procedures for the resolution of current or potential
conflicts of interest between the Company and its management or management-
affiliated entities. There can be no assurance that members of management will
resolve all conflicts of interest in the Company's favor. The officers and
directors are accountable to the Company as fiduciaries, which means that they
are legally obligated to exercise good faith and integrity in handling the
Company's affairs. Failure by them to conduct the Company's business in its best
interests may result in liability to them.
Officer and director Robert Putnam also acts as Treasurer and Secretary of
Patriot where he ultimately reports to the Board of Directors. Mr. Putnam is
also Vice President, Investor Relations of ATC. Ms. Warden is Chief Accounting
Officer, Treasurer and Secretary of ATC. The possibility exists that these
other relationships could affect Mr. Putnam's independence as an officer and
director of the Company and Ms. Warden's independence as an officer of the
Company. Mr. Putnam and Ms. Warden are obligated to perform their duties in
good faith and to act in the best interest of the Company and its stockholders,
and any failure on their part to do so may constitute a breach of their
fiduciary duties and expose them to damages and other liability under applicable
law. While the directors and officers are excluded from liability for certain
actions, there is no assurance that Mr. Putnam or Ms. Warden would be excluded
from liability or indemnified if they breached their loyalty to the Company.
7
<PAGE>
APPROVAL OF AMENDMENT TO 1994 STOCK OPTION PLAN
(Proposal Two)
Introduction
In 1994, the Board of Directors of the Company and the stockholders of the
Company approved the 1994 Stock Option Plan (the "1994 Plan") under which
500,000 shares of Common Stock were initially authorized for issuance pursuant
to the exercise of stock options granted thereunder. In 1996 and 1998, the 1994
Plan was amended to increase the number of shares authorized for issuance under
the 1994 Plan by 3,500,000 and 6,000,000 shares, respectively. In August 2000,
the Board of Directors amended the 1994 Plan, subject to stockholder approval,
to increase the number of shares authorized for issuance under the 1994 Plan by
4,000,000 shares. If such amendment is approved, a total of 14,000,000 shares
will be authorized for issuance under the 1994 Plan. To date, no options have
been or will be granted to purchase any of such additional 4,000,000 shares
prior to obtaining stockholder approval of such amendment.
Vote Required; Board Recommendation
The proposal to approve the increase in the number of shares authorized for
issuance under the 1994 Plan requires the affirmative vote of a majority of the
shares of Common Stock represented in person or by proxy and eligible to vote at
the meeting.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
General Description of the 1994 Plan
The 1994 Plan is designed to promote the interest of the Company and its
stockholders by providing an incentive to certain key employees, directors and
consultants of the Company and its affiliates to continue their employment and
to afford such employees, directors and consultants the opportunity to acquire
and enlarge their stock ownership in the Company in order that they may have a
direct interest in the Company's success. The 1994 Plan provides for the
granting of options which either qualify for treatment as incentive stock
options under Section 422A of the Internal Revenue Code of 1986, as amended (the
"Code") and are designated "incentive stock options" or which do not qualify for
such treatment and are designated "nonstatutory stock options." Unless the
context clearly indicates to the contrary, the term "option" used herein shall
mean either an incentive stock option or a non-statutory stock option and the
term "optionee" shall mean any person holding an option granted under the 1994
Plan.
Administration
The 1994 Plan is administered by a committee which the Board shall appoint
to administer the 1994 Plan (the "Committee"). The 1994 Plan is currently
administered by the Compensation Committee of the Board of Directors. The
Committee may make such rules and regulations and establish such procedures for
the administration of the 1994 Plan as it deems appropriate. In accordance with
the provisions of the 1994 Plan, the Committee has authority to determine from
time to time the persons who will be granted options, the number of shares
subject to each option, the time or times when options may be granted and to
prescribe such terms and provisions of each option granted which are not
inconsistent with the 1994 Plan. The Committee also construes and interprets the
1994 Plan and options granted under it and determines all questions of policy
which may arise in the administration of the 1994 Plan.
Eligibility
8
<PAGE>
Key employees, directors and consultants of the Company and its affiliates
are eligible for selection as participants in the 1994 Plan. Incentive stock
options may be granted only to full-time key employees of the Company including,
without limitation, officers and members of the Board who are also full-time key
employees at the time of grant. Non-qualified stock options may be granted to
employees (including officers) and directors of and consultants to the Company.
In no event, however, may a member of the Committee be granted an option under
the 1994 Plan. As of September 11, 2000, management estimates that
approximately 26 persons were eligible to receive options and 23 optionees were
holding options under the 1994 Plan.
Ceiling of Incentive Stock Option Grants
The aggregate fair market value (determined at the time the option is
granted) of the shares of Common Stock for which incentive stock options may be
exercisable for the first time by any employee during any calendar year (under
all incentive stock option plans of the Company) may not exceed $100,000. Should
it be determined that any incentive stock option granted pursuant to the 1994
Plan exceeds such maximum, such incentive stock option shall be considered a
non-qualified stock option and not qualify for treatment as an incentive stock
option under Section 422 of the Code to the extent, but only to the extent, of
such excess.
Option Price
The option exercise price per share for non-qualified stock options granted
under the 1994 Plan must be 85% of the fair market value of the Common Stock
determined on the date the option is granted. The option exercise price per
share for incentive stock options granted under the 1994 Plan must be 100% of
the fair market value of the Common Stock determined on the date that the option
is granted, except that in the case of an employee owning more than 10% of the
combined voting power of all classes of stock of the Company (applying
attribution rates), the option exercise price of any incentive stock option
shall be at least 110% of the fair market value of such shares on the date of
grant. The option exercise price is payable by check or by bank draft made
payable to the order of the Company or in shares of Common Stock of the Company
owned by the optionee having a fair market value on the exercise date
(determined by the Committee) equal to the option price for the shares being
purchased. The average for the bid and asked price for common stock on
September 11, 2000 as reported by the National Association of Securities
Dealers' OTC Electronic Bulletin Board.
Option Term
No option shall be exercisable after the expiration of ten years from the
date it was granted. Incentive stock options granted to any employee owning more
than 10% of the combined voting power of all classes of stock of the Company
will expire five years from the date such option is granted.
Termination of Option
Options granted under the 1994 Plan are contingent upon continued
employment by the Company or an affiliate of the Company or continued
relationship as a director or consultant; however, if the employment or other
relationship is terminated after 12 months from the date of the grant of the
option, the optionee has the right to exercise his or her option at any time
within a three month period after such termination, but only to the extent that
the optionee was entitled to exercise the option immediately prior to such
termination. If the optionee dies, the option may be exercised at any time
within 18 months following his or her death by his or her estate or by the
person or persons to whom his or her fights under the option passed by law or by
the laws of descent or distribution, but only to the extent that such option was
exercisable by the optionee on the date of optionee's termination or within not
more than 3 months after such termination. If an optionee becomes permanently
and totally disabled, the option may be exercised at any time within 12 months
following such disability, but only to the extent that such option was
exercisable by the optionee on the date of the optionee's termination or within
not more than 3 months after such termination.
Amendment of the 1994 Plan
9
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The Board of Directors may terminate or amend the 1994 Plan at any time as
it deems advisable, provided, however, that no amendment to the 1994 Plan which
would materially (i) impair any options previously granted, (ii) increase the
maximum number of shares of Common Stock for which options may be granted under
the 1994 Plan, (iii) increase the benefits accruing to options under the 1994
Plan or (iv) modify the requirements as to eligibility to participate in the
1994 Plan or alter the method of determining the option exercise price, may be
made without stockholder approval.
Federal Income Tax Consequences
Federal income tax laws have frequently been revised and may be changed
again in the future. The Company has been advised by its counsel of the
following federal income tax consequences of the grant and exercise of options
under the 1994 Plan and the disposition of shares issued thereunder in existence
as of the date that this Proxy Statement is being printed.
Incentive Stock Options. There are no tax consequences to the optionee upon
the grant of an incentive stock option pursuant to the procedures set forth in
the 1994 Plan. There are no tax consequences to the optionee upon exercise of an
incentive stock option, except that the amount by which the fair market value of
the share at the time of exercise exceeds the option exercise price is included
in the optionee's alternative minimum taxable income (unless the shares are sold
in the same taxable year), possibly giving rise to alternative minimum tax.
If the shares of Common Stock acquired are not disposed of within two years
from the date the incentive stock option was granted and within one year after
the shares are transferred to the optionee, any gain realized upon the
subsequent disposition of the shares will be characterized as long-term capital
gain and any loss will be characterized as long-term capital loss.
If all requirements other than the above described holding period
requirements are met, a "disqualifying disposition" occurs and gain in an amount
equal to the lesser of (i) the fair market value of the share on the date of
exercise minus the option exercise price or (ii) the amount realized on
disposition minus the option exercise price (except for certain "wash" sales,
gifts, or sales to related persons), is taxed as ordinary income and the Company
will be entitled to a corresponding deduction in an amount equal to the
optionee's ordinary income at that time. The gain in excess of this amount, if
any, will be characterized as long-term capital gain if the optionee held the
shares for more than one year. Persons that may be subject to the application of
the provisions of Section 16(b) of the Securities Exchange Act of 1934 are
subject to certain additional rules.
Nonstatutory Options. Other than incentive stock options granted under the
1994 Plan, all options granted under the 1994 Plan will be taxed as nonstatutory
options. Upon the grant of a nonstatutory option, no income will be recognized
by the optionee and the Company will not be entitled to a deduction. This is
because such options are not actively traded on an established market and the
fair market value of the option privilege is not easily ascertainable. Upon the
exercise of nonstatutory options, the optionee will recognize taxable income in
the amount by which the then fair market value of the shares of Common Stock
acquired exceeds the option exercise price, with the Company being entitled to a
deduction in an equal amount. The amount of such taxable income will be
characterized as compensation income to the optionee. Persons that may be
subject to the application of the provisions of Section 16(b) of the Securities
Exchange Act of 1934 are subject to certain additional rules.
Upon the subsequent disposition of the Common Stock, the optionee will
recognize gain or loss, which will be characterized as capital gain or loss in
an amount equal to the difference between the proceeds received upon disposition
and his or her basis for the shares (the basis being equal to the sum of the
price paid for the stock and the amount of income realized upon exercise of the
option) provided the shares are held as a capital asset. Any capital gain or
loss to the optionee will be characterized as long-term or short-term, depending
upon whether his or her holding period for tax purposes exceeds one year.
10
<PAGE>
The taxable income recognized upon the exercise of nonstatutory options is
subject to withholding for federal income tax purposes. Accordingly, the Company
generally must, as a condition to the exercise of a nonstatutory option, deduct
from payments otherwise due to the optionee the amount of taxes required to be
withheld by virtue of such exercise or require that the optionee pay such
withholding to the Company or make other arrangements satisfactory to the
Company regarding the payment of such taxes.
The preceding paragraphs as they relate to the optionee are intended to be
merely a summary of the most important Federal income tax consequences of the
grant and exercise of options to a U.S. citizen or resident under the 1994 Plan
and the disposition of shares issued thereunder in existence as of the date that
this Proxy Statement is being printed. Each optionee should consult his or her
own tax counsel as to the consequences under federal, state and local tax laws
for the particular optionee's circumstances.
THE FOREGOING SUMMARY OF CERTAIN MATERIAL FEATURES OF THE 1994 PLAN DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE 1994
PLAN, A COPY OF WHICH, AS AMENDED BY THE BOARD, WILL BE FURNISHED WITHOUT COST
TO STOCKHOLDERS ON REQUEST TO ROBERT PUTNAM, SECRETARY, E. DIGITAL CORPORATION,
13114 EVENING CREEK DRIVE SOUTH, SAN DIEGO, CALIFORNIA 92128.
APPROVAL OF THE 2000 EMPLOYEE STOCK COMPENSATION PLAN
(Proposal 3)
Introduction
In August 2000, the Board of Directors adopted, subject to stockholder
approval, the Company's 2000 Employee Stock Compensation Plan (the"Plan")
authorizing the issuance of 250,000 shares of the Company's Common Stock. The
Plan is intended to provide equity incentives to recruit and retain employees.
Vote Required; Board Recommendation
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the meeting will be
required to approve the Plan.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR THIS PROPOSAL.
General Description Of The Plan
The Plan provides for stock compensation through grants of the Company's
Common Stock. Awards of shares may be made as compensation for services
rendered, directly or in lieu of other compensation payable, as a bonus in
recognition of past service or performance or may be sold to an employee in
exchange for cash, property, services rendered or other lawful forms of
consideration. Shares awarded other than for services rendered will not be sold
at less than fair market value.
Purpose
The Plan is intended to further the growth and advance the interests of the
Company by supporting and increasing the Company's ability to attract, retain
and compensate persons with experience and ability and whose services are
considered valuable. Furthermore, the Plan is intended to encourage the sense of
proprietorship in such persons, and to stimulate the active interest of such
persons in the development and success of the Company.
Administration
The Compensation Committee of the Board of Directors administers the Plan
(the "Committee"). The
11
<PAGE>
Committee has the power to construe and interpret the Plan, to determine the
employees to whom and the dates on which awards will be made and to determine
the number of shares to be subject to each award.
Eligibility
Awards may be made to only employees. Employees include, without
limitation, persons employed by the Company, consultants, advisors, agents, law
firms and accounting firms. Directors and executive officers may not receive
awards under the Plan.
Adjustment Provisions
The Plan will be appropriately adjusted if there is any change in the stock
subject to the Plan (through stock dividend, stock split, combination of shares
(reverse stock split), recapitalization or other increase or decrease in the
number of shares of the Common Stock outstanding without receiving compensation
therefor in money, services or property).
Duration, Amendment And Termination
The Committee may suspend or terminate the Plan without seeking stockholder
approval or ratification at any time. Assuming stockholder approval of this
Proposal 3, unless sooner terminated, the Plan will terminate on November 9,
2003.
The Committee also may amend the Plan from time to time, provided such
amendment will not adversely affect the rights of a person granted an award
under the Plan prior to the effective date of the amendment. The Committee may
not amend the plan to extend the term of the Plan, increase the number of shares
available for issuance (although the Board may amend the plan to increase the
number of shares available for issuance) or to expand the class of eligible
employees to include executive officers or directors of the Company.
Federal Income Tax Information
Awards granted under the Plan generally have the following federal income
tax consequences:
Upon acquisition of stock under an award, the recipient normally will
recognize taxable ordinary income equal to the excess of the stock's fair market
value over the purchase price, if any. Generally, with respect to employees (but
not consultants, advisors or agents), the Company is required to withhold from
regular wages or supplemental wage payments an amount based on the ordinary
income recognized. Upon disposition of the stock, the recipient will recognize
capital gain or loss equal to the difference between the selling price and the
sum of the amount paid for such stock, if any, plus any amount recognized as
ordinary income upon acquisition of the stock. Such gain or loss will be long or
short-term depending on whether the stock was held for more than one year from
the date ordinary income is measured.
INDEPENDENT PUBLIC ACCOUNTANTS
(Proposal Four)
For the 2000 fiscal year, Ernst & Young LLP provided audit services which
included examination of the Company's annual financial statements, timely review
of unaudited quarterly financial information. Audit services were provided with
the approval of the Board of Directors which, among other things, considered the
independence of the public accountants. Arrangements for non-audit services, if
any, are made by management with the knowledge of the Board of Directors. The
Board has selected Ernst & Young LLP to provide audit services to the Company
for the fiscal year ending March 31, 2001. The stockholders are being requested
to ratify such selection at the Annual Meeting.
12
<PAGE>
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS FOR
2001 ANNUAL MEETING
Any proposal relating to a proper subject which an eligible stockholder may
intend to present for action at the Company's 2001 Annual Meeting of
Stockholders and which such stockholder may wish to have included in the proxy
material for such meeting in accordance with the provisions of Rule 14a-8
promulgated under the Exchange Act must be received as far in advance of the
meeting as possible in proper form by the Secretary of the Company at 13114
Evening Creek Drive South, San Diego, California 92128 and in any event not
later than May 2, 2001. It is suggested that any such proposal be submitted by
certified mail, return receipt requested.
OTHER BUSINESS OF THE ANNUAL MEETING
Management is not aware of any matters to come before the Annual Meeting or
any postponement or adjournment thereof other than the election of directors and
the ratification of accountants. However, inasmuch as matters of which
Management is not now aware may come before the meeting or any postponement or
adjournment thereof, the proxies confer discretionary authority with respect to
acting thereon, and the persons named in such proxies intend to vote, act and
consent in accordance with their best judgment with respect thereto, provided
that, to the extent the Company becomes aware a reasonable time before the
Annual Meeting of any matter to come before such meeting, the Company will
provide an opportunity to vote by proxy directly on such matter. Upon receipt
of such proxies in time for voting, the shares represented thereby will be voted
as indicated thereon and as described in this Proxy Statement.
MISCELLANEOUS
The solicitation of proxies is made on behalf of the Company and all the
expenses of soliciting proxies from stockholders will be borne by the Company.
In addition to the solicitation of proxies by use of the mails, officers and
regular employees may communicate with stockholders personally or by mail,
telephone, telegram, or otherwise for the purpose of soliciting such proxies,
but in such event no additional compensation will be paid to any such persons
for such solicitation. The Company will reimburse banks, brokers and other
nominees for their reasonable out-of-pocket expenses in forwarding soliciting
material to beneficial owners of shares held of record by such persons.
By Order of the Board of Directors
/s/ ALFRED H. FALK
------------------
Alfred H. Falk
San Diego, California President and Chief Executive Officer
September 22, 2000
13
<PAGE>
EXHIBIT A
RESOLUTION - APPOINTING AUDIT COMMITTEE AND CHARTER
WHEREAS, Corporations Code Section 311 authorizes the Board of Directors to
designate committees, and the Bylaws of the corporation do not limit that
authority; and
WHEREAS, this Board of Directors has determined that it is in the best
interests of this corporation and of its shareholders that an Audit committee of
the Board be designated;
NOW, THEREFORE, BE IT RESOLVED, that an Audit Committee (the "Audit
committee") consisting of at least three (3) directors, who are independent of
the management of the corporation within the definition of Rule 4100(a)(15) of
the NASD's listing standards is hereby created, and the following directors are
hereby designated as its members: Allen Cocumelli, Walter Matthews and Victor
Ramsauer.
RESOLVED, FURTHER, that each member of the audit committee shall be able to
read and understand fundamental financial statements, including the balance
sheet, income statement and statement of cash flows. At least on member of the
audit committee shall have such financial employment experience as set forth in
Rule 4310 (c)(26)(B)(i) of the NASD listing standards.
RESOLVED, FURTHER, that to the full extent permitted by applicable law, the
Audit Committee shall exercise the following powers and duties set forth in the
Audit Committee Charter attached here to as Exhibit A, which is hereby approved.
RESOLVED, FURTHER, that each member [including alternate members] of the
Audit Committee shall serve as such until such member's successor shall be
appointed by the Board or until the existence of the Audit Committee is
terminated by the Board. In the event any member of the Audit Committee shall
resign or cease to be a director of this corporation, the vacancy thus caused
shall be filled by the Board.
RESOLVED, FURTHER, that two (2) members of the Audit Committee shall
constitute a quorum for the transaction of business.
RESOLVED, FURTHER, that meetings of the Audit Committee may be held in any
place, and in any manner, permitted by applicable law and the Bylaws of this
corporation. The Audit Committee shall adopt rules of procedure and shall meet
as provided by those rules or as provided by this resolution and the Bylaws in
the absence of a rule duly adopted by the Audit Committee to the contrary.
Meetings shall be held when called by any member of the Audit Committee or
otherwise as permitted by the Bylaws, the call to be communicated orally or in
writing to each member of the Audit Committee at least eight (8) hours before
the hour fixed for the meeting; the call shall be directed to each member at his
or her business address (if sent for receipt during regular business hours), or
residence (if not sent for receipt during regular business hours), or residence
(if not sent for receipt during regular business hours). All calls and notices
and any such waivers, consents, or approvals respecting a meeting shall be made
a part of the minutes of the meeting.
RESOLVED, FURTHER, that minutes of all proceedings of the Audit Committee
shall be kept and shall be distributed to all members of the Board of Directors.
RESOLVED, FURTHER, that the Audit Committee shall be subject at all times to
the control of the Board, which shall have the power to revise or alter any
action taken by the Audit Committee, provided, however, that no rights of third
parties that have attached or arisen shall be affected thereby.
Dated: June 7, 2000
/s/ Allen Cocumelli Attest: /s/ Robert Putnam,
--------------- -----------------
Allen Cocumelli, Chairman of the Board Robert Putnam, Secretary
<PAGE>
AUDIT COMMITTEE CHARTER
Authority
. The Board, by resolution dated June 7, 2000 established the Audit
Committee.
. The Board adopted this Audit Committee Charter on June 7, 2000.
Purpose
The purpose of the Committee is to:
. recommend the appointment of independent auditors for consideration by
the Board and the shareholders of the Company;
. review and appraise Internal Auditing's performance and plans; and
. assist the Board in the discharge of its fiduciary responsibilities to
the shareholders, potential shareholders and the investment community
relating to the corporate accounting and reporting practices of the
Company and the quality and integrity of the Financial reports of the
Company and, in connection therewith, the assessment of the Company's
accounting principles, reporting practices, internal controls, code of
conduct and compliance with laws and regulations, and the independence
of the independent auditors.
Duties and Responsibilities
Relationship to Independent Auditor
The Committee will:
. Review the independence of the independent auditor relative to the
Company by:
. obtaining from the independent auditor a formal written statement
affirming their independence and delineating relationships
between the auditor and the Company as required by and in
compliance with Independence Standards Board Standard No. 1, and
discussing with the independent auditor any matters that might
reasonably be expected to affect independence.
. reviewing the non-audit services provided by the independent
auditor for any impact on independence.
. Inform the independent auditor as to Committee expectations:
. The independent auditor's client is the Audit Committee (and the
Board).
. The independent auditor is to opine to the Committee as to the
appropriateness and quality, not just the acceptability, of
accounting principles and the clarity of financial disclosures.
This includes providing judgments on the
aggressiveness/conservatism of accounting principles and
estimates.
. The independent auditor is to advise the Audit Committee of any
areas requiring special attention.
. Review and approve the fee, scope and timing of the audit and such
other services rendered by the independent auditor.
<PAGE>
. Review the independent auditor's latest Peer Review results, its
litigation status and any recent SEC or other disciplinary actions
taken against it.
. Inquire of both management and the principal independent auditor:
. if any independent auditor other than the principal independent
auditor has been engaged and, if so, why; and
. if any opinion has been sought from an independent auditor other
than the principal independent auditor and, if so, why.
. Review and appraise the overall performance of the independent auditor
annually.
. Recommend annually to the Board a firm of independent auditors to be
engaged by the Company, after consultation with management, and if
appropriate, nominate the independent auditor to be proposed for
stockholder approval in the proxy statement.
Relationship with Internal Auditing
The Committee will:
. Review and concur with the appointment, replacement, reassignment or
dismissal of the Internal Auditor.
. Review and appraise the Internal Auditor's performance annually.
. Inform the Internal Auditor that he is to advise the Audit Committee
of any areas requiring special attention.
. Review and assess the adequacy of the Internal Audit Charter annually.
Review and approve the annual Internal Audit Plan, including its
scope, coordination with the independent auditor and staffing and
budget requirements.
. Prepare a report of the audit committee, to be included in the proxy
statement of the Company [beginning in 2001], which states whether the
audit committee has (i) reviewed and discussed the audited financial
statements with management; (ii) discussed with the independent
auditors the matters required to be discussed by Statement of Auditing
Standards No. 61, as amended by SAS 90; (iii) received from the
auditors disclosures regarding the auditor's independence required by
Independence Standards Board Standard No. 1, and discussed with the
auditors the auditors' independence; and (iv) state whether, based on
the review and discussions noted above the audit committee recommended
to the Board of Directors that the audited financial statements be
included in the company's Annual Report on Form 10KSB.
Accounting Principles, Reporting Practices, Internal Controls, Code of
Conduct and Legal and Regulatory Matters
The Committee will:
. Review the appropriateness and soundness of the Company's
policies and practices with respect to accounting and financial
controls, including:
. the Internal Auditor's annual report on internal controls
. the risk assessment and review process in place to prevent a
material financial statement misstatement
. the planned scopes of the internal and external audits, including
their probability of detecting material fraud or control
weaknesses
. the adequacy of EDP controls
<PAGE>
. Review the financial section of the Annual Report to Shareholders, the
SEC Form 10-QSB and appropriate proxy material by making inquiries of
management, the General Counsel, the Internal Auditor and the
independent auditor, including focusing on:
. the independent auditor's engagement letter
. a financial statement variance analysis comparing the current
period to the prior period
. the completeness of the financial statements
. the appropriateness of accounting principles and any changes in
accounting principles (including the reasons for and impacts of
such changes)
. significant new or emerging accounting or reporting issues and
their resolution
. the consistency of other disclosures with the financial
statements
. any material accruals, reserves or other estimates and any
charges against such accruals
. compliance with laws and regulations and the monitoring of
compliance with the Company's code of conduct
. legal matters having potentially significant impacts on the
financial statements (including how such matters are reflected in
the financial statements)
. the management representation letter provided by management to
the independent auditor
. the required communications from the independent auditor to the
Audit Committee
. Review the SEC Form 10-QSB and other significant SEC filings, either
subsequent or prior to their filing as deemed appropriate by
management and the General Counsel, by making inquiries of management,
the General Counsel, the Internal Auditor and the independent auditor.
. the independent auditor will conduct a SAS 71 Interim Financial
Review prior to the Company's filing of its Form 10-QSB.
. Review the independent auditor's annual management letter findings and
their dispositions by management.
. Review the significant quarterly internal audit findings and their
dispositions by management, including:
. any audit findings from the review of executive officers' expense
reports and perquisites.
. Review the results of capital project post audits.
. Periodically review the management delegation of authority process.
. Conduct or authorize investigation into any matters within the
Committee's scope of responsibilities.
Administrative
The Committee will:
. Review the Committee's Charter annually and propose to the Board for
its approval any recommended modifications.
. Assure that members, particularly new members, have the training
necessary to carry out their duties.
. Assure that the Committee has sufficient resources to carry out its
duties.
. Assess its own performance annually.
<PAGE>
Membership
. The Committee will have a minimum of three directors.
. All Committee members will be "independent", as defined by the NASD.
. Committee members are required to have backgrounds and a minimum level
of financial literacy necessary to carry out their duties.
. At least one member shall have more significant financial or
accounting expertise.
. The Board will appoint the Committee members and a Chairman.
. The Board may fill vacancies on the Committee.
. The Board may remove a Committee member from the membership of the
Committee at any time with or without cause.
Committee Meetings and Action
. A majority of the Committee members will be a quorum for the
transaction of business.
. The action of a majority of those present at a meeting at which a
quorum is present will be the act of the Committee.
. Any action required to be taken at a meeting of the Committee will be
deemed the action of the committee if all of the Committee members
executed, either before or after the action is taken, a written
consent and the consent is filed with the Corporate Secretary.
. The Chairman will report from time to time to the Board on Committee
actions and on the fulfillment of the Committee's duties under its
charter.
. The Chief Financial Officer will be the management liaison to the
Committee.
. The Committee Secretary will keep minutes of all Committee meetings,
which will be distributed to all Board members.
. The Committee will meet at least once each quarter and at such other
times as may be requested by its Chairman.
. The following management representatives should attend all meetings
except executive and private sessions:
Chief Financial Officer
General Counsel
Controller
Internal Auditor
Other management representatives shall attend as necessary.
. The Committee Secretary and the Chief Financial Officer will prepare a
preliminary agenda. The Chairman will make the final decision
regarding the agenda.
. The agenda and all materials to be reviewed at the meetings should be
received by the Committee members as far in advance of the meeting day
as practicable (which will normally be 6 days).
<PAGE>
. The Committee Secretary should coordinate all mailings to the
Committee members, to the extent practicable.
Line of Communication
. The Internal Auditor and the independent auditor will have a direct
line of communication to the Committee and may by-pass management if
deemed necessary.
. The Committee will meet privately with the Internal Auditor and with
the independent auditor at least once annually.
. The General Counsel will report directly to the Committee with regard
to legal compliance.
. The Committee may contact any employee in the Company, and any
employee may bring before the Committee matters involving
questionable, illegal or improper practices or transactions.
. Disclosure:
. The Committee will annually disclose in its [annual report on
Form 10-KSB] the fact that this Charter has been adopted.
. The Committee will annually disclose in its [annual report on
Form 10-KSB] that the responsibilities outlined in the Charter
have been fulfilled.
. The Committee will disclose in its [annual report on Form 10-KSB]
the current Charter at least every three years.
. The Committee will disclose in its [annual report on Form 10-KSB]
whether or not, in the last fiscal year:
. management has reviewed the audited financial statements
with the Committee including a discussion of the quality of
the accounting principles as applied and significant
judgments affecting the Company's financial statements;
. the independent auditors have discussed with the Committee
their judgments of the quality of those principles as
applied and judgments referenced (above) under the
circumstances; and the Committee has discussed with the
independent auditors the matters required by Statement of
Auditing Standards No. 61, as amended by SAS 90.
. the members of the Committee have discussed among
themselves, without management or the independent auditors
present, the information disclosed to the Committee
described above; and
. the Committee, in reliance on the review and discussions
conducted with management and the independent auditors
pursuant to this section, believes that the Company's
financial statements are fairly presented in conformity with
General Accepted Accounting Principles in all material
respects.
<PAGE>
EXHIBIT B
2000 EMPLOYEE STOCK COMPENSATION PLAN
E.DIGITAL CORPORATION
1. Purpose of the Plan.
This 2000 Employee Stock Compensation Plan ("Plan") is intended to further the
growth and advance the best interests of E.DIGITAL CORPORATION, a Delaware
corporation (the "Company"), and Affiliated Corporations, by supporting and
increasing the Company's ability to attract, retain and compensate person of
experience and ability and whose services are considered valuable, to encourage
the sense of proprietorship in such persons, and to stimulate the active
interest of the Company and Affiliate Corporations. This Plan provides for stock
compensation through the award of the Company's Common Stock.
2. Definitions.
Whenever used in this Plan, except where the context might clearly indicate
otherwise, the following terms shall have the meanings set forth in this
section:
a. "Act" means the U.S. Securities Act of 1933, as amended.
b. "Affiliated Corporation" means any Parent or Subsidiary of the Company.
c. "Award" or "grant" means any grant or sale of Common Stock made under this
Plan.
d. "Board of Directors" means the Board of Directors of the Company. The term
"Committee" is defined in Section 4 of this Plan.
e. "Code" means the Internal Revenue Code of 1986, as amended.
f. "Common Stock" or "Common Shares" means the common stock, $0.001 par value
per share, of the Company, or in the event that the outstanding Common
Shares are hereafter changed into or exchanged for different shares of
securities of the Company, such other shares or securities.
g. "Date of Grant" means the day the Committee authorizes the grant of Common
Stock or such later date as may be specified by the Committee as the date a
particular award will become effective.
h. "Employee" means any person or entity that renders bona fide services to the
Company, including, without limitation, (i) a person employed by the Company
or an Affiliated Corporation; (ii) a person or company engaged by the
Company or an Affiliated Corporation as a consultant, advisor or agent; and
(iii) a lawyer, law firm, accountant or accounting firm, or other
professional or professional firm engaged by the Company or an Affiliated
Corporation; but specifically excluding persons who are directors or
executive officers of the Company or any Affiliated Corporation.
i. "Parent" means any corporation owning 50% or more of the total combined
voting stock of all classes of the Company or of another corporation
qualifying as a Parent within this definition.
j. "Participant" means an Employee to whom an Award of Plan Shares has been
made.
k. "Plan Shares" means shares of Common Stock from time to time subject to this
Plan.
l. "Subsidiary" means a corporation more than 50% of whose total combined
capital stock of all classes is held by the Company or by another
corporation qualifying as a Subsidiary within this definition.
3. Effective Date of the Plan
The effective date of this Plan is November 10, 2000. No Plan shares may be
issued after November 9, 2003.
<PAGE>
4. Administration of the Plan
The Employee Stock Compensation Committee of the Board of Directors
("Committee"), and in default of the appointment or continued existence of such
Committee, the Board of Directors, will be responsible for the administration of
this Plan, and will have sole power to award Common Shares under this Plan.
Subject to the express provisions of this Plan, the Committee shall have full
authority and sole and absolute discretion to interpret this Plan, to prescribe,
amend and rescind rules and regulations relating to it, and to make all other
determinations which it believes to be necessary or advisable in administering
this Plan. The determination of those eligible to receive an award of Plan
Shares shall rest in the sole discretion of the Committee, subject to the
provisions of this Plan. Awards of Plan Shares may be made as compensation of
services rendered, directly or in lieu of other compensation payable, as a bonus
in recognition of past service of performance or may be sold to an Employee as
herein provided. The Committee may correct any defect, supply any omission or
reconcile any inconsistency in this Plan in such manner and to such extent it
shall deem necessary to carry it into effect. Any decision made, or action
taken, by the Committee arising out of or in connection with the interpretation
and administration of this Plan shall be final and conclusive.
5. Stock Subject to the Plan
The maximum number of Plan Shares, which may be awarded under this Plan, is
250,000 ("two hundred fifty thousand") shares.
6. Person Eligible to Receive Awards
Awards may be granted only to Employees (as herein defined)
7. Grants or Awards of Plan Shares
Except as otherwise provided herein, the Committee shall have complete
discretion to determine when and to which Employees Plan Shares are to be
granted, and the number of Plan Shares to be awarded to each Employee. A grant
to an Employee may be made for cash, property, services rendered or other form
of payment constituting lawful consideration under applicable law; Plan Shares
awarded other than for services rendered shall be sold at not less than the fair
market value thereof on the date of grant. No grant will be made if, in the
judgment of the Committee, such a grant would constitute a public distribution
with the meaning of the Act or the rules and regulations promulgated thereunder.
8. Delivery of Stock Certificates
As promptly as practicable after authorizing an award of Plan Shares, the
Company shall deliver to the person who is the recipient of the award, a
certificate or certificates registered in that person's name, representing the
number of Plan Shares that were granted. Unless the Plan Shares have been
registered under the Act, each certificate evidencing Plan Shares shall bear a
legend to indicate that such shares represented by the certificate were issued
in a transaction which was not registered under the Act, and may only be sold or
transferred in a transaction that is registered under the Act or is exempt from
the registration requirements of the Act. In the absence of registration under
the Act, any person awarded Plan Shares may be required to execute and deliver
to the Company an investment letter, satisfactory in form and substance to the
Company, prior to issuance and delivery of the shares. An award may be made
under this Plan wherein the Plan Shares may be issued only after registration
under the Act.
9. Assignability
An award of Plan Shares may not be assigned. Plan Shares themselves may be
assigned only after such shares have been awarded, issued and delivered, and
only in accordance with law and any transfer restrictions imposed at the time of
award.
<PAGE>
10. Employment not Conferred
Nothing in this Plan or in the award of Plan Shares shall confer upon any
Employee the right to continue in the employ of the Company or Affiliated
Corporation nor shall it interfere with or restrict in any way the lawful rights
of the Company or any Affiliated Corporation to discharge any Employee at any
time for any reason whatsoever, with or without cause.
11. Laws and Regulations
The obligation of the Company to issue and deliver Plan Shares following an
award under this Plan shall be subject to the condition that the Company be
satisfied that the sale and delivery thereof will not violate the Act or any
other applicable laws, rules or regulations.
12. Withholding of Taxes
If subject to withholding tax, the Company or any Affiliated Corporation may
require that the Employee concurrently pay to the Company the entire amount or a
portion of any taxes which the Company or Affiliated Corporation is required to
withhold by reason of granting Plan Shares, in such amount as the Company or
Affiliated Corporation in its discretion may determine. In lieu of part or all
of any such payment, the Employee with the consent of the Committee may elect to
have the Company or Affiliated Corporation withhold from the Plan Shares issued
hereunder a sufficient number of shares to satisfy withholding obligations. If
the Company or Affiliated Corporation becomes required to pay withholding taxes
to any federal, state or other taxing authority as a result of the granting of
Plan Shares, and the Employee fails to provide the Company or Affiliated
Corporation with the funds with which to pay that withholding tax, the Company
or Affiliated Corporation may withhold up to 50% of each payment of salary or
bonus to the Employee (which will be in addition to any required or permitted
withholding), until the Company or Affiliated Corporation has been reimbursed
for the entire withholding tax it was required to pay in respect of the award of
Plan Shares.
13. Reservation of Shares
The stock subject to this Plan shall at all times, consist of authorized but
unissued Common Shares, or previously issued shares of Common Stock reacquired
or held by the Company or an Affiliated Corporation equal to the maximum number
of shares the Company may be required to issue as stated in Section 5 of this
Plan, and such number of Common Shares hereby is reserved for such purpose. The
Committee may decrease the number of shares subject to this Plan, but only the
Board of Directors may increase such number, except as consequence of a stock
split or other reorganization or recapitalization affecting all Common Shares.
14. Amendment and Termination of the Plan
The Committee may suspend or terminate this Plan at any time or from time to
time but no such action shall adversely affect the rights of a person granted an
Award under this Plan prior to that date. Otherwise, this Plan shall terminate
on the earlier of the terminal date stated in Section 3 of this Plan or the date
when all Plan Shares have been issued. The Committee shall have absolute
discretion to amend this Plan, subject only to those limitations expressly set
forth herein; however, the Committee shall have no authority to extend the term
of this Plan, to increase the number of Plan Shares subject to award under this
Plan or to amend the definition of "Employee" to include executive officers or
directors of the Company or any Affiliated Corporation.
15. Delivery of Plan
A copy or synopsis (for which copy the prospectus will serve) or description of
this Plan shall be delivered to every person to whom an award of Plan Shares is
made. The Secretary of the Company may, but is not required to, also deliver a
copy of the resolution or resolutions of the Committee authorizing the award.
<PAGE>
16. Liability
No member of the Board of Directors, the Committee or any other committee of
directors, or officers, employees or agents of the Company or any Affiliated
Corporation shall be personally liable for any action, omission or determination
made in good faith in connection with this Plan.
17. Miscellaneous Provisions
The place of administration of this Plan shall be in the State of California (or
subsequently, wherever the Company's principal executive officers are located),
and the validity, construction, interpretation and effect of this Plan and of
its rules, regulations and rights relating to it, shall be determined solely in
accordance with the laws of the State of Delaware. Without amending this Plan,
the Committee may issue Plan Shares to employees of the Company who are foreign
nationals or employed outside the United States, or both, on such terms and
conditions different from those specified in this Plan but consistent with the
purpose of this Plan, as it deems necessary and desirable to create equitable
opportunities given differences in tax laws in other countries. All expenses of
administering this Plan and issuing Plan Shares shall be borne by the Company.
18. Reorganizations and Recapitalization of the Company
(a) The shares of Common Stock subject to this Plan are shares of the Common
Stock of the Company as currently constituted. If, and whenever, the
Company shall effect a subdivision or consolidation of shares or other
capital readjustment, the payment of a Common Stock dividend, a stock
split, combination of shares (reverse stock split) or recapitalization or
other increase or reduction of the number of shares of the Common Stock
outstanding without receiving compensation therefor in money, services or
property, then the number of shares of Common Stock subject to this Plan
shall (i) in the event of an increase in the number of outstanding shares,
be proportionately increased; and (ii) in the event of a reduction in the
number of outstanding shares, be proportionately reduced.
(b) Except as expressly provide above, the Company's issuance of shares of
Common Stock of any class, or securities convertible into shares of Common
Stock of any class, for cash or property, or for labor or services either
upon direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into or exchangeable for shares of Common Stock or other
securities, shall not affect, and no adjustment by reason thereof shall be
made with respect to, the number of shares of Common Stock subject to this
Plan.
By signature below, the undersigned officers of the Company hereby certify that
the foregoing is a true and correct copy of the 2000 Employee Stock Compensation
Plan of the Company.
Dated: November 10, 2000
E.DIGITAL CORPORAITON
By: ____________________
Alfred H. Falk
President and CEO
ATTEST:
By: ____________________
Robert Putnam
Secretary
<PAGE>
e.Digital Corporation
This Proxy is solicited on behalf of the Board of Directors
2000 ANNUAL MEETING OF STOCKHOLDERS
To Be Held November 9, 2000
The undersigned stockholder of e.Digital Corporation, a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement, each dated September 22, 2000, and hereby
appoints Alfred H. Falk and Robert Putnam, and each of them, proxies and
attorneys-in-fact, with full power to each of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the 2000 Annual Meeting
of Stockholders of e.Digital Corporation, to be held on November 9, 2000, at
2:00 p.m., local time, at the California Center for the Arts, Concert Hall,
located at 340 N. Escondido Blvd. Escondido, California 92025, and at any
adjournment thereof, and to vote all shares of Common Stock which the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth below:
<TABLE>
<S> <C>
1. ELECTION OF DIRECTORS: ___ FOR all nominees listed below ___ WITHHOLD AUTHORITY to vote
(except as indicated) for all nominees listed below
</TABLE>
If you wish to withhold authority to vote for any individual nominee,
strike a line through that nominee's name in the following list:
Alfred H. Falk, Robert Putnam, Walter "Skip" Matthews, Allen Cocumelli, Victor
G. Ramsauer and Robert Jecmen.
2. PROPOSAL TO APPROVE AN AMENDMENT TO THE COMPANY'S 1994 STOCK OPTION PLAN TO
INCREASE THE AGGREGATE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FOR
ISSUANCE UNDER THE PLAN BY 4,000,000 SHARES.
___ FOR __ AGAINST __ ABSTAIN
3. PROPOSAL TO APPROVE THE COMPANY'S 2000 EMPLOYEE STOCK COMPENSATION PLAN.
___ FOR __ AGAINST __ ABSTAIN
4. PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP, AS THE INDEPENDENT
AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING MARCH 31, 2001:
___ FOR __ AGAINST __ ABSTAIN
and, in their discretion, upon such other matter or matters that may
properly come before the meeting or any adjournment thereof.
(Continued on reverse side)
<PAGE>
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION AND NO
ABSTENTION IS INDICATED, WILL BE VOTED FOR THE ELECTION OF DIRECTORS, FOR THE
APPROVAL OF AN AMENDMENT TO THE COMPANY'S 1994 STOCK OPTION PLAN TO INCREASE THE
AGGREGATE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FOR ISSUANCE UNDER THE
PLAN BY 4,000,000 SHARES, FOR THE APPROVAL OF THE COMPANY'S 2000 EMPLOYEE STOCK
COMPENSATION PLAN AND FOR THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG
LLP, AS INDEPENDENT AUDITORS, AND AS SAID PROXIES DEEM ADVISABLE ON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE MEETING. THE TELEPHONE NUMBER OF THE
COMPANY IS (858) 679-1504 AND ITS FACSIMILE NUMBER IS (858) 486-3922.
DATED:________________________, 2000
________________________________
Signature
________________________________
Signature
(This Proxy should be marked, dated
and signed by the stockholder(s)
exactly as his or her name appears
hereon, and returned promptly in the
enclosed envelope. Persons signing
in a fiduciary capacity should so
indicate. If shares are held by
joint tenants or as community
property, both should sign).
[_] I PLAN TO ATTEND THE MEETING
---------------------
Attach label here
---------------------
Even if you plan to join us at the meeting,
Please. . .
Sign, date, and return your proxy in the enclosed, postage paid envelope.
Thank You
