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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For quarterly period ended June 30, 1997.
Commission File Number 0-24248
AMERICAN TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 87-0361799
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
13114 Evening Creek Drive South, San Diego, California 92128
(Address of principal executive offices) (Zip Code)
(619) 679-2114
--------------
(Issuer's telephone number)
12725 Stowe Drive, Poway, California 92064
------------------------------------------
(Former Address)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.00001 par value 9,736,279
- ------------------------------- ---------
(Class) (Outstanding at July 31, 1997)
Transitional Small Business Disclosure Format (check one): YES NO X
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AMERICAN TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Balance Sheets as of June 30, 1997 and
September 30, 1996 3
Statements of Operations for the three and nine months ended
June 30, 1997 and 1996 4
Statements of Cash Flows for the nine months ended
June 30, 1997 and 1996 5
Notes to Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION 11
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
</TABLE>
* No information provided due to inapplicability of the item.
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN TECHNOLOGY CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, September 30,
1997 1996
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 446,285 $ 657,331
Investment securities 35,146 190,153
Trade accounts receivable - net 172,896 195,457
Inventories 318,177 313,930
Notes receivable-officers (Note 7) 154,646 -
Prepaid expenses 14,510 58,906
----------- -----------
Total current assets 1,141,660 1,415,777
EQUIPMENT -NET 236,819 93,409
PURCHASED TECHNOLOGY - NET 25,000 40,000
OTHER ASSETS - NET 105,529 46,276
----------- -----------
$ 1,509,008 $ 1,595,462
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 154,972 $ 367,990
LONG-TERM DEBT (NOTE 6) 685,763 -
----------- -----------
Total Liabilities 840,735 367,990
STOCKHOLDERS' EQUITY:
Preferred stock $.00001 par value: authorized
5,000,000 shares; issued and outstanding - none - -
Common stock $.00001 par value; authorized
20,000,000 shares; 9,645,317 and 8,611,759 shares
issued and outstanding, respectively 96 86
Additional paid-in capital 4,004,734 3,063,373
Accumulated deficit (3,371,500) (2,025,937)
Net unrealized gain on securities available for sale 34,943 189,950
----------- -----------
Total stockholders' equity 668,273 1,227,472
----------- -----------
$ 1,509,008 $ 1,595,462
=========== ===========
</TABLE>
See notes to interim financial statements.
3
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AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 88,013 $ 67,738 $ 771,117 $ 732,625
Cost of goods sold 79,610 62,327 624,098 602,290
----------- ----------- ----------- -----------
GROSS PROFIT 8,403 5,411 147,019 130,335
OPERATING EXPENSES:
Selling, general and administrative 356,529 116,152 971,233 328,970
Research and development 190,163 28,259 395,771 79,212
----------- ----------- ----------- -----------
Total operating expenses 546,692 144,411 1,367,004 408,182
----------- ----------- ----------- -----------
Loss from operations (538,289) (139,000) (1,219,985) (277,847)
OTHER INCOME (EXPENSES):
Gain on sale of investment securities - - - 55,019
Interest expense - (5,477) (158) (10,672)
Non-cash interest expense (14,477) - (139,677) -
Other 8,832 - 14,257 4,814
----------- ----------- ----------- -----------
Total other income (expense) (5,645) (5,477) (125,578) 49,161
----------- ----------- ----------- -----------
Loss before taxes on income (543,934) (144,477) (1,345,563) (228,686)
Taxes on income - - - -
----------- ----------- ----------- -----------
NET LOSS $ (543,934) $ (144,477) $(1,345,563) $ (228,686)
=========== =========== =========== ===========
NET LOSS PER SHARE
OF COMMON STOCK $ (0.06) $ (0.02) $ (0.15) $ (0.03)
=========== =========== =========== ===========
AVERAGE WEIGHTED NUMBER OF
COMMON SHARES OUTSTANDING 9,550,807 7,541,228 9,118,393 7,402,542
=========== =========== =========== ===========
</TABLE>
See notes to interim financial statements.
4
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AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH Nine Months Ended
June 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,345,563) $ (228,686)
Adjustments to reconcile net loss
to cash used in operating activities:
Gain on sale of investment securities - (55,019)
Amortization and depreciation 69,754 56,675
Warrants issued for services 4,500 -
Non-cash interest on long-term debt 128,914 -
Compensation and services paid in common stock 137,707 -
Gain on sale of equipment - (4,758)
Changes in operating assets and liabilities:
Prepaid expenses 44,396 6,510
Trade accounts receivable 22,561 57,833
Inventories (4,247) 19,533
Accounts payable and accrued expenses (213,018) (177,987)
Accrued interest on officer receivables (1,496) -
Accrued non-cash interest on long-term debt 10,763 6,204
----------- -----------
Net cash used in operating activities (1,145,729) (319,695)
INVESTING ACTIVITIES:
Proceeds received from sale of
investment securities - 55,050
Proceeds from sale of equipment - 4,605
Notes receivable - officers (173,150) -
Payments on notes - officers 20,000 -
Purchase of other assets (62,378) (22,925)
Purchase of equipment (195,039) (4,246)
----------- -----------
Net cash provided by (used in) investing activities (410,567) 32,484
----------- -----------
FINANCING ACTIVITIES:
Proceeds from convertible notes 1,000,000 220,000
Proceeds from bank line of credit - 25,000
Payment on bank line of credit - (25,000)
Proceeds from sale of common stock - 125,000
Reduction of note payable - shareholder - (50,788)
Proceeds from exercise of stock warrants 20,000 -
Proceeds from exercise of stock options 325,250 -
----------- -----------
Net cash provided by financing activities 1,345,250 294,212
----------- -----------
Increase (decrease) in cash (211,046) 7,001
CASH, BEGINNING OF PERIOD 657,331 58,903
----------- -----------
CASH, END OF PERIOD $ 446,285 $ 65,904
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 158 $ 8,539
Non-cash financing activities:
Exchange of 350,000 options for 292,963 shares $ 192,500 -
Issuance of convertible note for shareholder debt - $ 100,000
Convertible notes exchanged for common stock $ 325,000 -
</TABLE>
See notes to interim financial statements.
5
<PAGE> 6
AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
1. OPERATIONS
American Technology Corporation is engaged in the development, manufacture and
marketing of electronic products and technologies.
2. STATEMENT PRESENTATION
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. They do not include all information and footnotes required by
generally accepted accounting principles. The interim financial statements and
notes thereto should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended September 30, 1996.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. Operating results for the three and nine month
periods are not necessarily indicative of the results that may be expected for
the year.
The Company's plan of operation for the next twelve months is to introduce to
market the Company's sound reproduction technology, continue research and
development on existing and new technologies, expand distribution of its
ear-radio products and seek additional products for distribution. Management
estimates a base level of operating expenditures aggregating approximately $1.8
million during the next twelve months. Based on that level of expenditures,
management anticipates that minimum additional funding of approximately $1.4
million is required. Additionally, expanded radio distribution and the
introduction of the Company's sound reproduction technology may require
additional personnel and resources, which currently, are not estimable by
management. Therefore, the Company believes it will require funds from sale or
licensing of products or technologies, the sale of equity securities, the
placement of debt securities, the exercise of outstanding options and warrants
or other sources.
There can be no assurance that any funds required during the next twelve months
or thereafter can be generated from operations or that such required funds will
be available from the aforementioned or other potential sources. The lack of
sufficient funds from operations or additional capital could force the Company
to curtail or scale back operations and would therefore have an adverse effect
on the Company's business.
3. NEW ACCOUNTING PRONOUNCEMENT
On March 3, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128").
This pronouncement provides a different method of calculating earnings per share
than previously provided under Accounting Principles Board Opinion No. 15,
"Earnings Per Share." SFAS No. 128 provides for the calculation of "Basic" and
"Diluted" earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. The Company
will adopt SFAS No. 128 in fiscal 1998 and its implementation is not expected to
have a material effect on the financial statements.
4. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method. Inventories consist of the following at
June 30, 1997:
<TABLE>
<S> <C>
Finished goods $ 13,302
Work in process 228,710
Raw materials 76,165
--------
$318,177
========
</TABLE>
5. INVESTMENT SECURITIES
The Company's investment securities consists of 225,300 shares of Norris
Communications Inc. ("NCI") common stock, an affiliated corporation. These
securities are reported at fair value as a current asset with unrealized gains
and losses reported as a net amount as a separate component of stockholders'
equity. At June 30, 1997 the Company's market value of available for sale
securities consisted of:
<TABLE>
<CAPTION>
Gross Estimated
Unrealized Fair
Cost Gains Value
---- ----- -----
<S> <C> <C> <C>
Common stock $203 $34,943 $35,146
</TABLE>
6
<PAGE> 7
6. LONG-TERM DEBT
Long-term debt consists of $675,000 of unsecured 6% convertible subordinated
promissory notes due March 1, 1999. Annual simple interest is payable upon
maturity or in common stock when and as converted. The principal and interest
amount of the notes may at the election of each Noteholder be converted one or
more times into common stock at a price which is the lower of (i) $3.50 per
share or (ii) 85% of the ten days average closing bid price prior to conversion
but not less than $2.50 per share or (iii) for any conversions on or after March
1, 1998 the average of the closing bid prices for the prior thirty days but in
no event less than $1.00 per share. The notes may be called by the Company for
conversion if the market price exceeds $9.00 per share for ten days and certain
conditions are met. At June 30, 1997 the notes and accrued interest would have
been convertible into approximately 195,932 common shares.
In connection with the notes the Company granted the holders warrants to
purchase an aggregate of 50,000 common shares at an exercise price of $5.00 per
share until March 1, 2000. (See Note 7).
Upon sale of the original principal amount of $1,000,000 of notes, the Company
expensed $122,700 in the second quarter as embedded interest based on the
difference between the conversion price and the market price at the issue date.
A like amount was recorded as paid in capital. An additional $2,500 was expensed
as non-cash interest to record the value of the related warrants issued.
Subsequent to June 30, 1997, an additional $300,000 principal and accrued
interest of $5,596 was converted through the issuance of 87,312 common shares
reducing the principal amount of the notes to $375,000.
7. STOCKHOLDERS' EQUITY
The following summarizes equity transactions for the nine months ended June 30,
1997:
<TABLE>
<CAPTION>
Shares Dollars
<S> <C> <C>
Balance October 1, 1996 8,611,759 $3,063,459
Exercise of stock options for cash 577,500 325,250
Stock issued for compensation and
services 29,177 137,707
Stock issued on conversion of convertible
notes at $3.50 per share 92,857 325,000
Stock issued for interest on convertible
notes 1,061 3,714
Cash-less exchange of options for
common shares 292,963 -
Exercise of warrants 40,000 20,000
Value assigned to 50,000 warrants with
subordinated notes - 2,500
Value assigned to 90,000 warrants
as consulting services - 4,500
Non-cash interest on notes - 122,700
---------- ----------
Balance June 30, 1997 9,645,317 $4,004,830
========== ==========
</TABLE>
During the nine months ended June 30, 1997, the Company issued 577,500 common
shares pursuant to the exercise of stock options for cash proceeds of $325,250.
An additional 292,963 shares were issued in connection with the cashless
exercise of stock options for 350,000 shares. At June 30, 1997, the Company had
492,000 options outstanding pursuant to its 1992 ISO Stock Option Plan
exercisable at prices ranging from $0.50 to $4.48 per share expiring beginning
1998 through 2001. The Company also had 278,500 options outstanding pursuant to
its 1992 NSO Stock Option Plan exercisable at prices ranging from $0.50 to $5.06
per share expiring beginning 1997 through 2001.
In January 1997 the Company made cash demand loans to two officers aggregating
$173,250 in connection with the exercise of stock options. Notes
receivable-officers, represents the balance of principal and accrued interest at
7% per annum on these demand notes. Each officer made a $10,000 principal plus
interest payment during the third quarter.
At June 30, 1997 the Company had the following warrants outstanding each
exercisable into one common share:
<TABLE>
<CAPTION>
Number Exercise Price Expiration Date
------ -------------- ---------------
<S> <C> <C>
210,000 $0.50 February 23, 1999
100,000 $1.00 May 31, 1998
50,000 $5.00 March 1, 2000
90,000 $5.00 February 5, 2000
-------- (subject to vesting)
450,000
=======
</TABLE>
7
<PAGE> 8
Subsequent to June 30, 1997, an additional 2,500 stock options were exercised
for proceeds of $1,250 and the Company issued 1,150 common shares valued at
approximately $7,000 pursuant to the 1997 Employee Stock Compensation Plan
leaving a balance of 69,673 shares issuable under the plan.
8. INCOME TAXES
At June 30, 1997, a valuation allowance has been provided to offset the net
deferred tax asset as management has determined that it is more likely than not
that the deferred tax asset will not be realized. The Company has for federal
income tax purposes net operating loss carryforwards of approximately $1,959,000
which expire through 2011 of which certain amounts are subject to limitations
under the Internal Revenue Code of 1986, as amended.
9. SUBSEQUENT EVENT
On July 11, 1997, the Company entered into a three year lease for approximately
7,500 square feet of office space in San Diego, California providing for monthly
payments of approximately $8,000. To meet the credit requirements of the
landlord, both the Company and Norris Communications, Inc., an affiliated
corporation, entered into a joint lease agreement for approximately 12,925
square feet with aggregate monthly payments of $13,830 inclusive of utilities
and costs.
- - - - - - - - - - - - - - - - - -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING,
"BUSINESS RISKS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED SEPTEMBER 30, 1996.
OVERVIEW
From 1988 to early 1992 the Company was inactive. In early 1992 the Company
commenced its current business activities. Although the Company owns several
technologies, initial efforts concentrated on developing and producing the
ear-radios of which the FM version was introduced in September 1993 and the AM
version in July 1995.
The Company is focusing its primary efforts on completing the development and
commercialization of its HyperSonic Sound (HSS) technology and expanding
ear-radio distribution. The introduction of new technologies and products and
the continuation of research will require additional funds to be generated from
operations, additional sales of the NCI stock, the sale of additional Company
equity or from other sources. There can be no assurance additional funding will
be available in the future.
Demand for the Company's ear-radios is subject to significant month to month
variability resulting from the limited marketing penetration achieved to date by
the Company. Initial sales have been concentrated on a few customers and there
can be no assurance of future orders from these or new customers. The markets
for the Company's products and future products and technologies are subject to
rapidly changing customer tastes and a high level of competition. Demand for the
Company's products is influenced by demographic trends in society, marketing and
advertising expenditures, product positioning in retail outlets, technological
developments, seasonal variations and general economic conditions. Because these
factors can change rapidly, customer demand can also shift quickly. The Company
may not be able to respond to changes in customer demand because of the time to
change or introduce products, production limitations and because of limited
financial resources.
The Company's HSS technology is in development and has not been developed to the
point of commercialization. There can be no assurance that a commercially viable
system can be completed due to the inherent risks of new technology development,
limitations on financing, competition, obsolescence, loss of key technical
personnel and other factors. The Company has not generated any revenues from its
HSS technology to date, and has no agreements or arrangements providing any
assurance of revenues in the future. The Company's various development projects
are high risk in nature, where unanticipated technical obstacles can arise at
any time and result in lengthy and costly delays or result in determination that
further development is unfeasible. There can be no assurance of timely
completion of commercially viable HSS technology or that if available that it
will perform on a cost-effective basis, or that if introduced, that it will
achieve market acceptance.
8
<PAGE> 9
The future of the Company is largely dependent upon the success of the Company's
HSS technology or the development of new technologies. There can be no assurance
the Company can introduce any of its technologies or that if introduced they
will achieve market acceptance sufficient to sustain the Company or achieve
profitable operations. See also "Business Risks" below.
RESULTS OF OPERATIONS
Net sales for the nine months ended June 30, 1997 were $771,117, a 5% increase
from the first nine months of the prior year. Net sales for the three months
ended June 30, 1997 were $88,013 a 30% increase compared to $67,738 for the
comparable prior period. Substantially all revenues in all periods were from
ear-radio sales. During fiscal 1996 the Company encountered competition for its
FM ear-radio which due to the Company's U.S. patent had a greater impact on
foreign sales. The Company has taken and expects to continue to take actions to
preclude sale of infringing radios in the U.S. The Company also responded to
increased competition by (1) contracting for off-shore assembly to reduce
production costs and (2) reducing prices to make the ear-radios attractive to
large chain retailers. The improved sales results in fiscal 1997 include sales
to several new large chain retailers which sales are highly seasonal.
Management believes it has successfully completed the transition from in-house
FM ear-radio assembly to off-shore contract assembly for the current version of
the FM ear-radio. Management believes the change has resulted in reduced per
unit costs, working capital requirements and increased capacity for future
periods. However, reliance on off-shore assembly imposes certain risks including
delays, shortages and quality issues.
The Company has been successful in adding new sales representatives and
obtaining new ear-radio accounts but has had to reduce unit prices for new and
existing customers. Sales are subject to significant month to month and quarter
to quarter variability based on the timing of orders, new accounts, lost
accounts and other factors. The Company's sales are affected by a variety of
factors including seasonal requirements of customers. The Company has been
expanding its radio distribution to limit the exposure to particular customers
and to seasonality. The Company's first fiscal quarter has traditionally been
its strongest sales quarter and management expects this trend to continue. Also,
reductions in unit prices requires higher volumes in current periods to achieve
or exceed historical period sales.
Cost of sales for the nine months ended June 30, 1997 were $624,098 resulting in
a gross margin of $147,019 or 19%. This compares to a gross margin of 18% for
the comparable period of the prior year. Fiscal 1997 margins reflect the impact
of reduced selling prices offset by reduced manufacturing costs. Gross margin
percentage is highly dependent on sales prices, production volumes and costs and
manufacturing overhead allocations.
Research and development costs for the nine months ended June 30, 1997 were
$395,771 compared to $79,212 for the comparable nine months of the prior year.
The $316,559 increase resulted primarily from an increase in HSS technology
development activities and related costs. In the current nine month period
personnel costs increased by approximately $100,000, equipment and component
costs by $80,000 and outside design and consulting increased by approximately
$125,000 as compared to the prior comparable period.
Research and development costs vary quarter by quarter due to the timing of
projects, the availability of funds for research and development and the timing
and extent of use of outside consulting, design and development firms. The
Company expects fiscal 1997 research and development costs to be at higher
levels than the prior year due to increased staffing and use of outside design
and consultants primarily associated with HSS technology development. The
Company is seeking additional engineering and support personnel to further
expand research and development in future periods.
Selling, general and administrative expenses increased from $328,970 for the
nine months ended June 30, 1996 to $971,233 for the nine months ended June 30,
1997. The $642,263 increase included a $55,000 increase in commissions primarily
associated with large accounts, a $190,000 increase in personnel costs primarily
associated with HSS technology marketing, a $80,000 increase in marketing travel
and related costs, a $70,000 increase in costs associated with marketing and
promoting the HSS technology, a $40,000 increase in office related costs
primarily associated with new personnel, and an $140,000 increase in
professional and financing fees associated with preparing HSS technology
licensing information and new financings. Management anticipates that selling,
general and administrative costs will continue at higher levels in fiscal 1997
due to recent additions of HSS technology marketing personnel and related
operations.
As a result of the above factors, the Company experienced a loss from operations
of $1,219,985 during the nine months ended June 30, 1997, compared to a loss
from operations of $277,847 for the comparable nine months ended June 30, 1996.
The increase in the operating losses resulted primarily from increases in
research and development costs and selling, general and administrative costs
associated with HSS technology.
9
<PAGE> 10
During the nine months ended June 30, 1996, the Company recognized a gain of
$55,019 from the sale of NCI shares. No sales were made in the first nine months
of fiscal 1997. The timing and amount of NCI stock sales by the Company can have
an impact on net operations. The decision on timing of sales is dependent on NCI
stock prices, management's expectations as to NCI future operations and Company
financial requirements. During the second fiscal quarter ended March 31, 1997
the Company incurred $125,200 of non-cash interest expense consisting of $2,500
of value assigned to stock purchase warrants and $122,700 as embedded interest
on convertible notes based on the difference between the conversion price and
the market price at the issue date. A like amount was recorded as paid in
capital. At June 30, 1997 an additional $10,763 of interest payable in common
shares was accrued on the convertible notes.
As a result of the above factors, the Company reported a net loss of $1,345,563
for the nine months ended June 30, 1997, compared to a net loss of $228,686 for
the nine month period ended June 30, 1996. The Company has federal net loss
carryforwards of approximately $1,959,000 for federal tax purposes expiring
through 2011. The amount and timing of the utilization of the Company's net loss
carryforwards may be limited under Section 382 of the Internal Revenue Code.
Future operations are subject to significant variability as a result of product
sales and margins, timing of new product offerings, decisions regarding future
research and development, variability in other expenditures, and gains from NCI
stock sales when and if made.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company recommenced operations in January 1992, the Company has had
significant negative cash flow from operating activities. The negative cash flow
from operating activities was $611,350 for the fiscal year ended September 30,
1996 and $1,145,729 for the nine months ended June 30, 1997. During the first
nine months of fiscal 1997, in addition to the net loss of $1,345,563 as
adjusted for non-cash gains and expenses to a cash loss of $1,004,688, cash was
used in operating activities through an increase in inventories of $4,000 and a
$213,000 decrease in accounts payable and cash was provided by a $44,000
reduction in prepaid expenses and a $22,000 reduction in accounts receivable. At
June 30, 1997 the Company had approximately 60 days sales in accounts receivable
as compared to 75 days at September 30, 1996. This is consistent with terms of
retail chains which often require 60-90 day terms on sales. However, receivables
can vary dramatically due to quarterly and seasonal variations in sales.
For the nine months ended June 30, 1997, the Company used approximately $195,000
for the purchase of laboratory equipment and made a $62,000 investment in
patents and $173,150 in cash loans to officers with the principal used to
exercise stock options and purchase common shares. Such officers made principal
payments aggregating $20,000 in the third quarter of fiscal 1997.
At June 30, 1997, the Company had working capital of $986,688 and at September
30, 1996 had working capital of $1,047,787. Included in working capital is the
unrealized holding gain in the shares held by the Company in NASDAQ quoted NCI.
At June 30, 1997 and September 30, 1996, the Company owned 225,300 shares of NCI
with a market value of $35,146 and $190,153, respectively. This investment is
carried on the balance sheet as a current asset of the Company at market value
pursuant to Statement of Financial Accounting Standards No. 115 (SFAS No. 115),
"Accounting for Certain Investments in Debt and Equity Securities" which was
adopted by the Company effective September 30, 1994. Although the shares of NCI
have experienced significant price and volume variability, these shares have
provided and are an unused source of liquidity for the Company.
Since the Company's reorganization in January 1992 and through June 30, 1997,
the Company has financed its operations primarily through the sale of common
equity and convertible notes and proceeds from the sale of shares of NCI. During
the first nine months of fiscal 1997 the Company obtained $325,250 from the
exercise of stock options and warrants and $1,000,000 from convertible long-term
notes. During the same period the Company acquired $195,039 of new equipment and
invested $62,378 in capitalized patent costs.
Other than the NCI shares, the Company has no other material unused sources of
liquidity at this time. The Company expects to incur additional operating losses
as a result of continued product sale operations and as a result of expenditures
for research and development and marketing costs for HSS technology and other
products and technologies. The Company could be required to curtail research and
development expenditures if there is a cash shortage. The timing and amounts of
the Company's expenditures and the extent of operating losses will depend on
many factors, some of which are beyond the Company's control. The Company
anticipates that the commercialization of HSS technology will require increased
personnel and operating costs. At the current rate of expenditures, the Company
will require significantly improved gross margins from product sales, margins
from new technologies or additional funds for the next twelve months aggregating
an estimated $1.4 million. This estimate is subject to significant variability
due to management decisions and outside factors. Potential sources of any such
required funds may include the sale of additional NCI shares, bank financing,
other debt financing, and additional offerings of the Company's equity
10
<PAGE> 11
securities. There can be no assurance that any funds will be available from
these or other potential sources and the lack of such capital could have a
material adverse effect on the Company's business.
NEW ACCOUNTING PRONOUNCEMENT
On March 3, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128").
This pronouncement provides a different method of calculating earnings per share
than previously provided under Accounting Principles Board Opinion No. 15,
"Earnings Per Share." SFAS No. 128 provides for the calculation of "Basic" and
"Diluted" earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. The Company
will adopt SFAS No. 128 in fiscal 1998 and its implementation is not expected to
have a material effect on the financial statements.
BUSINESS RISKS
This report contains a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results or
those anticipated. In this report, the words "anticipates," "believes,"
"expects," "intends," "future" and similar expressions identify forward-looking
statements. Readers are cautioned to consider the specific risk factors
described in the Company's Annual Report on Form 10-KSB for the year ended
September 30, 1996 and not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements, to
reflect events or circumstances that may arise after the date hereof.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The following exhibits are filed with this Form 8-K:
10.13 Sublease Agreement between Global Associates, Ltd. and Norris
Communications, Inc. and the Company dated July 11, 1997.
(b) Reports on Form 8-K: The Company filed a report on Form 8-K dated April 1,
1997 reporting an Item 5 event related to the $1,000,000 of convertible notes.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN TECHNOLOGY CORPORATION
Date: August 12, 1997 By: /s/ ROBERT PUTNAM
-----------------
Robert Putnam, President,
CEO and Director
(Principal Executive, Financial and
Accounting Officer and duly
authorized to sign on behalf
of the Registrant)
11
<PAGE> 1
EXHIBIT 10.13
SUBLEASE AGREEMENT
This Sublease Agreement ("Sublease") is made this 11th day of July,
1997, by and between Global Associates, Ltd., a Virginia corporation
("Landlord") and Norris Communications, Inc., a Delaware corporation, and
American Technology Corporation, a Delaware corporation (collectively the
"Tenant").
RECITALS
A. Landlord, as tenant, has leased the premises (the "Prime Lease
Premises") located at 13112 Evening Creek Drive, South, San Diego, California
92128, from Bedford Property Investors, Inc. (the "Prime Landlord," such Prime
Landlord being the successor-in-interest to Scientific-Atlanta, Inc., a Georgia
corporation and the original landlord under the Prime Lease (as hereinafter
defined)), by lease agreement dated August 14, 1996, as amended by amendment
dated October 23, 1996, and amendment dated January 24, 1997 (collectively the
"Prime Lease," a copy of which is attached hereto and by this reference made a
part hereof as Exhibit A), as the Prime Lease Premises are more particularly
described in the Prime Lease; and
B. Landlord has agreed to sublet to Tenant and Tenant has agreed to
sublet from Landlord a portion of the Prime Lease Premises, deemed and agreed to
comprise approximately 12,925 rentable square feet (the "Premises") in the
building (the "Building") comprising a part of the Prime Lease Premises, as such
Premises are outlined and shown on Exhibit B attached hereto and by this
reference made a part hereof.
NOW THEREFORE, Landlord and Tenant, in consideration of the mutual
covenants herein contained and each with intent to be legally bound, for
themselves and respective successors and assigns, hereby agree as follows:
1. INCORPORATION OF RECITALS
The above recitals are by this reference incorporated as if fully
restated herein.
2. SUBLEASE
Landlord hereby subleases the Premises to Tenant and Tenant hereby
subleases the Premises from Landlord, on the terms and conditions contained in
this Sublease. Landlord shall be entitled, prior to the Commencement Date (as
hereinafter defined), to remove any or all of its fixtures, equipment and other
personal property located ar the Premises, except that Landlord shall leave, and
hereby grants to Tenant a license to use, during the term of this Sublease, the
furniture and equipment of Landlord identified in Exhibit C attached hereto and
by this reference made a part hereof. Tenant hereby accepts the existing "as is"
condition of such furniture and equipment. Tenant represents that it has
inspected the Premises and the Prime Lease Premises and has found the same in
satisfactory condition, subject to the completion of the pre-occupancy tenant
improvements specified in Exhibit B attached hereto and made a part hereof.
3. TERM
(A) The term of this Sublease shall commence on that date (the
"Commencement Date") which is the later to occur of (i) July 14, 1997 (the
"Target Date"), or (ii) the date Landlord shall have substantially completed the
improvements specified in Exhibit B and notified Tenant that the Premises are
ready for delivery. Landlord and Tenant agree that if, for any reason, the
Commencement Date shall not have occurred by the Target Date, Landlord shall use
reasonable efforts to deliver the Premises to Tenant as soon as reasonably
practicable thereafter. In the event that Landlord has not delivered the
Premises to Tenant on or before August 1, 1997, Tenant shall have the right to
terminate this Sublease by written notice to Landlord, and in such event this
Sublease shall terminate as of the date upon which Landlord receives Tenant's
notice, Landlord shall promptly return any monies advanced to Landlord by
Tenant, and neither party shall have any obligation to the other accruing
thereafter.
(B) The term of this Sublease shall expire at the close of business on
July 31, 2000, unless sooner terminated pursuant to the provisions of this
Sublease, applicable law or as a result of the termination of the Prime Lease
(collectively the "Expiration Date").
(C) At the request of Landlord, Tenant shall execute and deliver to
Landlord written confirmation of the Commencement Date established pursuant to
this section of the Sublease.
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<PAGE> 2
14. RENT
(A) Tenant covenants and agrees to pay to Landlord an annual base rent
(the "Base Rent") in equal monthly installments, each in advance on the first
day of each calendar month during the term of this Sublease in accordance with
the following schedule:
<TABLE>
<CAPTION>
Annual Rate
Per Square Foot of
Time Period Premises Rentable Area Annual Base Rent Monthly Base Rent
----------- ---------------------- ---------------- -----------------
<S> <C> <C> <C>
From August 1, 1997 through $12.84 $165,957.00 $13,829.75
July 31, 1998
From August 1, 1998 through $13.44 $173,712.00 $14,476.00
July 31, 1999
From August 1, 1999 through $14.04 $181,467.00 $15,122.25
July 31, 2000
</TABLE>
The installment of Base Rent for the first full calendar month of the term of
this Sublease shall be paid by Tenant at the time of execution and delivery of
this Sublease. Landlord hereby agrees to abate and forgive the payment of Base
Rent for the period from the Commencement Date through July 31, 1997.
(B) Tenant shall pay Base Rent and all other amounts due from Tenant to
Landlord pursuant to this Sublease (all such other amounts collectively called
"Additional Rent"), at such place as Landlord may designate in writing from time
to time, by good check, in lawful money of the United States of America, without
demand and without any deduction, setoff or abatement. Landlord shall have the
same rights and remedies with respect to the nonpayment of Additional Rent as
with respect to the nonpayment of Base Rent.
5. SECURITY DEPOSIT
Upon the execution of this Sublease, Tenant shall deposit with Landlord
the sum of Thirteen Thousand Eight Hundred Twenty-Nine and 75/100 Dollars
($13,829.75) as security for the full and faithful performance of every portion
of this Sublease to be performed by Tenant. If Tenant shall default with respect
to any provision of this Sublease, Landlord may use or apply such portion of
this security deposit as shall reasonably be required to remedy such default. If
any portion of said deposit is so used or applied, Tenant shall, as Additional
Rent, within ten (10) days after demand therefor, deposit funds with Landlord in
an amount sufficient to restore the security deposit to its original amount and
Tenant's failure to do so shall be a breach of this Sublease. Landlord shall not
be required to keep such security deposit separate from its general funds and
Tenant shall not be entitled to interest on such deposit. If Tenant shall fully
and faithfully perform every provision of this Sublease to be performed by it,
the security deposit or any balance thereof shall be returned to Tenant within
thirty (30) days after the expiration of this Sublease.
6. REPAIRS AND MAINTENANCE OF THE PREMISES
(A) Except as provided below in Paragraph 6(B) or otherwise in this
Sublease, any repair and maintenance obligations with respect to the Premises
which are caused solely by ordinary wear and tear and which are the
responsibility of the Landlord, as tenant under the Prime Lease, shall be
performed by Landlord, at Landlord's sole cost and expense. Tenant shall
promptly notify Landlord of the need for any such repair or maintenance.
(B) Notwithstanding the foregoing provisions of Paragraph 6(A), any
repair or maintenance with respect to the Premises or the Building caused by the
negligence, act or omission of Tenant, its employees, agents, contractors,
subtenants, licensees or invitees shall be made by Landlord at Tenant's sole
cost and expense, which amounts shall be payable by Tenant as Additional Rent
within ten (10) days after demand therefor. Tenant shall promptly notify
Landlord of the need for any such repair or maintenance.
7. TENANT'S USE
(A) Tenant shall use and occupy the Premises for general office,
research and development, and manufacturing purposes only, consistent with
Landlord's use of the Prime Lease Premises, and for no other purpose.
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<PAGE> 3
(B) Tenant shall comply with all covenants, conditions and restrictions
governing the Prime Lease Premises and all Federal, State and local laws,
ordinances, rules and regulations and the requirements of any Board of Fire
Insurance Underwriters, applicable to Tenant's use of the Premises.
(C) Tenant shall keep the interior of the Premises and all furniture,
equipment and fixtures therein in good order and condition and, on the
Expiration Date, shall remove all personal property, fixtures, equipment and
supplies which Tenant has placed in or about the Premises and any alterations,
additions or improvements which Landlord shall request Tenant to remove. Any
damage caused to the Premises by such removal shall be repaired by Landlord, or
by Tenant with Landlord's approval, at Tenant's sole expense. The furniture and
equipment of Landlord listed in Exhibit C and to be used by Tenant during the
term of this Sublease shall remain in the Premises and be surrendered by Tenant
on the Expiration Date in good condition and repair.
(D) Tenant shall not, by its acts or omissions, cause any increase in
the premium for fire or other insurance covering the Prime Lease Premises or the
termination of any such insurance.
(E) Tenant shall not commit waste on or to the Premises.
(F) Tenant shall not use the Premises for any unlawful or immoral use.
(G) Tenant shall comply with all of the environmental covenants,
requirements and obligations of Landlord as tenant under the Prime Lease, upon
the terms and conditions set forth in Article 4 (or in any other article or
section) of the Prime Lease.
8. ALTERATIONS
(A) Landlord shall perform the pre-occupancy tenant work, improvements,
installations and alterations as shown on Exhibit B attached hereto and as
specified on those certain drawings filed with and approved by the City of San
Diego, California, Plan File Number A103953-97 entitled "Signal Processing
Systems." Landlord shall perform such pre-occupancy tenant work and improvements
at its sole cost and expense, except as otherwise provided below in Paragraph
(B).
(B) Tenant shall reimburse Landlord for the costs incurred by Landlord
to perform certain pre-occupancy tenant work and improvements requested by
Tenant and performed by Landlord at Tenant's sole cost and expense, including
all those improvements to performed in and to Rooms 17, 19, 20, 22 and 24, as
such rooms are identified on Exhibit B attached hereto. Landlord and Tenant
hereby agree that the amount to be paid by Tenant to Landlord to reimburse it
for such costs is $21,407.08, together with such additional costs as Landlord
may incur because of change orders or other modifications requested by Tenant
and approved the Landlord. Such amount shall be payable as follows: $10,000.00
shall be paid by Tenant to Landlord upon Tenant's execution and delivery of this
Sublease. The remaining $11,407.08 shall be paid in six (6) equal installments
of $1,901.18 each. The first such installment shall be paid to Landlord on
August 1, 1997, and such payments shall continue to be made on the first day of
each next succeeding calendar month until paid in full.
(C) Tenant shall not make any alterations, improvements or
installations (collectively, "Alterations") in or to the Premises without
Landlord's prior written consent which shall not be unreasonably withheld. All
Alterations shall be subject to the approval of Prime Landlord and the terms and
conditions of the Prime Lease. Any Alterations consented to by Landlord shall be
performed at the sole cost and expense of Tenant, by contractors approved in
advance by Landlord and Prime Landlord, but shall become the property of
Landlord (subject to the terms of the Prime Lease and this Sublease). Landlord
may condition its approval to any Alterations on the removal of the same on the
Expiration Date, and restoration of any damage caused by installation and
removal.
9. ASSIGNMENT AND SUBLETTING
(A) Tenant shall not (i) assign, mortgage, pledge, hypothecate,
encumber or otherwise transfer this Sublease, (ii) sublease (which term shall be
deemed to include the granting of concessions and licenses and the like) all or
any part of the Premises, (iii) suffer or permit this Sublease or the leasehold
estate hereby created or any other rights arising under this Sublease to be
assigned, transferred, mortgaged, pledged, hypothecated or encumbered, in whole
or in part, whether voluntarily, involuntarily or by operation of law, or (iv)
permit the use or occupancy of the Premises by anyone other than Tenant, or the
Premises to be offered or advertised for assignment or subletting, without
Landlord's prior written consent which shall not be unreasonably withheld
provided that Prime Landlord's consent has been granted.
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<PAGE> 4
(B) For purposes of this Section 9, an assignment of this Sublease
shall be deemed to include any change in control of Tenant or any transaction
pursuant to which Tenant is merged or consolidated with another entity or
pursuant to which all or substantially all of Tenant's assets are transferred to
any other entity. For purposes hereof, "control" shall mean possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of the applicable person or entity, whether through the ownership
of voting securities, partnership or beneficial interests, by contract or
otherwise.
(C) If this Sublease is assigned or if the Premises or any part thereof
are sublet (or occupied by anybody other than Tenant and its employees)
Landlord, after default by Tenant hereunder, may collect the rents from such
assignee, subtenant or occupant, as the case may be, and apply the net amount
collected to the rent herein reserved, but no such collection shall be deemed a
waiver of the provisions set forth in the first paragraph of this Section 9, the
acceptance by Landlord of such assignee, subtenant or occupant, as the case may
be, as a tenant, or a release of Tenant from the future performance by Tenant of
its covenants, agreements or obligations contained in this Sublease.
(D) No subletting or assignment shall in any way impair the continuing
primary liability of Tenant hereunder, and no consent to any subletting or
assignment in a particular instance shall be deemed to be a waiver of the
obligation to obtain the Landlord's written approval in the case of any other
subletting or assignment. No assignment, subletting or occupancy shall affect
uses permitted hereunder. Any subletting, assignment or other transfer of
Tenant's interest in this Lease in contravention of this Section shall be
voidable at Landlord's option.
(E) If the rent and other sums (including, without limitation, the
reasonable value of any services performed by any assignee or subtenant in
consideration of such assignment or sublease), net of reasonable expenses such
as brokerage commissions, tenant improvements and rental abatements, either
initially or over the term of any assignment or sublease, payable by such
assignee or subtenant on account of an assignment of sublease of all or any
portion of the Premises exceed the sum of Rent plus Additional Rent called for
hereunder with respect to the space assigned or sublet, Tenant shall pay to
Landlord as Additional Rent one hundred percent (100%) of such excess payable
monthly at the time for payment of Rent. Nothing in this paragraph shall be
deemed to abrogate the provisions of this Section and Landlord's acceptance of
any sums pursuant to this paragraph shall not be deemed a granting of consent to
any assignment of the Lease or sublease of all or any portion of the Premises.
10. TENANT'S EQUIPMENT
(A) Tenant will not install or operate in the Premises any electrically
operated equipment or other machinery except that listed in Exhibit D attached
hereto and by this reference made a part hereof, without first obtaining the
prior written consent of Landlord, who may condition such consent upon payment
by Tenant of Additional Rent as compensation for additional consumption of
electricity and/or other utility services. Such Additional Rent shall be in
addition to Tenant's obligations to pay its Base Rent.
(B) If any or all of Tenant's equipment and machinery in the Premises
(except for the equipment and machinery listed in Exhibit D) requires
electricity consumption in excess of the capacity of the electrical system in
and serving the Premises, then subject to the approval of Prime Landlord, all
additional transformers, distribution panels and wiring that may be required to
provide the amount of electricity required for Tenant's equipment shall be
installed by Landlord at the cost and expense of Tenant. If Tenant's equipment
and machinery or any item thereof (including without limitation the equipment
and machinery listed in Exhibit D) is to be consistently operated beyond the
normal Building hours of 8:00 a.m. to 5:00 p.m., Monday through Friday (as such
consumption is determined by Landlord in its reasonable discretion), Landlord
may install at its option (i) a separate electric meter for the Premises at
Tenant's sole cost and expense, or (ii) a separate meter for the specific
equipment that is causing Tenant's excessive consumption of electricity at
Tenant's sole cost and expense. In the event Landlord installs a separate meter
for the Premises, Tenant shall then pay the cost of electricity it consumes as
recorded by such meter directly to the electric company. In the event Landlord
separately meters the specific equipment, Tenant shall be billed periodically by
Landlord based upon such consumption.
(C) Tenant shall not install any equipment or machinery of any kind or
nature whatsoever which will or may necessitate any changes, replacements or
additions to, or in the use of, the water system, heating system, plumbing
system, air-conditioning system, or electrical system of the Premises or the
Building without first obtaining the prior written consent of Landlord and Prime
Landlord. Business machines and mechanical equipment belonging to Tenant which
cause noise or vibration that may be transmitted to the structure of the
Building or to any space therein to such a degree as to be objectionable to
Landlord or to any tenant in the Building shall be installed and maintained by
Tenant, at Tenant's expense, on vibration eliminators or other devices
sufficient to eliminate such noise and vibration.
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<PAGE> 5
(D) Landlord shall have the right to prescribe the weight and position
of all heavy equipment, machinery and fixtures which Tenant intends to install
or locate within the Premises. Tenant shall obtain Landlord's and Prime
Landlord's prior review and approval before installing or locating heavy
equipment and fixtures in the Premises, and if installation or location of such
equipment or fixtures, in Landlord's opinion, requires structural modifications
or reinforcement of any portion of the Premises or the Building, Tenant agrees
to reimburse Landlord, as additional rent, for any and all costs incurred by
Landlord to make such required modifications or reinforcements, and such
modifications or reinforcements shall be completed prior to Tenant installing or
locating such equipment or fixtures in the Premises. Tenant shall reimburse
Landlord within thirty (30) days of receipt of any statement setting forth those
costs.
11. SERVICES, UTILITIES AND REAL ESTATE TAXES
(A) Landlord shall provide the following utilities and services, which
are included in the payment of Base Rent:
(1) Hot and cold water to the wet stacks of the Building.
(2) Cleaning services as specified in Exhibit E, Monday
through Friday of each week, except on the holidays listed in subparagraph (iii)
below.
(3) Heat and air-conditioning to the Premises in season,
Monday through Friday from 8:00 a.m. to 5:00 p.m., except for the following
holidays: New Year's Day, Presidents' Day, Memorial Day, Fourth of July, Labor
Day, Thanksgiving Day and the Friday immediately following Thanksgiving Day, and
Christmas Day, and any other national holiday promulgated by a Presidential
Executive Order or Congressional Act. Landlord may agree to provide heat and
air-conditioning at times in addition to those specified in the preceding
sentence at Tenant's expense as Additional Rent, provided Tenant gives Landlord
prior reasonable written notice requesting such after-hours service. Landlord
reserves the right to charge Tenant for said after-hours services at a
reasonable rate as determined by Landlord from time to time.
(4) A card-entry or other controlled-access system to the
Premises.
(5) Electricity and electrical facilities to furnish
commercially reasonable amounts of electricity for equipment and machinery of
Tenant installed pursuant to Section 10 of this Sublease.
(B) In the event any public utility supplying energy requires, or
government law, regulation, executive or administrative order results in a
requirement, that Landlord or Tenant must reduce, or maintain at a certain
level, the consumption of electricity for the Premises or Building, which
affects the heating, air-conditioning, lighting, or hours of operation of the
Premises or Building, Landlord and Tenant shall each adhere to and abide by said
laws, regulations or executive orders without any reduction in Base Rent.
(C) Landlord's inability to furnish, to any extent or for any reason,
these defined services, or any interruption or cessation thereof, shall not
render Landlord liable for damages to either person or property, nor be
construed as an eviction of Tenant, nor work an abatement of any portion of
rent, nor relieve Tenant from fulfillment of any covenant or agreement hereof.
Should any of the Building equipment or machinery cease to function properly for
any cause, Landlord shall use reasonable diligence to repair the same promptly,
but Tenant shall have no claim for damages or for a rebate of any portion of
rent on account of any interruptions in any services occasioned thereby or
resulting therefrom.
(D) Tenant shall have no obligation to pay any part of the real estate
taxes or operating expenses relating to the Premises or Prime Lease Premises,
except as otherwise expressly provided in this Sublease.
12. INSURANCE
Tenant shall comply with all of the insurance requirements and
obligations of Landlord, as tenant under the Prime Lease, upon the terms and
conditions set forth in Article 10 (or in any other article or section) of the
Prime Lease.
13. TENANT'S INDEMNITY
Tenant shall save Landlord and Prime Landlord harmless, and shall
exonerate and indemnify Landlord and Prime Landlord from and against any and all
claims, liabilities or penalties asserted by or on behalf of any person, firm,
corporation or public authority on account of injury, death, damage or loss to
person or property in or about the Premises and the Prime Lease Premises arising
out of the use or occupancy of the Premises by Tenant or by any person
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<PAGE> 6
claiming by, through or under Tenant (including, without limitation, all
subtenants, invitees, agents, contractors, patrons, employees and customers of
Tenant), or arising out of any delivery to or service supplied to the Premises,
or on account of or based upon anything whatsoever done on or occurring in or
about the Premises or Prime Lease Premises, except that Landlord shall not be
indemnified to the extent of any damage caused by Landlord's gross negligence or
willful misconduct. In respect of all of the foregoing, Tenant shall indemnify
Landlord and Prime Landlord from and against all costs, expenses (including
reasonable attorneys' fees), and liabilities incurred in or in connection with
any such claim, action or proceeding brought thereon.
14. PARKING
Landlord shall provide to Tenant up to fifty-two (52) unreserved
parking spaces in the parking lot serving the Prime Lease Premises. Landlord and
Tenant shall mutually agree upon the location of such parking spaces. Tenant
shall not use, and shall not permit its employees, subtenants, visitors and
invitees to use, more than the fifty-two (52) parking spaces allocated to Lessee
for use by its employees, visitors, customers and invitees.
15. SIGNAGE
Subject to the consent of Prime Landlord and any covenants, conditions,
restrictions and regulations governing such signage, Landlord shall provide to
Tenant, at Tenant's expense, the following signage:
(A) Suite entry signage on the door of the Premises; and
(B) Monument signage on the lawn of the Prime Lease Premises.
The design, size, style and location of such signage shall be subject to the
approval of Landlord and Prime Landlord, and should Prime Landlord disapprove or
withhold its consent to any such signage, or should any covenant, condition,
restriction or regulation prohibit any such signage, Landlord shall have no
further obligation to provide such signage to Tenant. Tenant shall pay to
Landlord as Additional Rent all design, purchase, installation, maintenance,
repair and removal costs incurred by Landlord in connection with such signage.
16. TENANT'S OBLIGATIONS UPON TERMINATION OF THIS SUBLEASE
Tenant shall keep the Premises in good order and condition and, at the
expiration or sooner termination of this Sublease, shall surrender and deliver
up the same, broom clean and in good order and condition, as otherwise required
by this Sublease and by the Prime Lease, ordinary wear and tear and damage by
fire and other casualty excepted (unless the same results from the act of Tenant
or its subtenants, agents, contractors or employees). Tenant shall repair any
damage to the Premises or the Prime Lease Premises caused by removal of any
property by or on behalf of Tenant. Any of Tenant's or its subtenant's personal
property, fixtures or equipment which shall remain in the Premises after the
expiration or sooner termination of this Sublease shall be deemed conclusively
to have been abandoned and either may be retained by Landlord as its property or
may be disposed of in such manner as Landlord may see fit, at Tenant's sole cost
and expense.
17. BROKERS
Each of Landlord and Tenant represents that it has dealt only with
Cushman & Wakefield of California, Inc. (in the case of Landlord) and no one (in
the case of Tenant) and with no other brokers. Landlord shall be responsible for
any commission or fee due or owing to said broker(s) under a separate agreement.
Each party shall indemnify and hold harmless the other from and against any and
all claims of any other broker claiming to have dealt with such party.
18. DEFAULTS
(A) Each of the following shall be a "Default of Tenant":
(1) Tenant shall fail to make any payment of Rent, Additional
Rent or any other payment Tenant is required to make when such payment is due
and such failure shall continue for five (5) days after notice from Landlord to
Tenant.
(2) Tenant shall fail to perform any other obligation of
Tenant pursuant to this Sublease (either directly or derivatively pursuant to
obligations arising under the Prime Lease) and such failure shall continue for
ten (10) days after notice from Landlord; provided, if such failure cannot be
cured solely by the payment of money and more than ten (10) days are reasonably
required for its cure, a Default of Tenant shall not be deemed to have occurred
if
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<PAGE> 7
Tenant shall commence such cure within said ten (10) day period and thereafter
diligently prosecute such cure to completion.
(3) Tenant or any guarantor of Tenant shall (u) file a
voluntary petition in bankruptcy or insolvency, or (v) be adjudicated bankrupt
or insolvent, or (w) take any action seeking or consenting to or acquiescing in
a reorganization arrangement, composition, liquidation, dissolution, appointment
of a trustee or receiver or liquidator or similar relief under any federal or
state bankruptcy or other law or (x) make an assignment for the benefit of
creditors, or (y) dissolve or liquidate or adopt any plan or commence any
proceeding, the result of which is intended to include dissolution or
liquidation, or (z) fail to discharge, within thirty (30) days, any proceeding
brought against Tenant seeking the relief described in clause (w) above.
(4) Tenant's leasehold interest shall be taken on
execution.
(5) A custodian or similar agent is authorized or appointed to
take charge of all or substantially all of the assets of Tenant or any guarantor
or Tenant.
(6) An order is entered in any proceeding by or against Tenant
or any guarantor of Tenant decreeing or permitting the dissolution of Tenant or
any guarantor of Tenant or the winding up of its affairs.
19. REMEDIES
(A) In the event of a Default of Tenant, Landlord (by and through its
agents, if and as appropriate) shall have the power and right:
(1) To enforce any remedies generally available at law or
in equity to a landlord on account of a default by a tenant.
(2) To obtain injunctive relief against any continuing
Default of Tenant.
(3) To maintain this Sublease in effect and collect the Rent,
Additional Rent and any other payments due from Tenant to Landlord.
(4) In addition to and not in derogation of any remedies for
any preceding breach of covenant, immediately or at any time thereafter without
demand or notice and with or without process of law (forcibly, if necessary) to
enter into and upon the Premises or any part thereof or mail a notice of
termination addressed to Tenant, and repossess the same as of Landlord's former
estate and expel Tenant and those claiming through or under Tenant and remove
its and their effects (forcibly, if necessary) without being deemed guilty of
any manner of trespass or wrongful eviction, and without prejudice to any
remedies which might otherwise be used for arrears of rent or prior breach of
covenant, and upon such entry or mailing as aforesaid this Lease shall
terminate, Tenant hereby waiving all statutory rights to the Premises (including
without limitation rights of redemption, if any, to the extent such rights may
be lawfully waived) and Landlord, without notice to Tenant, may store Tenant's
effects, and those of any person claiming through or under Tenant, at the
expense and risk of Tenant, and, if Landlord so elects, may sell such effects at
public auction or private sale and apply the net proceeds to the payment of all
sums due to Landlord from Tenant, if any, and pay over the balance, if any, to
Tenant.
(B) In the event of any termination pursuant to Section 17(A), Tenant
shall pay the Rent, Additional Rent and other charges payable hereunder up to
the time of such termination, and thereafter Tenant, until the end of what would
have been the term of this Sublease in the absence of such termination, less the
net proceeds, if any, of any reletting of the Premises, after deducting all
reasonable expenses in connection with such reletting, including, without
limitation, all repossession costs, brokerage commissions, legal expenses,
attorneys' fees, advertising, expenses of employees, alteration costs and
expenses of preparation for such reletting. Tenant shall pay such current
damages to Landlord monthly on the days on which the Rent would have been
payable hereunder if this Sublease had not been terminated.
(C) At any time after such termination, whether or not Landlord shall
have collected any such current damages, Land lord may elect to collect as
liquidated final damages and in lieu of all such current damages beyond the date
of such demand an amount equal to the excess, if any of the Rent, Additional
Rent and other charges as hereinbefore provided which would be payable hereunder
from the date of such demand would be the same as payments required for the
immediately preceding twelve calendar months (or if less than twelve calendar
months have expired since the Commencement Date, the payments required for such
lesser period projected to an annual amount) for what would be the then
unexpired term of this Sublease if the same remained in effect, over the then
fair net rental value of the Premises for the same period. Nothing contained in
this Sublease shall, however, limit or prejudice the right of
18
<PAGE> 8
Landlord to prove for and obtain in proceedings for bankruptcy or insolvency by
reason of the termination of this Sublease, an amount equal to the maximum
allowed by any statute or rule of law in effect at the time when, and governing
the proceedings in which, the damages are to be proved, whether or not the
amount be greater than, equal to, or less than the amount of the loss or damages
referred to above.
(D) In case of any Default by Tenant, re-entry, expiration and
dispossession by summary proceedings or otherwise, Landlord may (i) relet the
Premises or any part or parts thereof, either in the name of Landlord or
otherwise, for a term or terms which may at Landlord's option be equal to or
less than or exceed the period which would otherwise have constituted the
balance of the term of this Sublease and may grant concessions or free rent to
the extent that Landlord considers advisable and necessary to relet the same and
(ii) may make such reasonable alterations, repairs and decorations in the
Premises as Landlord in its sole judgment considers advisable and necessary for
the purpose of reletting the Premises; and the making of such alterations,
repairs and decorations shall not operate or be construed to release Tenant from
liability hereunder as aforesaid. Landlord shall in no event be liable in any
way whatsoever for failure to relet the Premises, or, in the event that the
Premises are relet, for failure to collect the rent under such reletting.
(E) To the fullest extent permitted by law, Tenant hereby expressly
waives any and all rights of redemption or of limitation or exemption from
liability or stays or other rights that contravene the rights granted to
Landlord hereunder or under any present of future laws in the event of Tenant
being evicted or dispossessed, or in the event of Landlord obtaining possession
of the Premises by reason of the violation by Tenant of any of the covenants and
conditions of this Sublease. Any and all rights and remedies which Landlord may
have under this Sublease, and at law and equity (including without limitation)
actions at law for direct, indirect, special and consequential (foreseeable and
unforeseeable) damages, for Tenant's failure to comply with its obligations
under the Sublease shall be cumulative and shall not be deemed inconsistent with
each other, and any two or more of all such rights and remedies may be exercised
at the same time insofar as permitted by law.
(F) At any time with or without notice, Landlord shall have the right,
but shall not be required, to pay such sums or do any act which requires the
expenditure of monies which may be necessary or appropriate by reason of the
failure or neglect of Tenant to comply with any of its obligations under this
Sublease (irrespective of whether the same shall have ripened into a Default of
Tenant), and in the event of the exercise of such right by Landlord, Tenant
agrees to pay to Landlord forthwith upon demand, as Additional Rent, all such
sums including reasonable attorneys fees, together with interest thereon at a
rate equal to the lesser of 5% over the then applicable Wall Street Journal
Prime Rate (U.S. money center commercial banks) (the "Prime Rate"), or the
maximum rate permitted by law.
(G) The failure of Landlord to seek redress for violation of, or to
insist upon the strict performance of, any covenant or condition of this
Sublease shall not be deemed a waiver of such violation nor prevent a subsequent
act, which would have originally constituted a violation, from having all the
force and effect on an original violation. The receipt by Landlord of rent with
knowledge of the breach of any covenant of this Sublease shall not be deemed to
have been a waiver of such breach by Landlord unless such waiver be in writing
signed by the party to be charged. No consent or waiver, express or implied, by
Landlord to or of any breach of any agreement or duty shall be construed as a
waiver or consent to or of any other breach of the same or any other agreement
or duty.
(H) No acceptance by Landlord of a lesser sum than the Rent, Additional
Rent or any other charge then due shall be deemed to be other than on account of
the earliest installment of such rent or charge due, nor shall any endorsement
or statement on any check or any letter accompanying any check or payment as
rent or other charge be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the balance of such installment or pursue any other remedy in this Sublease
provided.
20. SUBORDINATION TO THE PRIME LEASE
(A) In addition to Tenant's obligations under this Sublease and to the
extent not inconsistent with this Sublease, Tenant shall observe and perform all
of the terms, covenants and conditions of the Prime Lease which Landlord, as
tenant under the Prime Lease, is obligated to observe and perform with respect
to the Premises, to the same extent as if such terms, covenant and conditions of
the Prime Lease were set forth at length in this Sublease but incorporating such
provisions herein shall not obligate Landlord or be construed as causing
Landlord to assume or agree to perform any obligations assumed by the Prime
Landlord under the Prime Lease. Tenant shall not do, omit to do or permit to be
done or omitted any act in or related to the Premises which could constitute a
breach or default under the terms of the Prime Lease or result in the
termination of the Prime Lease by the Prime Landlord, and Tenant hereby
indemnifies and holds harmless Landlord for any claims, losses or damages
resulting from or suffered by Landlord as a result of Tenant's breach of the
foregoing covenant.
19
<PAGE> 9
(B) Notwithstanding the foregoing, Tenant shall have no option to renew
or extend the term of this Sublease or right of first negotiation to lease
additional premises in the Building.
21. LIMITATIONS ON LANDLORD'S LIABILITY
(A) If Landlord assigns its leasehold estate in the Prime Lease
Premises, Landlord shall be released of its obligations hereunder and shall have
no further obligation to Tenant arising thereafter. Tenant shall then recognize
and attorn to Landlord's assignee as Landlord of this Sublease. The Landlord,
upon serious contemplation of a lease assignment, agrees to promptly notify
Tenant and to keep Tenant informed in that regard.
(B) Except as otherwise expressly stated herein, Landlord shall not be
required to perform any of the covenants and obligations of the Prime Landlord
under the Prime Lease. If the Prime Landlord shall default in the performance of
any of its obligations under the Prime Lease or breach any provision of the
Prime Lease pertaining to the Premises, such default shall not constitute an
actual or constructive eviction nor result in any offset, abatement or deduction
against the Base Rent, Additional Rent or other charges due under this Sublease.
In any such event, Tenant shall promptly notify Landlord of Prime Landlord's
breach, and Landlord shall make a demand upon Prime Landlord. If this demand
does not result in a satisfactory response, Landlord may elect to institute an
action or proceeding, in accordance with and not contrary to any provision of
the Prime Lease, against the Prime Landlord under the Prime Lease for the
enforcement of the Prime Landlord's obligations thereunder.
(C) In no event shall Landlord be liable to Tenant for any indirect or
consequential damages.
22. FIRE, CASUALTY AND EMINENT DOMAIN
In the event of a fire, casualty or taking that affects the Premises
but does not result in termination of the Prime Lease, the rent hereunder shall
be abated to the extent that the rent payable by Landlord under the Prime Lease
with respect to the Premises shall be abated. The provisions of this Section 20
shall be considered an express agreement governing any cause of damage or
destruction to the Premises by fire or other casualty, and no local or state
statute, law, rule or regulation, now or hereafter in effect, providing for such
a contingency shall have any application in such case, to the extent permitted
by law.
23. LANDLORD ACCESS
Landlord and Landlord's agents, contractors and employees shall have
the right to enter onto the Premises at reasonable times, from time to time,
upon reasonable notice to Tenant (which notice may be oral and shall not be
required in the event of emergency) to ascertain whether Tenant is in compliance
with the provisions of this Sublease, to perform such inspections or to make
such repairs as Landlord deems advisable or necessary, to comply with Landlord's
obligations hereunder or under the Prime Lease, to perform work with respect to
the remainder of the Prime Lease Premises and (within the last year of the
Sublease term) to exhibit the Premises.
24. GOVERNING LAW
This Sublease shall be construed and interpreted in accordance with the
laws of the State of California.
25. INTEREST ON UNPAID RENT
All installments of Base Rent, Additional Rent and all other charges
which are not paid within five (5) days after the date when due shall bear
interest from the date due until paid, at a rate equivalent to the lesser of 5%
over the Prime Rate, or the maximum rate permitted by law.
26. HOLDOVER
If Tenant holds possession of the Premises after the Expiration Date or
sooner termination of this Sublease, Tenant shall become a tenant at sufferance
on a day-to-day basis upon the terms specified herein at 200% of the then
existing Base Rent, Additional Rent and other charges. In addition, Tenant shall
be responsible for any and all damages suffered by Landlord, including, without
limitation, damages or costs resulting from actions initiated by third parties
(including the Prime Landlord) as a result of said holding over. Such tenancy
shall not constitute a renewal of this Sublease.
20
<PAGE> 10
27. NOTICES
Any notice, statement, certificate, consent, approval, disapproval,
request or demand required or permitted to be given in this Sublease shall be in
writing and delivered by hand, by Federal Express next business day delivery (or
other comparable commercial courier night business day delivery service), or
sent by United States mail, registered or certified, postage prepaid, addressed,
as the case may be:
To Landlord at the following address:
Global Associates, Ltd.
7600 Leesburg Pike
West Building
Falls Church, Virginia 22043-2004
with a copy to:
Holland & Knight LLP 2100 Pennsylvania Avenue, N.W.
Suite 400
Washington, D.C. 20037
Attn: William Mutryn, Esq.
and to Tenant, at the Premises.
Either party by notice to the other may change the place where notices
are to be sent or delivered. In no event shall notice have to be sent on behalf
of either party to more than two (2) persons. Mailed notices will be deemed
served three (3) business days after mailing certified or registered mail
properly addressed with postage prepaid, provided the same are received in the
ordinary course of business.
28. LANDLORD'S AND TENANT'S POWER TO EXECUTE
Landlord and Tenant each covenants, warrants and represents that it has
full power and proper authority to execute this Sublease.
29. ENTIRE AGREEMENT
This Sublease contains the entire agreement between Landlord and Tenant
and can be changed only by a signed agreement.
30. CONSENT TO SUBLEASE BY PRIME LANDLORD
This Sublease shall be contingent upon and shall not become operative
unless and until the Prime Landlord has given to Landlord its consent hereto.
Landlord shall not be responsible for the failure of the Prime Landlord to
consent to this Sublease or the failure or refusal of Prime Landlord to grant
any consent of Prime Landlord required by this Sublease or the Prime Lease.
Should the Prime Landlord not grant its consent to this Sublease within thirty
(30) days from the date hereof, Landlord and Tenant shall be released from all
obligations with respect hereto and neither shall have any further rights at law
or in equity with respect to this Sublease. It is hereby acknowledged by the
parties that Prime Landlord's consent to this Sublease shall not make Prime
Landlord a party to this Sublease, shall not create any contractual liability or
duty on the part of Prime Landlord and shall not in any manner increase,
decrease or otherwise affect the rights and obligations of Prime Landlord and
Landlord, as lessor and lessee, with respect to the Prime Lease Premises.
31. BINDING EFFECT
The submission of this document for examination and negotiation does
not constitute an offer to sublease or a reservation of, or option for, the
Premises and Tenant shall have no right to the Premises hereunder until the
execution hereof by both Landlord and Tenant. Once fully executed, all the
covenants, agreements and undertakings in this Sublease contained shall extend
to and be binding upon the legal representatives, successors and assigns of the
respective parties hereto, the same as if they were in every case named and
expressed, but nothing herein shall be construed as a consent by Landlord to any
assignment or subletting by Tenant of any interest of Tenant in this Sublease.
21
<PAGE> 11
32. MISCELLANEOUS
If any provisions of this Sublease shall to any extent be invalid, the
remainder of this Sublease shall not be affected thereby. There are no oral or
written agreements between Landlord and Tenant affecting this Sublease. This
Sublease may be amended, and the provisions hereof may be waived or modified,
only by instruments in writing executed by Landlord and Tenant. The titles of
the several Sections contained herein are for convenience only and shall not be
considered in construing this Sublease. Except as herein otherwise provided, the
terms hereof shall be binding upon and shall inure to the benefit of the
successors and assigns, respectively, of Landlord and Tenant. If two or more
parties are named as Tenant herein, each of such party shall be jointly and
severally liable for the obligations of the Tenant hereunder, and Landlord may
proceed against any one without first having commenced proceedings against any
other of them. Each term and each provision of this Sublease to be performed by
Tenant shall be construed to be both an independent covenant and a condition.
The reference contained to successors and assigns of Tenant is not intended to
constitute a consent to assignment of Tenant. Except as otherwise set forth in
this Sublease, any obligations of Tenant (including, without limitation, rental
and other monetary obligations, repair obligations and obligations to indemnify
Landlord), shall survive the expiration or sooner termination of this Sublease,
and Tenant shall immediately reimburse Landlord for any expense incurred by
Landlord in curing Tenant's failure to satisfy any such obligation
(notwithstanding the fact that such cure might be effected by Landlord following
the expiration or earlier termination of this Sublease). If any installment of
Base Rent or Additional Rent is collected by or through an attorney, or if
Landlord shall require the services of an attorney after a breach by Tenant of
any of the terms, covenants or conditions of this Sublease, Tenant shall pay to
Landlord the reasonable fees of such attorney regardless of whether formal legal
proceedings have been commenced.
IN WITNESS WHEREOF, Landlord and Tenant have each caused these presents
to be executed, as a sealed instrument, as of the date first above written.
LANDLORD:
GLOBAL ASSOCIATES, LTD.
Attest: /s/ Cathy Francis By:/s/ JAMES T. LUNNEY
-------------------------------
Name: James T. Lunney
Title: President SPS
TENANT:
NORRIS COMMUNICATIONS, INC.
Attest: /s/ Cathy Francis By:/s/ ALFRED H. FALK
-------------------------------
Name: Alfred H. Falk
Title: President
AMERICAN TECHNOLOGY CORPORATION
Attest: /s/ Cathy Francis By:/s/ ROBERT PUTNAM
--------------------------------
Name: Robert Putnam
Title: President
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT N FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 446,285
<SECURITIES> 35,146
<RECEIVABLES> 179,377
<ALLOWANCES> 6,482
<INVENTORY> 318,177
<CURRENT-ASSETS> 1,141,660
<PP&E> 476,696
<DEPRECIATION> 239,877
<TOTAL-ASSETS> 1,509,008
<CURRENT-LIABILITIES> 154,972
<BONDS> 685,763
0
0
<COMMON> 96
<OTHER-SE> 668,177
<TOTAL-LIABILITY-AND-EQUITY> 1,509,008
<SALES> 771,117
<TOTAL-REVENUES> 771,117
<CGS> 624,098
<TOTAL-COSTS> 624,098
<OTHER-EXPENSES> 1,367,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158
<INCOME-PRETAX> (1,345,563)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,345,563)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,345,563)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
