<PAGE> 1
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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, 1998
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)
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 11,351,764
- ------------------------------- ----------
(Class) (Outstanding at July 31, 1998)
Transitional Small Business Disclosure Format (check one): YES __ NO X
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AMERICAN TECHNOLOGY CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Balance Sheets as of June 30, 1998 and
September 30, 1997 3
Statements of Operations for the three and nine months ended
June 30, 1998 and 1997 4
Statements of Cash Flows for the nine months ended
June 30, 1998 and 1997 5
Notes to Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings *
Item 2. Changes in Securities and Use of Proceeds *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
* No information provided due to inapplicability of the item.
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN TECHNOLOGY CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, September 30,
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,798,790 $ 3,338,458
Investment securities 26,833 29,289
Trade accounts receivable - net 120,085 307,174
Inventories 66,232 189,815
Prepaid expenses and other 50,673 27,376
----------- -----------
Total current assets 2,062,613 3,892,112
EQUIPMENT - NET 188,173 196,422
OTHER ASSETS
Patents 219,695 137,440
Other 7,779 25,904
----------- -----------
$ 2,478,260 $ 4,251,878
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 283,081 $ 172,305
LONG-TERM DEBT (NOTE 7) -- 386,651
----------- -----------
Total Liabilities 283,081 558,956
----------- -----------
STOCKHOLDERS' EQUITY (NOTE 8)
Preferred stock $.00001 par value; authorized
5,000,000 shares; Series A
Convertible preferred stock, 350,000
shares designated, -0- and 350,000
issued and outstanding, respectively,
(liquidation preference of $10 per share) -- 3,321,153
Common stock $.00001 par value; authorized
20,000,000 shares; 11,340,764 and 9,758,779 shares
issued and outstanding, respectively 113 98
Additional paid-in capital 8,750,245 4,666,035
Notes receivable (27,895) (153,150)
Accumulated deficit (6,553,914) (4,170,300)
Net unrealized gain on securities available for sale 26,630 29,086
----------- -----------
Total stockholders' equity 2,195,179 3,692,922
----------- -----------
$ 2,478,260 $ 4,251,878
=========== ===========
</TABLE>
See notes to interim financial statements.
3
<PAGE> 4
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 79,257 $ 88,013 $ 163,836 $ 771,117
Cost of goods sold 93,978 79,610 378,497 624,098
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) (14,721) 8,403 (214,661) 147,019
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 567,469 356,529 1,546,026 971,233
Research and development 269,210 190,163 745,318 395,771
------------ ------------ ------------ ------------
Total operating expenses 836,679 546,692 2,291,344 1,367,004
------------ ------------ ------------ ------------
Loss from operations (851,400) (538,289) (2,506,005) (1,219,985)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income 29,334 -- 113,946 --
Interest expense -- -- -- (158)
Non-cash interest expense -- (14,477) (6,555) (139,677)
Other -- 8,832 15,000 14,257
------------ ------------ ------------ ------------
Total other income (expense) 29,334 (5,645) 122,391 (125,578)
------------ ------------ ------------ ------------
Loss before taxes on income (822,066) (543,934) (2,383,614) (1,345,563)
Taxes on income -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $ (822,066) $ (543,934) $ (2,383,614) $ (1,345,563)
============ ============ ============ ============
BASIC NET LOSS PER SHARE
OF COMMON STOCK (NOTE 3) $ (0.07) $ (0.06) $ (0.22) $ (0.15)
============ ============ ============ ============
AVERAGE WEIGHTED NUMBER OF
COMMON SHARES OUTSTANDING 11,250,244 9,550,807 10,733,524 9,118,393
============ ============ ============ ============
</TABLE>
See notes to interim financial statements.
4
<PAGE> 5
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH Nine Months Ended
June 30,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,383,614) $(1,345,563)
Adjustments to reconcile net loss
to cash used in operating activities:
Amortization and depreciation 99,826 69,754
Warrants issued for services -- 4,500
Non-cash interest on long-term debt 6,555 128,914
Compensation and services paid in common stock 162,528 137,707
Inventory and loss accrual 160,000 --
Changes in operating assets and liabilities:
Prepaid expenses and other (23,297) 44,396
Trade accounts receivable 187,089 22,561
Inventories (36,417) (4,247)
Accounts payable and accrued expenses 110,776 (214,514)
Accrued interest on long-term debt -- 10,763
----------- -----------
Net cash provided by (used in) operating activities (1,716,554) (1,145,729)
----------- -----------
INVESTING ACTIVITIES:
Purchase of equipment (73,452) (195,039)
Purchase of other assets (82,255) (62,378)
----------- -----------
Net cash provided by (used in) investing activities (155,707) (257,417)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock warrants 136,250 20,000
Proceeds from exercise of stock options 196,343 325,250
Proceeds loaned on notes receivable - officers for
option exercise -- (173,150)
Principal payments on notes receivable - officer -- 20,000
Proceeds from convertible notes -- 1,000,000
----------- -----------
Net cash provided by (used in) financing activities 332,593 1,192,100
----------- -----------
Increase (decrease) in cash (1,539,668) (211,046)
CASH, BEGINNING OF PERIOD 3,338,458 657,331
----------- -----------
CASH, END OF PERIOD $ 1,798,790 $ 446,285
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ -- $ 158
Non-cash financing activities:
Convertible notes exchanged for common stock $ 375,000 $ 325,000
Interest paid by issuance of common stock 18,206 --
</TABLE>
See notes to interim financial statements.
5
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AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
1. OPERATIONS
American Technology Corporation (the "Company") is engaged in the design,
development and commercialization of sound, acoustics and other technologies and
the sales and marketing of consumer electronic products.
The Company's plan of operation for the next twelve months is to introduce to
market the Company's patent-pending sound and acoustics technologies, continue
research and development on proprietary existing and new technologies and
distribute its new line of portable electronic products. The Company expects to
incur additional operating losses primarily as a result of research and
development and marketing costs for its sound and acoustics technologies known
as Stratified Field Technology(TM) ("SFT(TM)"), Hypersonic Sound Technology(TM)
("HSS(TM)") and other technologies. The Company anticipates that the
introduction to market of its sound and acoustics technologies will require
increased personnel, patent preparation and filing fees and operating costs. 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.
At the current rate of expenditures, the Company believes it will require
approximately $750,000 in additional funds during the next twelve months.
Management believes these funds may be generated from operations but there can
be no assurance thereof. These estimates are subject to significant variability
and change due to management decisions regarding technology development and
marketing, operations and the result of factors beyond management's control. The
long-term success of the Company is dependent upon achieving a level of revenues
adequate to support the Company's capital and operating requirements.
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, 1997.
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.
3. NET LOSS PER SHARE
The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." Previously the Company followed the provisions of
Accounting Principles Board Opinion ("APB") 15, "Earnings Per Share." SFAS No.
128 provides for the calculation of "Basic" and "Diluted" earnings per share
("EPS"). Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. The Company's net losses for the periods presented
cause the inclusion of potential common stock instruments outstanding to be
antidilutive and, therefore, in accordance with SFAS No. 128, the Company is not
required to present a diluted EPS. Stock options and warrants to purchase
1,331,800 shares of common stock were outstanding at June 30, 1998 and stock
options, warrants and convertible debt exercisable into 1,416,432 shares of
common stock were outstanding as of June 30, 1997. These securities were not
included in the computation of diluted EPS because of the net losses but could
potentially dilute EPS in future periods. All prior period loss per share data
is presented in conformity with the requirements of SFAS No. 128.
6
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AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
4. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" and SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post retirement Benefits." SFAS No. 130 establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 131 supersedes SFAS
No. 14 "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosure
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. SFAS No. 132 standardizes the disclosure requirements for pensions
and other post retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis.
SFAS No. 130 and No. 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. SFAS No. 132 is effective for years beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated, unless such information is not readily available. Management
believes the adoption of these statements will have no material impact on the
Company's financial statements and that results of operations and financial
position will be unaffected by their implementation.
5. 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, 1998:
<TABLE>
<S> <C>
Finished goods $ 44,200
Work in process 8,005
Raw materials 14,027
--------
$ 66,232
========
</TABLE>
6. 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, 1998 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 $26,630 $26,833
</TABLE>
7. LONG-TERM DEBT
During the nine month period ended June 30, 1998 the Company's $375,000 of
unsecured 6% convertible subordinated promissory notes due March 1, 1999 and
accrued interest of $18,206 were converted into 128,459 common shares.
7
<PAGE> 8
AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
8. STOCKHOLDERS' EQUITY
The following summarizes equity transactions for the nine months ended June 30,
1998:
<TABLE>
<CAPTION>
Common Stock
------------ Preferred Stock
Common (Par Value and ---------------
Shares Paid in Capital) Shares Dollars
----------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance October 1, 1997 9,758,779 $ 4,666,133 350,000 $ 3,321,153
Stock issued on conversion of convertible
6% notes 122,494 375,000 -- --
Stock issued for interest on convertible 6%
notes 5,965 18,206 -- --
Stock issued on conversion of warrants 215,000 136,250 -- --
Cashless exercise of warrants 106,029 -- -- --
Stock issued on exercised stock options 150,300 196,343 -- --
Common stock issued on conversion of
Series A Convertible Preferred Stock 974,197 3,321,153 (350,000) (3,321,153)
Common stock issued for compensation
and services 8,000 37,273 -- --
----------- ----------- ----------- -----------
Balance June 30, 1998 11,340,764 $ 8,750,358 -- --
=========== =========== =========== ===========
</TABLE>
The following table summarizes information about stock option activity during
the period ended June 30, 1998:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Outstanding October 1, 1997 1,672,500 $3.79
Granted 246,600 $7.23
Canceled/expired (742,000) $5.81
Exercised (150,300) $1.31
---------
Outstanding June 30, 1998 1,026,800 $3.52
=========
Exercisable at June 30, 1998 843,733 $2.67
=========
</TABLE>
The following table summarizes information about stock options outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 06/30/98 Life Price at 06/30/98 Price
- -------------- ----------- ---------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C>
$0.50-$0.55 480,000 2.65 $ 0.52 480,000 $ 0.52
$2.00-$2.15 8,500 0.05 2.04 8,500 2.04
$3.59-$4.48 217,000 3.90 3.27 103,333 4.08
$4.98-$5.90 210,000 5.81 4.03 205,000 5.83
$7.81 61,300 2.76 7.81 46,900 7.81
$16.00 50,000 4.26 16.00 -0- --
- -------------- --------- ------ ------ --------- ------
$ 0.50-$16.00 1,026,800 3.52 $ 3.13 843,733 $ 2.67
============== ========= ====== ====== ========= ======
</TABLE>
At June 30, 1998 the Company had the following warrants outstanding, each
exercisable into one common share:
<TABLE>
<CAPTION>
Number Exercise Price Expiration Date
------ -------------- ---------------
<S> <C> <C>
50,000 $5.00 March 1, 2000
175,000 $7.50 August 1, 2000
60,000 $5.00 February 5, 2000
--------
305,000
========
</TABLE>
8
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AMERICAN TECHNOLOGY CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
9. INCOME TAXES
At June 30, 1998, 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 $3,600,000
which expire through 2012 of which certain amounts are subject to limitations
under the Internal Revenue Code of 1986, as amended.
10. YEAR 2000 COMPLIANCE
The Company, like most owners of computer software, will be required to modify
significant potions of its software so that it will function properly in the
year 2000. Preliminary estimates of the total costs to be incurred by the
Company to resolve this problem range from $10,000 to $20,000. Since the Company
mainly uses third party "off-the-shelf" software, it does not anticipate a
problem in resolving the year 2000 problem in a timely manner. Maintenance or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.
- - - - - - - - - - - - - - - - - -
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, 1997.
OVERVIEW
The Company is focusing on completing development and commercializing its
patent-pending Stratified Field Technology ("SFT") and Hypersonic Sound
Technology(TM) ("HSS") sound reproduction technologies. The SFT technology
features a thin form factor, in a variety of shapes and sizes, producing high
fidelity, low distortion sound reproduction. HSS technology employs a laser-like
beam to project sound to any listening environment. The Company has entered into
working agreements with three global consumer product companies for HSS and one
license for SFT technology. The Company's strategy is to enter into additional
arrangements with the goal of establishing additional definitive licensing or
supply agreements. There can be no assurance the Company will be successful in
commercially exploiting the SFT or HSS technology.
From 1988 to early 1992 the Company was inactive. In early 1992 the Company
commenced its current business activities related to electronic products and
technologies and in 1996 commenced development of its acoustical technologies.
The HSS technology has not been developed to the point of commercialization and
SFT has only recently been licensed for the first time. There can be no
assurance that commercially viable systems 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 beyond the
Company's control. The Company has not generated any significant revenues from
its SFT or HSS technology to date.
In June 1998 the Company executed its first license agreement on its SFT
technology with Authentic, Ltd. providing for initial license payments of
$250,000 based on the achievement of certain milestones and for future minimum
royalties. Although management believes this license agreement has the potential
for significant future royalties, the realization thereof is subject to
successful product implementation and acceptance.
The Company's various development projects are high risk in nature.
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 SFT and/or HSS products or that, if available, such products will perform
on a cost-effective basis, or that, they will achieve market acceptance. The
Company is also developing its patented and patent-pending GPS and jet engine
noise reduction technologies.
9
<PAGE> 10
The future of the Company is largely dependent upon the success of the SFT
and/or HSS technology, other technologies or the development of new
technologies. The Company invests significant funds in research and development
and on patent applications related to its proprietary technologies. There can be
no assurance the Company's technologies will achieve market acceptance
sufficient to sustain the Company or achieve profitable operations. See also
"Business Risks" below.
To date substantially all of the Company's revenues have been derived from
portable consumer electronic products. In the first quarter of fiscal 1998 the
Company began phasing out its ear radio line and sourcing a line of miniature
radios and portable consumer electronic products manufactured by others to be
marketed and distributed by the Company. The Company terminated ear radio
production in the second fiscal quarter and included in cost of sales is a
$160,000 charge for the write-off of obsolete parts inventory and writedown of
finished goods. The Company also terminated its mini-headphone radio development
to focus on sourced products and the Company's acoustical technologies. The
Company has sourced a total of eight portable electronic products (including FM
and solar radios) targeted for niche markets at retail prices ranging from
$11.99 to $51.99. Sourcing is on both an exclusive and nonexclusive basis and
for different market territories on a product by product basis. The Company's
market focus is in North America. The Company intends to inventory finished
goods as well as provide direct factory shipment to certain customers. The
Company recently obtained initial purchase orders and commenced shipments during
the third fiscal quarter ending June 30, 1998.
Demand for the Company's portable consumer electronic products is subject to
significant month to month variability resulting from seasonal demand issues and
the limited number of customers and market penetration achieved to date by the
Company. Prior ear radio sales were concentrated with a few customers and sales
of the new sourced product line may also be concentrated in a few customers. The
Company is reliant on outside manufacturers to supply the products and there can
be no assurance of future supply. 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 required to change or
introduce products, production limitations and because of limited financial
resources.
There can be no assurance that the new line of sourced radios and other products
can be marketed successfully. As a result, the Company anticipates significantly
lower portable consumer electronic product sales in the current fiscal year
compared to the prior year.
RESULTS OF OPERATIONS
Net sales for the nine months ended June 30, 1998 were $163,836, a 79% decrease
from the first nine months of the prior year. Substantially all sales in both
periods were from radio products. Sales for the three months ended June 30, 1998
were $79,257 compared to $88,013 for the comparable prior period. Sales in the
first nine months of fiscal 1998 included sales to several new large chain
retailers and the significant decrease in the current nine month period reflects
the phasing out and termination of the ear radio line. Future portable
electronic product sales are expected to consist of the new line of sourced
products manufactured by others. The Company anticipates significantly lower
portable consumer electronic product sales in the current fiscal year compared
to the prior year. Sales are also 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 further affected by a
variety of factors including seasonal requirements of customers.
Management believes, but there can be no assurance, that with the marketing and
distribution of sourced higher margin portable electronic products that it can
achieve better results over time with a broader product line than achieved in
the past. There can be no assurance that the planned new product line can be
successfully introduced to market.
Cost of sales for the nine months ended June 30, 1998 were $378,497 resulting in
a gross loss of $214,661. Cost of sales for the three months ended June 30, 1998
were $93,978 and the gross loss was $14,721. Included in the cost of sales for
the current year was $160,000 for the write-off of obsolete parts inventory and
writedown of finished goods to be liquidated. In the prior year the Company
recorded a gross margin of $147,019 for the first nine months and $8,403 for the
third fiscal quarter. The current year gross loss is the result of the phasing
out of the ear radio product line and included special close-out pricing to
reduce inventory levels as well as the $160,000 charge. Until the new products
are introduced in volume there is significant uncertainty about future gross
margins. Gross margin percentage is highly dependent on sales prices, volumes,
purchasing costs and overhead allocations.
Research and development costs for the nine months ended June 30, 1998 were
$745,318 compared to $395,771 for the comparable nine months of the prior year.
The $349,547 increase resulted primarily from an increase in HSS and SFT
10
<PAGE> 11
technology development activities and related personnel and component costs.
Personnel costs increased $260,000 in the current period due to additional
research employees and component and equipment costs increased by $58,000 due to
the increased level of activity in the current period. Research and development
costs increased from $190,163 in the third quarter of the prior year to $269,210
in the third fiscal quarter of 1998 reflecting the increased personnel and
activity.
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 1998 research and development costs to be at
significantly higher levels than the prior year due to increased staffing and
use of outside design and consultants primarily associated with SFT and HSS
technology development. The Company is seeking additional engineering and
support personnel to further expand in-house research and development activities
in future periods.
Selling, general and administrative expenses increased from $971,233 for the
nine months ended June 30, 1997 to $1,546,026 for the nine months ended June 30,
1998. The $574,793 increase included a $290,000 increase in personnel costs
primarily associated with the addition of senior executives and SFT/HSS
technology marketing personnel, a $97,000 increase in outside marketing and
professional services, a $75,000 increase in occupancy related costs due to a
new leased facility and increased personnel and a $45,000 increase in legal and
audit costs related to financing and pre-licensing activities. Selling, general
and administrative expenses increased to $567,469 in the third quarter compared
to $356,529 in the prior year's comparable third quarter as a result of the
increased costs outlined above. Management anticipates that selling, general and
administrative costs will continue at higher levels in fiscal 1998 due to the
additions of senior executive and marketing personnel, the expanded facility and
related operations. Management anticipates hiring additional licensing and
marketing personnel during the current fiscal year which will further increase
selling, general and administrative expenses.
As a result of the above factors, the Company experienced a loss from operations
of $2,506,005 during the nine months ended June 30, 1998, compared to a loss
from operations of $1,219,985 for the comparable nine months ended June 30,
1997. The operating loss for the third fiscal quarter of 1998 was $851,400
compared to $538,289 for the prior year's third quarter. The increase in the
operating losses resulted primarily from the increases in research and
development costs and increases in selling, general and administrative costs
associated with the SFT and HSS technology combined with the gross loss from
product sales.
During the nine months ended June 30, 1998, the Company recognized interest
income of $113,946 from the increased cash on hand and also realized a $15,000
gain from the sale of the Company's royalty interest in EarPHONE technology.
During the first nine months the Company incurred $6,555 of noncash interest
paid in common shares related to outstanding 6% convertible notes.
As a result of the above factors, the Company reported a net loss of $2,383,614
for the nine months ended June 30, 1998, compared to a net loss of $1,345,563
for the nine month period ended June 30, 1997. The Company has federal net loss
carryforwards of approximately $3,600,000 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 and variability in other expenditures.
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 $1,145,729 for the fiscal year ended September 30,
1997 and $1,716,554 for the nine months ended June 30, 1998. During the nine
months ended June 30, 1998, the net loss of $2,383,614 included non-cash
expenses of $428,909 resulting in an adjusted net cash loss of $1,954,705. In
addition to this amount of $1,954,705, cash was used in operating activities
through an increase in prepaid expenses and other of $23,297 and an increase in
inventories of $36,714, as adjusted. Operating cash was provided by a $187,089
reduction in accounts receivable and a $110,776 increase in accounts payable and
accrued liabilities.
At June 30, 1998 the Company had accounts receivable of $120,085 as compared to
$307,174 at September 30, 1997. The reduction in receivables is a direct result
of the significantly reduced sales in the first two quarters from the phasing
out of the ear radio product line. Receivables can vary dramatically due to
quarterly and seasonal variations in sales and timing of shipments to and
receipts from large customers many of which demand extended terms of 90-120
days.
11
<PAGE> 12
For the nine months ended June 30, 1998, the Company used approximately $73,000
for the purchase of laboratory equipment and made an $82,000 investment in
patents and new patent applications. The Company estimates a significant level
of investments in patents in fiscal 1998 and requirements for additional
equipment for developing SFT, HSS and other technologies. Dollar amounts of
these patent investments and equipment additions are not currently estimable by
management.
At June 30, 1998 the Company had working capital of $1,779,532 and at September
30, 1997, the Company had working capital of $3,719,807. The reduction is the
result of the Company's operating loss and cash used in operating activities.
Since the Company's reorganization in January 1992 and through June 30, 1998,
the Company has financed its operations primarily through the sale of common
equity, exercise of stock options, issuances of convertible notes and proceeds
from the sale of shares of NCI.
Other than cash of $1,798,790 at June 30, 1998 and 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 expenditures for
research and development and marketing costs for its SFT and HSS technology and
other products and technologies. 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 the SFT and HSS technology will require increased personnel
and operating costs. At the current rate of expenditures, without any
contribution from product sales or technology exploitation, the Company
estimates it will require approximately $750,000 of additional funding during
the next twelve months. Management believes that operations during the next
twelve months may be able to generate the required funds, but there can be no
assurance thereof. Management's estimates are subject to significant variability
and change due to decisions regarding technology development and marketing,
operations and the result of outside factors. Should additional funding be
required there can be no assurance of its availability nor the terms thereof.
The long-term success of the Company is dependent upon achieving a level of
revenues adequate to support the Company's capital and operating requirements.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued a number of new
pronouncements for future implementation as discussed in the footnotes to the
Company's interim financial statements (see page 6, Note 4). As discussed in the
notes to the interim financial statements, the implementation of these new
pronouncements is not expected to have a material effect on the financial
statements.
YEAR 2000 COMPLIANCE
The Company, like most owners of computer software, will be required to modify
significant potions of its software so that it will function properly in the
year 2000. Preliminary estimates of the total costs to be incurred by the
Company to resolve this problem range from $10,000 to $20,000. Since the Company
mainly uses third party "off-the-shelf" software, it does not anticipate a
problem in resolving the year 2000 problem in a timely manner. Maintenance or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.
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, 1997 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.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's fiscal 1997 Annual Meeting of Stockholders held on April 24,
1998 the following individuals, constituting all of the members of the Board of
Director were elected: Dale Williams, Elwood G. Norris, Richard M. Wagner, Joel
A. Barker, Cornelius J. Brosnan.
The following proposals were approved at the Company's Annual Meeting of
Stockholders:
1. Election of Directors:
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C> <C>
Dale Williams 6,121,512 -0- 2,843,817
Elwood G. Norris 8,960,729 -0- 4,600
Richard M. Wagner 8,961,329 -0- 4,000
Joel A. Barker 8,961,729 -0- 3,600
Cornelius J. Brosnan 8,959,609 -0- 5,720
</TABLE>
2. To Approve the Company's 1997 Stock Option Plan.
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C>
8,702,354 219,597 26,865
</TABLE>
3. To ratify the selection of BDO Seidman, LLP as independent auditors of
the Company for the fiscal year ended September 30, 1998.
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C>
8,954,431 21,339 20,500
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The following exhibits are filed with this Form 10-QSB:
10.18 Agreement dated as of June 1, 1998, between the Company and
Authentic, Ltd. (Portions of this Exhibit have been omitted,
based on a request for confidential treatment, and have been
filed with the Securities and Exchange Commission pursuant to
rule 406)
27 Financial Data Schedule
(b) Reports on Form 8-K
By Form 8-K report dated June 29, 1998, the Company reported an Item 5 event
related to the Resignation of Dale Williams.
13
<PAGE> 14
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 10, 1998 By: /s/ ROBERT PUTNAM
------------------------------------
Robert Putnam, Vice President,
Treasurer and Director
(Principal Financial and
Accounting Officer and duly
authorized to sign on behalf
of the Registrant)
14
<PAGE> 1
Exhibit 10.18
CONFIDENTIAL TREATMENT REQUESTED
UNDER 17 C.F.R. SECTIONS 200.80(b)(4),
200.83 AND 240.24b-2
LICENSE AGREEMENT
THIS AGREEMENT is made this first day of June, 1998 (the "Effective
Date") by and between AUTHENTIC, Ltd., a Japanese subsidiary corporation of NEC
(hereinafter "NEC") with an office and place of business at 3-14-1 Hisamoto
Takatsu-ku, Kawasaki City, Kanagawa-Ken 213-0011, Japan (hereinafter "Authentic"
or "Licensee") and AMERICAN TECHNOLOGY CORPORATION, a Delaware corporation with
an office and place of business at 13114 Evening Creek Drive South, San Diego,
California 92128, United States of America (hereinafter "ATC").
RECITALS
WHEREAS, ATC has developed and has rights to sound reproduction systems
known as Stratified Field Technology(TM) (SFT(TM)) and picoSonic(TM) Transducer
Technology (picoSonic(TM)) for which ATC has applied for patents; and,
WHEREAS, ATC has developed certain proprietary exciter materials (PEM) for
use in the manufacture of SFT and picoSonic systems; and
WHEREAS, ATC has demonstrated the use of its SFT system in computer
product components similar to those manufactured by Authentic and used by NEC;
and,
WHEREAS, ATC has developed certain trademarks regarding this system
including, but not limited to, Stratified Field Technology and picoSonic(TM) for
which registration has been requested in the United States Patent and Trademark
Office; and
WHEREAS, Authentic wishes to utilize this SFT system in its products; and
WHEREAS, Authentic, and ATC are willing to enter into License and/or
Volume Purchase Agreements, as applicable, for the manufacture and use of SFT
and picoSonic technologies for Licensed Products;
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS.
A. "LICENSED INFORMATION" shall mean ATC's confidential or proprietary
information, trade secrets, designs, drawings, reports, memoranda, blueprints
and know-how relating to the inventions disclosed and claimed in the Licensed
Patents filed and pending, and inventions for which patents have not yet been
filed but which relate to SFT and picoSonic, but only to the extent the rights
thereunder are necessary for the Licensed Products to fulfill the specifications
of Exhibit B.
1
<PAGE> 2
B. "LICENSED PATENTS" shall mean (1) any and all of ATC's patents and
applications therefore identified in Exhibit A and all continuations,
continuations in part, divisionals, reissues and reexaminations thereof, (2) any
and all applications subsequently filed by ATC to the extent the rights
thereunder are necessary for the Licensed Product to fulfill the specifications
of Exhibit B and (3) any and all patents licensed or acquired by ATC to the
extent the rights thereunder are necessary for the Licensed Product to fulfill
the specifications of Exhibit B.
C. "LICENSED PRODUCT" or "LICENSED PRODUCT" shall mean the product or
those categories of products identified in Exhibit D, which fulfill the
specifications of Exhibit B and thereby contain an implementation of some or all
of the SFT Technology, and which also bear one or more of the Licensed
Trademarks on the Licensed Product or packaging therefor. ATC shall determine,
in its sole discretion, whether any particular product falls within a category
of products identified in Exhibit D and/or fulfills the specifications of
Exhibit B.
D. "LICENSED RIGHTS" shall mean the combination of Licensed Patents and
Licensed Information.
E. "LICENSED TRADEMARKS" shall mean, collectively, the trademarks
identified in the United States trademark registrations and applications
therefor identified in Exhibit C hereto, the trademarks identified in all
applications and registrations in any country which claim priority from the
United States trademark applications and registrations identified in Exhibit C,
or which are identical to or similar to a trademark identified in any United
States trademark application, the rights to which are owned by ATC, any
combination of words, and/or symbols containing the listed federally registered
trademarks here after adopted by ATC from time to time, and any other
trademarks, trade names and logos used by ATC in connection with the SFT system.
F. "FIELD OF USE" shall mean sound reproduction devices utilized in
conjunction with [...***...], as manufactured by NEC Personal Computer Division
("NEC-PC").
G. "MARK LOCATION" shall mean the primary viewing surface of all
Licensed Products.
H. "PROPRIETARY EXCITER MATERIAL" or "PEM" shall mean the material(s)
developed by and proprietary to ATC which are required to manufacture the SFT
and picoSonic systems.
2. RIGHTS GRANTED.
A. LICENSES GRANTED TO LICENSEE.
ATC hereby grants to Licensee, under the Licensed Rights and subject to
the payment of royalties and compliance with the other terms and conditions of
this Agreement, and restricted to the Field of Use, the following:
(i) A nontransferable, nonexclusive (subject to Paragraph C of
this Section 2), worldwide, royalty-bearing license to make, use, offer to sell,
sell and import into the United States the Licensed Products;
* CONFIDENTIAL TREATMENT REQUESTED
2.
<PAGE> 3
(ii) A nontransferable, nonexclusive (subject to Paragraph C of
this Section 2) worldwide license to use the Licensed Rights for developing
improvements to the Licensed Products; and
(iii) A nontransferable, nonexclusive (subject to Paragraph C of
this Section 2) worldwide license to use the Licensed Trademarks in connection
with the identification, advertisement, marketing, distribution and sale of the
Licensed Products.
B. SUBLICENSING.
Licensee shall have no right to sublicense the Licensed Rights or Licensed
Trademarks; provided, however, that Licensee shall be permitted to:
(i) sublicense the Licensed Rights for the manufacture of Licensed
Products to one or more third party manufacturers for the sole purpose of
manufacturing the Licensed Products for sale directly to and only to Licensee,
but only if (a) Licensee and such manufacturer enter into a sublicense agreement
with terms which are no less favorable to ATC or that the terms of this
Agreement and (b) such sublicense is approved in writing by ATC prior to its
effective date, which approval shall not be unreasonably withheld.
(ii) sublicense the Licensed Rights for developing improvements to
the Licensed Products to one or more developers for the sole purpose of
developing improvements to the Licensed Products (subject to Section 3.D) but
only if (a) Licensee and such developer enter into a sublicense agreement with
terms which are no less favorable to ATC than the terms of this Agreement and
(b) such sublicense is approved in writing by ATC prior to its effective date,
which approval shall not be unreasonably withheld.
C. EXCLUSIVE LICENSING PERIOD.
During the [...***...] immediately following the Effective Date, ATC shall
not grant a license to the Licensed Rights or Licensed Trademarks to any other
manufacturer of products within the Field of Use.
3. OBLIGATIONS OF LICENSEE.
A. CONFIDENTIALITY.
Licensee acknowledges that the Licensed Rights are the confidential,
proprietary information of ATC. Licensee agrees not to use, disclose, or grant
use of the Licensed Rights except as expressly authorized by this Agreement.
Upon termination of this Agreement Licensee shall make no use whatsoever of the
Licensed Rights and shall not disclose the Licensed Information to any third
parties.
* CONFIDENTIAL TREATMENT REQUESTED
3.
<PAGE> 4
B. PATENT/COPYRIGHT MARKING.
Licensee shall conspicuously mark on a publicly exposed surface of all
Licensed Products manufactured, distributed or sold by Licensee, and inside each
instruction, servicing or other manual distributed with, or prepared for use
with respect to, any Licensed Product, appropriate patent and copyright markings
identifying all Licensed Patents and all copyrights of ATC applicable to such
Licensed Product and identifying ATC as the owner of the Licensed Patents and
copyrights. The content, form and language used in such marking shall be in
accordance with the laws and practices of the country where such Licensed
Products are manufactured, marketed, distributed and sold.
C. USE OF LICENSED TRADEMARKS.
The parties hereby agree to avoid public confusion, Licensee's rights and
obligations concerning the use of the Licensed Trademarks shall be as follows:
(i) Licensee agrees to place at least one of the Licensed
Trademarks (in accordance with at least one of the examples described in Exhibit
C) on each Licensed Product (unless determined by ATC to be reasonably
infeasible) and at each Mark Location. The Licensed Trademarks may only be used
on, or in reference to, Licensed Products. Licensee agrees to submit for review
and prior written approval by ATC, prior to use or publication, a representative
copy of all packaging, advertising, manuals and other collateral materials used
by Licensee that bear one or more of the Licensed Trademarks.
(ii) The ownership of the Licensed Trademarks shall be indicated
whenever they are used by Licensee. Specifically, Licensee shall place the
following notice on each Licensed Product:
"Stratified Field Technology(TM)" and "SFT(TM)" are marks owned by
and used under written License from American Technology Corporation,
San Diego, CA (USA).
"picoSonic(TM)" is a mark owned by and used under written License
from American Technology Corporation, San Diego, CA (USA).
(iii) Licensee shall acknowledge that the Licensed Products are
manufactured under license from ATC by placing one of the following notices on a
publicly exposed primary surface of all Licensed Products made, used, offered
for sale or sold by Licensee:
"Incorporates components of Stratified Field Technology under
license from American Technology Corporation"
"Incorporates the Stratified Field Technology under license from
American Technology Corporation"
"SFT under license from American Technology Corporation"
4.
<PAGE> 5
(iv) Licensee shall require all persons or entities to whom it sell
Licensed Products to place the Licensed Trademarks and the other notices
referred to in paragraphs (1), (2) and (3) above on all descriptive,
instructional, advertising, marketing, packaging and other materials prepared by
or for such Purchaser which contain a direct or indirect description or
reference to the SFT, the Licensed Products or the benefits to be derived
therefrom.
(v) Except with ATC's prior written approval, Licensee further
agrees that it will not file any application for registration in any country of
any mark, symbol or phrase which is identical to, similar to or likely to be
confused with the Licensed Trademarks. Licensee further agrees and acknowledges
that, if it has obtained or obtains in the future, in any country, any right
title or interest in any mark, symbol or phrase which is identical to, similar
to or likely to be confused with the Licensed Trademarks, then Licensee has
acted or will act as an agent for the benefit of ATC for the limited purpose of
obtaining such registrations and assigning such registrations (and all right,
title and interest in such mark, symbol or phrase) to ATC. Licensee further
agrees to execute any and all instruments deemed by ATC to be necessary to
transfer such registrations or such right, title or interest to ATC.
(vi) ATC will advise Licensee of ensuing grants of registration for
the Licensed Trademarks, and Licensee agrees to comply with all applicable laws
and practices of the countries wherein such marks are used and/or registered
relating to the marking of notices of registrations and the recording of
Licensee as a registered or licensed user of the Licensed Trademarks.
(vii) The Licensed Trademarks may not be used in direct combination
with any other trade names, trademarks or symbols, except as specified in
Exhibit E. Moreover, the trade names, trademarks and symbols of Licensee may not
be used in any way that may suggest that Licensee is a division, affiliate or
subsidiary of ATC, or that the relationship between the two parties to the
Agreement is anything other than that of licensor-licensee.
(viii) The expense of obtaining and maintaining registrations for
the Licensed Trademarks shall be borne by ATC. The expense of registering or
recording Licensee as a registered user or otherwise complying with the laws of
any country pertaining to such registration or the recording of trademark
agreements shall he borne by Licensee.
(ix) Licensee shall furnish a written report to ATC of all
countries where Licensed Products are manufactured, marketed, distributed or
sold (a) within thirty (30) calendar days after each calendar year and (b) prior
to any manufacture, marketing, distribution or sale by Licensee of any Licensed
Product in any country not previously reported to ATC.
(x) Licensee shall not refer to the Licensed Products as
incorporating any technology other than the Licensed Rights and will not use
trademarks other than the Licensed Trademarks in reference to the Licensed
Products.
D. IMPROVEMENTS BY LICENSEE.
If Licensee shall hereafter during the term of this Agreement bring about
any improvements relating to the performance or manufacture of the Licensed
Products or otherwise relating to the Licensed Rights, including such
improvements brought about by Licensee's
5.
<PAGE> 6
vendors, sublicensees or subcontractors ("Improvements"), Licensee shall
promptly disclose such Improvements to ATC in confidence. The ownership of
Improvements shall be determined as follows:
(i) If an Improvement is based upon or relates to the Licensed
Information or other proprietary information which is disclosed to Licensee in
connection with this Agreement, or which is disclosed within the Licensed
Patents or which comes within the scope of a claim or claims of the Licensed
Patents, then such Improvement shall become the sole property of ATC. If the
Improvement is patentable, Licensee shall assign and hereby does assign to ATC
its entire right, title and interest in the Improvement and any patent issuing
thereon in any country of the world. ATC shall and hereby does grant to Licensee
a non-exclusive right to use such Improvement and any such patent in accordance
with the terms of this Agreement, and such Improvement and patent shall be
deemed part of the Licensed Rights.
(ii) If an Improvement is not based upon or does not relate to the
Licensed Information or other proprietary information which is disclosed to
Licensee in connection with this Agreement, or which is disclosed within the
Licensed Patents or which comes within the scope of a claim or claims of the
Licensed Patents, then such Improvement shall become the property of Licensee
and ATC shall retain, and/or Licensee shall and hereby does grant to ATC, an
unrestricted, perpetual, irrevocable royalty-free non-exclusive license to fully
exercise all intellectual property rights with respect to such Improvement (with
the right to sublicense).
E. IMPROVEMENTS BY ATC.
If (1) ATC shall hereafter during the term of this Agreement bring about
any improvements in the Licensed Rights relating to the performance or
manufacturing of the Licensed Products, including any such improvements brought
about by ATC's vendors, other licensees or subcontractors and (2) such
improvements are necessary for Licensee to manufacture, distribute and sell the
Licensed Products or otherwise meet any updated specifications for the Licensed
Products set forth in Exhibit B, then to the extent permitted by the U.S.
Government and by third party rights, if applicable, ATC shall promptly disclose
the existence and general nature of such improvements to Licensee in confidence
and ATC shall and hereby does grant Licensee a non-exclusive right to use such
improvements in accordance with the terms of this Agreement as if such
improvements were part of the Licensed Rights.
4. PAYMENTS.
A. All payments shall be made in United States Dollars.
B. TECHNOLOGY TRANSFER FEE. Authentic shall pay to ATC a technology
transfer fee in the amount of $250,000.00 as follows:
[...***...] within [...***...] after the Effective Date of this
Agreement;
[...***...] within [...***...] after [...***...];
[...***...] within [...***...] after [...***...].
* CONFIDENTIAL TREATMENT REQUESTED.
6.
<PAGE> 7
C. PERIODIC ROYALTY.
(i) Exhibit E lists the Licensed Products together with their ATC
Part Number and the minimum number of each product that is to be sold or
otherwise transferred each month. Additionally, the section value and royalty
calculation method is set forth in Exhibit E.
(ii) QUARTERLY ROYALTY PAYMENT. The quarterly royalty shall be paid
to ATC by Authentic so as to be received by ATC within [thirty] calendar days
after the end of each calendar quarter, i.e., April 30th, July 30th, October
31st and January 31st. The quarterly royalty shall be that amount due to ATC as
calculated by multiplying the section royalty rate by the number of products
sold or otherwise transferred by Authentic for each Licensed Product for the
respective quarter, as set forth in Exhibit E. In no event, shall the quarterly
royalty amount paid to ATC, be less than the section royalty rate multiplied by
the minimum number of Licensed Products for that quarter as set forth in Exhibit
E.
D. SALE OF MATERIAL.
ATC agrees to provide and sell, and Authentic agrees to exclusively accept
and purchase from ATC, the Proprietary Exciter Material "PEM required to
manufacture the SFT and picoSonic systems. Such sale and purchase costs to
Authentic shall be included as a component of the License Royalty fees defined
in Exhibit E attached hereto. Authentic agrees to issue purchase orders to ATC
in a rolling six (6) month forecast which cover at least the minimum annual
quantities as set forth in Exhibit E.
5. FORECASTS.
Exhibit E sets forth the Agreement as to Minimum Quantities of each
Licensed Product for the period from the Effective Date through the end of
calendar year 1999. These Minimum Quantities are based upon forecasts developed
by the parties in the negotiations of this Agreement. These forecasts and the
resulting Minimum Quantities may be reviewed and adjusted by the parties every
six (6) months after the Effective Date. On October 1, 1999, or at another date
in October agreed upon by the parties, the parties shall commence good faith
negotiations for the establishment of forecasts and Minimum Quantities of the
Licensed Products for the calendar year 2000. Thereafter, each year on October
1, or the next business day after October 1, if that date falls on a weekend,
the parties shall commence negotiations for the establishment of forecasts and
Minimum Quantities for the Licensed Products for the following calendar year. In
no event shall the Minimum Quantities established for any particular year be
less than 25% more than the Minimum Annualized Quantities established for the
immediately preceding year.
6. EXCLUSIVITY.
The period of exclusivity for the Field of Use, as set forth in Section
2.C. above shall continue so long as Authentic sales or transfers of the
Licensed Products equal or exceeding the Minimum Quantities as established in
Section 5 above and set forth in Exhibit E.
7.
<PAGE> 8
7. BOOKS, RECORDS AND RIGHT OF INSPECTION.
A. BOOKS AND RECORDS.
Authentic shall keep complete books of account and records of all Licensed
Products which are manufactured, sold, distributed or otherwise disposed of, and
all transactions relating to Authentic's activities in connection with this
Agreement. Such books and records shall be kept in accordance with generally
accepted accounting principles, consistently applied, and shall be retained by
Authentic and kept available for at least three (3) years after the termination
of this Agreement for inspection, copying and/or auditing by ATC.
B. RIGHT OF INSPECTION.
ATC shall have the right, through an independent auditor selected by ATC
and at ATC's expense, to inspect and copy the books of account and records
referred to in Paragraph A of this Section 7, and to interview the employees,
agents and accountants responsible for the preparation and maintenance of such
books of account and records on behalf of Authentic for the purpose of verifying
the accuracy of such books and records and the reports provided for herein;
provided, however, that such examination shall be made during normal business
hours upon reasonable notice and not more than twice per calendar year. If, as a
result of any such examination, an error of more than 2.5% is discovered in the
amount of royalty payments or the number of units manufactured or sold, as
specified in any report specified in Section 8 below, (1) then the costs related
to such inspection shall be borne by Authentic and (2) ATC shall thereafter have
the right to conduct such examinations not more often that once per calendar
quarter.
ATC agrees not to divulge to third parties any confidential information
obtained from the books and records of Authentic as a result of such inspections
unless such information (a) was known to ATC prior to its acquisition by ATC as
a result of such inspection, (b) becomes known to ATC from sources other than
Authentic or, (c) becomes a matter of public knowledge other than by breach of
this Agreement by ATC.
8. PAYMENTS AND REPORTS.
Royalty payments shall be calculated and reported for each calendar month.
All royalty payments due under this Agreement shall be paid in United States
Dollars within 30 days of the end of each calendar quarter. Each royalty payment
shall be accompanied by a report in sufficient detail to permit confirmation of
the accuracy of the royalty payment made, including, without limitation the
quantity of Licensed Products sold or otherwise transferred during the month and
the method by which the calculation of royalties was performed. Such report
shall be in a form and format as agreed upon by the parties.
All payments by Licensee shall be made free and clear of, and without
reduction for, any and all taxes, including, without limitation, sales, use,
property, license, value added, excise, franchise, income, withholding or
similar taxes, other than such taxes which are imposed by the United States or
any political subdivision thereof based on the net income of ATC. Any such taxes
which are otherwise imposed on payments to ATC shall be the sole responsibility
of Licensee.
8.
<PAGE> 9
9. INDEMNIFICATION.
A. INFRINGEMENT INDEMNITY.
ATC shall indemnify and hold Authentic harmless from all costs, loss,
damage and liability, except consequential damages, which may be incurred on
account of the infringement of any United States patent arising out of the sale
or use of Licensed Products, to the extent such infringement is based upon
Licensee's use of the Licensed Rights, and ATC shall, at its own expense, defend
all claims, suits or actions or infringement of patents against Authentic,
provided ATC is promptly notified of such claims, suits and actions, given all
evidence in Authentic's possession, provide reasonable assistance in and sole
control of the defense thereof and all negotiations for it's settlement or
compromise. In the event of such a charge of infringement, ATC's obligation
under this Agreement shall be fulfilled if ATC:
(i) Obtains a third party license allowing Authentic to continue
to use or sell the infringing product.
(ii) Replaces or modifies the infringing product so as to be
substantially equal but non-infringing.
In no event shall ATC's liability to Authentic for the patent infringement
be greater than the amount Authentic has paid to ATC in royalty for the
infringing product.
ATC shall not have any liability to Authentic under any provision of this
Section 9 if the Patent infringement is based upon a use of a product in a
manner for which it was not designed, or if the Licensed Product would not
infringe but for (i) Licensee-made modifications to the Licensed Product or (ii)
combinations of the Licensed Product with other technology. The above states the
entire liability of ATC with respect to infringement of patents.
B. LIABILITY INDEMNITY.
Licensee agrees to indemnify, hold harmless and defend ATC against any and
all claims, suits, losses, damages, costs, fees and expenses resulting from or
arising out of its manufacturing, use and/or sale of the Licensed Products,
including, but not limited to, any damages, losses or liabilities whatsoever
with respect to death or injury to any person and damage to any property arising
from the possession, manufacture, use, sale or administration of the Licensed
Products by Licensee.
10. WARRANTY DISCLAIMER.
ATC warrants that the PEM material furnished under this Agreement will, at
the time of initial shipment, be in conformity with ATC's proprietary
specifications and free from defects in material and workmanship. ATC will, at
it's option, repair or replace any PEM material that does not conform to this
warranty. Authentic shall within thirty (30) days notify ATC in writing of any
defects and obtain ATC's approval for return of the PEM material to ATC.
EXCEPT AS EXPRESSLY PROVIDED HEREIN, ATC HEREBY EXPRESSLY DISCLAIMS ANY
AND ALL WARRANTIES OF ANY KIND OR NATURE, WHETHER
9.
<PAGE> 10
EXPRESS OR IMPLIED, RELATING TO THE LICENSED RIGHTS OR THE LICENSED PRODUCTS,
INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF TITLE, NONINFRINGEMENT,
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Nothing contained in this
Agreement shall be construed as either a warranty or representation by ATC as to
the validity or scope of any Licensed Patents. Licensee will not pass through to
its end users or any other third party the warranties made by ATC hereunder and
will expressly indicate to its customers distributors that they must look solely
to Licensee in connection with any problems, warranty claims or other matters
concerning the Licensed Products.
11. TERM AND TERMINATION,
A. TERM OF AGREEMENT.
This Agreement shall commence on the Effective Date and shall continue for
a period of five (5) years thereafter, unless terminated earlier as provided in
this Section 11. Upon termination or expiration, all licenses granted to
Licensee hereunder shall terminate, provided, however, that Licensee shall be
entitled to sell units of Licensed Products manufactured prior to termination or
expiration for a period of six months after such termination or expiration.
B. TERMINATION FOR CAUSE.
This Agreement may be terminated for cause by one party for a material
breach by the other party. Failure to make payments when due shall constitute a
material breach. Should a party believe there has been a material breach by the
other party, then that party shall send written notice setting forth the breach
to the other party. The other party shall have sixty (60) days to cure the
breach, except for breach of the duty to make payments when due, which must be
cured within fifteen (15) days. If the breach is not cured by the end of this
period, the first party may provide written notice to the other party
terminating this Agreement for cause. Said termination shall be effective ten
(10) after the issuance of such notice.
C. TERMINATION OF CONVENIENCE.
Either party may terminate this Agreement for convenience upon six (6)
month notice to the other party.
D. NOTICE.
All notices herein shall be made by registered mail or by a delivery
service which provides a delivery receipt. Said notice shall be made to
Authentic at the following address:
3-14-1- Hisamoto Takatsu-ku
Kawasaki City, Kanagawa-Ken 213-0011
Japan
Attention: Naomi 0gawa
and to ATC at the following address:
10.
<PAGE> 11
13114 Evening Creek Drive South
San Diego, California 92128
United States of America
Attention: Richard H. Wagner
or to such address as may be designated in writing by either party.
E. SURVIVAL.
Sections 3, 4, 7, 8, 9, 10, 13 and 14 shall survive any termination or
expiration of this Agreement.
12. DISCLOSURES CONCERNING RELATIONSHIP.
Neither party shall make any disclosure concerning the substance of this
Agreement nor issue any public release or announcement concerning their
relationship, except as mutually agreed in advance or otherwise required by law.
It is agreed that permission to release information will not be unreasonably
withheld by either ATC or Authentic.
13. APPLICABLE LAW.
This Agreement is made in accordance with and shall be governed and
construed in accordance with the laws of the State of California, without regard
to conflicts of laws rules. All disputes arising hereunder shall be adjudicated
in the state and federal courts having jurisdiction over disputes arising in San
Diego County, California, and Licensee hereby consents to the jurisdiction of
such courts. The official language of this Agreement is English.
14. LIMITATION OF LIABILITY.
IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY LOST PROFITS,
LOST SAVINGS, OR ANY OTHER INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES, EVEN
IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ARISING OUT
OF OR IN CONNECTION WITH THIS AGREEMENT.
IN NO EVENT SHALL ATC'S TOTAL LIABILITY TO LICENSEE HEREUNDER EXCEED THE
AMOUNT PAID BY LICENSEE TO ATC UNDER THIS AGREEMENT.
15. WAIVER.
No waiver of any provision of this Agreement or any rights or obligations
of either party hereunder shall be affective, except pursuant to a written
instrument signed by the party or parties waiving compliance and any such
written waiver shall be effective only in the specific instance and for the
specific purpose stated in such writing.
11.
<PAGE> 12
16. AMENDMENTS IN WRITING.
Any amendments or additions to this Agreement shall not be valid unless
executed in writing by duly authorized representatives of the panics hereto.
17. ASSIGNMENT.
This Agreement may not voluntarily assigned in whole or in part by either
party, without the prior written consent of the other party, except upon merger,
consolidation or other transfer of all or substantially all of the assets of
either party. Either party may, however, assign this Agreement to its wholly or
majority owned subsidiaries without the prior written consent of the other, as
long as transferor remains liable hereunder.
18. SEVERABILITY.
Whenever possible, each provision of the Agreement will be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of the Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of the Agreement.
19. EXPORT CONTROL.
Licensee acknowledge that the manufacture and sale of the Licensed
Products is subject to the export control laws of the United States of America,
including the U.S. Bureau of Export Administration regulations, as amended, and
hereby agrees to obey any and all such laws. Licensee agree not to take any
actions that would cause either party to violate the U.S. Foreign Corrupt
Practices Act of 1977, as amended.
20. ENTIRE AGREEMENT.
This Agreement constitutes the entire understanding and agreement between
the parties with respect to the transactions contemplated herein and supersedes
any and all prior oral or written communications with respect to the subject
matter herein. This Section does not apply to the Proprietary Information
Exchanged Agreement entered into by the parties on April 22, 1998 which
agreement remains in full force and effect.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the date
first written above.
AUTHENTIC, LTD.: AMERICAN TECHNOLOGY CORPORATION:
By: /s/ NOBUYUKI KONDO By: /s/ DALE W. WILLIAMS
--------------------------- -------------------------------
Nobuyuki Kondo Dale W. Williams
Title: President Title: Chairman/Chief Executive Officer
12.
<PAGE> 13
EXHIBIT A
LICENSED PATENTS
AMERICAN TECHNOLOGY CORPORATION
INTELLECTUAL PROPERTY FOR ATC STRATIFIED FIELD TRANSDUCER CONFIDENTIAL
[...***...]
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 14
EXHIBIT B
SPECIFICATIONS
<PAGE> 15
EXHIBIT C
LICENSED TRADEMARKS
Stratified Field Technology(TM)
SFT(TM)
picoSonic(TM)
<PAGE> 16
EXHIBIT D
LICENSED PRODUCTS
An Audio sound reproduction device, sound panel and/or transducer "unit" for use
in NEC-PC [...***...].
Such sound reproduction device, panel and/or transducer shall be limited only to
the following dimensions:
Unique single Device or Panel or Transducer sound reproduction surface
area of up to [...***...].
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 17
EXHIBIT E
ROYALTY CALCULATION AND RATE
Each Licensed Product unit, as defined above, containing ATC SFT and picoSonic
technologies as defined herein shall bear a [...***...] for the period of this
Agreement.
ATC and Authentic shall meet quarterly and agree upon the minimum number of
units to be subject to Royalty payments during the six (6) months period
following the date of the meeting. During the first six (6) months following the
Effective Date of the Agreement, Authentic agrees to a minimum of [...***...] of
Licensed Product to be supplied under this Agreement to it's Field of Use.
* CONFIDENTIAL TREATMENT REQUESTED
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10QSB FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,798,790
<SECURITIES> 26,833
<RECEIVABLES> 128,290
<ALLOWANCES> 8,205
<INVENTORY> 66,232
<CURRENT-ASSETS> 2,062,613
<PP&E> 534,588
<DEPRECIATION> 346,415
<TOTAL-ASSETS> 2,478,260
<CURRENT-LIABILITIES> 283,081
<BONDS> 0
0
0
<COMMON> 113
<OTHER-SE> 2,195,066
<TOTAL-LIABILITY-AND-EQUITY> 2,478,260
<SALES> 163,836
<TOTAL-REVENUES> 163,836
<CGS> 378,497
<TOTAL-COSTS> 378,497
<OTHER-EXPENSES> 2,291,344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,555
<INCOME-PRETAX> (2,383,614)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,383,614)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,383,614)
<EPS-PRIMARY> (.22)
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