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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED SEPTEMBER 30, 1998
Commission File No. 0-24248
AMERICAN TECHNOLOGY CORPORATION
(Name of small business issuer in its charter)
Delaware 87-0361799
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(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
13114 Evening Creek Drive South, San Diego, California 92128
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(Address of principal executive offices) (Zip Code)
(619) 679-2114
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(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, $.00001 par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The Company's revenues for its most recent fiscal year were $244,758.
The aggregate market value of the voting stock held by non-affiliates of the
registrant on December 18, 1998 was approximately $39,716,000 based on an
average of the closing bid and ask price of $4.98 as reported on the NASD's OTC
Electronic Bulletin Board system.
At December 28, 1998, 11,376,314 shares of common stock, par value $.00001 per
share, were outstanding, and 172,750 shares of Series B Preferred Stock, par
value $.00001 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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TABLE OF CONTENTS
PART I
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ITEM 1. Description of Business 2
ITEM 2. Description of Property 13
ITEM 3. Legal Proceedings 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
PART II
ITEM 5. Market for Common Equity and Related
Stockholder Matters 13
ITEM 6. Management's Discussion and Analysis or Plan of Operation 14
ITEM 7. Financial Statements 20
ITEM 8. Changes in and Disagreement with Accountants on
Accounting and Financial Disclosure 20
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 20
ITEM 10. Executive Compensation 22
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 24
ITEM 12. Certain Relationships and Related Transactions 25
ITEM 13. Exhibits, Lists and Reports on Form 8-K 25
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FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-KSB
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21A OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE "SAFE
HARBOR" PROVISIONS THEREOF. THEREFORE THE COMPANY IS INCLUDING THIS STATEMENT
FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH SAFE
HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS IN THIS REPORT 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, INCLUDING THOSE
DISCUSSED HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS. 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 BELOW 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 I
ITEM 1. DESCRIPTION OF BUSINESS
American Technology Corporation (the "Company" or "ATC") develops, markets and
licenses proprietary sound reproduction and other electronic technologies. ATC's
primary business is the marketing of two proprietary sound reproduction
technologies, (i) SFT(TM), Stratified Field Technology and (ii) HSS(TM),
HyperSonic Sound technology. The Company also markets a line of portable
consumer electronic products under its own label.
SFT is an advanced speaker technology sharing certain characteristics of
electrostatic speakers, which are known for very high sound quality and low
distortion. Electrostatic speakers are generally large, expensive speakers
employing a thin plastic film to radiate sound. ATC's SFT consists of several
high performance, non-magnetic flat panel speaker designs with a favorable
size/low bass response relationship. Unlike traditional electrostatic speakers,
SFT can be economically and easily manufactured in small to large sizes in
variety of thin formats and shapes.
The HSS technology creates a new method of sound reproduction -- sound is
generated in the air using ultrasonic frequencies, those above the normal range
of hearing. A proprietary electronic process causes an ultrasonic beam to
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interact in mid-air producing wide spectrum audio along the beam. The sound beam
has a very high degree of directionality and maintains sound volume over longer
distances than traditional methods of sound reproduction.
ATC's objective is to be a leader in developing, marketing and licensing sound
reproduction technologies that address large and expanding domestic and
international consumer electronics markets. ATC seeks to have its SFT and HSS
technologies become important alternatives to conventional loudspeakers in
target market segments. ATC believes that it is becoming increasingly difficult
for manufacturers to differentiate their sound reproduction electronic products
to offer consumers new choices. ATC also believes the rapid emergence of flat
panel computer and television monitors and the growing computer multimedia
market provides growing new opportunities for SFT.
Although SFT and the HSS technology are still in development, ATC has commenced
initial marketing and licensing activities primarily focused on SFT. During
fiscal 1998 (year ended September 30, 1998) ATC entered into its first SFT
licensing agreement with Authentic Ltd. of Japan ("Authentic") and entered into
several HSS technology evaluation agreements. In August 1998, ATC obtained an
initial military contract for $20,000 to evaluate an application of the HSS
technology. ATC is seeking additional governmental and military contracts
related to the HSS technology. In June 1998, musician Ray Charles agreed to
serve as a spokesperson for certain SFT flat panel speaker models for ATC or OEM
(original equipment manufacturer) customers. However, other than a
non-refundable $50,000 progress payment on the Authentic license agreement, ATC
has not realized any significant SFT or HSS technology-related revenues to date.
The marketing of portable consumer electronic products provided substantially
all revenues during fiscal 1998 and 1997. There can be no assurance ATC will
realize any future SFT license or royalty fees from Authentic or from other
sources or realize any HSS technology revenues in the future.
ATC owns other electronic technologies in various stages of development. ATC's
SFT and HSS technology were both principally invented by ATC's Chief Technology
Officer, Elwood G. Norris. Mr. Norris also invented ATC's Global Positioning
System ("GPS") technology providing improved searching and tracking features for
objects or persons and the Engine Plasma Displacement ("EPD") technology
providing a method for jet engine noise reduction. ATC's GPS technology includes
two U.S. patents and the EPD technology includes one pending patent application.
ATC is not presently devoting resources to exploiting these two technologies.
During fiscal 1998 ATC discontinued marketing its patented miniature ear radios
and began marketing a new line of American Technology Corporation labeled
portable consumer electronic products, primarily sourced from foreign
manufacturers. At November 30, 1998 ATC was marketing and distributing eleven
portable consumer electronic products with retail prices ranging from $9.99 to
$51.99.
ATC was incorporated in the State of Utah on February 11, 1980 as Chasko, Inc.
and on April 7, 1982 its name was changed to American Technology Corporation.
From its inception to 1988, ATC was engaged in electronic product development.
From 1988 to early 1992, ATC was inactive due to inadequate financial resources.
In early 1992 ATC was brought into good standing and restructured. There were no
changes to management resulting from this re-activation. On June 19, 1992 ATC
redomiciled from the State of Utah to the State of Delaware.
Since the 1992 restructuring, Company operations have focused on developing its
various technology assets. ATC's shares trade in the over-the-counter market on
the National Association of Securities Dealers OTC Bulletin Board system under
the symbol "ATCO." ATC's address is 13114 Evening Creek Drive South, San Diego,
California, and its telephone number is 619-679-2114. Its Internet site is
located at www.atcsd.com.
SOUND REPRODUCTION INDUSTRY OVERVIEW
The human ear is sensitive to the rate at which sound vibrations occur or
frequencies from about 20 Hertz (Hz) to 20,000 Hz (a Hertz is equal to one
vibration per second). A wide variety of loudspeakers are produced today to
recreate the range of hearing. These range from tweeters that attempt to
re-create the top end of the audio spectrum, to mid-range speakers and woofers
to address the lower frequencies. Conventional loudspeakers generally are direct
radiating - they are fundamentally a piston-like device designed to directly
pump air molecules into motion to create audible sound waves. Better sound
quality and low frequency (bass) reproduction is generally associated with
larger and more expensive speakers.
Since 1925, when C.W. Rice and E.W. Kellogg described basic, direct radiating
speaker parameters, there have been few fundamental changes in speaker design or
in the way electrical impulses are converted to sound. During this period,
electronics (receivers, amplifiers, tuners and recording and playback equipment)
have evolved from vacuum tubes to solid state digital circuits and recording
technology has progressed from analog grooves in records to digital coding on
compact discs that are read by a laser. Loudspeaker industry developments have
focused primarily on improving individual elements such as magnets, coils, cones
and enclosures. However, compared to the improvements in electronics, ATC
believes loudspeakers are still relatively inefficient in converting electrical
energy into acoustic energy and their design contributes to various forms of
sound distortion.
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Loudspeakers are used in televisions, radios, telephones, computers,
automobiles, and a wide range of other consumer and industrial applications.
From miniature speakers in hearing aids to large home theater, public address
and concert sound systems, loudspeakers encompass a wide range in size, quality
and cost. The manufacture and sale of loudspeakers is highly competitive and
includes both large international consumer electronic companies and specialty
branded loudspeaker manufacturers. ATC believes the lack of fundamental
innovation and the diversity and size of the loudspeaker market presents an
opportunity to introduce new sound technology that will appeal to consumers and
be cost-effective for manufacturers.
The rapid emergence of flat panel computer and television monitors and the
growing multimedia computer market provides opportunities for thin flat panel
speaker designs. In its infancy, the market for computer flat panel monitors is
expected to grow from $1 billion in 1998 factory sales to $19 billion in 2002
according to Stanford Resources, Inc. Recently several companies have introduced
flat panel speaker designs (see "Competition") to benefit from this trend and
for other applications such as wall-mounted picture speakers. ATC believes these
new products suffer a variety of limitations and none have yet achieved
significant dollar volume. However, ATC believes the introduction of these new
products has increased market awareness of new speaker designs and the benefits
of thin flat panel speaker designs.
ATC'S SOUND SOLUTIONS
Stratified Field Technology, or SFT, is a new flat, thin, non-magnetic
loudspeaker design featuring a flexible format providing high quality
performance for a wide variety of applications. The term Stratified Field
relates to the multiple layers of materials employed in the design. ATC
currently has three distinct SFT designs employing plastic film as the direct
radiating element. ATC believes the three SFT designs offer advantages over
existing electrostatic, planar magnetic and magnetic actuated panel designs
generally associated with flat speakers (see "ATC's Technologies" below).
ATC believes its patent-pending SFT will compete with other flat panel and
conventional speakers. SFT has a competitive cost of construction, as compared
to its quality of sound reproduction. SFT can be manufactured flat or can be
shaped into curves, cylinders and spheres, providing unique product design
opportunities for consumer product manufacturers. SFT eliminates the costs and
constraints of the normal "box" associated with loudspeakers and permits the use
of creative industrial designs for new products. ATC believes SFT will be
competitive on quality, pricing, design opportunities, form factor and reduced
size primarily due to elimination of the speaker box. The following SFT
attributes compare well on a competitive basis to conventional and other flat
panel loudspeaker designs:
Performance Attributes
- Consistent radiation movement over the entire surface resulting in
low distortion, smooth frequency response and low coloration of
sound
- Smooth, flat frequency response across the effective sound range
- Low bass response compared to comparable size flat panels
- Accurate imaging and high sound quality o Low mechanical vibration
- Loss-less load (no heat is produced regardless of sound pressure
level)
- No constraint on the ratio of height to width. Ability to curve and
shape the speakers to produce new product designs.
Physical Attributes
- Flat, thin physical format - as thin as 5 mm over the entire surface
with no protruding actuater drive mechanism
- Non-magnetic design employs no magnetic fields
- Low moving mass producing minimal vibration
- No requirement for a speaker box or enclosure
- Radiating surface can be curved, shaped or cylindrical
- Low overall weight
Manufacturing Benefits
- Simple manufacturing process with robust design for
manufacturability
- High fidelity to cost ratio
- Variable dimensions to meet custom application requirements
- Multiple product mounting options
- Low component and manufacturing costs
The above properties of SFT are expected to offer advantages for products such
as flat panel video displays, laptop computers, home audio and theater systems,
installed sound reinforcement, professional monitors, high-fidelity
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speakers, automotive systems and other applications requiring physically flat or
thin (in the case of curved) panels but with high-quality audio performance.
ATC's HSS technology utilizes a new method of sound reproduction -- sound is
generated in the air using ultrasonic frequencies, those above the normal range
of hearing. A patent-pending process creates an ultrasonic wave that interacts
in mid-air to produce wide spectrum audio. Since traditional loudspeaker system
elements such as voice coils, magnets, cones/diaphragms, crossover networks,
baffles and speaker enclosures are eliminated, ATC believes HSS technology
offers quality sound while using little space and low weight. The sound produced
by the HSS technology is significantly more directional over greater distances
with less volume loss than traditional sound reproduction methods thereby
offering a number of application advantages to users.
ATC believes its HSS technology, comprised of the combination of proprietary
electronics and custom ultrasonic emitters (specialized ultrasonic devices
essentially taking the place of the radiating element of a loudspeaker) offers a
number of possible advantages:
- Wide audible band coverage with a small device - no woofer,
mid-range and tweeter addition is expected to be required in most
applications
- Sound quality that is less dependent on the size of the emitting
face or speaker enclosure
- Elimination of the need for a speaker enclosure
- Reduction of the effect of room acoustics on sound quality
- Improved phase coherency (frequency time alignment)
- Ability to manipulate or selectively position or diffuse the source
of sound
- Ability to deliver a beam of sound over long distances
- Elimination of magnets, their weight and adverse effects
- Elimination of feedback in professional applications
ATC believes its technologies offer important competitive advantages for its
original equipment manufacturers ("OEMs") and features that are important to
consumers. However, there can be no assurance SFT and HSS technology advantages
can be successfully implemented commercially or will achieve market acceptance.
COMPANY STRATEGY
ATC's marketing of its sound technologies continues to evolve as a result of
market awareness, technical developments, changes in patent and protection
strategies and reactions from prospective users of the technologies. Rather than
broadly licensing large market segments or industries, ATC is focusing its
efforts on OEMs desiring to implement SFT or the HSS technology in specific
products. ATC's strategy is to establish business relationships with leading
participants in various segments of the electronics and sound reproduction
markets. ATC believes this strategy will enable it to take advantage of the
superior financial resources, technological capabilities, proprietary positions
and market presence of these companies in establishing and maintaining SFT and
HSS technologies.
ATC intends to implement a branding strategy to make SFT and HSS synonymous with
innovative, high-quality sound reproduction. ATC believes that positioning
itself as a licensor of the SFT and HSS technology and establishing technology
collaboration arrangements with contract and OEM manufacturers will facilitate
the rapid adoption of the SFT and HSS technologies. ATC is focusing its primary
marketing efforts towards introducing its SFT technology. Key elements of ATC's
strategy include:
1. Build on technical achievements to allow licensees to produce
commercially viable products for consumers. ATC is converting its
prototypes into designs and materials that licensees can use to produce
commercially viable sound reproduction systems to meet consumer demand
across a variety of targeted market segments. ATC expects to make
continued improvements in its designs to benefit licensees.
2. Expand patent coverage. ATC has filed multiple patent applications
worldwide and expects to continue to file amendments, continuations and
additional patents as development progresses. Management believes the
scope and breadth of its patents will be an important factor in the
exploitation of its sound reproduction technologies.
3. Implement a segmented and flexible licensing approach. ATC has
developed a segmented licensing approach to target individual fields of
use for SFT and HSS technologies. The approach also includes developing
one or more manufacturing partners to supply product to those OEMs not
wishing to license and produce the technology. Manufacturers of
electronic components will be offered licenses to produce SFT or HSS
speakers. ATC may sell key components or materials and also may sell
electronic components to make electronic implementation simpler.
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4. Identify and determine market segment needs. ATC has identified and is
focusing its SFT marketing and licensing efforts on four initial fields
of use (a) computer multimedia (b) high-end televisions, (c) consumer
home audio, and (d) professional audio. ATC is working with
manufacturers in each of these fields of use to identify market
requirements for the SFT technology. ATC believes that its SFT
technology can become an important competitive feature for
manufacturers and can also enable such manufacturers to achieve premium
price or premium margins for their products. ATC is focusing HSS
technology marketing efforts primarily towards military and
governmental contracts to further develop and fund the technology. Upon
development of commercial emitters, ATC believes the HSS technology
will have applications in the four segments above as well as in
communications and other markets.
5. Establish cross segment relationships to facilitate standards. ATC
believes that successful implementation of SFT and the HSS technology
requires the cooperation of manufacturers of electronic components. ATC
believes that developing standards will accelerate adoption of the
technologies across targeted fields of use. Therefore ATC is targeting
long-term relationships with multiple entities to provide a competitive
advantage in protecting ATC's market position.
6. Support licensees and develop a market position. ATC intends to support
its licensees and manufacturers with technical support and an ongoing
research and development effort. ATC intends to require branding of SFT
and HSS devices to create and build consumer awareness.
ATC's strategy is to develop strategic arrangements with manufacturers in the
targeted fields of use with limited exclusivity to accelerate implementation and
market introduction and to allow the selected manufacturers to differentiate
product offerings from competitors. Although ATC anticipates generating a
significant portion of its revenues from licensing and royalties or arrangements
with contract manufacturers, ATC may also directly produce and sell SFT and HSS
materials or components. There can be no assurance that ATC can be successful in
implementing its Company strategies or commercializing its sound technologies.
See "Management's Discussion and Analysis or Plan of Operation - Business
Risks."
ATC'S TECHNOLOGIES
SFT Technology
Several designs of direct radiating speakers are currently associated with
thinner or flat products. These include electrostatic speakers, planar magnetic
speakers and magnetic actuated panel speakers. An electrostatic loudspeaker
generally employs a diaphragm (generally a thin plastic film) which is tensioned
between two conductive planes. A charge is applied to the diaphragm and charges
are alternated between the two conductive planes to move the diaphragm thus
moving air to create audible tones. Based on the size of the device and the
speed of the movement of the diaphragm, various sound pressure levels and
frequencies are produced.
Generally electrostatic speakers are:
- quite large in order to produce low frequencies
- difficult to manufacture due to high tolerances, resulting
in high cost
- low in distortion, high in sound quality - the chief advantages
A planar magnetic loudspeaker combines some aspects of traditional direct
radiating speakers and electrostatic designs. In the traditional planar design,
conducting wires are imbedded in the large plastic film or sheet, and magnets
are employed to create a magnetic field around the sheet to radiate sound
similar to an electrostatic speaker. Planar speakers are also generally
expensive and difficult to produce. A new flat panel design employs a magnetic
actuater or exciter to excite a rigid panel to radiate sound. This method has
recently been introduced in multi-media and home audio systems.
In February 1998, ATC announced the invention of SFT which was derived from
ATC's HSS technology development. SFT is both a departure from and a significant
improvement on electrostatic designs. While employing plastic film as the
primary radiating sound element, ATC's SFT designs are distinct from traditional
electrostatic, planar magnetic or magnetic actuater speaker designs. New
materials and methods are employed to overcome some of the limitations of
electrostatic, planar magnetic and magnetic actuater speaker designs. The
Company expects SFT to compete with conventional loudspeakers due to its
economics and ease of manufacture in a variety of thin sizes and shapes. To
date, ATC has divided its SFT developments into three separate designs. For
internal purposes, one design is referred to as PicoSonic(TM) and the other two
as the laboratory initials, BT and BBS. ATC believes each design has attributes
that may benefit OEMs in target applications. ATC has filed multiple patent
applications on its SFT technologies.
ATC has produced prototypes of its SFT designs and is developing specifications,
manufacturing methods and technology transfer documentation. ATC believes SFT is
commercially viable technology and recently commenced marketing SFT to
prospective OEM licensees.
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HSS Technology
HSS technology is partially based on a phenomenon in music known as Tartini
tones, which were first noted by Giuseppe Tartini, an 18th century composer.
When two sound tones are positioned relatively close together and are sufficient
in volume, then two new tones appear, one is the sum of the original tones and
one is the difference. In 1856, H. von Helmholtz, a German physiologist and
physicist, published the results of his combination tone experiments proving the
effect resulted from the non-linearity of air. Although others have experimented
with these principles in the past, ATC believes it has created novel and
proprietary methods to efficiently use this concept to produce sufficient sound
volume and quality capable of being commercially exploited. ATC's technology and
processes are the subject of multiple pending patents.
HSS technology employs a method where ultrasonic frequencies are created
electronically using proprietary techniques to carry intelligence (e.g. music,
voice), and these ultrasonic frequencies are then emitted into the air using an
ultrasonic emitter. Since the audible sound is created in the air, sound does
not appear on the surface of the ultrasonic emitter (a significant departure
from a loudspeaker) but is actually created within the beam of ultrasonic energy
being emitted. Accordingly, if the beam is directed towards a wall, the sound
emanates from the surface of the wall, and if the beam is directed to a person,
the sound emanates from the person. This directionality allows sound to be
manipulated in space or diffused from a surface in a wide variety of ways to
produce desired effects. The sound also does not dissipate at the same rate over
distance as it does with traditional speakers, providing greater volume at
selected distant points with less energy.
HSS technology uses ultrasonic emitters (transducers which convert electrical
energy to high frequency acoustical energy). Certain crystals, and ceramics and
other materials, known as piezoelectric elements, produce high frequency
movement when voltage is supplied. These piezoelectric elements are used to emit
ultrasonic energy in applications such as sonar, ultrasonic cleaning, industrial
inspection and medical ultrasound. Such ultrasonic devices are incapable of
producing frequencies in the audible range. However, ATC has developed the
ability to use such devices (in lieu of loudspeakers) to emit a custom-generated
ultrasonic wave with the proper difference frequency characteristics to produce
audible sound in the air. ATC believes its ultrasonic emitters can be designed
and configured in a variety of designs, shapes and sizes to produce desired
effects in commercial applications.
Ultrasonic emission is currently employed in a wide variety of medical
applications where it is directly coupled to the body rather than air. ATC's
technology uses relatively small amounts of ultrasonic sound energy which
dissipates or is absorbed rapidly in the air. ATC employs frequencies above
those that may be harmful to pets, but within those used by medical devices. ATC
believes that the frequencies and amount of energy employed in the HSS
technology is harmless. ATC also believes the emission of such frequencies is
not subject to U.S. governmental regulation. ATC's use of ultrasonic frequencies
to carry intelligence is compatible with traditional recording and transmission
technology.
ATC acquired the basic concepts of HSS technology (previously called Sonic
Generator technology) from Mr. Norris in 1992. During fiscal 1996 and 1997, ATC
devoted a significant portion of its research and development activities to HSS
technology. In July 1996, ATC produced a laboratory proof-of-concept
demonstration capable of producing sound in the air using ultrasonics. In
October 1996, ATC produced a second generation portable demonstration system
with improved electronics. In September 1997, ATC produced a portable stereo
demonstration system. Commencing with the late 1997 invention of SFT, ATC
devoted substantially all of its research and development efforts towards
commercializing SFT as management believes it is more readily adaptable by OEMs.
Because of this shift in focus, during fiscal 1998, ATC's limited HSS technology
development efforts focused on expanding the patent portfolio and designing,
developing and testing ultrasonic emitters.
ATC believes that custom ultrasonic emitters will be required to produce a
commercially viable HSS technology sound system. ATC is working with multiple
producers of ultrasonic devices to assist in developing custom emitters to ATC's
specifications. Due to the current SFT development emphasis and the inherent
risks in new technology development, there can be no assurance that commercially
acceptable emitter designs and sources of materials will be available for
prospective licensees in the near future or at all. The development of ATC's HSS
technology has taken longer than anticipated by ATC's management and could be
subject to additional delays.
Portable GPS Technology
In late 1994, ATC innovated a proprietary method of tracking persons and objects
utilizing GPS technology. ATC has developed a GPS design as a simple solution to
(1) finding another person or object or (2) finding a known location. The system
employs GPS technology but doesn't require complicated longitude/latitude
readouts, mapping software or recording and storing of previous locations and
movements as used in most portable GPS devices. ATC has produced a
proof-of-concept demonstration system utilizing the GPS technology. ATC owns two
U.S. patents on its GPS designs. There can be no assurance the patents will
provide meaningful protection of the GPS technology or that such patents will be
commercially exploitable.
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ATC has postponed further development on its GPS technology due to the
significant competition and rapidly changing nature of the GPS equipment market.
ATC believes that certain features of its GPS technology may be licensable to
the GPS industry; however, no resources are currently be devoted to developing
or marketing this technology.
EPD Technology
ATC has filed an initial U.S. patent application regarding its EPD technology, a
new method and system for reducing noise in jet engines. This technology,
invented by Mr. Norris, relates to canceling acoustic waves produced by a jet
engine. Mr. Norris has previously performed rudimentary experiments on this
technology; however, ATC has not yet developed a proof-of-concept device or
demonstration. There can be no assurance that ATC's concepts will function as
theorized or that any practical product or technology will ever result from the
concepts. In addition, ATC has performed only limited competitive research and
there can be no assurance that the concepts innovated by ATC are new or unique
or that they are functionally better than existing and proposed methods for jet
engine noise reduction.
ATC's strategy is to develop a proof-of-concept demonstration of the EPD
technology and seek a collaborative arrangement to further develop this
technology. Management has not developed a timetable for this project, nor has
it identified personnel for further development. Although management believes
there is a significant market for an improved system for jet engine noise
reduction, there can be no assurance when or if the EPD technology can be
exploited by ATC.
MARKETS AND LICENSING
SFT Markets
ATC has targeted four initial fields of use which include computer multimedia,
high-end televisions, consumer home audio and professional audio systems.
The market for computer sound, primarily multimedia applications, is growing
rapidly. According to John Peddie Associates, 1997 worldwide multimedia equipped
desktop computer shipments were 81 million units. There is also a growing demand
for improved sound in notebook and other small computers with worldwide
shipments of 56 million units in 1997 according to Frost & Sullivan. In addition
to OEM computer sound markets, there is a growing aftermarket for computer
speakers. According to the Consumer Electronics Manufacturers Association (CEMA)
41% of multimedia computer owners bought speakers separately in 1997.
Flat panel computer monitors are expected to be an increasingly important
category growing from less than 1 million units and $1 billion in worldwide
factory sales projected for 1998 to over $19 billion in 2002 according to
Stanford Resources, Inc. ATC believes limitations in size, sound quality and
cost are critical factors in the computer sound market. ATC is targeting its
non-magnetic, flat and thin SFT designs to offer size, cost and quality
advantages to manufacturers and consumers in this rapidly growing market. The
Company believes SFT has important attributes for the emerging flat panel
monitor market to provide high quality sound in a thin format.
High-end televisions and home theater systems are growing segments of the
consumer electronics market. Home theater audio systems include component and
rack audio systems for the home as well as specifically targeted home theater
systems. ATC intends to focus initially on manufacturers in the mid to high-end
range of these segments. Home theater and large screen televisions are expected
to experience continued growth from the introduction of the high-capacity DVD
(digital versatile disc). According to CEMA, U.S. factory sales of televisions
25" and higher were $4.3 billion in 1997. Home theater speakers and speaker
packages had U.S. factory sales of $246 million in the first half of 1998
according to CEMA.
The market for professional audio systems is also believed by the Company to be
growing. Professional audio systems include systems used by studios and other
professionals in the creation or production of audio and video material. The
market for professional equipment includes stage speakers, sound modules,
synthesizers, digital pianos and signal processing equipment among others.
Cinemas, juke box systems and karaoke systems are also demanding increasingly
high quality sound reproduction.
ATC believes its SFT technology will offer the home audio/video and professional
markets improved full-spectrum sound source with less distortion.
HSS Markets
ATC is focusing HSS technology marketing efforts primarily towards military and
governmental contracts to further develop and fund the technology. Upon
development of commercial emitters, ATC believes the HSS technology will have
applications in consumer and commercial markets including military applications,
portable consumer electronics,
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<PAGE> 9
hearing aids, headphones, cinema/theater, public address and outdoor sound
systems and use with noise cancellation systems.
Licensing and Contracts
ATC seeks to execute its licensing strategy through its marketing and executive
personnel and through a September 1997 business development and representation
agreement with Teksel Co., Ltd. in Japan.
In June 1998, ATC executed its first license agreement on its SFT technology
with Authentic which provides for initial license payments of $250,000 provided
certain milestones are achieved by the Company and certain future minimum
royalties. This agreement is exclusive in a narrow market segment and for a
limited customer set. Although the implementation schedule, specified in the
license agreement has been subject to delays, management believes the agreement
has the potential for significant future royalties. The realization thereof is
subject to successful SFT product implementation by Authentic and acceptance by
Authentic customers. Management expects the agreement will be amended at a
future date to reflect changes in scheduling and to modify certain royalty
terms.
Other than an initial non-refundable $50,000 progress payment on the Authentic
agreement, ATC has not realized any significant SFT or HSS technology revenues
to date. In August 1998, ATC obtained an initial military contract for $20,000
from the U.S. Army Space and Missile Command to evaluate an application of the
HSS technology. ATC is seeking additional governmental and military contracts
related to the HSS technology. There can be no assurance ATC will realize any
future SFT license or royalty fees from the Authentic agreement or from other
sources or realize any HSS technology revenues in the future.
In addition to seeking OEMs to license SFT, ATC is seeking to develop supply
agreements with contract manufacturers capable of supplying SFT speakers to OEM
customer specifications. SFT technology is readily retrofitted to existing
product designs and may offer advantages in new OEM product designs. Many OEMs
source speaker products from outside vendors rather than manufacture such
components. Accordingly, ATC's strategy is to develop a supply arrangement for
such OEM customers that do not wish to license or manufacture. ATC believes
there are a large number of contract manufacturers with facilities and
capabilities to manufacture SFT speakers.
The HSS technology has not been developed to the point of commercialization due
to delays in sourcing acceptable emitters. ATC has entered into non-binding
working agreements with three global consumer product companies to explore the
HSS technology. Further progress on these arrangements require new emitters.
There can be no assurance that commercially viable HSS 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 ATC's control.
ATC's strategy is to enter into additional SFT licenses or supply agreements and
further develop and exploit the HSS technology. There can be no assurance ATC
will be successful in commercially exploiting the SFT or HSS technology.
CONSUMER PRODUCT SALES
To date substantially all of ATC's revenues have been derived from portable
consumer electronic products. In the first quarter of fiscal 1998, ATC began
phasing out its older ear radio line and began sourcing a line of miniature
radios and portable consumer electronic products manufactured by others to be
marketed and distributed by ATC. ATC terminated ear radio production in the
quarter ended March 31, 1998. ATC has sourced a total of eleven portable
consumer electronic products (including miniature FM, AM and solar radios)
targeted for niche markets at retail prices ranging from $9.99 to $51.99.
Sourcing is from four manufacturers on both an exclusive and nonexclusive basis
and for different market territories on a product by product basis. ATC's market
focus is in North America.
ATC commenced shipments of sourced products during the quarter ended June 30,
1998. ATC inventories finished goods and provides direct factory shipment to
certain customers.
ATC has designed and developed a mini-headphone radio (HeadGear) scheduled for
introduction in early 1999. Incorporating ATC's patented ear radio technology,
the HeadGear is smaller than similar headphone radio products currently on the
market and offers additional features. The intended retail price range is $29.95
and up. This product will be manufactured for ATC by a foreign contract
manufacturer. ATC has filed one additional patent application for this product.
ATC has received opening orders from customers and placed opening purchase
orders with its supplier. There can be no assurance this product will be
successful.
Management continually seeks additional products and accessories developed by
others for distribution. There can be no assurance ATC can obtain rights to
manufacture and/or distribute any future products.
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SELLING AND MARKETING
The Company's SFT and HSS technology marketing is directed by one sales and
marketing officer and senior executive personnel. ATC has employed one agent,
Teksel Co., Ltd. in Japan. The Company's marketing activities are directed at
promoting the technology through industry press, at industry trade shows and
related marketing activities. The Company's SFT and HSS technology sales
activities are targeted at specific prospective OEMs.
The Company's marketing activities have resulted in a number of awards and press
articles. In May 1997, the inventor of the HSS technology, Mr. Norris, was
awarded the 1997 Discover Magazine Award for Technical Innovation in the sound
category for ATC's HSS technology. Winners in a total of eight categories were
selected from over 4,000 entries. The annual awards are designed to recognize
and promote new technological innovations, and the winners are selected by an
expert panel of judges. Winners were also featured in the July issue of
Discovery magazine. In November 1997, HSS technology won a Popular Science 1997
"Best of What's New Award" from among thousands of new products. These awards
and recognition have provided marketing exposure for the HSS technology. HSS
technology has also been featured in over 30 journal articles providing
additional marketing exposure.
In June 1998, ATC entered into a representation agreement with musician Ray
Charles. Mr. Charles has agreed to serve as a spokesperson for certain SFT flat
panel speaker models for ATC or future OEM customers.
ATC has two full-time marketing personnel assigned to consumer electronic
product marketing and sales activities. ATC had 20 independent representative
agencies in the U.S. and Canada at November 30, 1998. ATC also uses one
international representative agency.
To date, ATC has focused consumer electronic product marketing on four primary
market segments for consumer electronic product marketing and distribution:
- Retail outlets - ATC directly, and also through established manufacturer
representatives, promotes its products to local, regional and national
retail distributors such as electronics stores, drug stores, computer
stores, sporting stores and other retailers.
- Catalog distribution - ATC's personnel contact catalog companies
directly and through third-party agents. To date, ATC's products have
been illustrated and offered in a diverse range of catalogs.
- Television - ATC's radio products have been displayed and sold by
various television marketers. ATC's marketing plan includes pursuing
additional television outlets for its products.
- Premium/Incentive/Specialty - ATC targets corporate and other
organizations to use its products as premiums, incentives, prizes and
for promotions. ATC, from time to time, attends premium/incentive trade
shows as well as initiates direct contact with large users of prizes and
premiums.
ATC also employs cooperative marketing and advertising arrangements with its
product customers from time to time.
CUSTOMERS
For the fiscal year ended September 30, 1998, Authentic accounted for 100% of
ATC's licensing revenues. Sales to four customers accounted for 71% of product
sales with Abdul Aziz, Athenic, Big 5 and QVC accounting for approximately 24%,
23%, 13% and 11% of sales, respectively, with no other single customer
accounting for more than 10% of product sales.
ATC expects that it will continue to rely on a number of large individual
customers for future revenues and the loss of any customer could have a material
adverse effect on ATC's financial condition, results of operations and cash
flows.
COMPETITION
ATC's technologies and products compete with those of other companies. Many of
ATC's present and potential future competitors have, or may have, substantially
greater resources than ATC to devote to further technological and new product
developments. ATC believes it will compete primarily on the originality of its
concepts, the uniqueness and quality of its technology and designs, the ease and
cost of manufacturing and implementing its technologies, the ability to meet
OEMs' needs to differentiate their products, the strength of its intellectual
property and the strength of future licensee and contract supply arrangements.
There can be no assurance that based on these factors ATC can be competitive
with existing or future products, technologies or services of its competitors.
ATC is not aware of any other sound reproduction system that has successfully
employed HSS technology concepts similar to those developed by ATC. Although
others have attempted to use the combination tone concept to produce
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sound, to the knowledge of ATC, none have progressed to the stage of development
of ATC nor been able to produce sufficient sound volume and quality to make a
commercially viable system. ATC also believes its SFT designs are novel with
distinct market appealing attributes compared to existing and competing flat
panel speaker designs.
One of the distinguishing features of ATC's SFT designs are their thin, flat
panel form factor. SFT designs may also be easily and economically shaped to
create curves or other designs. Other companies that are focusing marketing
efforts in the flat panel market segment include, but are not limited to (i)
high-end electrostatic flat panel manufacturers such as Martin Logan and others,
(ii) NXT Plc and their licensees employing the NXT flat panel technology which
uses a magnetic actuater to produce vibrations over a rigid panel, (iii) NCT
Group, Inc. and their Gekko line of flat panel speakers using a comparable
magnetic actuated panel, and (iv) Sonigistix's Monsoon multimedia speaker using
a planar magnetic design. There are continuing attempts by a large number of
competitors to innovate new methods of sound reproduction to overcome
limitations of traditional loudspeakers. There can be no assurance that
alternate technologies and systems have not been developed, or that such systems
may currently be in development, or will be developed by others in the future,
that would be directly competitive with ATC's SFT and HSS technology.
ATC's methods of sound reproduction will also compete with traditional
loudspeakers. Many international manufacturers provide loudspeakers such as
Sony, AIWA, Phillips, Samsung, Mitsubishi, Toshiba, Sanyo, Sharp, JVC and
others. There are also specialty audio component manufacturers such as Carver
Corporation, Marantz, NAD and others. ATC will also compete with branded
loudspeaker manufacturers including Bose Corporation, JBL, Harman International
(Infinity and Epicure), International Jensen (Acoustic Research and Advent),
Polk Audio, Boston Acoustics, Klipsch, Yamaha and a host of others. Such
competitors have substantially greater financial, technical and marketing
resources than ATC and have proven technology and products, marketing data,
customer relationships and distribution channels. There can be no assurance that
ATC's SFT and HSS technology, if implemented commercially, will be competitive
in the entrenched loudspeaker market.
ATC believes that its success will be dependent upon creating relationships with
OEMs by providing them the ability to differentiate their products with SFT and
HSS technology attributes.
The consumer electronic product marketplace is extremely competitive with a
large number of suppliers. Most of ATC's competitors have greater financial,
manufacturing and marketing resources and can command more retail and consumer
exposure than that of ATC. Barriers to entry by new competitors are not
significant and new competitors in consumer electronics are continually
commencing operations. The technology of electronics and electronic components,
features and capabilities is also rapidly changing, in many cases rapidly
obsoleting existing products and technologies. Rather than compete in mainstream
consumer electronic product markets, ATC seeks to market unique products to
market segments.
With respect to consumer electronic product sales, which accounts for
substantially all of ATC's revenues, ATC is dependent on contract suppliers for
finished goods. ATC sources products developed by others from a variety of
suppliers. The loss of a supply of a high selling product could have a material
adverse effect on operations. ATC intends to rely on one supplier for the new
HeadGear product. Disruption of supply could cause additional costs and delays
and could also have an adverse impact on operations. The manufacture of consumer
electronic products is dependent upon the availability of electronic components.
ATC believes there are secondary suppliers of components and subassemblies such
that the products it distributes are not reliant on one supplier, although
delays could result should there be a change in suppliers of longer lead time
components or subassemblies. Any significant delays in obtaining components from
existing or secondary suppliers through supplier changes or from component
shortages, which are common to the electronics industry, could have a material
adverse effect on ATC's financial condition and results of operations.
GOVERNMENT REGULATION
ATC is subject to regulation by federal, state and local governmental
authorities in connection with its assembly and production operations. Certain
of ATC's electronic products are also subject to various regulations and are
required to meet the specifications of agencies such as the Federal
Communications Commission (the "FCC"). ATC believes it is in substantial
compliance with all applicable regulations, and that it has all material
governmental permits, licenses, qualifications and approvals required for its
operation.
ATC does not believe its HSS technology ultrasonic emitters, which emit
ultrasonic waves into the air rather than electromagnetic waves, are the subject
of existing governmental regulation. However there can be no assurance that
interpretations of existing regulations or imposition of new regulations could
not have an adverse impact on ATC's proposed commercialization of HSS
technology.
ATC does not believe it is materially affected, nor does it expect to be
materially affected, by the costs and effects of compliance with environmental
laws.
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INTELLECTUAL PROPERTY RIGHTS AND PROPRIETARY INFORMATION
ATC operates in an industry where innovations, investment in new ideas and
protection of its resulting intellectual property rights are important to
success. ATC relies on a variety of intellectual property protections for its
products and technologies, including patent, copyright, trademark and trade
secret laws, and contractual obligations, and pursues a policy of vigorously
enforcing such rights.
ATC has nineteen patents pending on its SFT and HSS technology. ATC is preparing
and intends to file other SFT and HSS technology patent applications. ATC holds
two U.S. patents on its ear radio technology which has been phased out of
production. ATC holds two U.S. patents on its GPS technology. ATC has one patent
pending on its EPD technology and one patent pending on the HeadGear product.
ATC has an ongoing policy of filing patent applications to seek protection for
novel features of its products and technologies. Prior to the filing and
granting of patents, ATC's policy is to disclose key features to patent counsel
and maintain these features as trade secrets prior to product introduction.
There can be no assurance that any additional patents on ATC's products or
technology will be granted.
In addition to such factors as innovation, technological expertise and
experienced personnel, ATC believes that a strong patent position will be
important to compete effectively through licensing in the sound reproduction
industry. ATC is investing significant management, legal and financial resources
toward SFT and HSS technology patents. The electronics industry is characterized
by frequent litigation regarding patent and other intellectual property rights.
Numerous patents in electronics and sound reproduction are held by others,
including academic institutions and competitors. Although ATC is not aware of
any existing patents that would inhibit its ability to license the SFT and HSS
technology, there can be no assurance that others will not assert claims in the
future. There can be no assurance that such claims, with or without merit, would
not have a material adverse effect on the financial condition or operations of
the Company.
The validity of ATC's existing patents have not been adjudicated by any court.
Competitors may bring legal action to challenge the validity of ATC's patents or
may attempt to circumvent the protection provided by those patents. There can be
no assurance that either of such activities by competitors would not be
successful. The failure to obtain patent protection or the loss of patent
protection on ATC's technology, or the circumvention of ATC's patents, by ATC's
competitors could have a material adverse effect on ATC's ability to compete
successfully in its business.
ATC generally takes advantage of the Patent Convention Treaty procedures for
patent protection in foreign countries. This procedure is more cost efficient,
but results in a delay in the application and issuance of foreign patents;
however, any resulting foreign patents, if and when issued, enjoy the same
priority date as their U.S. counterparts.
ATC also files for tradename and trademark protection when appropriate. ATC is
the owner of the federally registered trademarks HYPERSONIC(R), HYPERCOUSTIC(R)
and HSS(R). Trademark applications have been filed for STRATIFIED FIELD
TECHNOLOGY, SFT and PICOSONIC. There can be no assurance any degree of
protection will be granted, or that if granted, that tradenames or trademarks
can be successfully maintained, defended or protected.
ATC's policy is to enter into nondisclosure agreements with each employee and
consultant or third party to whom any of ATC's proprietary information is
disclosed. These agreements prohibit the disclosure of confidential information
to anyone outside ATC, both during and subsequent to employment or the duration
of the working relationship. There can be no assurance, however, that these
agreements will not be breached, that ATC will have adequate remedies for any
breach or that ATC's trade secrets will not otherwise become known or be
independently developed by competitors.
RESEARCH AND DEVELOPMENT
The sound reproduction market is subject to rapid changes in technology and
designs with frequent improvements and new product introductions. ATC believes
its future success will depend on its ability to enhance and improve its
existing technologies and to introduce new technologies on a competitive basis.
Accordingly, ATC has in the past, and is expected in the future, to engage in
significant research and development activities. There can be no assurance,
however, that ATC will be able to commercialize its current or future
technologies.
For the fiscal years ended September 30, 1998 and 1997, ATC invested $991,238
and $566,288, respectively, on research and development. Future levels of
research and development expenditures will vary depending on the timing of
further new product development and the availability of funds to carry on
additional research and development on ATC's currently owned technologies or in
other areas.
EMPLOYEES
At December 1, 1998 ATC, in addition to its three executive officer employees,
employed sixteen persons. Of such employees, one person was engaged in
purchasing, nine in research, development and technology transfer, one in
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shipping and distribution, two in general and administrative and three in
marketing and sales. ATC also leases technical personnel from time to time on an
as needed basis and uses outside consultants for various services.
ATC has experienced no work stoppages and is not a party to a collective
bargaining agreement. ATC believes its relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY.
On July 11, 1997, ATC entered into a three year lease for the property located
at 13114 Evening Creek Drive South, San Diego, California. To meet the credit
requirements of the landlord, both ATC and Norris Communications, Inc. ("NCI"),
an affiliated company, entered into a joint lease agreement for approximately
12,925 square feet with aggregate monthly payments of $13,830 inclusive of
utilities and costs. ATC is occupying approximately 7,500 square feet of the
jointly leased office space with its share of monthly payments being
approximately $8,000.
ATC believes this facility is adequate to meet its needs for the next twelve
months given management's current plans. However should ATC expand its
operations, it may be required to obtain additional space or alternative space.
ATC believes there is adequate availability of office space in the general
vicinity to meet its future needs.
ITEM 3. LEGAL PROCEEDINGS.
ATC is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET INFORMATION
ATC's Common Stock is traded in the over-the-counter market and is quoted on the
OTC Electronic Bulletin Board (symbol "ATCO") maintained by the National
Association of Securities Dealers. The market for ATC's Common Stock has often
been sporadic and limited.
The following table sets forth the high and low bid quotations for the Common
Stock for the fiscal years ended September 30, 1997 and 1998 as quoted on the
OTC Electronic Bulletin Board:
<TABLE>
<CAPTION>
Bid Quotations
High Low
------- ---------
<S> <C> <C>
Fiscal Year Ending September 30, 1997
First Quarter ..................... $ 7.37 $ 3.375
Second Quarter .................... $ 5.43 $ 3.375
Third Quarter ..................... $ 6.62 $ 3.50
Fourth Quarter .................... $ 6.53 $ 5.00
Fiscal Year Ending September 30, 1998
First Quarter ..................... $ 6.12 $ 3.46875
Second Quarter .................... $ 4.65 $ 3.375
Third Quarter ..................... $ 11.68 $ 4.75
Fourth Quarter .................... $ 9.81 $ 4.375
</TABLE>
The above quotations reflect inter-dealer prices, without retail markup,
markdown or commission and may not represent actual transactions.
ATC had 1,204 holders of record of its Common Stock at December 18, 1998 with
11,374,314 shares issued and outstanding. ATC has never paid a cash dividend on
its Common Stock and does not expect to pay any in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a description of equity securities sold by ATC during the year
ended September 30, 1998 that were not registered or previously reported in
quarterly filings under the Securities Act:
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1. ATC issued a stock purchase warrant to Jonathan A. Berg dated May 12,
1998 exercisable to purchase 50,000 shares of Common Stock at $16.00 per
share until May 12, 2003. ATC expensed $105,000 as the value assigned to
consulting services in connection with this warrant using the
Black-Scholes option pricing model. The issuance was exempt by reason of
Section 4(2) of the Securities Act of 1933, as amended in reliance on
the private nature of the transaction, restrictions on transfer and
representations of the holder.
2. ATC issued a stock purchase warrant to L.H. Friend, Weinress,
Frankson & Presson, Inc. dated June 18, 1998 exercisable to purchase
25,000 shares of Common Stock at $16.00 per share until June 18, 2000.
ATC expensed $17,000 as the value assigned to consulting services in
connection with this warrant using the Black-Scholes option pricing
model. The issuance was exempt by reason of Section 4(2) of the
Securities Act of 1933, as amended in reliance on the private nature of
the transaction, restrictions on transfer and representations of the
holder.
Subsequent to year end, during December, 1998, the Company received gross
proceeds of $1,727,500 from the sale of Series B Preferred Stock as follows:
On December 24, 1998 the Company completed the private offering and sale
for cash at $10.00 per share a total of 172,750 shares of Series B
Preferred Stock, par value $.00001 ("Preferred Stock") to a limited
number of investors ("Preferred Shareholders") for an aggregate of
$1,727,500. The dollar amount of Preferred Stock, increased by $.60 per
share of Preferred Stock per annum and other adjustments, at the
election of the Preferred Shareholder, may be converted one or more
times into fully paid and nonassessable shares of common stock, $.00001
par value, of the Company, at a conversion price which is the lower of
(i) $5.00 per share or (ii) 92% of the average of the five days closing
bid market price prior to conversion, but in no event less than $3.50
per share. The shares of Preferred Stock may be called by the Company
for conversion if the common stock market price exceeds $12.00 per share
for ten days and certain conditions are met. The Preferred Stock shall
be subject to automatic conversion on November 30, 2001.
Each purchaser was granted a warrant to purchase 1,000 common shares of
the Company at $6.00 per share, subject to certain future adjustments,
until November 30, 2001 ("Warrant") for each 1,000 shares of Preferred
Stock (aggregate Warrants exercisable into 172,750 shares). These
securities were offered and sold without registration under the
Securities Act of 1933, as amended (the "Act"), in reliance upon the
exemption provided by Regulation D thereunder and an appropriate legend
was placed on the Preferred Stock and Warrants and will be placed on the
shares issuable upon conversion of the Preferred Stock or exercise of
the Warrants unless registered under the Act prior to issuance. The
Company has agreed to file a registration statement on the stock
obtained on conversion of the Preferred Stock and the Warrants. No
underwriter was employed in the offering.
Net proceeds from the sale of the Preferred Stock of approximately
$1,712,000 is intended primarily for working capital to continue the
Company's efforts to exploit its SFT and HSS technology and other
technologies. The Company has received subscription and expects to issue
an additional 28,850 shares of Series B Preferred Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
ATC is focusing on completing development and commercializing its proprietary
Stratified Field Technology ("SFT") and HyperSonic Sound ("HSS") sound
reproduction technologies. SFT 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. ATC's strategy is commercialize the technologies through OEMs by
entering into licensing or contract supply agreements. There can be no assurance
ATC will be successful in commercially exploiting the SFT or HSS technology.
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 ATC's
control. ATC has not generated any significant revenues from its SFT or HSS
technology to date.
ATC'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.
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The future of ATC is largely dependent upon the success of the SFT and/or HSS
technology, other technologies or the development of new technologies. ATC
invests significant funds in research and development and on patent applications
related to its proprietary technologies. There can be no assurance ATC's
technologies will achieve market acceptance sufficient to sustain ATC or achieve
profitable operations. See "Business Risks" below.
To date substantially all of ATC's revenues have been derived from the sale of
portable consumer electronic products. In the first quarter of fiscal 1998, ATC
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 ATC. ATC terminated ear radio production in the second fiscal
quarter of 1998. Included in cost of sales for fiscal 1998 is a $160,000 charge
for the write-off of obsolete parts inventory and write-down of finished goods.
ATC has sourced a total of eleven portable electronic products (including FM and
solar radios) targeted for niche markets at retail prices ranging from $9.99 to
$51.99. Sourcing is on both an exclusive and nonexclusive basis and for
different market territories on a product by product basis. ATC's market focus
is in North America. ATC intends to inventory finished goods as well as provide
direct factory shipment to certain customers. There can be no assurance that the
new line of sourced products can be marketed successfully.
Demand for ATC's portable consumer electronic products is subject to significant
month to month variability resulting from seasonal demand fluctuations and the
limited number of customers and market penetration achieved to date by ATC.
Further, sales have been concentrated with a few customers. ATC is also reliant
on outside manufacturers to supply the products that it sells and markets and
there can be no assurance of future supply. The markets for ATC's products and
future products and technologies are subject to rapidly changing customer tastes
and a high level of competition. Demand for ATC'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. ATC 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.
RESULTS OF OPERATIONS
Total revenues for the fiscal year ended September 30, 1998 (fiscal 1998) were
$244,758, a 75% decrease from revenues of $967,408 for the prior fiscal year.
Substantially all revenues for fiscal 1997 were from consumer product sales.
Revenues for fiscal 1998 included $194,758 from consumer product sales and
$50,000 from licensing revenues. The significant decrease in product sales
during fiscal 1998 reflects the phasing out and termination of the ear radio
line. Future consumer product sales are expected to consist primarily of the new
line of sourced products manufactured by others. Consumer product 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 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 operating results over time with
a broader product line than achieved in the past.
License revenues of $50,000 were received from one customer as a non-refundable
progress payment on a license agreement providing for total initial license
payments of $250,000 assuming the achievement of certain milestones. There can
be no assurance when or if ATC will realize any future progress payments under
this license agreement. ATC's policy is to recognize one-time license fees upon
achievement of contractual milestones and the collection of the resulting
receivable is deemed probable.
Cost of product sales for fiscal 1998 were $407,123 resulting in a gross loss of
$162,365. Cost of sales for fiscal 1997 were $809,437 resulting in a gross
margin of $157,971. Included in the cost of sales for fiscal 1998 was $160,000
for the write-off of obsolete parts inventory and write-down of finished goods
to be liquidated in connection with the phase-out of the ear radio line of
products. The phase-out of the ear radio product line also included special
close-out pricing to reduce inventory levels which adversely affected gross
margins. Until 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.
Overall gross margins will also be impacted by future licensing revenues, if
any.
Selling, general and administrative expenses increased to $2,005,348 for fiscal
1998 from $1,137,054 for the year ended September 30, 1997. The $868,294
increase included a $578,000 increase in personnel costs primarily associated
with the addition of senior executives and SFT/HSS technology marketing
personnel, a $53,000 increase in marketing and related services, a $85,000
increase in occupancy related costs due to a new leased facility and increased
personnel and a $55,000 increase in legal and accounting costs related to
financing and pre-licensing activities. Management anticipates that selling,
general and administrative costs will continue at comparable levels in fiscal
1999, however they could increase should ATC add additional personnel or elect
to incur additional marketing or administrative expenses.
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<PAGE> 16
Research and development costs for fiscal 1998 were $991,238 compared to
$566,288 for the prior year. The $424,950 increase resulted primarily from an
increase in SFT and HSS technology development activities and related personnel
and component costs. Personnel costs increased $333,000 in the current year due
to additional research employees and component and equipment costs increased by
$54,000 due to the increased level of activity in the current year.
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. ATC
expects fiscal 1999 research and development costs to remain at comparable
levels to fiscal 1998 or at higher levels should ATC increase staffing or expand
the use of outside design and consultants.
ATC incurred $655,174 of non-cash compensation expenses during fiscal 1998
including $122,000 for warrants issued for services, $91,919 for common stock
issued for services, $125,255 as a bonus reducing notes receivable and $316,000
for stock options granted to non-employees for services. During fiscal 1997
aggregate non-cash compensation costs were $479,514. ATC uses common stock,
options and warrants from time to time to compensate for services provided to
the Company. Management is unable to estimate the amount or timing of future
uses of such compensation in future periods.
As a result of the above factors, ATC experienced a loss from operations of
$3,814,125 during fiscal 1998, compared to a loss from operations of $2,024,885
for fiscal 1997. The increase in the operating losses resulted primarily from
increases in research and development costs and increase in selling, general and
administrative costs associated with ATC's technologies. ATC expects to incur
continued operating losses until it is able to commercialize its technologies
and produce revenues sufficient to support operating costs. There can be no
assurance ATC will be successful in such efforts.
During fiscal 1998, ATC incurred $926,555 of non-cash interest including
$920,000 computed on the cashless exercise of previously issued warrants. During
fiscal 1997, ATC incurred $146,331 of non-cash interest expense including
$122,700 as embedded interest on convertible notes based on the difference
between the conversion price and the market price at the issue date. Net
non-operating expenses aggregated $779,588 for fiscal 1998 compared to $119,478
for fiscal 1997.
ATC reported a net loss of $4,593,713 for fiscal 1998, compared to a net loss of
$2,144,363 for fiscal 1997. ATC has federal net loss carryforwards of
approximately $7.2 million for federal tax purposes expiring through 2018. The
amount and timing of the utilization of ATC's net loss carryforwards may be
limited under Section 382 of the Internal Revenue Code. A valuation allowance
has been recorded to offset the related net deferred tax asset as management was
unable to determine that it is more likely than not that the deferred tax asset
will be realized.
The net loss available to common stockholders for fiscal 1997 was increased in
computing loss per share of common stock by an imputed deemed dividend in the
amount of $617,646 or $.07 per share. The imputed deemed dividend resulted from
a discount provision included in the Series A Convertible Preferred Stock issued
in August 1997. This imputed deemed dividend was not a contractual obligation on
the part of ATC to pay such imputed dividend in cash or otherwise.
Future operations are subject to significant variability as a result of
licensing activities, product sales and margins, timing of new product
offerings, the success and timing of new technology exploitation, decisions
regarding future research and development and variability in other expenditures.
LIQUIDITY AND CAPITAL RESOURCES
Since ATC recommenced operations in January 1992, ATC has had significant
negative cash flow from operating activities. The negative cash flow from
operating activities was $2,464,375 for the fiscal year ended September 30, 1998
and $1,572,425 for the fiscal year ended September 30, 1997. During fiscal 1998,
the net loss of $4,593,713 included non-cash expenses of $1,873,944 resulting in
an adjusted net cash loss of $2,719,769. In addition to this adjusted net cash
loss, cash was used in operating activities through a $57,477 increase in
inventories and a $31,094 increase in prepaid expenses. Operating cash was
provided by a $235,437 decrease in trade accounts receivable, a $81,173 increase
in accounts payable and a $27,355 increase in accrued liabilities.
At September 30, 1998 ATC had approximately 130 days product sales in accounts
receivable as compared to 115 days at September 30, 1997. The increase is due
primarily to the reduced sales levels in the current year. Large retail chains
often require 90-120 day terms on sales. However, receivables can vary
dramatically due to overall sales volumes and due to quarterly and seasonal
variations in sales and timing of shipments to and receipts from large
customers.
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<PAGE> 17
For the year ended September 30, 1998, ATC used approximately $81,000 for the
purchase of laboratory equipment and made a $108,000 investment in patents. ATC
estimates a continued investment in patents in fiscal 1999. Dollar amounts to be
invested on these patents are not currently estimable by management.
At September 30, 1998, ATC had working capital of $985,888 and at September 30,
1997 had working capital of $3,719,807. Included in working capital is the
unrealized holding gain in the shares held by ATC in Norris Communications, Inc.
("NCI"). At September 30, 1998 and 1997, ATC owned 225,300 shares of NCI with a
market value of $14,645 and $29,289, respectively. This investment is carried on
the balance sheet as a current asset of ATC at market value.
Since ATC's reorganization in January 1992 and through September 30, 1998, ATC
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. During December 1998, ATC completed the sale of 172,750
shares of Series B Preferred Stock providing net proceeds to the Company of
$1,712,000. The Company anticipates net proceeds of approximately $2,000,000
based on subscriptions to date. See "Note 13 - Subsequent Event" in the
footnotes to the financial statements.
Other than cash of $1,034,577 at September 30, 1998, the proceeds of the
December Series B Preferred Stock sale and the NCI shares, ATC has no other
material unused sources of liquidity at this time. ATC 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
SFT and the HSS technology and other products and technologies. The timing and
amounts of ATC's expenditures and the extent of operating losses will depend on
many factors, some of which are beyond ATC's control. ATC anticipates that the
commercialization of SFT and the HSS technology may require increased operating
costs, however the amounts are not currently estimable by management. ATC
believes it has sufficient financial resources for the next twelve months of
operations given existing cash resources and assuming the current level of
operations and cash expenditures. Management believes product sales, licensing
and other operations may also contribute financial resources during the next
twelve months, but there can be no assurance thereof. The level of expenditures
during the next twelve months could also exceed prior levels or management's
estimates and the variances could be material. Management's estimates are
subject to significant variability and change due to management decisions
regarding technologies, operations and the result of outside factors. The
long-term success of ATC is dependent upon achieving a level of revenues
adequate to support ATC's capital and operating requirements. The failure to
raise additional funds, if required, could have a material adverse effect on ATC
and could force ATC to reduce or curtail operations.
ATC may, from time to time, seek additional funds through lines of credit,
public or private debt or equity financing. ATC estimates that it will require
additional capital to finance future developments and improvements to its
technology. There can be no assurances that additional capital will be available
when needed.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued a number of new
pronouncements for future implementation as discussed in the footnotes to ATC's
financial statements (see page F-9). As discussed in the notes to the financial
statements, the implementation of these new pronouncements is not expected to
have a material effect on the financial statements of the Company.
YEAR 2000 COMPLIANCE
ATC is aware of the issues associated with the programming code in existing
computer systems as the Year 2000 approaches. The "Year 2000" problem is
concerned with whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Year 2000 problem is pervasive and complex as the computer operation
of virtually every company will be affected in some way.
ATC, 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 ATC to
resolve this problem range from $10,000 to $20,000. 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.
Since ATC mainly uses third party "off-the-shelf" software, it does not
anticipate a problem in resolving the Year 2000 problem in a timely manner. ATC
is currently taking steps to ensure that its computer systems and services will
continue to operate on and after January 1, 2000. However, there can be no
assurance that Year 2000 problems will not occur with respect to ATC's computer
systems. Furthermore, the Year 2000 problem may impact other entities with which
ATC transacts business, and ATC cannot predict the effect of the Year 2000
problem on such entities or the resulting effect on ATC. For such externally
maintained systems, the Company has begun to work with venders to ensure that
each such system is currently Year 2000 compliant or will be Year 2000 compliant
during 1998 or 1999.
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<PAGE> 18
The cost to be incurred by the Company related to externally maintained systems
is expected to be minimal. Because of the many uncertainties associated with
Year 2000 issues, and because the Company's assessment of externally maintained
systems is necessarily based on information provided by third party vendors and
suppliers, there can be no assurance that the Company's assessment is correct.
As a result, if preventative and/or corrective actions by ATC and those ATC does
business with are not made in a timely manner, the Year 2000 issue could have a
material adverse effect on ATC's business, financial condition, results of
operations and cash flows. ATC has not yet developed a contingency plan to
operate in the event that any noncompliant critical systems are not remedied by
January 1, 2000, but ATC intends to develop such a plan by March 31, 1999.
BUSINESS RISKS
This report contains a number of forward-looking statements which reflect ATC's
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those discussed below and elsewhere in this Annual Report on Form
10-KSB, 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 below and not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. ATC
undertakes no obligation to publicly revise these forward-looking statements, to
reflect events or circumstances that may arise after the date hereof.
History of Losses; Absence of Profitability; Variability of Results; and
Reliance on Customers - ATC has an accumulated deficit of $8,764,013 with net
losses of $4,593,713 for fiscal 1998 and $2,144,363 for fiscal 1997. ATC expects
to incur additional operating losses in future quarters. There is no assurance
that ATC will be able to achieve or sustain significant periods of profitability
in the future. The sales of ATC's products are subject to significant quarterly
and seasonal variability. ATC has been and is expected to continue to be reliant
on a limited number of customers, the loss of any one of which would have an
adverse effect on ATC's financial condition and results of operations.
Future Financing Requirements - The Company intends to fund its operations and
other capital needs for the next twelve months substantially from cash on hand
resulting from the proceeds from equity offerings. The Company will require
substantial amounts of the current proceeds for operating costs and working
capital during the next twelve months. The Company may also need funds for
future expansion of operations. There can be no assurance, however, that
existing funds, and those generated from operations, if any, will be sufficient
for these purposes. There can be no assurance future additional financing, if
required, will be available, or that it will be available on acceptable terms.
Technology in Development -The Company's SFT and HSS technologies are still in
the development stage. There can be no assurance that a commercially viable SFT
or HSS technology system can be completed due to the inherent risks of
technology development, limitations on financing, competition, obsolescence,
loss of key technical personnel and other factors. ATC has not generated
significant revenues from SFT or the HSS technology to date, and there is no
assurance of any significant revenues in the future. The development of SFT and
the HSS technology has taken longer than anticipated by management and could be
subject to additional delays. There can be no assurance of timely completion of
commercially viable SFT or 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. ATC'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. Furthermore, ATC is not currently commercially exploiting its GPS
and EPD technologies and management currently has no plans to do so. The failure
by the Company to successfully develop and exploit its technology would have a
material adverse effect on the Company's financial condition and results of
operations and business prospects. The future of ATC is largely dependent upon
the success of SFT and/or the HSS technology or the development of new
technologies. There can be no assurance ATC can successfully introduce any of
its technologies or that if introduced they will achieve market acceptance
sufficient to sustain ATC or achieve profitable operations.
Significant Competition and Possible Obsolescence - Technological competition
from other and longer established electronic and loudspeaker manufacturers is
significant and expected to increase. Most of the companies with which ATC
expects to compete have substantially greater capital resources, research and
development staffs, marketing and distribution programs and facilities, and many
of them have substantially greater experience in the production and marketing of
products. In addition, one or more of ATC's competitors may have developed or
may succeed in developing technologies and products that are more effective than
any of those of ATC, rendering ATC's technology and products obsolete or
noncompetitive.
New Technology Faces Many Barriers and Risks - The introduction of new
technology, such as SFT and the HSS technology, targeted for wide use often
faces barriers to commercialization and many risks that cannot currently be
identified. The HSS technology employs ultrasonics. Although ultrasonics are
employed in a wide variety of medical
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<PAGE> 19
and industrial applications, there can be no assurance that ATC will not face
barriers to introduction due to the use of ultrasonics. ATC's technology uses
relatively small amounts of ultrasonic energy which dissipates rapidly in air.
ATC employs frequencies above those that may be harmful to pets but within those
used by medical devices. Although ATC believes the frequencies and the amount of
energy employed is harmless, and that the emission of such frequencies is not
presently subject to government regulation, there can be no assurance that
barriers to commercialization will not develop or that the use of such
ultrasonics will not be subject to future regulation or interpretation of
existing regulation.
Dependence On Third Party Strategic Alliances and Business Relationships - ATC's
strategy is to establish business relationships with leading participants in
various segments of the electronics and sound reproduction markets to assist ATC
in developing, marketing and selling consumer electronic products and products
that may result from its SFT or HSS technologies. ATC believes this strategy
will enable it to take advantage of the superior financial resources,
technological capabilities, proprietary positions and market presence of these
companies in developing, marketing and selling product, if any, that result from
the SFT or HSS technology in the sound reproduction market. Although ATC's
strategy is to establish closer relationships with selected companies through
specific product collaborations, licensing or product supply arrangements, there
can be no assurance that ATC can successfully collaborate to develop commercial
products to exploit its technologies. To date, ATC has entered into only one
such collaborative arrangement.
ATC's success will depend on its ability to enter into strategic arrangements
with new partners on commercially reasonable terms. The failure of the Company
to enter into such strategic arrangements with third parties could have a
material adverse effect on the Company's financial condition, results of
operations, cash flows and business prospects. Any future relationships may
require ATC to share control over its development, manufacturing and marketing
programs or to relinquish rights to certain versions of its technology.
No Active Trading Market; Market Volatility - ATC's shares are traded on the OTC
Bulletin Board, a screen-based trading system operated by the National
Association of Securities Dealers, Inc. Securities traded on the OTC Bulletin
Board are, for the most part, thinly traded and are subject to special
regulations not imposed on securities listed or traded on the NASDAQ system or
on a national securities exchange. ATC's shares, like that of the securities of
other small, growth-oriented companies, have experienced in the past and are
expected to experience in the future significant price and volume volatility
thereby increasing the risk of ownership to investors. Historically, ATC's
Common Stock has experienced low trading volume. There can be no assurance that
the market price of the Common Stock will remain at its present level, and any
future changes in market price cannot be predicted as to timing or extent. Past
performance of the Common Stock does not guarantee and should not be construed
to imply future performance. Factors such as announcements by ATC or its
competitors concerning technological innovations, new commercial products or
procedures, proposed government regulations and developments or disputes
relating to patents or proprietary rights may have a significant effect on the
market price of the Common Stock. Changes in the market price of the Common
Stock may have no connection with ATC's actual financial results.
Patents and Proprietary Rights Subject to Uncertainty - ATC has nineteen patent
applications pending on its sound reproduction technologies and ATC is
considering additional patent applications. There can be no assurance that any
patents held by ATC will not be challenged and invalidated, that patents will
issue from any of ATC's pending applications or that any claims allowed from
existing or pending patents will be of sufficient scope or strength. There can
be no assurance the patents will be issued in all countries where ATC's products
can be sold or licensed to provide meaningful protection or any commercial
advantage to ATC. Competitors of ATC may also be able to design around ATC's
patents. The electronics industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. There is currently no
pending intellectual property litigation against ATC. There is no assurance,
however, that ATC's technologies or products do not and will not infringe the
patents or proprietary rights of third parties. Problems with patents or other
rights could potentially increase the cost of ATC's products, or delay or
preclude new product development and commercialization by ATC. If infringement
claims against ATC are deemed valid, ATC may seek licenses which might not be
available on acceptable terms or at all. Litigation could be costly and
time-consuming but may be necessary to protect ATC's future patent and/or
technology license positions, or to defend against infringement claims. A
successful challenge to the SFT or HSS technology could have a materially
adverse effect on ATC and its business prospects. There can be no assurance that
any application of ATC's technologies will not infringe upon the proprietary
rights of others or that licenses required by ATC from others will be available
on commercially reasonable terms, if at all.
Product Sales Dependent on Outside Contractors; Possible Disruptions in Supply -
With respect to consumer electronic product sales, which accounts for
substantially all of ATC's revenues, ATC is dependent on contract suppliers for
finished goods. ATC sources products developed by others from a variety of
suppliers. The loss of a supply of a high selling product could have a material
adverse effect on operations. ATC intends to rely on one supplier for the new
HeadGear product. Disruption of supply could cause additional costs and delays
and could also have an adverse impact on operations. The manufacture of consumer
electronic products is dependent upon the availability of electronic
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<PAGE> 20
components. ATC believes there are secondary suppliers of components and
subassemblies such that the products it distributes are not reliant on one
supplier, although delays could result should there be a change in suppliers of
longer lead time components or subassemblies. Any significant delays in
obtaining components from existing or secondary suppliers through supplier
changes or from component shortages, which are common to the electronics
industry, could have a material adverse effect on ATC's financial condition and
results of operations.
Performance Dependent on Key Personnel; Limited Key Person Life Insurance;
Success Dependent on Future Personnel - ATC's performance is substantially
dependent on the performance of its executive officers and key technical
employees. Given ATC's early stage of development, ATC is dependent on its
ability to retain and motivate high quality personnel, especially its management
and highly skilled technical personnel. Other than a $2 million life insurance
policy on Elwood G. Norris, inventor of ATC's technologies, ATC does not
maintain any "key person" life insurance policies. The loss of the services of
Mr. Norris could have a material adverse effect on the business, operating
results or financial condition of ATC. ATC's future success and growth also
depends on its continuing ability to identify, hire, train and retain other
highly qualified technical, managerial and sales personnel. Competition for such
personnel is intense, there can be no assurance that ATC will be able to
attract, assimilate or retain other highly-qualified technical, managerial or
sales personnel in the future. The inability to attract and retain the necessary
technical, managerial or sales personnel could have a material adverse effect
upon ATC's business, operating results or financial condition.
General Conflicts of Interest Due to Part-Time Management and Relationships - As
more fully disclosed in "Item 9" below, certain of ATC's officers, including Mr.
Norris, the inventor of ATC's technologies, devote only part-time services to
ATC and have other employment and business interests to which they devote
attention and will continue to do so, resulting in certain conflicts of
interest.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item begin on page F-1 (immediately
following page 27 of this report) with the index to financial statements
followed by the financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The present directors, executive officers and significant employees of ATC,
their ages, positions held in ATC and duration as director, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES
<S> <C> <C>
Cornelius J. Brosnan 51 Chairman, Chief Executive Officer and President
Elwood G. Norris 60 Director and Chief Technology Officer
Richard M. Wagner 53 Director and Secretary
David J. Carter 50 Director
O'Connell J. Benjamin 48 Director
Robert Putnam 40 Vice President, Treasurer and Assistant Secretary
James Croft 45 Vice President Engineering (1)
</TABLE>
(1) A significant employee of ATC.
The terms of all directors will expire at the next annual meeting of ATC's
shareholders, or when their successors are elected and qualified. Directors are
elected each year, and all directors serve one-year terms. Officers serve at the
pleasure of the Board of Directors. There are no arrangements or understandings
between ATC and any other person pursuant to which he was or is to be selected
as a director, executive officer or nominee therefor. There are no other persons
whose activities are material or are expected to be material to ATC's affairs.
ATC maintains a key person life insurance policy on Mr. Norris in the amount of
$2 million.
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BIOGRAPHICAL INFORMATION
CORNELIUS J. BROSNAN. Mr. Brosnan was appointed as a director in October 1997.
In July 1998 he was appointed Chairman, Chief Executive Officer and President of
ATC and commenced full-time duties in August 1998. From June 1997 to August 1998
he was Vice President of Strategic Planning for Sprint PCS. From May 1995 to
June 1997 he was Vice President, Product Planning Center for Samsung North
America. From 1987 to May 1995 he held various executive positions at AT&T
including serving as General Manager of Cordless Telephones, New Business
Development Director for Consumer Products, Engineering Director for Interactive
TV Services and Program Director for Broadband Networks. Mr. Brosnan received a
B.A. in Political Science from Middlebury College in 1969.
ELWOOD G. NORRIS. Mr. Norris has been a director of ATC since August 1980. He
served as President from August 1980 to February 1994. He currently manages
ATC's research and development activities as Chief Technology Officer. He has
been a director and Chairman of Norris Communications, Inc. ("NCI"), a public
company engaged in electronic product development, distribution and sales, since
1988. He has served as Chief Technology Officer to NCI since October 1995. From
1988 to October 1995 he served as NCI's President and Chief Executive Officer.
In January 1997, he was reappointed as Chief Executive Officer of NCI and served
in that capacity until July 1998. Since August 1989, he has served as director
of Patriot Scientific Corporation ("Patriot"), a public company engaged in the
development of microprocessor technology, digital modem products and radar and
antenna engineering. He also served as Chairman and Chief Executive Officer of
Patriot until June 1994. From June 1995 until June 1996 when he was reappointed
Chairman, Mr. Norris served as temporary President and Chief Executive Officer
of Patriot. He is an electronics engineer and an inventor with over 20 U.S.
patents, primarily in the fields of electrical and acoustical engineering. He is
the inventor of ATC's ear radio, HyperSonic Sound, EPD technology and other
technologies. Mr. Norris devotes only part-time services to ATC, approximating
25-35 hours per week.
RICHARD M. WAGNER. Mr. Wagner has served as a director of ATC since 1986 and was
appointed Secretary in February 1994. Since 1980 he has been a self-employed
real estate broker and agent. In 1986 he founded and has since operated The
Mortgage Company and Scripps Escrow Co. which provide full-service real estate
services. He received a Masters of Science degree from San Diego State
University in 1974.
DAVID J. CARTER. Mr. Carter was appointed as a director of ATC in September
1998. From 1983 until his retirement in April 1998, he was employed by AT&T,
most recently as General Manager and Product Development Vice President. He
previously served in other positions at AT&T including Business Development Vice
President and Consumer Products Marketing Vice President. He previously served
as a Marketing Research Consultant and Managing Consultant - Marketing and
Business Strategy for General Electric Company. His career has included
technical positions at Temple Barker & Sloane, Inc., Decision Research Corp. and
Johnson & Johnson. He obtained a B.S. in Mathematics in 1970 and a M.S. in
Mathematical Statistics in 1973 from the University of Massachusetts.
O'CONNELL J. BENJAMIN. Mr. Benjamin was appointed as a director of ATC in
September 1998. For the past 25 years he has been employed with Bell
Laboratories and is currently Vice President in the Wireless Networks Group. He
has served in a variety of positions at Bell Laboratories, including Vice
President of Telephone Products Research and Development, Vice President of
Wireless Technology, Vice President of Customer Technical Support and Director
of Cellular Telephones. He received a B.S. (1973) and an M.S. (1975) in
Electrical Engineering from the Brooklyn Polytechnic Institute.
ROBERT PUTNAM. Mr. Putnam served as a director of ATC from 1984 until September
1997. He also served as Secretary/Treasurer until February 1994, then President
and CEO through August 1997, and currently serves as Vice President, Treasurer
and Assistant Secretary. Since 1988 he has served as Secretary of NCI and from
1995 as a Director of NCI. Since 1989 he has also served as Secretary/Treasurer
and Director of Patriot. He received a B.A. degree in Mass Communication/
Advertising from Brigham Young University in 1983. Mr. Putnam devotes
approximately 20-25 hours per week to ATC.
JAMES CROFT. Mr. Croft joined ATC in October 1997 as Vice President of
Engineering. From October 1992 to October 1997 he was an executive with Carver
Corp., a publicly traded high-end audio supplier. He was appointed Vice
President of Marketing and Product Development for Carver Corp. in March 1993
and Vice President Research and Development in February 1995. From 1990 through
October 1992, Mr. Croft was employed by Dahlquist, Inc., a loudspeaker
manufacturer, the latest position being its Vice President of Research and
Development. Mr. Croft is also a Vice President of Definitive Audio, Inc., a
Seattle audio specialty retailer which he co-founded in 1975 and managed until
1985.
CONFLICTS OF INTEREST
Certain conflicts of interest now exist and will continue to exist between ATC
and certain of its officers and directors due to the fact that they have other
employment or business interests to which they devote some attention and they
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<PAGE> 22
are expected to continue to do so. ATC has not established policies or
procedures for the resolution of current or potential conflicts of interest
between ATC and its management or management-affiliated entities. There can be
no assurance that members of management will resolve all conflicts of interest
in ATC's favor. The officers and directors are accountable to ATC as
fiduciaries, which means that they are legally obligated to exercise good faith
and integrity in handling ATC's affairs. Failure by them to conduct ATC's
business in its best interests may result in liability to them.
It is conceivable that the respective areas of interest of ATC, Patriot and NCI
could overlap or conflict. ATC believes that although each of the three
corporations are involved in the electronics industry, the respective areas of
focus, products and technology directions of the three companies are
sufficiently distinct such that no conflict in business lines or executive
loyalties will result. Because of this unlikelihood, no steps have been taken to
resolve possible conflicts, and any such conflicts, should they arise, will be
addressed at the appropriate time.
Mr. Norris and Mr. Putnam are officers and directors of multiple public
companies as outlined above and Mr. Putnam is subordinate to Mr. Norris in these
relationships. ATC has not provided a method of resolving any potential
conflicts arising from these relationships and probably will not do so, partly
due to inevitable extra expense and delay any such measures would occasion. Mr.
Norris and Mr. Putnam are obligated to perform their duties in good faith and to
act in the best interest of ATC and its shareholders, and any failure on their
part to do so may constitute a breach of their fiduciary duties and expose them
to damages and other liability under applicable law. While the directors and
officers are excluded from liability for certain actions, their is no assurance
that Mr. Norris or Mr. Putnam would be excluded from liability or indemnified if
they breached their loyalty to ATC.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Act") requires ATC's
officers, directors and persons who own more than 10% of a class of ATC's
securities registered under Section 12(g) of the Act to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than 10% shareholders are required by
SEC regulation to furnish ATC with copies of all Section 16(a) forms they file.
Based solely on a review of copies of such reports furnished to ATC and written
representations that no other reports were required during the fiscal year ended
September 30, 1998, ATC believes that all persons subject to the reporting
requirements pursuant to Section 16(a) filed the required reports on a timely
basis with the SEC except as follows: (1) to ATC's knowledge, former executive
officer Dale Williams' Form 4 for June 1998 to report one transaction was not
timely filed and (2) one transaction in July, 1998 for Cornelius J. Brosnan was
reported on a Form 4 filed in September 1998.
ITEM 10. EXECUTIVE COMPENSATION.
There is shown below information concerning the compensation of the two
individuals who acted as ATC's chief executive officer for the fiscal year ended
September 30, 1998 and two other highly compensated officers of ATC whose salary
and bonus exceeded $100,000 during the fiscal year ended September 30, 1998
(each a "Named Executive Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Name and Fiscal Other Annual Securities Underlying All Other
Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation
- ------------------ ------ --------- -------- --------------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cornelius J. Brosnan, 1998 $ 32,308 $50,000 -- 300,000 --
Chairman, President and CEO(1)
Dale Williams, former 1998 $166,154 -- $30,000 (4) -- --
Chairman, President 1997 $ 13,846 $43,750 (3) $55,600 (4) 862,000 (5) --
and CEO (2)
Elwood G. Norris, Director 1998 $101,538 $86,652 (6) $ 973 (7) -- --
and Chief Technology 1997 $ 24,453 -- $7,866 (7) -- --
Officer 1996 $ 16,736 -- $7,739 (7) 280,000 --
James Croft, Vice President 1998 $102,807 -- -- 100,000 $25,650 (9)
of Engineering (8)
</TABLE>
(1) Elected as a director in October 1997. Appointed Chairman, President
and CEO in July 1998.
(2) Chairman, President and CEO from September 1997 to June 1998. Served
as a consultant from June 1997 through August 1997 and from July 1998
to September 1998.
(3) Represents consulting bonus paid by the issuance of 7,500 shares of
Common Stock.
(4) Represents consulting fees, see note (2).
(5) A total of 742,000 of these options were canceled in June 1998.
22
<PAGE> 23
(6) Represents bonus applied to cancel note due ATC.
(7) Represents royalties paid.
(8) Appointed Vice President of Engineering in October 1997.
(9) Represents bonus for relocation costs paid by the issuance of 5,000
shares of Common Stock.
Except for stock options, discussed below, and stock bonuses discussed above, no
Named Executive Officer received any form of non-cash compensation from ATC in
the fiscal year ended September 30, 1998, 1997 nor 1996 or currently receives
any such compensation.
OPTION GRANTS
Shown below is further information on grants of stock options in fiscal 1998 to
the Named Executive Officers reflected in the Summary Compensation Table shown
above for fiscal 1998.
OPTION GRANTS FOR FISCAL YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Percent of Total
Number of Options Granted Exercise Expiration
Name Options Granted to Employees in Fiscal Year Price Date
---- --------------- --------------------------- -------- ----------
<S> <C> <C> <C> <C>
Cornelius J. Brosnan 50,000 (1) 9% $ 16.00 10/2/2002
250,000 (2) 44% $ 8.50 7/15/2003
James Croft 100,000 (3) 18% $3.6875 1/23/2003
</TABLE>
(1) Vest 50% on each annual anniversary date, subject to acceleration for
certain events.
(2) Options on a total of 10,000 common shares were vested and exercisable
at issuance, the balance vesting monthly over 32 months at the rate of
7,500 shares per month commencing two months after issuance on July
15, 1998, subject to acceleration for certain events.
(3) A total of 33,334 vested at issuance with 33,333 at each annual
anniversary of grant.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information on unexercised options of the Named
Executive Officers at September 30, 1998:
<TABLE>
<CAPTION>
AGGREGATED FISCAL YEAR-END OPTION VALUES
Number of Unexercised Value of Unexercised
Options Held At In-The-Money Options At
September 30, 1998 September 30, 1998 (1)
-------------------------------- -------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Cornelius J. Brosnan 10,000 290,000 -- (2) -- (2)
Dale Williams 120,000 -- -- (2) -- (2)
Elwood G. Norris 280,000 -- $1,391,000 --
James Croft 33,334 66,666 $ 60,418 $ 120,832
</TABLE>
(1) Based on the last sale price at the close of business on the last
trading day of the fiscal year of $5.50 per share.
(2) All options were out-of-the-money at September 30, 1998.
ATC does not have any stock appreciation rights plans in effect and has no
long-term incentive plans, as those terms are defined in Securities and Exchange
Commission regulations. During the fiscal year ended September 30, 1998, ATC did
not adjust or amend the exercise price of stock options awarded to the Named
Executive Officers and ATC has no defined benefit or actuarial plans covering
any person. However, the Company allowed Mr. Norris to cashless exercise
warrants granted in connection with a prior financing during fiscal 1998. See
"Certain Relationships and related transactions."
COMPENSATION OF DIRECTORS
No direct or indirect remuneration has been paid or is payable by ATC to the
directors in their capacity as directors during fiscal 1998. It is anticipated
that during the next twelve months that ATC will not pay any direct or indirect
remuneration to any directors of ATC in their capacity as directors other than
in the form of reimbursement of expenses of attending directors' or committee
meetings. However, directors have received in the past, and may receive in the
future, stock option grants.
EMPLOYMENT CONTRACTS AND COMPENSATION ARRANGEMENTS
Effective July 17, 1998 ATC entered into a three year employment contract with
Mr. Brosnan, Chairman, President and CEO. The agreement provides for a base
salary of $20,000 per month, subject to future reviews. The agreement provides
that bonuses are at the discretion of the Board of Directors. ATC also pays
limited automobile expenses. ATC may terminate the employment with or without
cause (as defined), but termination without cause (other than disability or
death) results in a severance payment equal to up to six months of the then
monthly base salary. Likewise upon a change in control, as defined in the
agreement, Mr. Brosnan may elect to terminate employment and obtain a payment
23
<PAGE> 24
equal to the greater of (i) the remaining months of the agreement multiplied by
the then base monthly salary, or (ii) twelve months of the then monthly base
salary. Mr. Brosnan has agreed not to disclose trade secrets, has agreed to
assign inventions to ATC during employment and has agreed to a two-year
non-compete agreement. In connection with the employment agreement, ATC granted
Mr. Brosnan options to purchase up to 250,000 common shares at $8.50 per share,
with 10,000 shares vesting on the date of the grant and the balance over 32
months commencing two months of full-time service subject to acceleration for
certain events. In connection with Mr. Brosnan's employment and move to the San
Diego area, ATC agreed to pay limited moving expenses and paid a $50,000 bonus
in lieu of amounts forfeited by Mr. Brosnan with his previous employer.
Effective September 1, 1997 ATC entered into a three year employment contract
with Mr. Norris, director and Chief Technology Officer for his part-time
services. The agreement provides for a base salary of $10,000 per month, as
adjusted by the Board of Directors, subject to future reviews. The agreement
provides that Mr. Norris shall participate in bonus, benefit and other
incentives at the discretion of the Board of Directors. ATC may terminate the
employment with or without cause (as defined), but termination without cause
(other than disability or death) results in a severance payment equal to up to
twelve months of the then monthly base salary and any bonus on an as if
perfected basis. Likewise upon a change in control, as defined in the agreement,
Mr. Norris may elect to terminate employment and obtain a payment equal to the
greater the remaining months of the agreement multiplied by the then base
monthly salary plus any bonus on an as if perfected basis. Mr. Norris has agreed
not to disclose trade secrets and has agreed to assign certain inventions (as
defined) to ATC during employment.
ATC is also obligated to pay to Mr. Norris a 1% royalty on all sales of radio
equipment based on the gross amount received by ATC less returns and allowances
pursuant to a September 3, 1985 royalty agreement. Pursuant to an Addendum
Agreement dated December 2, 1996, ATC is also obligated to pay Mr. Norris a 2%
royalty on gross revenues received by ATC from the HSS, SFT, EPD and GPS
technologies.
Effective as of June 1, 1998 ATC entered into an employment contract through
September 30, 2001 with Mr. Croft to serve as Vice President of Engineering. The
agreement is automatically renewable for one year terms thereafter. The
agreement provides for a base salary of $9,167 per month, as may be adjusted by
the Company's Chief Executive Officer. The agreement provides that Mr. Croft
shall participate in bonus, benefit and other incentives at the discretion of
the Board of Directors. ATC may terminate the employment with or without cause
(as defined), but termination without cause (other than disability or death)
results in a severance payment equal to six months of the then monthly base
salary and any bonus on an as if perfected basis. Mr. Croft has agreed not to
disclose trade secrets and has agreed to assign certain inventions (as defined)
to ATC during employment.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of December 18, 1998, the stock ownership of
each Named Executive Officer (see Item 10), directors, all executive officers
and directors of ATC as a group, and of each person known by ATC to be a
beneficial owner of 5% or more of its Common Stock. Except as otherwise noted,
each person listed below is the sole beneficial owner of the shares and has sole
investment and voting power of such shares. No person listed below has any
option, warrant or other right to acquire additional securities of ATC, except
as otherwise noted.
<TABLE>
<CAPTION>
Name and Address Amount & Nature
of Beneficial of Beneficial
Title of Class Owner Ownership (1) Percent of Class
- -------------- ---------------- --------------- ----------------
<S> <C> <C> <C>
Common Stock Elwood G. Norris 3,214,634 (2) 27.6%
par value 13114 Evening Creek Drive South
$.00001 San Diego, California 92128
SAME Robert Putnam 620,000 (3) 5.4%
13114 Evening Creek Drive South
San Diego, California 92128
SAME Dale Williams 120,000 (4) 1.0%
5800 Sterling Dr.
Boise, ID 83703
SAME Cornelius J. Brosnan 72,500 (5) * %
13114 Evening Creek Drive South
San Diego, California 92128
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C> <C> <C>
SAME Richard M. Wagner 64,600 (6) * %
13114 Evening Creek Drive South
San Diego, California 92128
SAME James Croft 32,834 (7) * %
13114 Evening Creek Drive South
San Diego, California 92128
SAME O'Connell J. Benjamin 20,000 (5) * %
13114 Evening Creek Drive South
San Diego, California 92128
SAME David J. Carter 20,000 (5) * %
13114 Evening Creek Drive South
San Diego, California 92128
ALL DIRECTORS & EXECUTIVE OFFICERS 4,011,734(8) 33.5 %
AS A GROUP (6 PERSONS)
</TABLE>
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
securities. Percentage of beneficial ownership is based on 11,374,314
shares of Common Stock outstanding on December 18, 1998.
(2) Includes 280,000 Common Shares issuable upon the exercise of
outstanding stock options within 60 days of December 18, 1998.
(3) Includes 200,000 Common Shares issuable upon the exercise of
outstanding stock options within 60 days of December 18, 1998.
(4) Consists of Common Shares issuable upon the exercise of outstanding
stock options within 60 days of December 18, 1998. The Company has no
information on any other holdings of Mr. Williams.
(5) Consists of Common Shares issuable upon the exercise of outstanding
stock options within 60 days of December 18, 1998.
(6) Includes 20,000 Common Shares issuable upon the exercise of
outstanding stock options within 60 days of December 18, 1998.
(7) Includes 32,334 Common Shares issuable upon the exercise of
outstanding stock options within 60 days of December 18, 1998.
(8) Includes 612,500 Common Shares issuable upon the exercise of
outstanding stock options within 60 days of December 18, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On July 11, 1997, ATC entered into a three year lease. To meet the credit
requirements of the landlord, both ATC and NCI entered into a joint lease
agreement for approximately 12,925 square feet with aggregate monthly payments
of $13,830 inclusive of utilities and costs. ATC is occupying approximately
7,500 square feet of the jointly leased office space with its share of monthly
payments being approximately $8,000. Accordingly ATC could become obligated for
the entire lease should NCI default on its share of payments thereon. Elwood
Norris, a director of ATC, is also Chief Technology Officer of NCI. He is the
owner of less than 1% of its common shares and Robert Putnam (the Vice
President, Treasurer and Asst. Secretary of ATC) is Secretary of NCI and the
owner of less than 1% of its common shares.
In January 1997, ATC made unsecured cash demand loans with interest at 7% per
annum to two officers aggregating $173,250 (Mr. Putnam as to $82,500 and Mr.
Norris as to $90,750). The proceeds of the loans were used by the officers to
exercise Company stock options. Each officer made a $10,000 principal payment
plus interest during the 1997 fiscal year and during fiscal 1998 bonuses
aggregating $86,652 and $50,000 to Mr. Norris and Mr. Putnam, respectively, were
applied to pay principal and interest under the notes. The remaining note with
Mr. Putnam with a principal balance of $27,895 is payable on demand.
In May 1998, the Board of Directors amended the terms of a stock purchase
warrant on 100,000 shares of Common Stock issued in 1992 to Mr. Norris in
connection with a financing transaction. The amendment provided for a cashless
exercise of the warrant, there was no change in the exercise price or expiration
date. Mr. Norris exercised the warrant effective May 28, 1998 in exchange for
90,196 shares of Common Stock. The Company recorded a non-cash interest expense
and additional paid-in capital of $920,000 in connection with the cashless
exercise.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The following is a list and index of Exhibits required by Item
601 of Regulation S-B. Except for those exhibits indicated by an asterisk which
are filed herewith, the remaining exhibits listed below are incorporated by
reference to the exhibit (of the number indicated) previously filed by ATC as
indicated.
25
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C>
3. ARTICLES AND BYLAWS
3.1 Certificate of Incorporation of American Technology Corporation
(Delaware) dated March 1, 1992, filed as Exhibit 2.1 to ATC's
Form 10-SB effective August 1, 1994
3.1.1 Amendment to Certificate of Incorporation of American Technology
Corporation dated March 24, 1997 and filed with Delaware on April
22, 1997. Filed as Exhibit 3.1.1 to ATC's Form 10-QSB for March
31, 1997
3.1.2 Certificate of Designations of Series A Convertible Preferred
Stock filed with Delaware on August 15, 1997. Filed as Exhibit
3.1.2 to ATC's Form 8-K dated August 29, 1997.
3.1.3 Corrected Certificate of Designations of Series A Convertible
Preferred Stock dated and filed with Delaware on August 25, 1997.
Filed as Exhibit 3.1.3 to ATC's Form 8-K dated August 29, 1997.
*3.1.4 Corrected Certificate of Designations of Series B Convertible
Preferred Stock filed with Delaware on December 23, 1998.
3.2 Bylaws of American Technology Corporation (Delaware) filed as
Exhibit 2.3 to ATC's Form 10-SB effective August 1, 1994
4. INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS
4.1 Form of Stock Purchase Warrant exercisable at $5.00 per share
until March 1, 2000 granted to sixteen investors for an aggregate
of 50,000 common shares filed as Exhibit 4.8 to ATC's Form 8-K
dated April 1, 1997
4.2 Stock Purchase Warrant issued to Renwick Corporate Finance, Inc.
dated as of February 5, 1997 exercisable to purchase 90,000
common shares at $5.00 per share until February 5, 2000 filed as
Exhibit 4.9 to ATC's Form 10-QSB for March 31, 1997
4.3 Form of Stock Purchase Warrant exercisable at $7.50 per share
until August 1, 2000 granted to eleven investors for an aggregate
of 175,000 common shares and filed as Exhibit 4.10 to ATC's Form
8-K dated August 29, 1997
*4.4 Stock Purchase Warrant dated June 18, 1998 exercisable at $16.00
per share until June 18, 2000 between ATC and to L.H. Friend,
Weinress, Frankson & Presson, Inc. for an aggregate of 25,000
common shares.
*4.5 Stock Purchase Warrant dated May 12, 1998 exercisable at $16.00
per share until May 12, 2003 between ATC and Jonathan A. Berg for
an aggregate of 50,000 common shares.
*4.6 Form of Series B Preferred Stock and Warrant Purchase Agreement
executed with nine investors and dated December 24, 1998.
*4.7 Form of Warrant to Purchase Common Stock granted to nine
investors for an aggregate of 172,750 shares of Common Stock
dated December 24, 1998.
4.8 Reference is made to Exhibits 3.1 through 3.2.
10. MATERIAL CONTRACTS
10.1 Royalty Agreement between ATC and Elwood G. Norris dated
September 3, 1985 filed as Exhibit 6.2 to ATC's Form 10-SB
effective August 1, 1994
10.2 Assignment of Technology Agreement between ATC and Elwood G.
Norris dated March 2, 1992 filed as Exhibit 6.3 to ATC's Form
10-SB effective August 1, 1994
10.2.1 Addendum Agreement to Assignment of Technology Agreement between
ATC and Elwood G. Norris dated December 2, 1996 filed as Exhibit
10.3.1 to ATC's Form 10-KSB for September 30, 1996
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C>
10.3 1992 Incentive Stock Option Plan adopted by the Board of
Directors on March 2, 1992 and approved by the shareholders on
June 19, 1992 filed as Exhibit 6.8 to ATC's Form 10-SB effective
August 1, 1994
10.3.1 Standard form of Incentive Stock Option Plan Agreement filed as
Exhibit 6.8.1 to ATC's Form 10-SB effective August 1, 1994
10.4 1992 Non-Statutory Stock Option Plan adopted by the Board of
Directors on March 2, 1992 and approved by the shareholders on
June 19, 1992 filed as Exhibit 6.9 to ATC's Form 10-SB effective
August 1, 1994
10.4.1 Standard form of Non-Statutory Stock Option Plan Agreement filed
as Exhibit 6.9.1 to ATC's Form 10-SB effective August 1, 1994
10.5 Demand Promissory Note for $82,500 due from Robert Putnam dated
January 17, 1997 filed as Exhibit 10.11 to ATC's Form 10-QSB for
March 31, 1997
10.6 Sublease Agreement between Global Associates, Ltd. and Norris
Communications, Inc. and the Company dated July 11, 1997 filed as
Exhibit 10.13 to ATC's Form 10-QSB for June 30, 1997
10.7 1997 Employee Stock Compensation Plan of ATC dated March 10, 1997
filed as Exhibit 10.11 to ATC's Form S-8 dated March 24, 1997
10.8 Stock Option Agreement dated September 1, 1997 between ATC and
Dale Williams filed as Exhibit 10.15.1 to ATC's Form 10-KSB for
September 30, 1997
10.8.1 Separation Agreement and General Release between Dale Williams
and ATC executed on June 19, 1998 filed as Exhibit 10.15.2 to
ATC's Form 8-K dated June 29, 1998
10.8.2 Amendment to Stock Option Agreement between Dale Williams and ATC
dated as of June 12, 1998 filed as Exhibit 10.15.3 to ATC's Form
8-K dated June 29, 1998
10.9 Employment Agreement dated as of September 1, 1997 between ATC
and Elwood G. Norris filed as Exhibit 10.16 to ATC's Form 10-KSB
for September 30, 1997
10.10 Employment Agreement dated as of September 1, 1997 between ATC
and Robert Putnam filed as Exhibit 10.17 to ATC's Form 10-KSB for
September 30, 1997
10.11 Agreement dated as of June 1, 1998, between ATC 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) as filed
as Exhibit 10.18 to ATC's 10-QSB dated August 10, 1998
10.12 1997 Stock Option Plan as adopted on January 23, 1998 filed as
Exhibit 10.1 to ATC's Form S-8 dated July 27, 1998
*10.13 Employment Agreement dated July 17, 1998 between ATC and
Cornelius J. Brosnan
10.13.1 Special Stock Option Agreement dated October 2, 1997 between ATC
and Cornelius J. Brosnan filed as Exhibit 10.2 to ATC's Form S-8
dated July 27, 1998
*10.13.2 Stock Option Agreement dated July 15, 1998 between ATC and
Cornelius J. Brosnan
*10.14 Employment Agreement dated July 8, 1998 between ATC and James
Croft.
23. CONSENTS OF EXPERTS AND COUNSEL
*23.1 Consent of BDO Seidman, LLP
27. FINANCIAL DATA SCHEDULE
*27.1 Financial Data Schedule
</TABLE>
- -----------------
(b) Reports on Form 8-K - None
27
<PAGE> 28
AMERICAN TECHNOLOGY CORPORATION
INDEX TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-2
Balance Sheet as of September 30, 1998 F-3
Statements of Operations for the Years Ended
September 30, 1998 and 1997 F-4
Statements of Stockholders' Equity for the Years Ended
September 30, 1998 and 1997 F-5
Statements of Cash Flows for the Years Ended
September 30, 1998 and 1997 F-6
Summary of Accounting Policies F-7 - F-9
Notes to Financial Statements F-10 - F-17
</TABLE>
F-1
<PAGE> 29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
================================================================================
To the Stockholders and Board of Directors
American Technology Corporation
San Diego, California
We have audited the accompanying balance sheet of American Technology
Corporation as of September 30, 1998 and the related statements of operations,
stockholders' equity and cash flows for each of the two years in the period then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Technology Corporation
as of September 30, 1998, and the results of its operations and its cash flows
for each of the two years in the period then ended in conformity with generally
accepted accounting principles.
/s/ BDO SEIDMAN, LLP
--------------------
BDO Seidman, LLP
Denver, Colorado
November 6, 1998,
except for Note 13 which is as of December 28, 1998
F-2
<PAGE> 30
AMERICAN TECHNOLOGY CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 1998
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,034,577
Investment securities available for sale [note 1] 14,645
Trade accounts receivable [note 10], less allowance of
$17,000 for doubtful accounts 71,737
Inventories [note 2] 87,292
Prepaid expenses and other 58,470
------------
TOTAL CURRENT ASSETS 1,266,721
------------
Equipment, net [note 3] 169,367
Patents 245,919
Other 1,738
------------
TOTAL ASSETS $ 1,683,745
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 202,042
Accrued liabilities 78,791
------------
TOTAL CURRENT LIABILITIES 280,833
============
COMMITMENTS AND CONTINGENCIES [NOTES 4 AND 9]
STOCKHOLDERS' EQUITY [NOTES 7 AND 8]:
Common stock, $0.00001 par value; 20,000,000 shares
authorized: 11,356,014 shares issued and outstanding 114
Additional paid-in capital 10,180,265
Notes receivable [note 4] (27,895)
Accumulated deficit (8,764,013)
Net unrealized gain on securities available for sale [note 1] 14,441
------------
TOTAL STOCKHOLDERS' EQUITY 1,402,912
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,683,745
============
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-3
<PAGE> 31
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997
------------ -----------
<S> <C> <C>
REVENUES:
Product sales [note 10] $ 194,758 $ 967,408
Licensing revenues 50,000 --
------------ -----------
Total revenues 244,758 967,408
------------ -----------
Cost of products sold and licensed [note 4] 407,123 809,437
------------ -----------
GROSS PROFIT (LOSS) (162,365) 157,971
------------ -----------
OPERATING EXPENSES:
Selling, general and administrative 2,005,348 1,137,054
Research and development 991,238 566,288
Non-cash compensation expense 655,174 479,514
------------ -----------
Total operating expenses 3,651,760 2,182,856
------------ -----------
Loss from operations (3,814,125) (2,024,885)
------------ -----------
OTHER INCOME (EXPENSE):
Interest income 131,967 27,653
Interest expense - non-cash (926,555) (146,331)
Other 15,000 (800)
------------ -----------
Total other income (expense) (779,588) (119,478)
------------ -----------
NET LOSS $ (4,593,713) $(2,144,363)
============ ===========
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (4,593,713) $(2,762,009)
============ ===========
NET LOSS PER SHARE OF COMMON STOCK - BASIC AND
DILUTED (0.42) (0.30)
============ ===========
AVERAGE WEIGHTED NUMBER OF COMMON SHARES OUTSTANDING 10,889,654 9,268,128
============ ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-4
<PAGE> 32
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Series A Convertible Preferred Stock
--------------------- -------------------------------------
Additional
Paid-in Notes
Shares Amount Capital Shares Amount Receivable
--------- ------ ------------ ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1996 8,611,759 $ 86 $ 3,063,373 -- -- --
------------ ---- ------------ ------ ---------- ---------
Issuance of common stock:
Upon exercise of stock options [note 8] 592,500 6 343,644 -- -- (173,150)
For compensation and services 40,327 1 201,413 -- -- --
Upon conversion of 6% convertible notes
at $3.50 per share
and accrued interest [note 5] 181,230 2 634,308 -- -- --
Cash-less exercise of 350,000 options 292,963 3 (3) -- -- --
Upon exercise of warrants at $0.50
per share [note 7] 40,000 -- 20,000 -- -- --
Value assigned to 50,000 warrants granted with 6%
convertible notes [note 5] -- -- 2,500 -- -- --
Value assigned to 90,000 warrants granted as
consulting services [note 7] -- -- 33,300 -- -- --
Value assigned to 97,500 options granted for
services [note 8] -- -- 244,800 -- -- --
Non-cash interest on convertible notes [note 5] -- -- 122,700 -- -- --
Issuance of preferred stock, net of offering
costs [note 7] -- -- -- 350,000 3,321,153 --
Payment on notes receivable [note 4] -- -- -- -- -- 20,000
Net loss for the year -- -- -- -- -- --
Net unrealized loss on securities available
for sale -- -- -- -- -- --
------------ ---- ------------ ------ ---------- ---------
BALANCE, SEPTEMBER 30, 1997 9,758,779 98 4,666,035 350,000 3,321,153 (153,150)
Issuance of common stock:
Upon exercise of stock options [note 8] 158,800 2 213,716 -- -- --
For compensation and services [note 8] 14,750 -- 91,919 -- -- --
Upon conversion of 6% convertible notes
at $3.50 per share
and accrued interest [note 5] 128,459 1 393,205 -- -- --
Cash-less exercise of warrants [note 7] 106,029 1 919,999 -- -- --
Upon conversion of Series A Preferred
Stock [note 7] 974,197 10 3,321,143 (350,000) (3,321,153) --
Upon exercise of warrants from $0.50 - $7.50 215,000 2 136,248 -- -- --
Value assigned to 75,000 warrants granted as
consulting services [note 7] -- -- 122,000 -- -- --
Value assigned to 80,000 options granted
for services [note 8] -- -- 316,000 -- -- --
Payment on notes receivable [note 4] -- -- -- -- -- 125,255
Net loss for the year -- -- -- -- -- --
Net unrealized loss on securities available
for sale [note 1] -- -- -- -- -- --
------------ ---- ------------ ------ ---------- ---------
BALANCE, SEPTEMBER 30, 1998 11,356,014 $114 $ 10,180,265 -- -- $ (27,895)
============ ==== ============ ====== ========== =========
<CAPTION>
Net
unrealized
gain on
securities Total
Accumulated available Stockholders'
Deficit for sale Equity
----------- ----------- ------------
<S> <C> <C> <C>
BALANCE, OCTOBER 1, 1996 $(2,025,937) $ 189,950 $ 1,227,472
----------- --------- -----------
Issuance of common stock:
Upon exercise of stock options [note 8] -- -- 170,500
For compensation and services -- -- 201,414
Upon conversion of 6% convertible notes
at $3.50 per share
and accrued interest [note 5] -- -- 634,310
Cash-less exercise of 350,000 options -- -- --
Upon exercise of warrants at $0.50
per share [note 7] -- -- 20,000
Value assigned to 50,000 warrants granted with 6%
convertible notes [note 5] -- -- 2,500
Value assigned to 90,000 warrants granted as
consulting services [note 7] -- -- 33,300
Value assigned to 97,500 options granted for
services [note 8] -- -- 244,800
Non-cash interest on convertible notes [note 5] -- -- 122,700
Issuance of preferred stock, net of offering
costs [note 7] -- -- 3,321,153
Payment on notes receivable [note 4] -- -- 20,000
Net loss for the year (2,144,363) -- (2,144,363)
Net unrealized loss on securities available
for sale -- (160,864) (160,864)
----------- --------- -----------
BALANCE, SEPTEMBER 30, 1997 (4,170,300) 29,086 3,692,922
Issuance of common stock:
Upon exercise of stock options [note 8] -- -- 213,718
For compensation and services [note 8] -- -- 91,919
Upon conversion of 6% convertible notes
at $3.50 per share
and accrued interest [note 5] -- -- 393,206
Cash-less exercise of warrants [note 7] -- -- 920,000
Upon conversion of Series A Preferred
Stock [note 7] -- -- --
Upon exercise of warrants from $0.50 - $7.50 -- -- 136,250
Value assigned to 75,000 warrants granted as
consulting services [note 7] -- -- 122,000
Value assigned to 80,000 options granted
for services [note 8] -- -- 316,000
Payment on notes receivable [note 4] -- -- 125,255
Net loss for the year (4,593,713) -- (4,593,713)
Net unrealized loss on securities available
for sale [note 1] -- (14,645) (14,645)
----------- --------- -----------
BALANCE, SEPTEMBER 30, 1998 $(8,764,013) $ 14,441 $ 1,402,912
=========== ========= ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements. F-5
F-5
<PAGE> 33
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN CASH
OPERATING ACTIVITIES:
Net loss $(4,593,713) $(2,144,363)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 132,215 97,920
Warrants granted for services 122,000 33,300
Warrants granted with convertible debt -- 2,500
Common stock issued for services and
compensation 91,919 201,414
Common stock issued for interest 18,206 9,310
Options granted for services 316,000 244,800
Inventory and loss accrual 160,000 --
Bonus paid on exchange for payment 125,255 --
Non-cash interest on cash-less exercise
of warrants 920,000 --
Non-cash interest expense on convertible notes -- 122,700
Non-cash accrued interest on long term debt (11,651) 11,651
Changes in assets and liabilities:
Trade accounts receivable 235,437 (111,717)
Inventories (57,477) 124,116
Prepaid expenses and other (31,094) 31,530
Accounts payable 81,173 (227,319)
Accrued liabilities 27,355 31,633
----------- -----------
Net cash used in operating activities (2,464,375) (1,572,525)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (80,995) (176,766)
Patent costs paid (108,479) (101,235)
----------- -----------
Net cash used in investing activities (189,474) (278,001)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net -- 3,321,153
Proceeds from exercise of common stock warrants 136,250 20,000
Proceeds from exercise of stock options 213,718 343,650
Proceeds loaned on notes receivable - officers for
option exercise -- (173,150)
Principal payment received on notes receivable -
officers -- 20,000
Proceeds from issuance of convertible notes -- 1,000,000
----------- -----------
Net cash provided by financing activities 349,968 4,531,653
----------- -----------
Net increase (decrease) in cash (2,303,881) 2,681,127
----------- -----------
Cash, beginning of year 3,338,458 657,331
----------- -----------
Cash, end of year $ 1,034,577 $ 3,338,458
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-6
<PAGE> 34
AMERICAN TECHNOLOGY CORPORATION
SUMMARY OF ACCOUNTING POLICIES
================================================================================
ORGANIZATION AND BUSINESS
American Technology Corporation (the "Company"), a Delaware corporation, is
engaged in design, development and commercialization of sound, acoustics and
other electronic technologies and the sales and marketing of consumer electronic
products.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and trade accounts receivable.
The Company's cash is placed in quality money market accounts with major
financial institutions. The investment policy limits the Company's exposure to
concentrations of credit risk. Such deposit accounts at times may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
Concentration of credit risk with respect to the trade accounts receivable are
limited due to the wide variety of customers and markets which comprise the
Company's customer base, as well as their dispersion across many different
geographic areas. The Company routinely assesses the financial strength of its
customers and, as a consequence, believes that the trade accounts receivable
credit risk exposure is limited. Generally, the Company does not require
collateral or other security to support customer receivables.
The carrying amounts of financial instruments including cash, trade accounts
receivable, notes receivable-officers, accounts payable and accrued liabilities
approximated fair market value because of the immediate or short-term maturity
of these instruments.
INVESTMENT SECURITIES
Investment securities classified as available for sale are those securities that
the Company does not have the positive intent to hold to maturity or does not
intend to trade actively. These securities are reported at fair value with
unrealized gains and losses reported as a net amount (net of applicable income
taxes) as a separate component of stockholders' equity.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
EQUIPMENT AND DEPRECIATION
Equipment is stated at cost. Depreciation is computed over the estimated useful
lives of three years using the straight-line method.
PATENTS
Patents are carried at cost and, when granted, will be amortized over their
estimated useful lives. The carrying value of patents is periodically reviewed
and impairments, if any, are recognized when the expected future benefit to be
derived from individual intangible assets is less than its carrying value.
LEASES
Leases entered into are classified as either capital or operating leases.
Leases, which substantially transfer all benefits and risks of ownership of
property to the Company, are accounted for as capital leases. At the time a
capital lease is entered into, an asset is recorded together with its related
long-term obligation to reflect the purchase and
F-7
<PAGE> 35
AMERICAN TECHNOLOGY CORPORATION
SUMMARY OF ACCOUNTING POLICIES
================================================================================
financing. At fiscal year end 1998 the Company had no capital lease obligations.
All current leases reported are classified as operating leases.
REVENUE RECOGNITION
Product sales are recognized in the periods that products are shipped. Licensing
revenues for one-time license fees are recognized upon achievement of
contractual milestones and the collection of the resulting receivable is deemed
probable.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109. Temporary differences are differences between the
tax basis of assets and liabilities and their reported amounts in the financial
statements that will result in taxable or deductible amounts in future years. A
valuation allowance is recorded by the Company to the extent it is more likely
than not that a deferral tax asset will not be realized.
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 of 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, after deduction for cumulative unpaid
dividends, by the weighted average number of Common Shares outstanding for the
period. The weighted average number of Common Shares outstanding during 1998 was
10,889,654 [1997 - 9,268,128]. 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 losses for the years 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
1,693,100 shares of Common Stock were outstanding at September 30, 1998 and
stock options, warrants and convertible debt exercisable into 2,408,000 shares
of Common Stock were outstanding at September 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.
Net loss available to Common Stockholders was reduced by $617,646 in computing
net loss per share for the fiscal year ended September 30, 1997 by an imputed
deemed dividend from a discount provision included in the Series A Preferred
Stock [see Note 7]. The deemed dividend was amortized to the earliest period at
which the preferred stock became convertible and was recognized as a deemed
dividend for the fiscal year ended September 30, 1997. The imputed dividend was
not a contractual obligation on the part of the Company to pay such imputed
dividend.
STOCK OPTIONS
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for all stock options plans. Under APB
Opinion 25, compensation cost is recognized for stock options granted to
employees when the option price is less than the market price of the underlying
Common Stock on the date of grant.
SFAS Statement No. 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income as if compensation
cost for the Company's stock option plans had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. To provide the required
pro forma information for employees, the Company estimates the fair value of
each stock option at the grant date by using the Black-Scholes option-pricing
model. Under SFAS No. 123, compensation cost is recognized for stock options
granted to nonemployees using the Black-Scholes Option-pricing model.
F-8
<PAGE> 36
AMERICAN TECHNOLOGY CORPORATION
SUMMARY OF ACCOUNTING POLICIES
================================================================================
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosure About Segments of an
Enterprise and Related Information", SFAS No. 132, "Employers' Disclosure about
Pensions and Other Post-retirement Benefits" and SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 130 establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Owners and distribution to owners define comprehensive
income to include all changes in equity except those resulting from investments.
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 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 the 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 change
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis. SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair market value. Gains or
losses resulting from changes in the values of those derivatives are accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows.
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. Because of the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on the future financial statement disclosure. Results of operations and
financial position, however, will be unaffected by implementation of these
standards. Management believes that the adoption of SFAS No. 130 and 131 will
have no material impact on the Company's financial statement disclosures. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. Management
believes that the adoption of SFAS No. 133 will have no material effect on its
financial statements.
F-9
<PAGE> 37
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. INVESTMENT SECURITIES
The Company's investment in securities consists of 225,300 shares of Norris
Communications Inc. Common Stock, an affiliated corporation. At September 30,
1998, the Company's market value of available for sale securities consisted of:
<TABLE>
<CAPTION>
Gross Estimate
Unrealized Fair
Cost Gains Value
---- ---------- --------
<S> <C> <C> <C>
Common Stock $203 $14,441 $14,645
==== ======= =======
</TABLE>
2. INVENTORIES
At September 30, 1998, inventories consisted of the following:
<TABLE>
<S> <C>
Finished goods $28,258
Consigned finished goods 43,200
Work-in-process 7,847
Raw materials 7,987
-------
$87,292
=======
</TABLE>
3. EQUIPMENT
Equipment consisted of the following at September 30, 1998:
<TABLE>
<S> <C>
Machinery and equipment $ 413,278
Office furniture and equipment 91,409
Leasehold improvements 37,442
---------
Accumulated depreciation (372,762)
---------
Net equipment $ 169,367
=========
</TABLE>
Depreciation expense was approximately $108,049 and $74,000 for the years ended
September 30, 1998 and 1997, respectively.
4. RELATED PARTY TRANSACTIONS
Facility Lease
The Company entered into a three-year lease agreement commencing on July 11,
1997 and expiring on July 30, 2000. To meet the credit requirements of the
landlord, both the Company and an affiliated corporation Norris Communications
Inc. ("NCI") entered into a joint lease agreement for approximately 12,925
square feet with aggregate monthly payments of $14,476 inclusive of utilities
and costs. The Company is occupying 7,500 square feet of the jointly leased
office space with its share of monthly payments being approximately $8,000. The
Company could become obligated for the entire lease should NCI default on its
share of payments thereon. Office rent expense recorded by the Company for the
years ended September 30, 1998 and 1997 was $91,515 and $32,000, respectively.
Royalties
In connection with a 1992 agreement to purchase technology, the Company is
required to pay a stockholder/director of the Company a 1% royalty on all net
sales of radio equipment (as defined). For the years ended September 30, 1998
and 1997, total royalties paid by the Company on radio sales were approximately
$973 and $7,900.
F-10
<PAGE> 38
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company is also obligated to pay the stockholder/director royalties of 2% on
gross revenues of the Company's sound reproduction and global positioning
satellite technologies. As of September 30, 1998, no amounts have been paid nor
are due under this agreement.
Notes Receivable-Officers
In January 1997, to allow for the exercise of stock options, the Company made
unsecured cash demand loans to two officers aggregating $173,150. During fiscal
1997, the officers made principal payments aggregating $20,000. During fiscal
1998 the Company bonused an aggregate of $136,652 to the two officers, including
$125,255 of principal, thereby reducing the balance of notes receivable to
$27,895. The notes are presented as a reduction from stockholders' equity in the
accompanying financial statements.
5. LONG-TERM DEBT
During fiscal 1997, the Company raised $1,000,000 through the issuance of 6%
convertible subordinated promissory notes due March 1, 1999 (the "Convertible
Notes"). As the market price of the Company's Common Stock exceeded the
conversion price of the Convertible Notes at the date of issuance, the Company
recognized embedded non-cash interest expense of $122,700 upon issuance of the
Convertible Notes in fiscal 1997. The Convertible Notes were issued with
detachable warrants which grant the holders the right to acquire up to 50,000
shares of the Company's Common Stock at a per share price of $5.00. The warrants
expire on March 1, 2000. The warrants were determined to have a value of $2,500,
which amount was recorded as additional paid-in capital.
During fiscal 1997, holders of $625,000 of the Convertible Notes converted their
notes, and accrued interest thereon, into 181,230 shares of the Company's Common
Stock. During fiscal 1998, the remaining balance of $375,000 and accrued
interest of $18,206 (including $11,651 accrued from September 30, 1997) was
converted into 128,459 Common Shares.
6. INCOME TAXES
Income taxes consisted of the following:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
- ------------------------- ------------ ----------
<S> <C> <C>
Deferred (benefit)
Federal $(1,302,000) $(597,000)
State (230,000) (105,000)
------------ ----------
(1,532,000) (702,000)
Change in valuation allowance 1,532,000 702,000
------------ ----------
$ -- $ --
============ ==========
</TABLE>
A reconciliation of income taxes at the federal statutory rate of 34% to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
- ------------------------- ----------- ---------
<S> <C> <C>
Income taxes (benefit) computed at the
federal statutory rate $(1,562,000) $(729,000)
Tax effect of change in valuation allowance 1,526,000 638,000
Nondeductible compensation and
interest expense 288,000 168,000
State income taxes (benefit), net of
federal tax benefit (276,000) (127,000)
Other 24,000 50,000
----------- ---------
$ -- $ --
=========== =========
</TABLE>
F-11
<PAGE> 39
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
The types of temporary differences between the tax basis of assets and
liabilities and their approximate tax effects that give rise to a significant
portion of the net deferred tax asset (liability) at September 30, 1998 are as
follows:
<TABLE>
<S> <C>
DEFERRED TAX ASSETS:
Tax loss carryforwards $ 2,866,000
Equipment 22,000
Accruals and other 15,000
Allowances 7,000
-----------
Gross deferred tax asset 2,910,000
Less valuation allowance (2,904,000)
6,000
DEFERRED TAX LIABILITIES: -----------
Unrealized gain on investment securities (6,000)
-----------
Net deferred tax asset (liability) $ --
===========
</TABLE>
A valuation allowance has been recorded to offset the net deferred tax asset as
management has been unable to determine that it is more likely than not that the
deferred tax asset will be realized.
At September 30, 1998, the Company, for federal income tax purposes, has net
operating loss carryforwards of approximately $7,200,000 which expire through
2018 of which certain amounts are subject to limitations under the Internal
Revenue Code of 1986, as amended.
7. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock, $0.0001
par value, without any action by the stockholders. The board of directors has
the authority to divide any and all shares of preferred stock into series and to
fix and determine the relative rights and preferences of the preferred stock,
such as the designation of series and the number of shares constituting such
series, dividend rights, redemption and sinking fund provisions, liquidation and
dissolution preferences, conversion or exchange rights an voting rights, if any.
With respect to voting rights, if the preferred stock were permitted to vote in
the election of directors or on other matters, each such share would be entitled
to one vote, and such shares may vote with the shares of Common Stock or may
vote as a separate class. Issuance of preferred stock by the board of directors
could result in such shares having dividend and or liquidation preferences
senior to the rights of the holders of Common Stock and could dilute the voting
rights of the holders of Common Stock.
During the year ended September 30, 1997 the Company designated 350,000 shares
of its Preferred Stock as Series A convertible Preferred Stock ("Series A") all
of which was issued at $10.00 per share for net proceeds of $3,321,153. During
the year ended September 30, 1998, all 350,000 shares of Series A sock were
converted into 974,197 shares of Common Stock.
See Note 13 subsequent event.
Warrants
During fiscal 1997 the Company granted warrants to purchase 90,000 shares at
$5.00 per share in connection with consulting services. These warrants were
valued at $33,300. During fiscal 1998 the Company granted warrants to purchase
75,000 shares at $16.00 per share in connection with consulting services. These
warrants were valued at $122,000.
During fiscal 1998, the Company amended the terms of a warrant to purchase
100,000 shares of Common Stock previously granted to a director in connection
with a 1992 financing transaction. The amendment provided for a
F-12
<PAGE> 40
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
cashless exercise, which was completed in May 1998. The Company recorded
non-cash interest expense of $920,000 in connection with the cashless exercise.
At September 30, 1998, the Company had the following warrants outstanding
arising from the offerings and transactions, each exercisable into one Common
Share:
<TABLE>
<CAPTION>
Number Exercise Price Expiration Date
------- -------------- ----------------
<S> <C> <C>
60,000 $ 5.00 February 5, 2000
47,500 $ 5.00 March 1, 2000
172,500 $ 7.50 August 1, 2000
25,000 $16.00 June 18, 2000
50,000 $16.00 May 12, 2003
-------
355,000
=======
</TABLE>
8. BENEFIT PLANS
1997 Employee Stock Compensation Plan ("ESC")
Effective March 10, 1997, the Company adopted the ESC Plan, expiring March 9,
2000, reserving for issuance 100,000 shares of the Company's Common Stock. The
ESC Plan provides for compensation awards of the Company's Common Stock to
non-executive employees (as defined), at the discretion of the ESC Plan
committee. During fiscal 1998, the Company issued 14,750 shares of Common Stock
under the Plan recording non-cash compensation expense of $91,919 for awards
valued at an estimated fair market value ranging from $3.875 to $8.53 per share.
During fiscal 1997, the Company issued 40,327 shares of Common Stock under the
plan recording non-cash compensation expense of $201,414 for awards valued at
an estimated fair market value ranging from $3.75 to $6.38 per share.
1997 Stock Option Plan
The Company has a Stock Option Plan, expiring January 22, 2008, reserving for
issuance 500,000 shares of the Company's Common Stock. The Options issued under
the Plan shall, in the discretion of the Board, be either Incentive Stock
Options or Nonstatutory Stock Options. The Stock Option Plan provides for grants
to employees, directors or consultants, both at the discretion of the Board of
Directors. Options to purchase Common Stock of the Company at a price not less
than the fair market value of the shares on the date of grant. In the case of a
significant stockholder, the option price of shares will not be less than 110
percent of the fair market value of the share on the date of grant. Any options
granted under the Stock Option Plan must be exercised within ten years of the
date they were granted (five years in the case of a significant stockholder). As
of September 30, 1998, there were options outstanding covering 238,000 shares of
Common Stock under this Plan.
1992 Incentive Stock Option Plan ("ISO")
The Company has an ISO Plan, expiring March 2, 2002, originally reserving for
issuance 1,000,000 shares of the Company's Common Stock. The ISO Plan provides
for grants to either full or part time employees, at the discretion of the Board
of Directors, options to purchase Common Stock of the Company at a price not
less than the fair market value of the shares on the date of grant. In the case
of a significant stockholder, the option price of shares will not be less than
110 percent of the fair market value of the share on the date of grant. Any
options granted under the ISO Plan must be exercised within ten years of the
date they were granted (five years in the case of a significant stockholder). As
of September 30, 1998, there were options outstanding covering 502,600 shares of
Common Stock under this Plan.
1992 Non-Statutory Stock Option Plan ("NSO")
The Company has an NSO Plan, expiring March 2, 2002, originally reserving for
issuance 1,000,000 shares of the Company's Common Stock. The NSO Plan provides
for grants to either full or part-time employees, directors or consultants, at
the discretion of the Board of Directors, options to purchase Common Stock of
the Company at a price not less than the fair market value of the shares on the
date of grant. Any options granted under the NSO Plan must be exercised within
10 years of the date they were granted. As of September 30, 1998, there were
options outstanding covering 187,500 shares under this Plan.
F-13
<PAGE> 41
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
Other Stock Options
During fiscal 1998 the Company granted to an executive officer options of up to
290,000 Common Shares vesting over a period of two years. A total of 240,000
options are exercisable at $8.50 per share until July 15, 2003 and 50,000
options are exercisable at $16.00 per share until October 2, 2002. The Company
cancelled options on 742,000 shares of Common Stock previously granted to a
former executive officer with the balance of the option on 120,000 shares at
$5.81 per share expiring on June 12, 1999.
Non-Cash Stock Option Compensation Expense
During fiscal 1998 and 1997, the Company recorded non-cash compensation expense
of $316,000 and $244,800, respectively, under its stock option plans to
non-employees through the granting of 80,000 options and 97,500 options,
respectively. Of the non-cash compensation expense recorded in fiscal 1998,
$136,000 pertained to the fourth quarter. Also during fiscal 1997, 292,963
Common Shares were issued in connection with the cashless exercise of stock
options relating to 350,000 shares.
Stock Option Pro Forma and Summary Information
FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"), requires the Company to provide pro forma information regarding net loss
and net loss per share as if compensation costs for the Company's stock options
plans and other stock awards had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. The Company estimates the fair
value of each stock award (those under the stock option plans described above
plus the 75,000 warrants for consulting services) (see note 7) at the grant date
by using the Black-Scholes option-pricing model with the following weighted
average assumptions used respectively; dividend yield of zero percent for all
years; expected volatility of 70 to 100 percent; risk-free interest rates
between 4.8 and 5.8 percent; and expected lives of 2 to 5 years.
Under the accounting provisions for SFAS No. 123, the Company's net loss
available to Common Shareholders and basic and diluted per Common Share would
have been increased by the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
- ------------------------- ------------- -------------
<S> <C> <C>
Net Loss available to Common Shareholders
As reported $ (4,593,713) $ (2,762,009)
Pro forma (4,906,273) (3,195,634)
Net loss per Common Share
As reported $ (.42) $ (.30)
Pro forma $ (.45) (.34)
</TABLE>
During the initial phase-in period of SFAS No. 123, the effect on pro forma
results are not likely to be representative of the effects on pro forma results
in future years since options vest over several years and additional awards
could be made each year.
A summary of the status of the Company's stock option plans as of September 30,
1998 and 1997 and the changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
---------------- --------------
<S> <C> <C>
FISCAL 1997:
Outstanding October 1, 1996 1,586,000 $ 0.58
Granted 1,054,000 $ 5.66
Canceled/expired (25,000) $ 0.50
Exercised (942,500) $ 0.57
=========
Outstanding September 30, 1997 1,672,500 $ 3.79
=========
Exercisable at September 30, 1997 1,016,500 $ 2.55
=========
Weighted average fair value of options granted during the year $ 1.51
========
</TABLE>
F-14
<PAGE> 42
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C> <C>
FISCAL 1998:
Outstanding October 1, 1997 1,672,500 $ 3.79
Granted 567,600 $ 7.46
Canceled/expired (743,200) $ 5.81
Exercised (158,800) $ 1.35
=========
Outstanding September 30, 1998 1,338,100 $ 4.51
=========
Exercisable at September 30, 1998 898,568 $ 2.84
=========
Weighted average fair value of options granted during the year $ 0.52
========
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.50-$ 0.55 480,000 2.40 $ 0.52 480,000 $ 0.52
$ 3.59-$ 4.48 285,000 3.48 4.03 155,668 4.20
$ 4.98-$ 5.90 210,000 1.94 5.81 205,000 5.83
$ 7.81 63,100 1.78 7.81 47,900 7.81
$ 8.50 250,000 4.79 8.50 10,000 8.50
$16.00 50,000 4.01 16.00 -- --
------------- ----------- ----------- --------- ----------- ---------
$0.50-$ 16.00 1,338,100 3.03 $ 4.51 898,568 $ 2.84
============= =========== =========== ========= =========== =========
</TABLE>
Employee Benefit - 401(k) Plan
On January 1, 1998, the Company established a 401(k) plan covering its
employees. The plan originated service effectively in June 1998. Matching
contributions are made on behalf of all participants at the discretion of the
Board of Directors. During the fiscal year ended September 30, 1998, the Company
made no matching contributions.
9. COMMITMENTS AND CONTINGENCIES
Facility
The Company and NCI, a company related through common management and ownership
has a joint lease office space in San Diego, California (see note 4). The lease
expires on July 31, 2000. The total operating lease obligation under the joint
lease for office space is $326,227 of which the Company's share of minimum
commitments is as follows:
<TABLE>
<S> <C>
Years ending:
1999 $ 96,603
2000 83,625
--------
$180,228
========
</TABLE>
The Company could become obligated for the entire lease should NCI default on
its share of payments thereon.
Automobile Leases.
The Company has three automobile lease obligations with terms of 24 to 36
months. All leases will expire as of September 2001 and are reported as
operating leases within the financial statements. The obligations under these
leases are as follows:
F-15
<PAGE> 43
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C>
Years ending:
1999 $31,452
2000 16,648
2001 10,000
-------
$58,100
=======
</TABLE>
Equipment Operating Lease
The Company has a 36 month equipment lease obligation which is reported as an
operating lease within the financial statements. The lease expires in September
2000. The obligations under this lease is as follows:
<TABLE>
Years ending:
<S> <C>
1999 $18,868
2000 14,151
-------
$33,019
=======
</TABLE>
Employment Agreements
The company has entered into four employment agreements with executive officers
and one key employee. These agreements are each for three-year terms expiring
from August, 2000 to September, 2001. The agreements may be automatically
renewed for one-year terms. The agreements provide for minimum annual salaries
ranging from $60,000 to $240,000, a total of $530,000, in the aggregate. Certain
of the agreements provide for up to twelve months severance for certain
terminations and payments for the term of the agreement (or in one case twelve
months, if longer) on certain changes in control.
10. MAJOR CUSTOMERS, FINANCIAL INSTRUMENTS, CONCENTRATIONS OF CREDIT RISK
AND EXPORT SALES
During the year ended September 30, 1998, sales to three individual customers
accounted for 19%, 18% and 10% of total revenue. During the year ended September
30, 1997, sales to three individual customers accounted for 30%, 14% and 13% of
total revenues.
11. SUPPLIER AGREEMENTS
Finished consumer products are purchased from a variety of foreign and domestic
sources under contract or by purchase order. In fiscal 1998, the Company sourced
certain finished products representing approximately 81% of its net revenues
from outside foreign manufacturers. The Company has relationships with a number
of high quality, low-cost foreign manufacturers who provide the Company with a
diverse line of consumer electronic products. The Company believes this
diversification is such that it is not reliant on any one supplier.
F-16
<PAGE> 44
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997
- ------------------------- -------- --------
<S> <C> <C>
Non-cash financing activities:
Convertible notes exchanged for Common Stock $375,000 $625,000
Interest paid by issuance of Common Stock 18,206 16,310
Cash paid for interest -- 170
Bonus paid in exchange for payment on officer note receivable 125,255 --
======== ========
</TABLE>
13. SUBSEQUENT EVENT
On December 24, 1998 the Company issued 172,750 shares of Series B Preferred
Stock, par value $.00001 ("Preferred Stock") for cash at $10.00 per share for
gross proceeds of $1,727,500. The dollar amount of Preferred Stock, increased by
$.60 per share of Preferred Stock per annum and other adjustments, is
convertible one or more times into fully paid and nonassessable shares of Common
Stock of the Company at a conversion price which is the lower of (i) $5.00 per
share or (ii) 92% of the average of the five days closing bid market price prior
to conversion, but in no event less than $3.50 per share. The shares of
Preferred Stock may be called by the Company for conversion if the Common Stock
market price exceeds $12.00 per share for ten days and certain conditions are
met. The Preferred Stock shall be subject to automatic conversion on November
30, 2001. In connection with the sale of Preferred Stock the Company issued
warrants to purchase 172,750 shares of Common Stock at $6.00 per share until
November 30, 2001 ("Warrants"). The Company intends to use the net proceeds of
approximately $1,712,000 for general corporate purposes.
The Company has received subscriptions for an additional 28,850 shares of Series
B Preferred Stock. The following pro forma condensed balance sheet assumes the
sale of an aggregate of 201,600 shares of Preferred Stock and the estimated
valuation of the warrants granted as if the transaction was completed as of
September 30, 1998:
<TABLE>
<CAPTION>
Pro Forma As
Actual Adjustment Adjusted
------------ ---------- ------------
<S> <C> <C> <C>
Current assets $ 1,266,721 $2,000,000 $ 3,266,721
Long-term assets 417,024 -- 417,024
------------ ---------- ------------
$ 1,683,745 $2,000,000 $ 3,683,745
============ ========== ============
Current liabilities $ 280,833 -- $ 280,833
Preferred stock - net -- 2 2
Common Stock 114 -- 114
Additional paid-in capital 10,180,265 2,348,998 12,529,263
Other (13,454) -- (13,454)
Accumulated deficit (8,764,013) (349,000) (9,113,013)
------------ ---------- ------------
Total stockholders' equity 1,402,912 2,000,000 3,402,912
------------ ---------- ------------
$ 1,683,745 $2,000,000 $ 3,683,745
============ ========== ============
</TABLE>
F-17
<PAGE> 45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN TECHNOLOGY CORPORATION
December 29, 1998
By: /s/ CORNELIUS J. BROSNAN
----------------------------------
Cornelius J. Brosnan
Chairman, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: December 29, 1998 By /s/ CORNELIUS J. BROSNAN
----------------------------------
Cornelius J. Brosnan, Chairman,
President and Chief Executive Officer
and Director
(Principal Executive Officer)
Date: December 29, 1998 By /s/ ROBERT PUTNAM
----------------------------------
Robert Putnam, Vice President,
Treasurer and Assistant Secretary
(Principal Financial and Accounting
Officer)
Date: December 29, 1998 By /s/ ELWOOD G. NORRIS
----------------------------------
Elwood G. Norris
Chief Technology Officer and Director
Date: December 29, 1998 By /s/ RICHARD M. WAGNER
----------------------------------
Richard M. Wagner
Secretary and Director
Date: December 29, 1998 By /s/ O'CONNELL J. BENJAMIN
----------------------------------
O'Connell J. Benjamin
Director
Date: December 29, 1998 By /s/ DAVID J. CARTER
----------------------------------
David J. Carter
Director
<PAGE> 1
Exhibit 3.1.4
CORRECTED
CERTIFICATE OF DESIGNATIONS
OF
SERIES B PREFERRED STOCK
OF
AMERICAN TECHNOLOGY CORPORATION,
A DELAWARE CORPORATION
-------------------------
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
-------------------------
AMERICAN TECHNOLOGY CORPORATION, a Delaware corporation (the
"Corporation"), does hereby certify:
I. The name of the Corporation is American Technology Corporation.
II. The instrument being corrected is entitled: Certificate of Designations of
Series B Preferred Stock, which was filed with the Secretary of State of the
State of Delaware on December 14, 1998.
III. The inaccuracies or defects of said Certificate to be corrected are several
typographical errors contained in Section 4(a), 4(b), 5(d) and 5(k) of said
Certificate.
IV. The Corporation has not issued any Series B Preferred Stock as of the date
of this correction.
V. The Corporation certifies that pursuant to the authority contained in its
Certificate of Incorporation (the "Certificate of Incorporation") and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors of the Corporation adopted the
following resolution, which resolution remains in full force and effect on the
date hereof, and which as corrected should read in its entirety as follows:
RESOLVED, that there is hereby established a series of authorized
preferred stock having a par value of $.00001 per share, which series shall be
designated as "Series B Preferred Stock," shall consist of 250,000 shares and
shall have the following voting powers, preferences and relative, participating,
optional and other special rights, and qualifications, limitations and
restrictions thereof as follows:
1.
<PAGE> 2
1. DESIGNATION AND AMOUNT. The designation of the series of Preferred
Stock shall be "Series B Preferred Stock," par value $.00001 per share (the
"Series B Preferred Stock"). The number of authorized shares of Series B
Preferred Stock shall be 250,000. The Series B Preferred Stock shall have an
initial issue price of $10.00 per share (the "Original Issue Price"). The date
on which any shares of Series B Preferred Stock are first issued is referred to
herein as the "Original Issue Date."
2. DIVIDENDS. The holders of shares of Series B Preferred Stock shall be
entitled to receive, on an as-if-converted to Common Stock basis, when, as and
if a cash dividend on the Corporation's common stock, par value $.00001 per
share (the "Common Stock"), is declared by the Board of Directors out of funds
legally available therefor, a cash dividend in a per share amount per share of
Series B Preferred Stock equal to the amount of the cash dividend declared on
the number of shares of Common Stock into which such Series B Preferred Stock is
convertible (as adjusted for any stock splits, reverse stock splits,
reorganizations, stock dividends, recapitalizations and the like for such
shares).
3. LIQUIDATION.
(a) PREFERENCE UPON LIQUIDATION, DISSOLUTION OR WINDING UP. In the
event of any liquidation, dissolution or winding up of the affairs of the
Corporation (any or all of such events, a "liquidation"), whether voluntary or
involuntary, subject to the prior preferences and other rights of any Senior
Stock (as defined below), if any, the holders of shares of Series B Preferred
Stock then outstanding shall be entitled pari passu as if members of a single
class of securities with the holders of any Parity Stock (as defined below), if
any, to be paid out of the assets of the Corporation before any payment shall be
made to the holders of Junior Stock (as defined below) an amount per share equal
to the Conversion Value (as defined in Section 5(a) below), plus any declared
but unpaid dividends (the "Liquidation Amount"). Except as provided in this
Section 3(a), holders of Series B Preferred Stock shall not be entitled to any
distribution in the event of liquidation, dissolution or winding up of the
affairs of the Corporation. The term "Junior Stock" shall mean Common Stock or
any other class or series of stock ranking junior to the Series B Preferred
Stock in respect of the right to receive dividends or the right to participate
in any distribution upon liquidation, the term "Senior Stock" shall mean any
class or series of stock of the Corporation authorized after the date of
issuance of the Series B Preferred Stock ranking senior to the Series B
Preferred Stock in respect of the right to receive dividends or the right to
participate in any distribution upon liquidation, and the term "Parity Stock"
shall mean any class or series of stock of the Corporation authorized after the
date of issuance of the Series B Preferred Stock ranking on a parity with the
Series B Preferred Stock in respect of the right to receive dividends or the
right to participate in any distribution upon liquidation.
(b) MERGER OR SALE OF ASSETS. A merger of the Corporation in which
holders of more than 50% of the outstanding Common Stock of the Corporation
before the merger do not hold more than 50% of the outstanding Common Stock of
the Corporation after the merger, or a sale of all or substantially all of the
Corporation's assets, shall be deemed to be a liquidation for purposes of this
Section 3; provided, however, that a merger, consolidation or reorganization
where the Corporation is the surviving entity, or a merger of the Corporation
into a wholly-owned subsidiary shall not be deemed a liquidation.
2.
<PAGE> 3
(c) INSUFFICIENT ASSETS. If, upon any liquidation of the Corporation,
the assets of the Corporation are insufficient to pay the holders of shares of
the Series B Preferred Stock and any Parity Stock, if any, then outstanding the
full amount to which they shall be entitled, such assets shall be distributed to
each holder of the Series B Preferred Stock and Parity Stock, if any, pro rata
based on the number of shares of Common Stock into which the Series B Preferred
Stock and Parity Stock, if any, held by each is convertible.
(d) RIGHTS OF OTHER HOLDERS. In the event of any liquidation, after
payment shall have been made to the holders of the Series B Preferred Stock and
Parity Stock, if any, of all preferential amounts to which they shall be
entitled, the holders of shares of Junior Stock and other capital stock of the
Corporation shall receive such amounts as to which they are entitled by the
terms thereof.
4. VOTING RIGHTS.
(a) VOTING. Each holder of shares of Series B Preferred Stock shall be
entitled to one (1) vote for each share of Common Stock then issuable upon
conversion of each share of Series B Preferred Stock thereof held on any matter
submitted to the Corporation's stockholders for their approval or consent.
Except as otherwise required by law or expressly provided herein, the holders of
the Series B Preferred Stock shall vote equally with the shares of Common Stock
of the Company and not as a separate class on any matter to voted upon by the
stockholders of the Company.
(b) CERTIFICATE OF INCORPORATION; CERTAIN STOCK. The affirmative vote
or consent of the holders of a majority of the outstanding shares of Series B
Preferred Stock, voting separately as a class, will be required for (i) any
amendment, alteration, or repeal, whether by merger or consolidation or
otherwise, of the Corporation's Certificate of Incorporation if the amendment,
alteration, or repeal materially and adversely affects the powers, preferences,
or special rights of the Series B Preferred Stock, (ii) any amendment,
alteration, or repeal of this Certificate of Designations, or (iii) the creation
or issuance of any Senior Stock; provided, however, that any increase in the
authorized preferred stock of the Corporation or the creation and issuance of
any Junior Stock shall not be deemed to affect materially and adversely such
powers, preferences or special rights and any such increase or creation and
issuance may be made without any such vote by the holders of the Series B
Preferred Stock, except as otherwise required by law.
5. CONVERSION RIGHTS.
(a) OPTIONAL CONVERSION OF SERIES B PREFERRED STOCK. The holder of any
shares of Series B Preferred Stock shall have the right, at such holder's
option, at any time or from time to time to convert any or all of such holder's
shares of Series B Preferred Stock into such number of fully paid and
nonassessable shares of Common Stock (the "Conversion Shares") as determined for
each share of Series B Preferred Stock by dividing the Conversion Value (as
defined below) by the Conversion Price (as defined below). The "Conversion
Value" per share means, as of any date, the sum of (i) $10.00; provided,
however, that if the registration statement (the "Registration Statement")
required to be filed by the Company pursuant to Section 6.2 of that certain
Series B Preferred Stock and Warrant Purchase Agreement between the Corporation
and the original holders of shares of Series B Preferred Stock is not declared
effective by the
3.
<PAGE> 4
Securities and Exchange Commission (the "SEC") by May 1, 1999, then such $10.00
amount shall be increased by one percent (1%) for the first thirty (30) day
period after May 1, 1999 (pro-rated for any period less than 30 days) and by an
additional three percent (3%) for each thirty (30) day period after May 1, 1999
(pro-rated for any period less than 30 days) until either such Registration
Statement is declared effective by the SEC or until December 31, 1999 (whichever
occurs earlier), plus (ii) an amount which accrues from the Original Issue Date
at a rate of $0.60 per annum, computed on the basis of a 360-day year to the
date of conversion. The "Conversion Price" shall be the lesser of (i) $5.00 per
share (as adjusted for any stock splits, reorganizations, dividends,
recapitalizations and the like), or (ii) ninety-two percent (92%) of the average
closing bid price of the Corporation's Common Stock as quoted on the principal
exchange or market on which such securities are traded (the "Market Price") for
the five (5) trading days immediately preceding the date of conversion;
provided, however, that in no event shall the Conversion Price be less than
$3.50 per share; and provided, further, that no such conversion shall be made
prior to May 31, 1999 at a Conversion Price of less than $5.00 per share (as
adjusted for any stock splits, reorganizations, dividends, recapitalizations and
the like). For purposes of this Section 5(a) if on any date there shall be no
reported closing bid price, the Market Price on such date shall be the closing
bid price on the date next preceding such date on which a closing bid price for
such security has been reported. Notwithstanding anything to the contrary set
forth above, each such conversion at the option of the holder pursuant to this
Section 5(a) shall cover at least the total number of shares of Series B
Preferred Stock then held by such holder or a number of shares of Series B
Preferred Stock having an aggregate Conversion Value of at least $100,000. The
Conversion Shares and the Conversion Price are subject to certain adjustments as
set forth herein, and the terms Conversion Shares and Conversion Price as used
herein shall as of any time be deemed to include all such adjustments to be
given effect as of such time in accordance with the terms hereof.
Upon the exercise of the option of the holder of any shares of Series B
Preferred Stock to convert Series B Preferred Stock into Common Stock, the
holder of such shares of Series B Preferred Stock to be converted shall
surrender the certificates representing the shares of Series B Preferred Stock
so to be converted in the manner provided in Section 5(d) below. Immediately
following such conversion, the rights of the holders of the Series B Preferred
Stock that has been converted (other than the right to receive dividends unpaid
as of the date of such conversion) shall cease and the persons entitled to
receive the Common Stock upon the conversion of Series B Preferred Stock shall
be treated for all purposes (other than the right to receive dividends unpaid as
of the date of such conversion) as having become the owners of such Common
Stock.
(b) AUTOMATIC CONVERSION. Each remaining outstanding share of Series B
Preferred Stock shall be automatically converted into shares of Common Stock on
November 30, 2001 in accordance with the provisions of Section 5(a) hereof.
Pursuant to this Section 5(b), on the Conversion Date (as defined below), all
outstanding shares of Series B Preferred Stock shall be converted into that
number of shares of Common Stock as determined in accordance with Section 5(a)
hereof as if the conversion of such number of shares of Series B Preferred Stock
were made by the holders thereof in accordance therewith without any further
action on the part of such holders.
4.
<PAGE> 5
(c) CONVERSION AT OPTION OF CORPORATION. If for any ten (10)
consecutive trading days the Market Price of the Corporation's Common Stock is
at least $12.00 per share (as adjusted for stock splits, reorganizations,
dividends, recapitalizations and the like), then at any time within ten (10)
business days after the end of such ten (10) trading day period, the Corporation
shall have the right to require the conversion of all outstanding shares of
Series B Preferred Stock into shares of Common Stock in accordance with the
provisions of Section 5(a) hereof; provided, however, in the event that the
Corporation elects to convert shares of Series B Preferred Stock to Common Stock
pursuant to the terms of this Section 5(c) prior to December 31, 1999, the
Corporation shall only be able to require such conversion if a Registration
Statement (as defined in Section 5(a)) filed with the SEC is then effective. For
purposes of this Section 5(c), if on any date there shall be no reported closing
bid price, the "Market Price" on such date shall be the closing bid price on the
date next preceding such date on which a closing bid price for such security has
been reported. Pursuant to this Section 5(c), on the Conversion Date (as defined
below), all outstanding shares of Series B Preferred Stock shall be converted
into that number of shares of Common Stock as determined in accordance with
Section 5(a) hereof as if the conversion of such number of shares of Series B
Preferred Stock were made by the holders thereof in accordance therewith without
any further action on the part of such holders.
(d) DELIVERY OF STOCK CERTIFICATES. The holder of any shares of Series
B Preferred Stock may exercise the optional conversion right pursuant to Section
5(a) above by delivering to the Corporation or its duly authorized transfer
agent during regular business hours at the office of the Corporation the
certificate or certificates for the shares of Series B Preferred Stock to be
converted, duly endorsed or assigned either in blank or to the Corporation (if
required by it), accompanied by written notice (the "Conversion Notice") stating
that such holder elects to convert such shares of Series B Preferred Stock and
shall provide a certificate to the Corporation or its duly authorized transfer
agent as to the date of such conversion. Upon the occurrence of an automatic
conversion pursuant to Section 5(b) above or conversion at the option of the
Corporation pursuant to Section 5(c) above, the Corporation shall deliver notice
to each holder of Series B Preferred Stock and the holder of any shares of
Series B Preferred Stock shall deliver to the Corporation at the office of the
Corporation the certificate or certificates for all shares of Series B Preferred
Stock then held by such holder, duly endorsed or assigned either in blank or to
the Corporation (if requested by it). Conversion shall be deemed to have been
effected (1) in the case of an optional conversion pursuant to Section 5(a), on
the date when the aforesaid delivery of the Conversion Notice is made if such
day is a business day and otherwise on the business day following the date of
the aforesaid delivery, and (2) in the case of an automatic conversion pursuant
to Section 5(b) on November 30, 2001, or (3) in the case of conversion at the
option of the Corporation pursuant to Section 5(c), upon the date of the notice,
and in each case such date is referred to herein as the "Conversion Date."
Within five (5) business days, the Corporation, through its transfer agent, if
any, shall issue and deliver to or upon the written order of such holder, to the
place designated by such holder, a certificate or certificates for the number of
full shares of Common Stock to which such holder is entitled and a check or cash
in respect of any fractional interest in a share of Common Stock, as provided
below; provided, however, that in the case of a conversion in connection with
liquidation, no such certificates need be issued. The person in whose name the
certificate or certificates for Common Stock are to be issued shall be deemed to
have become the stockholder of record in respect of such Common Stock on the
applicable Conversion Date unless the transfer books of the Corporation are
closed on that date,
5.
<PAGE> 6
in which event such holder shall be deemed to have become the stockholder of
record in respect of such Common Stock on the next succeeding date on which the
transfer books are open, but the Conversion Value and the Conversion Price shall
be that in effect on the Conversion Date. Upon conversion of only a portion of
the number of shares covered by a stock certificate representing shares of
Series B Preferred Stock surrendered for conversion, the Corporation shall issue
and deliver to or upon the written order of the holder of the stock certificate
so surrendered for conversion, at the expense of the Corporation, a new stock
certificate covering the number of shares of Series B Preferred Stock
representing the unconverted portion of the certificate so surrendered. Any
transfer taxes applicable to the above described transactions shall be paid by
such transferee. The Corporation shall not be required to pay any tax which may
be payable in respect of any transfer involved in the issuance and delivery of
Common Stock or the reissuance of the Preferred Stock in a name other than that
in which the shares of Series B Preferred Stock so converted were registered,
and no such issuance or delivery shall be made unless and until the person
requesting such issuance has paid to the Corporation the amount of any such tax
or has established to the satisfaction of the Corporation that such tax has been
paid.
(e) NO FRACTIONAL SHARES OF COMMON STOCK.
(i) No fractional shares of Common Stock shall be issued upon
conversion of shares of Series B Preferred Stock and in lieu thereof, the
Corporation shall pay to the holder of such fractional share interest cash in
respect of such fractional interest in an amount equal to the Market Price on
the Conversion Date multiplied by such fractional interest. The holders of
fractional interests shall not be entitled to any rights as stockholders of the
Corporation in respect of such fractional interests. In determining the number
of shares of Common Stock and the payment, if any, in lieu of fractional shares
that a holder of Series B Preferred Stock shall receive, the total number of
shares of Series B Preferred Stock surrendered for conversion by such holder
shall be aggregated.
(ii) On the date, if any, on which dividends are paid in full to
all holders of Series B Preferred Stock following the optional conversion
pursuant to Section 5(a) of all or any portion of the Series B Preferred Stock,
the Corporation shall pay any dividends on such converted Series B Preferred
Stock to the date of such conversion. Dividends, if any, with respect to all
shares converted pursuant to Section 5(b) or 5(c) hereof shall be paid in full
on the Conversion Date out of funds legally available therefor.
(f) CHANGES IN COMMON STOCK. If any capital reorganization or
reclassification of the capital stock of the Corporation, or consolidation or
merger of the Corporation with another corporation, or the sale, transfer or
other disposition of all or substantially all of its assets to another
corporation for cash or stock of such other corporation, shall be effected,
then, as a condition of such reorganization, reclassification, consolidation,
merger, sale, transfer or other disposition, lawful and adequate provision shall
be made whereby each holder of Series B Preferred Stock shall thereafter have
the right to purchase and receive upon the basis and upon the terms and
conditions herein specified and in lieu of the shares of the Common Stock of the
Corporation immediately theretofore issuable upon conversion of the Series B
Preferred Stock, such shares of stock, securities or properties as may be
issuable or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such Common Stock
immediately theretofore issuable upon conversion of the Series B
6.
<PAGE> 7
Preferred Stock had such reorganization, reclassification, consolidation,
merger, sale, transfer or other disposition not taken place, and in any such
case appropriate provisions shall be made with respect to the rights and
interests of each holder of Series B Preferred Stock to the end that the
provisions hereof (including without limitation provisions for adjustment of the
Conversion Price) shall thereafter be applicable, as nearly equivalent as may be
practicable in relation to any shares of stock, securities or properties
thereafter deliverable upon the exercise thereof. The Corporation shall not
effect any such consolidation, merger, sale, transfer or other disposition,
unless prior to or simultaneously with the consummation thereof the successor
corporation (if other than the Corporation) resulting from such consolidation or
merger or the corporation purchasing or otherwise acquiring such properties
shall assume, by written instrument executed and mailed or delivered to the
holders of Series B Preferred Stock at the last address of such holders
appearing on the books of the Corporation, the obligation to deliver to such
holders such shares of stock, securities or properties as, in accordance with
the foregoing provisions, such holders may be entitled to acquire. The above
provisions of this subparagraph shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, sales, transfers,
or other dispositions.
(g) STOCK TO BE RESERVED. The Corporation will at all times reserve and
keep available out of its authorized Common Stock, solely for the purpose of
issue upon the conversion of Series B Preferred Stock as herein provided, such
number of shares of Common Stock as shall then be issuable upon the conversion
of all outstanding Series B Preferred Stock. The Corporation covenants that all
shares of Common Stock which shall be so issuable shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, free from preemptive
or similar rights on the part of the holders of any shares of capital stock or
securities of the Corporation, and free from all liens and charges with respect
to the issue thereof; and without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action as may
be requisite to assure that the par value, if any, per share of the Common Stock
is at all times equal to or less than the then effective Conversion Price. The
Corporation will take all such action as may be necessary to assure that such
shares of Common Stock may be so issued without violation by the Corporation of
any applicable law or regulation or agreement, or of any requirements of any
domestic securities exchange upon which the Common Stock may be listed. Without
limiting the foregoing, the Corporation will take all such action as may be
necessary to assure that, upon conversion of any of the Series B Preferred
Stock, an amount equal to the lesser of (i) the par value of each share of
Common Stock outstanding immediately prior to such conversion, or (ii) the
Conversion Price shall be credited to the Corporation's stated capital account
for each share of Common Stock issued upon such conversion, and that, if clause
(i) above is applicable, the balance of the Conversion Price of Series B
Preferred Stock converted shall be credited to the Corporation's capital surplus
account.
(h) CLOSING OF BOOKS. The Corporation will at no time close its
transfer books against the transfer of any Series B Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any Series B
Preferred Stock in any manner which interferes with the timely conversion of
such Series B Preferred Stock.
(i) TAXES. The Corporation shall pay all documentary, stamp or other
transactional taxes attributable to the issuance or delivery of shares of
capital stock of the Corporation upon conversion of any shares of Series B
Preferred Stock. The Corporation shall not, however, be
7.
<PAGE> 8
required to pay any tax which may be payable in respect of any transfer involved
in the issuance and delivery of Common Stock or the reissuance of the Series B
Preferred Stock in a name other than that in which the shares of Series B
Preferred Stock so converted were registered, and no such issuance or delivery
shall be made unless and until the person requesting such issuance has paid to
the Corporation the amount of any such tax or has established to the
satisfaction of the Corporation that such tax has been paid.
(j) EXCLUSION OF OTHER RIGHTS. Except as may otherwise be required by
law, the shares of Series B Preferred Stock shall not have any voting powers,
preferences and relative, participating, optional or other special rights, other
than those specifically set forth in this Certificate of Designations and in the
Certificate of Incorporation.
(k) LIMITATION ON ISSUANCE OF CONVERSION SHARES; REDEMPTION.
Notwithstanding any adjustment of the Conversion Price made under this Section
5, and except as provided below, the Corporation shall not be obligated to issue
upon conversion of the Series B Preferred Stock, in the aggregate, more than
that number of shares of Common Stock equal to 19.99% of the number of shares of
Common Stock of the Corporation outstanding on the Original Issue Date (such
amount to be proportionately and equitably adjusted from time to time in the
event of stock splits, stock dividends, combinations, reverse stock splits,
reclassifications, capital reorganization and similar events relating to the
Common Stock) (the "Maximum Share Amount") if the issuance of shares of Common
Stock in excess of the Maximum Share Amount (such number of excess shares
referred to in the aggregate as the "Excess Shares") would constitute a breach
or violation of the Corporation's obligations under the rules or regulations of
Nasdaq or any other principal securities exchange or market upon which the
Common Stock is or becomes traded (the "Exchange Rules"). To the extent the
Corporation will be required, or it appears likely to the Board of Directors of
the Corporation that it will be required, to issue any Excess Shares as a result
of an adjustment to the Conversion Price, the Corporation shall, at its option,
either (i) promptly take such action that would enable it to issue such Excess
Shares without breaching or violating any Exchange Rules, including without
limitation, obtaining stockholder approval, or (ii) redeem the Excess Shares at
a redemption price equal to the Conversion Price. The number of shares
comprising the Maximum Share Amount (and if applicable, any Excess Shares to be
issued) shall be allocated among the holders of the shares of Series B Preferred
Stock pro rata based on the total number of shares of Series B Preferred Stock
then outstanding.
6. NO REDEMPTION. The Series B Preferred Stock shall not be redeemable by
the Corporation.
8.
<PAGE> 9
IN WITNESS WHEREOF, this Certificate has been subscribed this 22nd day of
December, 1998, by the undersigned who affirms that the statements made herein
are true and correct.
AMERICAN TECHNOLOGY CORPORATION
By: /s/ ROBERT PUTNAM
------------------------------
Name: Robert Putnam
Title: Assistant Secretary
9.
<PAGE> 1
Exhibit 4.4
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933 ("ACT"), AND THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE 25,000 SHARES OF COMMON STOCK
THIS CERTIFIES THAT L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, INC. and all
registered and permitted assigns ("Holder") is entitled to purchase, on or
before June 18, 2000, TWENTY-FIVE THOUSAND (25,000) shares of the common stock
("Common Stock" or "Shares") of AMERICAN TECHNOLOGY CORPORATION (the
"Corporation") upon exercise of this Warrant along with presentation of the full
purchase price as provided herein. The purchase price of the common stock upon
exercise (the "Warrant Shares") is equal to Sixteen Dollars ($16.00) per share
(the "Exercise Price"). This Warrant is granted for valuable consideration
received.
1. Exercise.
(a) This Warrant may be exercised one time on any business day on or before the
expiration date listed above by presentation and surrender hereof to the
Corporation at its principal office of a written exercise request and the
Exercise Price in lawful money of the United States of America in the form of a
wire transfer or check, subject to collection, for the Warrant Shares specified
in the exercise request. Upon receipt by the Corporation of an exercise request
and representations, together with proper payment of the Exercise Price, at such
office, the Holder shall be deemed to be the holder of record of the Warrant
Shares, notwithstanding that the stock transfer books of the Corporation shall
then be closed or that certificates representing such Warrant Shares shall not
then be actually delivered to the Holder. The Corporation shall pay any and all
transfer agent fees, documentary stamp or similar issue or transfer taxes
payable in respect of the issue or delivery of the Warrant Shares.
(b) At any time during the period from issuance to expiration (the "Exercise
Period"), the Holder may, at its option, exchange this Warrant, (a "Warrant
Exchange"), into the number of Warrant Shares determined in accordance with this
Section (1)(b), by surrendering this Warrant at the principal office of the
Company, accompanied by a written notice stating such Holder's intent to effect
such exchange, the number of Warrant Shares to be exchanged and the date on
which the Holder requests that such Warrant Exchange occur (the "Notice of
Exchange"). The Warrant Exchange shall take place on the date the Notice of
Exchange is received by the Company or such later date as may be specified in
the Notice of Exchange (the "Exchange Date"). Certificates for the shares
issuable upon such Warrant Exchange and, if applicable, a new Warrant of like
tenor evidencing the balance of the shares remaining subject to this Warrant,
shall be issued as of the Exchange Date and delivered to the Holder within ten
(10) days following the Exchange Date. In connection with any Warrant Exchange,
this Warrant shall represent the right to subscribe for and acquire the number
of Warrant Shares (rounded to the next highest integer) equal to (i) the number
of Warrant Shares specified by the Holder in its Notice of Exchange (the "Total
Number") less (ii) the number of Warrant Shares equal to the quotient obtained
by dividing (A) the product of the Total Number and the existing Exercise Price
by (B) the current market value of a share of Common Stock. Current market value
shall be the average closing trading price for the 5 trading day period prior to
the Exchange Date.
2. Adjustment of Exercise Price and Number of Shares Deliverable Upon Exercise
of Warrant.
The Exercise Price and the number of Shares purchasable upon the exercise of
this Warrant are subject to adjustment from time to time upon the occurrence of
the events enumerated in this paragraph.
(a) In case the Corporation shall at any time after the date of this Warrant:
(i) Pay a dividend of its shares of its Common Stock or make a
distribution in shares of its Common Stock with respect to its
outstanding Common Stock;
(ii) Subdivide its outstanding shares of Common Stock;
(iii) Combine its outstanding shares of Common Stock; or
(iv) Issue any other shares of capital stock by reclassification of
its shares of Common Stock;
1
<PAGE> 2
the Exercise Price in effect at the time of the record date of such dividend,
subdivision, combination, or reclassification shall be proportionately adjusted
so that Holder shall be entitled to receive the aggregate number and kind of
shares which, if this Warrant had been exercised prior to such event, Holder
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) In case the Corporation shall fix a record date for the issuance of rights,
options, or warrants or make a distribution of shares of Common Stock to all
(but not less than all) holders of its outstanding Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities convertible
into shares of Common Stock) at a price per share (or having a conversion price
per share, if a security convertible into Common Stock) less than the market
price of the shares (based on the closing price on the record date on NASDAQ or
a listed securities exchange of the Corporation's Common Stock, or if no such
quote is available, the shareholders equity on the date of the last financial
statement divided by the total number of shares outstanding) (the "Market
Price"), the Exercise Price to be in effect after such record date shall be
determined by multiplying the then current Exercise Price in effect immediately
prior to such record date by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on such record date plus the number
of shares of Common Stock which the aggregate offering price of the total number
of shares of Common Stock so to be offered (or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at such
Market Price and of which the denominator shall be the number of shares of
Common Stock outstanding on such record date plus the number of additional
shares of Common Stock to be offered for subscription or purchase (or into which
the convertible securities so to be offered are initially convertible). Such
adjustment shall be made successively whenever such a record date is fixed; and
in the event that such rights or warrants are not so issued, the Exercise Price
shall again be adjusted to be the Exercise Price which would then be in effect
if such record date had not been fixed.
(c) In case of any reorganization of the Corporation, or in case of any
reclassification or change of outstanding Common Stock issuable upon exercise of
this Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
split-up or combination of the Common Stock), or in case of any consolidation or
merger of the Company with or into another entity (other than a consolidation or
merger with a subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the property of the
Corporation, then, as a condition of such reorganization, reclassification,
change, consolidation, merger, sale, or conveyance, the Corporation or such
successor or purchasing entity, as the case may be, shall forthwith provide to
Holder a supplemental warrant (the "Supplemental Warrant") which will make
lawful and adequate provision whereby Holder shall have the right thereafter to
receive, upon exercise of such Supplemental Warrant, the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification, change, consolidation, merger, sale, or
conveyance by a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon exercise of this Warrant immediately prior to such
reorganization, reclassification, change, consolidation, merger, sale, or
conveyance. Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph. The above provisions of this paragraph shall
similarly apply to successive reorganizations, reclassifications, and changes of
Common Stock and to successive consolidations, mergers, sales, or conveyances.
3. Restrictions on Transfer.
Holder has been advised and understands that the Warrants and the Warrant Shares
purchasable thereby are characterized as "restricted securities" under the
federal securities laws because they are being acquired from Corporation in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act only in certain limited circumstances. Holder further understands that
the certificates evidencing the Warrant Shares will bear the following or
comparable legend: "These securities have not been registered under the
Securities Act of 1933. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under such Act or an opinion of counsel satisfactory to the
Company that such registration is not required or unless sold pursuant to Rule
144 under such Act."
The Holder understands that the Company may place, and may instruct any transfer
agent or depository for the Warrant Shares to place, a stop transfer notation in
the securities records in respect of the Warrant Shares.
2
<PAGE> 3
4. Registration Rights.
Holder shall have the right, at any time and from time to time until June 19,
2000, to include all of the shares purchased or purchasable upon the exercise of
this Warrant ( the "Registrable Shares") within any Registration Statement of
the Corporation filed by the Corporation covering shares of its Common Stock
other than a Registration Statement filed solely with respect to any employee
benefit plan of the Corporation or an offering solely related to an acquisition
or for which such Registrable Shares cannot, in the sole judgment of the
Company, be appropriately registered. The Corporation shall promptly give
written notice to Holder of any intended registration of its Common Stock not
less than forty-five (45) days prior to the anticipated effective date of the
Registration Statement, and Holder shall, within fifteen (15) days of receipt
thereof, notify the Corporation of the number of Registrable Shares it desires
to include in the Registration Statement. The number of Registrable Shares which
may be included by the Holder in any such Registration Statement may be
restricted by the Corporation if, in the opinion of the Corporation's managing
underwriter, the number of shares proposed to be sold by the Holder and by the
Corporation in such offering exceeds the number of securities which can be sold
in such offering. In such event, the Registrable Shares of Holder to be included
within such Registration Statement shall not exceed the number approved for
inclusion therein by the Corporation and its managing underwriter. All costs or
expenses, incident to the registration, qualification or listing of such
securities shall be paid by the Corporation, and the Corporation shall comply
with all reasonable requests of Holder made in connection with the registration,
qualification, listing or sale of Registrable Shares.
Each Holder of Warrants and Warrant Shares to be sold pursuant to any
Registration Statement (each, a "Distributing Holder") shall severally, and not
jointly, indemnify and hold harmless the Company, its officers and directors,
each underwriter and each person, if any, who controls the Company and such
underwriter, against any loss, claim, damage, expense or liability, joint or
several, as incurred, to which any of them may become subject under the
Securities Act or any other statute or at common law, in so far as such loss,
claim, damage, expense or liability (or actions in respect thereof) arises out
of or is based upon any untrue statement or alleged untrue statement of any
material fact contained in any such Registration Statement, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Distributing Holder specifically for use therein. Such Distributing Holder shall
reimburse the Company, such underwriter and each such officer, director or
controlling person for any legal or other expenses reasonably incurred by any of
them in connection with investigating or defending any such liability, as
incurred. Notwithstanding the foregoing, such indemnity with respect to such
preliminary prospectus or such final prospectus shall not inure to the benefit
of the Company, its officers or directors, or such underwriter (or such
controlling person of the Company or the underwriter) if the person asserting
any such loss, claim, damage, expense or liability purchased the securities that
are the subject thereof and did not receive a copy of the final prospectus (or
the final prospectus as then amended, revised or supplemented) at or prior to
the time such furnishing is required by the Securities Act in any case where any
such untrue statement or omission of a material fact contained in the
preliminary prospectus was corrected in the final prospectus (or, if contained
in the final prospectus, was subsequently corrected by amendment, revision or
supplement).
5. Public Offering Lock-Up.
In connection with any public registration of this Company's securities, the
Holder (and any transferee of Holder) agrees, upon the request of the Company or
the underwriter(s) managing such underwritten offering of the Company's
securities, not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of this Warrant, any of the shares of Common
Stock issuable upon exercise of this Warrant or any other securities of the
Company heretofore or hereafter acquired by Holder (other than those included in
the registration) without the prior written consent of the Company and such
underwriter(s), as the case may be, for a period of time not to exceed one
hundred eighty (180) days from the effective date of the registration. Upon
request by the Company, Holder (and any transferee of Holder) agrees to enter
into any further agreement in writing in a form reasonably satisfactory to the
Company and such underwriter(s). The Company may impose stop-transfer
instructions with respect to the securities subject to the foregoing
restrictions until the end of said 180-day period. Any shares issued upon
exercise of this Warrant shall bear an appropriate legend referencing this
lock-up provision.
3
<PAGE> 4
6. Assignment or Loss of Warrant.
(a) The Holder of this Warrant shall be entitled, without obtaining the consent
of the Corporation, to assign its interest in this Warrant, or any of the
Warrant Shares, in whole or in part to any person, provided, however, that the
transferee, prior to any such transfer, provides the Corporation with a legal
opinion, in form and substance satisfactory to the Company, that such transfer
will not violate the Act or any applicable state securities or blue sky laws.
Otherwise without obtaining the prior written consent of the Company, Holder
shall not transfer or assign its interest in this Warrant, or any of the Warrant
Shares prior to exercise, in whole or in part to any transferee.
(b) Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnification satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.
7. Reservation of Shares.
The Company hereby agrees that at all times there shall be reserved for issuance
and delivery upon exercise or exchange of this Warrant all shares of its Common
Stock or other shares of capital stock of the Company from time to time issuable
upon exercise or exchange of this Warrant. All such shares shall be duly
authorized and, when issued upon the exercise or exchange of the Warrant in
accordance with the terms hereof, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale (other than as provided in the
Company's articles of incorporation and any restrictions on sale set forth
herein or pursuant to applicable federal and state securities laws) and free and
clear of all preemptive rights.
The Holder shall not have any rights as a shareholder of the Company with regard
to the Warrant Shares prior to actual exercise resulting in the purchase of the
Warrant Shares.
8. Arbitration.
In the event that a dispute arises between the Corporation and the holder of
this Warrant as to any matter relating to this Warrant, the matter shall be
settled by arbitration in San Diego County, California in accordance with the
Rules of the American Arbitration Association and the award rendered by such
arbitrator(s) shall not be subject to appeal and may be entered in any federal
or state court located in San Diego County having jurisdiction thereof, and
actions or proceedings shall be brought in no other forum or venue.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers as of this 18th day of June, 1998.
AMERICAN TECHNOLOGY CORPORATION
/s/ CORNELIUS J. BROSNAN
Cornelius J. Brosnan, Chairman
/s/ RICHARD M. WAGNER
Richard M. Wagner, Corporate Secretary
4
<PAGE> 1
Exhibit 4.5
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933 ("ACT"), AND THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE 50,000 SHARES OF COMMON STOCK
THIS CERTIFIES THAT JONATHAN A. BERG and all registered and permitted assigns
("Holder") is entitled to purchase, on or before May 12, 2003, FIFTY THOUSAND
(50,000) shares of the common stock ("Common Stock" or "Shares") of AMERICAN
TECHNOLOGY CORPORATION (the "Corporation") upon exercise of this Warrant along
with presentation of the full purchase price as provided herein. The purchase
price of the common stock upon exercise (the "Warrant Shares") is equal to
Sixteen Dollars ($16.00) per share (the "Exercise Price"). This Warrant is
granted for valuable consideration received.
1. Exercise.
(a) This Warrant may be exercised one time, in whole or minimum increments of
10,000 shares, on any business day on or before the expiration date listed above
by presentation and surrender hereof to the Corporation at its principal office
of a written exercise request and the Exercise Price in lawful money of the
United States of America in the form of a wire transfer or check, subject to
collection, for the Warrant Shares specified in the exercise request. If this
Warrant should be exercised in part only, the Company shall, upon surrender of
this Warrant, execute and deliver a new Warrant evidencing the rights of the
Holder hereof to purchase the balance of the Warrant Shares purchasable
hereunder. Upon receipt by the Corporation of an exercise request and
representations, together with proper payment of the Exercise Price, at such
office, the Holder shall be deemed to be the holder of record of the Warrant
Shares, notwithstanding that the stock transfer books of the Corporation shall
then be closed or that certificates representing such Warrant Shares shall not
then be actually delivered to the Holder. The Corporation shall pay any and all
transfer agent fees, documentary stamp or similar issue or transfer taxes
payable in respect of the issue or delivery of the Warrant Shares.
(b) At any time during the period from issuance to expiration (the "Exercise
Period"), the Holder may, at its option, exchange this Warrant, in whole or
minimum increments of 10,000 shares (a "Warrant Exchange"), into the number of
Warrant Shares determined in accordance with this Section (1)(b), by
surrendering this Warrant at the principal office of the Company, accompanied by
a written notice stating such Holder's intent to effect such exchange, the
number of Warrant Shares to be exchanged and the date on which the Holder
requests that such Warrant Exchange occur (the "Notice of Exchange"). The
Warrant Exchange shall take place on the date the Notice of Exchange is received
by the Company or such later date as may be specified in the Notice of Exchange
(the "Exchange Date"). Certificates for the shares issuable upon such Warrant
Exchange and, if applicable, a new Warrant of like tenor evidencing the balance
of the shares remaining subject to this Warrant, shall be issued as of the
Exchange Date and delivered to the Holder within ten (10) days following the
Exchange Date. In connection with any Warrant Exchange, this Warrant shall
represent the right to subscribe for and acquire the number of Warrant Shares
(rounded to the next highest integer) equal to (i) the number of Warrant Shares
specified by the Holder in its Notice of Exchange (the "Total Number") less (ii)
the number of Warrant Shares equal to the quotient obtained by dividing (A) the
product of the Total Number and the existing Exercise Price by (B) the current
market value of a share of Common Stock. Current market value shall be the
average closing trading price for the 5 trading day period prior to the Exchange
Date.
2. Adjustment of Exercise Price and Number of Shares Deliverable Upon Exercise
of Warrant.
The Exercise Price and the number of Shares purchasable upon the exercise of
this Warrant are subject to adjustment from time to time upon the occurrence of
the events enumerated in this paragraph.
(a) In case the Corporation shall at any time after the date of this Warrant:
(i) Pay a dividend of its shares of its Common Stock or make a
distribution in shares of its Common Stock with respect to its
outstanding Common Stock;
(ii) Subdivide its outstanding shares of Common Stock;
<PAGE> 2
(iii) Combine its outstanding shares of Common Stock; or
(iv) Issue any other shares of capital stock by reclassification of
its shares of Common Stock;
the Exercise Price in effect at the time of the record date of such dividend,
subdivision, combination, or reclassification shall be proportionately adjusted
so that Holder shall be entitled to receive the aggregate number and kind of
shares which, if this Warrant had been exercised prior to such event, Holder
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, subdivision, combination, or reclassification. Such adjustment
shall be made successively whenever any event listed above shall occur.
(b) In case the Corporation shall fix a record date for the issuance of rights,
options, or warrants or make a distribution of shares of Common Stock to all
(but not less than all) holders of its outstanding Common Stock entitling them
to subscribe for or purchase shares of Common Stock (or securities convertible
into shares of Common Stock) at a price per share (or having a conversion price
per share, if a security convertible into Common Stock) less than the market
price of the shares (based on the closing price on the record date on NASDAQ or
a listed securities exchange of the Corporation's Common Stock, or if no such
quote is available, the shareholders equity on the date of the last financial
statement divided by the total number of shares outstanding) (the "Market
Price"), the Exercise Price to be in effect after such record date shall be
determined by multiplying the then current Exercise Price in effect immediately
prior to such record date by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on such record date plus the number
of shares of Common Stock which the aggregate offering price of the total number
of shares of Common Stock so to be offered (or the aggregate initial conversion
price of the convertible securities so to be offered) would purchase at such
Market Price and of which the denominator shall be the number of shares of
Common Stock outstanding on such record date plus the number of additional
shares of Common Stock to be offered for subscription or purchase (or into which
the convertible securities so to be offered are initially convertible). Such
adjustment shall be made successively whenever such a record date is fixed; and
in the event that such rights or warrants are not so issued, the Exercise Price
shall again be adjusted to be the Exercise Price which would then be in effect
if such record date had not been fixed.
(c) In case of any reorganization of the Corporation, or in case of any
reclassification or change of outstanding Common Stock issuable upon exercise of
this Warrant (other than a change in par value, or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
split-up or combination of the Common Stock), or in case of any consolidation or
merger of the Company with or into another entity (other than a consolidation or
merger with a subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the property of the
Corporation, then, as a condition of such reorganization, reclassification,
change, consolidation, merger, sale, or conveyance, the Corporation or such
successor or purchasing entity, as the case may be, shall forthwith provide to
Holder a supplemental warrant (the "Supplemental Warrant") which will make
lawful and adequate provision whereby Holder shall have the right thereafter to
receive, upon exercise of such Supplemental Warrant, the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification, change, consolidation, merger, sale, or
conveyance by a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon exercise of this Warrant immediately prior to such
reorganization, reclassification, change, consolidation, merger, sale, or
conveyance. Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph. The above provisions of this paragraph shall
similarly apply to successive reorganizations, reclassifications, and changes of
Common Stock and to successive consolidations, mergers, sales, or conveyances.
3. Restrictions on Transfer.
Holder has been advised and understands that the Warrants and the Warrant Shares
purchasable thereby are characterized as "restricted securities" under the
federal securities laws because they are being acquired from Corporation in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act only in certain limited circumstances. Holder further understands that
the certificates evidencing the Warrant Shares will bear the following or
comparable legend: "These securities have not been registered under the
Securities Act of 1933. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under such Act or an opinion of counsel satisfactory to the
Company that such registration is not required or unless sold pursuant to Rule
144 under such Act."
The Holder understands that the Company may place, and may instruct any transfer
agent or depository for the Warrant Shares to place, a stop transfer notation in
the securities records in respect of the Warrant Shares.
<PAGE> 3
4. Registration Rights.
Holder shall have the right, at any time and from time to time until May 12,
2003, to include all of the shares purchased or purchasable upon the exercise of
this Warrant (the "Registrable Shares") within any Registration Statement of
the Corporation filed by the Corporation covering shares of its Common Stock
other than a Registration Statement filed solely with respect to any employee
benefit plan of the Corporation or an offering solely related to an acquisition
or for which such Registrable Shares cannot, in the sole judgment of the
Company, be appropriately registered. The Corporation shall promptly give
written notice to Holder of any intended registration of its Common Stock not
less than forty-five (45) days prior to the anticipated effective date of the
Registration Statement, and Holder shall, within fifteen (15) days of receipt
thereof, notify the Corporation of the number of Registrable Shares it desires
to include in the Registration Statement. The number of Registrable Shares which
may be included by the Holder in any such Registration Statement may be
restricted by the Corporation if, in the opinion of the Corporation's managing
underwriter, the number of shares proposed to be sold by the Holder and by the
Corporation in such offering exceeds the number of securities which can be sold
in such offering. In such event, the Registrable Shares of Holder to be included
within such Registration Statement shall not exceed the number approved for
inclusion therein by the Corporation and its managing underwriter. All costs or
expenses, incident to the registration, qualification or listing of such
securities shall be paid by the Corporation, and the Corporation shall comply
with all reasonable requests of Holder made in connection with the registration,
qualification, listing or sale of Registrable Shares.
Each Holder of Warrants and Warrant Shares to be sold pursuant to any
Registration Statement (each, a "Distributing Holder") shall severally, and not
jointly, indemnify and hold harmless the Company, its officers and directors,
each underwriter and each person, if any, who controls the Company and such
underwriter, against any loss, claim, damage, expense or liability, joint or
several, as incurred, to which any of them may become subject under the
Securities Act or any other statute or at common law, in so far as such loss,
claim, damage, expense or liability (or actions in respect thereof) arises out
of or is based upon any untrue statement or alleged untrue statement of any
material fact contained in any such Registration Statement, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Distributing Holder specifically for use therein. Such Distributing Holder shall
reimburse the Company, such underwriter and each such officer, director or
controlling person for any legal or other expenses reasonably incurred by any of
them in connection with investigating or defending any such liability, as
incurred. Notwithstanding the foregoing, such indemnity with respect to such
preliminary prospectus or such final prospectus shall not inure to the benefit
of the Company, its officers or directors, or such underwriter (or such
controlling person of the Company or the underwriter) if the person asserting
any such loss, claim, damage, expense or liability purchased the securities that
are the subject thereof and did not receive a copy of the final prospectus (or
the final prospectus as then amended, revised or supplemented) at or prior to
the time such furnishing is required by the Securities Act in any case where any
such untrue statement or omission of a material fact contained in the
preliminary prospectus was corrected in the final prospectus (or, if contained
in the final prospectus, was subsequently corrected by amendment, revision or
supplement).
5. Public Offering Lock-Up.
In connection with any public registration of this Company's securities, the
Holder (and any transferee of Holder) agrees, upon the request of the Company or
the underwriter(s) managing such underwritten offering of the Company's
securities, not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of this Warrant, any of the shares of Common
Stock issuable upon exercise of this Warrant or any other securities of the
Company heretofore or hereafter acquired by Holder (other than those included in
the registration) without the prior written consent of the Company and such
underwriter(s), as the case may be, for a period of time not to exceed one
hundred eighty (180) days from the effective date of the registration. Upon
request by the Company, Holder (and any transferee of Holder) agrees to enter
into any further agreement in writing in a form reasonably satisfactory to the
Company and such underwriter(s). The Company may impose stop-transfer
instructions with respect to the securities subject to the foregoing
restrictions until the end of said 180-day period. Any shares issued upon
exercise of this Warrant shall bear an appropriate legend referencing this
lock-up provision.
<PAGE> 4
6. Assignment or Loss of Warrant.
(a) The Holder of this Warrant shall be entitled, without obtaining the consent
of the Corporation, to assign its interest in this Warrant, or any of the
Warrant Shares, in whole or in part to any person, provided, however, that the
transferee, prior to any such transfer, provides the Corporation with a legal
opinion, in form and substance satisfactory to the Company, that such transfer
will not violate the Act or any applicable state securities or blue sky laws.
Otherwise without obtaining the prior written consent of the Company, Holder
shall not transfer or assign its interest in this Warrant, or any of the Warrant
Shares prior to exercise, in whole or in part to any transferee.
(b) Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnification satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.
7. Reservation of Shares.
The Company hereby agrees that at all times there shall be reserved for issuance
and delivery upon exercise or exchange of this Warrant all shares of its Common
Stock or other shares of capital stock of the Company from time to time issuable
upon exercise or exchange of this Warrant. All such shares shall be duly
authorized and, when issued upon the exercise or exchange of the Warrant in
accordance with the terms hereof, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale (other than as provided in the
Company's articles of incorporation and any restrictions on sale set forth
herein or pursuant to applicable federal and state securities laws) and free and
clear of all preemptive rights.
The Holder shall not have any rights as a shareholder of the Company with regard
to the Warrant Shares prior to actual exercise resulting in the purchase of the
Warrant Shares.
8. Arbitration.
In the event that a dispute arises between the Corporation and the holder of
this Warrant as to any matter relating to this Warrant, the matter shall be
settled by arbitration in San Diego County, California in accordance with the
Rules of the American Arbitration Association and the award rendered by such
arbitrator(s) shall not be subject to appeal and may be entered in any federal
or state court located in San Diego County having jurisdiction thereof, and
actions or proceedings shall be brought in no other forum or venue.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers as of this 13th day of May, 1998.
AMERICAN TECHNOLOGY CORPORATION
/s/ DALE W. WILLIAMS
Dale W. Williams, Chairman and CEO
/s/ ROBERT PUTNAM
Robert Putnam, Treasurer and Asst. Secretary
<PAGE> 1
EXHIBIT 4.6
AMERICAN TECHNOLOGY CORPORATION
SERIES B PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
THIS SERIES B PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (the
"Agreement") is entered into as of December ____1998, by and among American
Technology Corporation, a Delaware corporation (the "Company"), and each of
those persons and entities, severally and not jointly, whose names are set forth
on the Schedule of Purchasers attached hereto as Exhibit A (which persons and
entities are hereinafter collectively referred to as "Purchasers" and each
individually as a "Purchaser").
RECITALS
WHEREAS, the Company has authorized the sale and issuance of an
aggregate of up to two hundred fifty thousand (250,000) shares of its Series B
Preferred Stock (the "Shares") and warrants to purchase an aggregate of up to
two hundred and fifty thousand (250,000) shares of its Common Stock (the
"Warrants," and together with the Shares, the "Securities");
WHEREAS, Purchasers desire to purchase the Securities on the terms and
conditions set forth herein; and
WHEREAS, the Company desires to issue and sell the Securities to
Purchasers on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. AGREEMENT TO SELL AND PURCHASE.
1.1 AUTHORIZATION OF SHARES. On or prior to the Closing (as
defined in Section 2 below), the Company shall have authorized (i) the sale and
issuance to Purchasers of the Securities and (ii) the issuance of such shares of
Common Stock to be issued upon conversion or exercise, as the case may be, of
the Securities (the "Conversion Shares"). The Securities and the Conversion
Shares shall have the rights, preferences, privileges and restrictions set forth
in the Company's Corrected Certificate of Designations of Series B Preferred
Stock, in the form attached hereto as Exhibit B (the "Certificate of
Designation") and in the Company's Certificate of Incorporation (collectively,
the "Charter").
1.2 SALE AND PURCHASE. Subject to the terms and conditions
hereof, at the Closing (as hereinafter defined) the Company hereby agrees to
issue and sell to each Purchaser, severally and not jointly, and each Purchaser
agrees to purchase from the Company, severally and not jointly, the number of
Shares set forth opposite such Purchaser's name on Exhibit A, at a purchase
price of ten dollars ($10.00) per share and a Warrant, in the form attached
hereto as
1.
<PAGE> 2
Exhibit C, to purchase the number of shares of Common Stock set forth opposite
such Purchaser's name on Exhibit A.
2. CLOSING, DELIVERY AND PAYMENT.
2.1 CLOSING. The closing of the sale and purchase of the
Securities under this Agreement (the "Closing") shall take place at 10:00 a.m.
on the date hereof, at the offices of Cooley Godward LLP, 4365 Executive Drive,
Suite 1100, San Diego, CA 92121-2128 or at such other time or place as the
Company and Purchasers may mutually agree (such date is hereinafter referred to
as the "Closing Date").
2.2 DELIVERY.
(a) ESCROW. Each Purchaser shall pay the purchase price for the
Securities as set forth next to such Purchaser's name on Exhibit A hereto by
delivering immediately available funds in United States Dollars to the escrow
agent (the "Escrow Agent") identified in the Joint Escrow Instructions attached
hereto as Exhibit D (the "Joint Escrow Instructions"). The Company shall deliver
certificates for the Shares and Warrants, registered in the name of such
Purchaser, to the Escrow Agent. By signing this Agreement, the Purchaser and the
Company each agree to all of the terms and conditions of, and become parties to,
the Joint Escrow Instructions, all of the provisions of which are incorporated
herein by this reference as if set forth herein in full.
(b) METHOD OF PAYMENT. Payment of the purchase price for the
Securities shall be made by wire transfer of funds to:
Bank of Commerce - La Jolla Office
ABA#: 122235821
Credit: Scripps Escrow Company
A/C# 008-301171
Ref # 986080-ZN
2.3 SUBSEQUENT SALES OF SHARES. At any time on or before the 120th day
following the Closing, the Company may sell up to the balance of the authorized
shares of Series B Preferred Stock and Warrants not sold at the Closing to such
persons as may be approved by the Board of Directors of the Company. All such
sales shall be made on the terms and conditions set forth in this Agreement,
including, without limitation, the representations and warranties by such
Purchasers as set forth in Section 4. Any Shares of Series B Preferred Stock
sold pursuant to this Section 2.3 shall be deemed to be "Shares" for all
purposes under this Agreement, any Warrants sold pursuant to this Section 2.3
shall be deemed "Warrants" for all purposes under this Agreement, and any
purchasers thereof shall be deemed to be "Purchasers" for all purposes under
this Agreement.
2.
<PAGE> 3
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
Except as set forth in the Schedule of Exceptions attached hereto as
Exhibit E, the Company hereby represents and warrants to, and covenants with,
each Purchaser as of the date of this Agreement as follows:
3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Company has all requisite corporate power and
authority to own and operate its properties and assets, to execute and deliver
this Agreement and the Warrants to issue and sell the Securities and the
Conversion Shares and to carry out the provisions of this Agreement, the
Warrants and the Charter and to carry on its business as presently conducted and
as presently proposed to be conducted. The Company is duly qualified and is
authorized to do business and is in good standing as a foreign corporation in
all jurisdictions in which the nature of its activities and of its properties
(both owned and leased) makes such qualification necessary, except for those
jurisdictions in which failure to do so would not have a material adverse effect
on the Company or its business.
3.2 SUBSIDIARIES. The Company owns no equity securities of any
other corporation, limited partnership or similar entity, except for 225,300
shares of Common Stock of Norris Communications, Inc. The Company is not a
participant in any joint venture, partnership or similar arrangement.
3.3 CAPITALIZATION; VOTING RIGHTS. The authorized capital stock
of the Company consists of 20,000,000 shares of Common Stock, par value $.00001
per share, 11,364,314 shares of which are issued and outstanding, 1,334,600
shares which are subject to outstanding options and 339,056 shares of which are
reserved for future issuance to employees, directors and consultants pursuant to
the Company's stock option plans, and 5,000,000 shares of Preferred Stock, par
value $.00001 per share, 350,000 of which are designated Series A Preferred
Stock, none of which are issued and outstanding and 250,000 of which are
designated Series B Preferred Stock, none of which, prior to the Closing, are
issued and outstanding. All issued and outstanding shares of the Company's
Common Stock (a) have been duly authorized and validly issued, and (b) are fully
paid and nonassessable. The rights, preferences, privileges and restrictions of
the Shares are as stated in the Charter. 1,075,000 shares of Common Stock have
been duly and validly reserved for issuance as Conversion Shares, and the
Company will take all reasonable measures to ensure that, at all times, a
sufficient number of shares of its Common Stock are reserved for issuance upon
conversion of the Shares and exercise of the Warrants. As of December 2, 1998,
other than the 339,056 shares reserved for issuance under the Company's stock
option and stock compensation plans, 1,334,600 shares subject to outstanding
options and 355,000 shares subject to outstanding warrants and except as may be
granted pursuant to this Agreement or the Warrants, there are no outstanding
options, warrants, rights (including conversion, anti-dilution or preemptive
rights and rights of first refusal), proxy or stockholder agreements, or
agreements of any kind for the purchase or acquisition from the Company of any
of its securities. When issued in compliance with the provisions of this
Agreement and the
3.
<PAGE> 4
Charter, the Securities and the Conversion Shares will be validly issued, fully
paid and nonassessable, and will be free of any liens or encumbrances; provided,
however, that the Shares and the Conversion Shares may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
herein or as otherwise required by such laws at the time a transfer is proposed.
3.4 AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on
the part of the Company, its officers, directors and stockholders necessary for
the authorization of this Agreement, the Warrants and the Joint Escrow
Instructions, the performance of all obligations of the Company hereunder and
thereunder at the Closing and the authorization, sale, issuance and delivery of
the Securities pursuant hereto and the Conversion Shares pursuant to the Charter
has been taken or will be taken prior to the Closing. The Agreement, the
Warrants and the Joint Escrow Instructions, when executed and delivered, will be
valid and binding obligations of the Company enforceable in accordance with
their terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights; (b) general principles of equity that restrict
the availability of equitable remedies; and (c) to the extent that the
enforceability of the indemnification provisions in Section 6.6 of this
Agreement may be limited by applicable laws. The sale of the Securities and the
subsequent conversion or exercise of the Securities, as the case may be, into
Conversion Shares are not and will not be subject to any preemptive rights,
anti-dilution or rights of first refusal that have not been properly waived or
complied with.
3.5 SEC REPORTS AND FILINGS. The Company has delivered to
Purchaser a complete and accurate copy (excluding copies of exhibits) of each
Annual Report on Form 10-KSB, Quarterly Report on Form 10-QSB, Form 8-K,
definitive proxy statement and annual report filed by the Company with the
Securities and Exchange Commission ("SEC") on or after January 1, 1997 (the "SEC
Documents"). The SEC Documents, including the financial statements contained
therein, (i) complied with the requirements of the Securities Act of 1933, as
amended (the "Securities Act") or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as the case may be, at and as of the times they
were filed (or, if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) in all material respects and (ii)
did not at and as of the time they were filed (or, if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Company has made all filings with the SEC required under the
Securities Act, the Exchange Act and all regulations promulgated thereunder
since January 1, 1997.
3.6 CHANGES. Since January 1, 1998, there has been no material
adverse change or disruption in the business, operations, prospects or financial
condition of the Company other than as disclosed in the SEC Documents.
4.
<PAGE> 5
3.7 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has
good and marketable title to its properties and assets, including the properties
and assets reflected in the most recent balance sheet included in the SEC
Documents, and good title to its leasehold estates, in each case subject to no
mortgage, pledge, lien, lease, encumbrance or charge, other than (a) those
resulting from taxes which have not yet become delinquent, (b) minor liens and
encumbrances which do not materially detract from the value of the property
subject thereto or materially impair the operations of the Company, and (c)
those that have otherwise arisen in the ordinary course of business. All
facilities, machinery, equipment, fixtures, vehicles and other properties owned,
leased or used by the Company are in good operating condition and repair and are
reasonably fit and usable for the purposes for which they are being used. The
Company is in compliance with all material terms of each lease to which it is a
party or is otherwise bound.
3.8 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation or default of any term of its Charter or Bylaws, or of any provision
of any mortgage, indenture, contract, agreement, instrument or contract to which
it is party or by which it is bound or of any judgment, decree, order, writ or,
to its knowledge, any statute, rule or regulation applicable to the Company
which would materially and adversely affect the business, assets, liabilities,
financial condition or operations of the Company. The execution, delivery, and
performance of and compliance with this Agreement, the Warrants and the Joint
Escrow Instructions, and the issuance and sale of the Securities pursuant hereto
and of the Conversion Shares pursuant to the Certificate of Designations and the
Charter, will not, with or without the passage of time or giving of notice,
result in any such material violation, or be in conflict with or constitute a
default under any such term, or result in the creation of any mortgage, pledge,
lien, encumbrance or charge upon any of the properties or assets of the Company
or the suspension, revocation, impairment, forfeiture or nonrenewal of any
permit license, authorization or approval applicable to the Company, its
business or operations or any of its assets or properties.
3.9 LITIGATION. There is no action, suit, proceeding or
investigation pending or to the Company's knowledge currently threatened in
writing against the Company that questions the validity of this Agreement or the
Warrants or the right of the Company to enter into any of such agreements, or to
consummate the transactions contemplated hereby or thereby, or which might
result, either individually or in the aggregate, in any material adverse change
in the assets, prospects, condition or affairs of the Company, financially or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for the foregoing.
3.10 EMPLOYEES. The Company has no collective bargaining
agreements with any of its employees. There is no labor union organizing
activity pending or, to the Company's knowledge, threatened with respect to the
Company.
3.11 REGISTRATION RIGHTS. Except as required pursuant to this
Agreement and pursuant to the terms of Stock Purchase Warrant Agreements with
Renwick Corporate Finance dated February 5, 1997, Jonathan Berg dated May 13,
1998, and L.H. Friend & Co. dated June 18, 1998, the Company is presently not
under any obligation, and has not granted any rights, to
5.
<PAGE> 6
register (as defined in Section 6.1 of this Agreement) any of the Company's
presently outstanding securities or any of its securities that may hereafter be
issued.
3.12 COMPLIANCE WITH LAWS; PERMITS. To its knowledge, the
Company is not in violation of any applicable statute, rule, regulation, order
or restriction of any domestic or foreign government or any instrumentality or
agency thereof or any administrative or self-regulatory agency in respect of the
conduct of its business or the ownership of its properties which violation would
materially and adversely affect the business, assets, liabilities, financial
condition or operations of the Company. No orders, permissions, consents,
approvals or authorizations are required to be obtained and no registrations or
declarations are required to be filed in connection with the execution and
delivery of this Agreement and the issuance of the Securities or the Conversion
Shares, except such as has been duly and validly obtained or filed, or with
respect to any filings that must be made after the Closing, as will be filed in
a timely manner. The Company has all franchises, permits, licenses and any
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted.
3.13 PATENTS AND TRADEMARKS. To the best of its knowledge, the
Company owns or possesses sufficient legal rights to all patents, trademarks,
service marks, trade names, copyrights, trade secrets, information and other
proprietary rights and processes necessary for its business as now conducted and
as proposed to be conducted, without any known infringement of the rights of
others. There are no outstanding options, licenses or agreements of any kind
relating to the foregoing, nor is the Company bound by or a party to any
options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information and other proprietary rights and processes of any other person or
entity other than such licenses or agreements arising from the purchase of "off
the shelf" or standard products. The Company has not received any communications
alleging that the Company has violated or, by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights or trade secrets or other proprietary rights of any other
person or entity. The Company is not aware that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with their duties to
the Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business by the employees of the Company, nor the
conduct of the Company's business as proposed, will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any employee is now obligated. The Company does not believe it is or will be
necessary to utilize any inventions, trade secrets or proprietary information of
any of its employees made prior to their employment
6.
<PAGE> 7
by the Company, except for inventions, trade secrets or proprietary information
that have been assigned to the Company.
3.14 OFFERING VALID. Assuming the accuracy of the
representations and warranties of the Purchasers contained in Section 4.2
hereof, the offer, sale and issuance of the Securities and the Conversion Shares
will be exempt from the registration requirements of the Securities Act and will
have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws. Neither the Company nor any agent on its
behalf has solicited or will solicit any offers to sell or has offered to sell
or will offer to sell all or any part of the Securities to any person or persons
so as to bring the sale of such Securities by the Company within the
registration provisions of the Securities Act or any state securities laws.
3.15 ELIGIBILITY FOR FORM S-3. The Company represents and
warrants that it meets the requirements for the use of Form S-3 for registration
of the sale by the Purchaser of the Conversion Shares, and the Company shall
file all reports required to be filed by the Company with the SEC in a timely
manner and take all other necessary action so as to maintain such eligibility
for the use of Form S-3.
3.16 REPORTING STATUS. The Company's Common Stock is registered
under Section 12 of the Exchange Act. So long as any Purchaser beneficially owns
any of the Securities or Conversion Shares, the Company shall timely file all
reports required to be filed with the SEC pursuant to the Exchange Act, and the
Company shall not voluntarily terminate its status as an issuer required to file
reports under the Exchange Act even if the Exchange Act or the rules and
regulations thereunder would permit such termination.
3.17 OTC BULLETIN BOARD. The Company's Common Stock is traded on
the OTC Electronic Bulletin Board maintained by the National Association of
Securities Dealers, Inc., and for so long as any Purchaser owns any of the
Securities or Conversion Shares, the Company shall continue the listing and
trading of its Common Stock on the OTC Bulletin Board, the Nasdaq SmallCap
Market, the Nasdaq National Market System, the New York Stock Exchange or the
American Stock Exchange, secure and maintain listing and trading of the
Conversion Shares on such market or exchange, and comply in all respects with
the Company's reporting filing and other obligations under the bylaws or rules
of such market or exchange. The Company is not aware of any delisting or
suspension proceeding regarding its Common Stock or any SEC or OTC Bulletin
Board inquiries regarding the Company and does not reasonably anticipate any
such delisting, suspension or inquiry.
7.
<PAGE> 8
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.
Each Purchaser hereby represents and warrants, severally and not
jointly, to the Company as follows:
4.1 REQUISITE POWER AND AUTHORITY. Purchaser has all necessary
power and authority under all applicable provisions of law to execute and
deliver this Agreement and to carry out its provisions. All action on
Purchaser's part required for the lawful execution and delivery of this
Agreement has been or will be effectively taken prior to the Closing. Upon its
execution and delivery, this Agreement will be a valid and binding obligation of
Purchaser, enforceable in accordance with its terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors' rights, (b) general
principles of equity that restrict the availability of equitable remedies, and
(c) to the extent that the enforceability of the indemnification provisions of
Section 6.6 of this Agreement may be limited by applicable laws.
4.2 INVESTMENT REPRESENTATIONS. Purchaser understands that
neither the Securities nor the Conversion Shares have been registered under the
Securities Act. Purchaser also understands that the Securities are being offered
and sold pursuant to an exemption from registration contained in the Securities
Act based in part upon Purchaser's representations contained in the Agreement.
Purchaser hereby represents and warrants as follows:
(a) PURCHASER BEARS ECONOMIC RISK. Purchaser has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. Purchaser must bear the economic risk of
this investment indefinitely unless the Securities (or the Conversion Shares)
are registered pursuant to the Securities Act, or an exemption from registration
is available. Purchaser understands that other than pursuant to the terms of
this Agreement the Company has no present intention of registering the
Securities, the Conversion Shares or any shares of its Common Stock. Purchaser
also understands that there is no assurance that any exemption from registration
under the Securities Act will be available and that, even if available, such
exemption may not allow Purchaser to transfer all or any portion of the
Securities or the Conversion Shares under the circumstances, in the amounts or
at the times Purchaser might propose.
(b) ACQUISITION FOR OWN ACCOUNT. Purchaser is acquiring the
Securities and the Conversion Shares for Purchaser's own account for investment
only, and not with a present view towards their distribution other than in
compliance with the Securities Act.
(c) PURCHASER CAN PROTECT ITS INTEREST. Purchaser represents
that by reason of its, or of its management's, business or financial experience,
Purchaser has the capacity to protect its own interests in connection with the
transactions contemplated in this Agreement. Further, Purchaser is aware of no
publication of any advertisement in connection with the transactions
contemplated in the Agreement.
8.
<PAGE> 9
(d) ACCREDITED INVESTOR. Purchaser represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.
(e) COMPANY INFORMATION. Purchaser has received and read
the SEC Documents and has had an opportunity to discuss the Company's business,
management and financial affairs with directors, officers and management of the
Company and has had the opportunity to review the Company's operations and
facilities. Purchaser has also had the opportunity to ask questions of and
receive answers from, the Company and its management regarding the terms and
conditions of this investment.
(f) RULE 144. Purchaser acknowledges and agrees that the
Securities, and, if issued, the Conversion Shares must be held indefinitely
unless they are subsequently registered under the Securities Act or an exemption
from such registration is available. Purchaser has been advised or is aware of
the provisions of Rule 144 promulgated under the Securities Act as in effect
from time to time, which permits limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things: the availability of certain current public information about the
Company, the resale occurring following the required holding period under Rule
144 and (other than Rule 144(k)) the number of shares being sold during any
three-month period not exceeding specified limitations.
(g) RESIDENCE. If the Purchaser is an individual, then the
Purchaser resides in the state or province identified in the address of the
Purchaser set forth on Exhibit A; if the Purchaser is a partnership,
corporation, limited liability company or other entity, then the office or
offices of the Purchaser in which its investment decision was made is located at
the address or addresses of the Purchaser set forth on Exhibit A.
5. CONDITIONS TO CLOSING.
5.1 CONDITIONS TO PURCHASERS' OBLIGATIONS AT THE CLOSING.
Purchasers' obligations to purchase the Securities at the Closing are subject to
the satisfaction, at or prior to the Closing Date, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF
OBLIGATIONS. The representations and warranties made by the Company in Section 3
hereof shall be true and correct in all material respects as of the Closing Date
with the same force and effect as if they had been made as of the Closing Date,
and the Company shall have performed all obligations and conditions herein
required to be performed or observed by it on or prior to the Closing.
(b) LEGAL INVESTMENT. On the Closing Date, the sale and
issuance of the Securities and the proposed issuance of the Conversion Shares
shall be legally permitted by all laws and regulations to which Purchasers and
the Company are subject.
9.
<PAGE> 10
(c) CONSENTS, PERMITS, AND WAIVERS. The Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement (except for such
as may be properly obtained subsequent to the Closing).
(d) FILING OF CERTIFICATE OF DESIGNATION. The Certificate
of Designation shall have been filed with the Secretary of State of the State of
Delaware with a copy provided to Purchasers.
(e) RESERVATION OF CONVERSION SHARES. The Conversion Shares
issuable upon conversion of the Shares and exercise of the Warrants shall have
been duly authorized and reserved for issuance upon such conversion or exercise.
(f) COMPLIANCE CERTIFICATE. The Company shall have
delivered to Purchasers a Compliance Certificate, executed by the President or
Chief Financial Officer of the Company, dated the Closing Date, to the effect
that the conditions specified in subsections (a), (c), (d) and (e) of this
Section 5.1 have been satisfied.
(g) ESCROW. The Company shall have delivered to the Escrow
Agent certificates for the Shares and the Warrants in accordance with this
Agreement.
(h) OTC BULLETIN BOARD. The Company's Common Stock shall be
currently trading on the OTC Bulletin Board. The Company and Purchasers shall
not be aware of any delisting or suspension proceeding regarding the Company's
Common Stock or any SEC or OTC Bulletin Board inquiries regarding the Company,
nor shall the Company or any Purchaser reasonably anticipate any such delisting,
suspension or inquiry.
(i) SIZE OF OFFERING. Purchasers purchasing at least an
aggregate of $1,000,000 of the Securities pursuant to this Agreement shall have
purchased, or will be purchasing, such Securities prior to or concurrent with
the Closing.
5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's
obligation to issue and sell the Securities at the Closing is subject to the
satisfaction, on or prior to such Closing, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE. The representations
and warranties made by those Purchasers acquiring Securities in Section 4 hereof
shall be true and correct in all material respects at the date of the Closing,
with the same force and effect as if they had been made on and as of said date.
(b) PERFORMANCE OF OBLIGATIONS. Such Purchasers shall have
performed and complied with all agreements and conditions herein required to be
performed or complied with by such Purchasers on or before the Closing.
10.
<PAGE> 11
(c) FILING OF CERTIFICATE OF DESIGNATION. The Certificate of
Designation shall have been filed with the Secretary of State of the State of
Delaware.
(d) CONSENTS, PERMITS, AND WAIVERS. The Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement (except for such
as may be properly obtained subsequent to the Closing).
(e) ESCROW. Each Purchaser shall have delivered to the
Escrow Agent immediately available funds as payment in full of an amount equal
to the purchase price of the Securities as set forth next to such Purchaser's
name on Exhibit A hereto in accordance with Section 2.2 hereof.
6. REGISTRATION RIGHTS
6.1 DEFINITIONS. As used in this Section 6, the following terms
shall have the following respective meanings:
"FORM S-3" means such form under the Securities Act as in effect
on the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
"HOLDER" means any person owning of record Registrable Securities
that have not been sold to the public or any assignee of record of such
Registrable Securities in accordance with Section 6.7 hereof.
"REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of
effectiveness of such registration statement or document.
"REGISTRABLE SECURITIES" means (a) Common Stock of the Company
issued or issuable upon conversion of the Shares; (b) Common Stock of the
Company issued or issuable upon exercise of the Warrants; and (c) any Common
Stock of the Company issued as (or issuable upon the conversion or exercise of
any warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, such
above-described securities. Notwithstanding the foregoing, Registrable
Securities shall not include (i) any Conversion Shares issued prior to the date
the Registration Statement covering such other Registrable Securities which is
required to be filed by the Company pursuant to the first sentence of Section
6.2(a) hereof is declared effective by the SEC, and (ii) any securities sold by
a person to the public either pursuant to a registration statement or Rule 144
or sold in a private transaction in which the transferor's rights under this
Section 6 are not assigned.
"REGISTRABLE SECURITIES THEN OUTSTANDING" shall be the number of
shares determined by calculating the total number of shares of the Company's
Common Stock that are
11.
<PAGE> 12
Registrable Securities and either (a) are then issued and outstanding or (b) are
issuable pursuant to then exercisable or convertible securities.
"REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in complying with this Section 6 hereof, including, without limitation,
all registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company which shall be paid in any
event by the Company).
"SEC" or "COMMISSION" means the Securities and Exchange
Commission.
"SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale.
6.2 MANDATORY REGISTRATION.
(a) The Company shall prepare and file with the SEC on or
before January 31, 1999 (the "SEC Filing Date") a Registration Statement on Form
S-3 or, if Form S-3 is not available, on another appropriate form reasonably
acceptable to the Investors, which covers the resale of a number of shares of
Common Stock equal to at least the number of Registrable Securities issuable to
each Holder upon conversion of the Shares and exercise of the Warrants,
determined as if the Shares were converted in full (based on a $3.50 conversion
price) and the Warrants were exercised in full on the first anniversary of the
Closing Date. If at any time the number of shares of Common Stock included in
the Registration Statement required to be filed as provided in the first
sentence of this Section 6.2(a) shall be insufficient to cover the number of
shares of Common Stock issuable on conversion in full of the unconverted Shares
and unexercised Warrants, then promptly, but in no event later than 60 days
after such insufficiency shall occur, the Company shall file with the SEC an
additional Registration Statement on Form S-3, or another appropriate form
(which shall not constitute a post-effective amendment to the Registration
Statement filed pursuant to the first sentence of this Section 6.2(a)) covering
such number of shares of Common Stock as shall be sufficient to permit such
conversion and exercise. For all purposes of this Agreement such additional
Registration Statement shall be deemed to be the Registration Statement required
to be filed by the Company pursuant to this Section 6.2(a), and the Company and
the Holders shall have the same rights and obligations with respect to such
additional Registration Statement as they shall have with respect to the initial
Registration statement required to be filed by the Company pursuant to this
Section 6.2(a).
(b) ADJUSTMENT OF CONVERSION TERMS. If the Registration
Statement covering the Registrable Securities which is required to be filed by
the Company pursuant to the first sentence of Section 6.2(a) hereof is not
effective by May 1, 1999, the terms of conversion of the Shares shall be
adjusted as provided in the Certificate of Designation.
12.
<PAGE> 13
6.3 EXPENSES OF REGISTRATION. Except as specifically provided
herein, all Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 6.2 shall be borne by the
Company. All Selling Expenses incurred in connection with any registrations
hereunder, shall be borne by the holders of the securities so registered pro
rata on the basis of the number of shares so registered.
6.4 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities, the Company shall:
(a) Prepare and file with the SEC a Registration Statement
on Form S-3 with respect to the number of Registrable Securities provided in
Section 6.2(a), and thereafter to use all reasonable efforts to cause each
Registration Statement relating to Registrable Securities to become effective
and keep the Registration Statement effective for two years after the Closing
Date.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement for the period set forth in
paragraph (a) above.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its reasonable best efforts to register and
qualify the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders; provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
(e) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing, and use its best efforts to prepare a supplement or amendment to the
Registration Statement to correct such untrue statement or omission, and deliver
such number of copies of such supplement or amendment to each Holder as such
Holder may reasonably request.
(f) Use all reasonable efforts to prevent the issuance of
stop orders or any other suspensions in trading of the Company's Common Stock by
the SEC or any applicable
13.
<PAGE> 14
exchange or market, and use its best efforts to have removed or reversed any
such stop order or suspension in trading that occurs.
6.5 OBLIGATIONS OF HOLDER.
(a) No Holder shall have any right to obtain or seek an
injunction restraining or otherwise delaying any such registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Section 6.
(b) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to Section 6.2 or 6.4 that each Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request.
(c) Each Holder by such Holder's acceptance of the
Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Holder has notified the Company in
writing of such Holder's election to waive all of such Holder's rights to
register any securities under this Section 6;
(d) Each Holder agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind described in Section
6.4(e), such Holder will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Holder's receipt of copies of a supplemented or amended
prospectus and, if so directed by the Company, such Holder shall deliver to the
Company (at the expense of the Company) or destroy (and deliver to the Company a
certificate of destruction) all copies in such Holder's possession, of the
prospectus covering such Registrable Securities current at the time of receipt
of such notice.
6.6 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under this Section 6:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the partners, officers and directors of
each Holder, any underwriter (as defined in the Securities Act) for such Holder
and each person, if any, who controls such Holder or underwriter within the
meaning of the Securities Act or the Exchange Act, against any losses, claims,
damages, or liabilities (joint or several) to which they may become subject
under the Securities Act, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation") by the Company: (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any
14.
<PAGE> 15
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law in connection with the offering
covered by such registration statement; and the Company will pay as incurred to
each such Holder, partner, officer, director, underwriter or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this Section 6.6
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company, which consent shall not be unreasonably withheld, nor shall the Company
be liable in any such case for any such loss, claim, damage, liability or action
to the extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by such Holder, partner, officer,
director, underwriter or controlling person of such Holder.
(b) To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which such registration qualifications or compliance is being effected,
indemnify and hold harmless the Company, each of its directors, its officers and
each person, if any, who controls the Company within the meaning of the
Securities Act, any underwriter and any other Holder selling securities under
such registration statement or any of such other Holder's partners, directors or
officers or any person who controls such Holder, against any losses, claims,
damages or liabilities (joint or several) to which the Company or any such
director, officer, controlling person, underwriter or other such Holder, or
partner, director, officer or controlling person of such other Holder may become
subject under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder under an
instrument duly executed by such Holder and stated to be specifically for use in
connection with such registration; and each such Holder will pay as incurred any
legal or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, underwriter or other Holder, or partner, officer,
director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or action if
it is judicially determined that there was such a Violation; provided, however,
that the indemnity agreement contained in this Section 6.6 shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; provided further, that in no event shall any
indemnity under this Section 6.6 exceed the proceeds from the offering received
by such Holder.
15.
<PAGE> 16
(c) Promptly after receipt by an indemnified party under
this Section 6.6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 6.6, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if materially prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 6.6, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 6.6.
(d) If the indemnification provided for in this Section 6.6
is held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such indemnified party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in such
loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by a court of law by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided, that in no event shall any contribution by a
Holder hereunder exceed the proceeds from the offering received by such Holder.
(e) The obligations of the Company and Holders under this
Section 6.6 shall survive completion of any offering of Registrable Securities
in a registration statement and the termination of this agreement. No
indemnifying party, in the defense of any such claim or litigation, shall,
except with the consent of each indemnified party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect to such claim or litigation.
16.
<PAGE> 17
6.7 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the
Company to register Registrable Securities pursuant to this Section 6 may be
assigned by a Holder to a transferee or assignee of Registrable Securities which
(a) is a subsidiary, parent, general partner, limited partner, retired partner,
member or retired member of a Holder, (b) is a Holder's family member or trust
for the benefit of an individual Holder, or (c) acquires at least twenty-five
thousand (25,000) shares of Registrable Securities (as adjusted for stock splits
and combinations); provided, however, (i) the transferor shall, within ten (10)
days after such transfer, furnish to the Company written notice of the name and
address of such transferee or assignee and the securities with respect to which
such registration rights are being assigned and (ii) such transferee shall agree
to be subject to all restrictions set forth in this Agreement.
7. MISCELLANEOUS.
7.1 GOVERNING LAW. This Agreement shall be governed in all
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and performed entirely in
California.
7.2 SURVIVAL. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by any Purchaser and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument.
7.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Securities from time to time.
7.4 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules
hereto, the Warrants and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and agreements
except as specifically set forth herein and therein.
7.5 SEVERABILITY. In case any provision of the Agreement shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
7.6 AMENDMENT AND WAIVER.
(a) This Agreement may be amended or modified only upon the
written consent of the Company and holders of at least fifty percent (50%) of
the Shares (treated
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<PAGE> 18
as if converted and including any Conversion Shares into which the Shares or
Warrants have been converted or exercised that have not been sold to the
public).
(b) The obligations of the Company and the rights of the
holders of the Shares, the Warrants and the Conversion Shares under the
Agreement may be waived only with the written consent of the holders of at least
fifty percent (50%) of the Shares (treated as if converted and including any
Conversion Shares into which the Shares or Warrants have been converted or
exercised that have not been sold to the public).
7.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission
to exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement or the Charter,
shall impair any such right, power or remedy, nor shall it be construed to be a
waiver of any such breach, default or noncompliance, or any acquiescence
therein, or of or in any similar breach, default or noncompliance thereafter
occurring. It is further agreed that any waiver, permit, consent or approval of
any kind or character on any Purchaser's part of any breach, default or
noncompliance under this Agreement or under the Charter or any waiver on such
party's part of any provisions or conditions of the Agreement or the Charter
must be in writing and shall be effective only to the extent specifically set
forth in such writing. All remedies, either under this Agreement, the Charter by
law, or otherwise afforded to any party, shall be cumulative and not
alternative.
7.8 NOTICES. All notices required or permitted hereunder shall
be in writing and shall be deemed effectively given: (a) upon personal delivery
to the party to be notified; (b) when sent by confirmed telex or facsimile if
sent during normal business hours of the recipient, if not, then on the next
business day; (c) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (d) one (1) day
after deposit with a nationally recognized overnight courier, specifying next
day delivery, with written verification of receipt. All communications shall be
sent to the Company at the address as set forth on the signature page hereof and
to Purchaser at the address set forth on Exhibit A attached hereto or at such
other address as the Company or Purchaser may designate by ten (10) days advance
written notice to the other parties hereto.
7.9 EXPENSES. Each party shall pay all costs and expenses that
it incurs with respect to the negotiation, execution, delivery and performance
of this Agreement and the Warrants.
7.10 ATTORNEYS' FEES. In the event that any dispute among the
parties to this Agreement should result in litigation, the prevailing party in
such dispute shall be entitled to recover from the losing party all fees, costs
and expenses of enforcing any right of such prevailing party under or with
respect to this Agreement, including without limitation, such reasonable fees
and expenses of attorneys and accountants, which shall include, without
limitation, all fees, costs and expenses of appeals.
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7.11 CONFIDENTIALITY. The Company shall not publicly disclose
the name or identity of any Purchaser unless (i) required by law or the rules
and regulations of the SEC, (ii) such Purchaser has given its prior written
consent or (iii) such information is already in the public domain. 7.12 TITLES
AND SUBTITLES. The titles of the sections and subsections of the Agreement are
for convenience of reference only and are not to be considered in construing
this Agreement.
7.12 TITLES AND SUBTITLES. The titles of the sections and
subsections of the Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
7.13 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, by facsimile, or both, each of which shall be an original, but
all of which together shall constitute one instrument.
7.14 BROKER'S FEES. Each party hereto represents and warrants
that no agent, broker, investment banker, person or firm acting on behalf of or
under the authority of such party hereto is or will be entitled to any broker's
or finder's fee or any other commission directly or indirectly in connection
with the transactions contemplated herein. Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 7.13 being untrue.
7.15 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges
that it is not relying upon any person, firm, or corporation, other than the
Company and its officers and directors, in making its investment or decision to
invest in the Company. Each Purchaser agrees that no Purchaser nor the
respective controlling persons, officers, directors, partners, agents, or
employees of any Purchaser shall be liable for any action heretofore or
hereafter taken or omitted to be taken by any of them in connection with the
Securities and Conversion Shares.
7.16 PRONOUNS. All pronouns contained herein, and any variations
thereof, shall be deemed to refer to the masculine, feminine or neutral,
singular or plural, as to the identity of the parties hereto may require.
19.
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have executed the SERIES B
PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT as of the date set forth in the
first paragraph hereof.
COMPANY: PURCHASER:
AMERICAN TECHNOLOGY CORPORATION
13114 Evening Creek Drive South --------------------------------
San Diego, California 92128 [Print name of purchaser]
By: /s/ ROBERT PUTNAM By:
----------------------------- -----------------------------
Robert Putnam
Assistant Secretary
Title:
--------------------------
<PAGE> 1
EXHIBIT 4.7
EXHIBIT C
NO. W-____
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
WARRANT TO PURCHASE _________ SHARES
OF COMMON STOCK OF
AMERICAN TECHNOLOGY CORPORATION
(VOID AFTER NOVEMBER 30, 2001)
This certifies that _________________________________ or its assigns
(the "Holder"), for value received, is entitled to purchase from AMERICAN
TECHNOLOGY CORPORATION, a Delaware corporation (the "Company"), having a place
of business at 13114 Evening Creek Drive South, San Diego, California 92128, a
maximum of ______________ fully paid and nonassessable shares of the Company's
Common Stock ("Common Stock") for cash at a price of $6.00 per share (the "Stock
Purchase Price") at any time or from time to time up to and including 5:00 p.m.
(Pacific time) on November 30, 2001 (the "Expiration Date"), upon surrender to
the Company at its principal office (or at such other location as the Company
may advise the Holder in writing) of this Warrant properly endorsed with the
Form of Subscription attached hereto duly filled in and signed and, if
applicable, upon payment in cash or by check of the aggregate Stock Purchase
Price for the number of shares for which this Warrant is being exercised
determined in accordance with the provisions hereof. The Stock Purchase Price
and the number of shares purchasable hereunder are subject to adjustment as
provided in Section 3 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
1.1 GENERAL. This Warrant is exercisable at the option of the
holder of record hereof, at any time or from time to time, up to the Expiration
Date for all or any part of the shares of Common Stock (but not for a fraction
of a share) which may be purchased hereunder. The Company agrees that the shares
of Common Stock purchased under this Warrant shall be and are deemed to be
issued to the Holder hereof as the record owner of such shares as of the close
of business on the date on which this Warrant shall have been surrendered,
properly endorsed, the completed, executed Form of Subscription delivered and
payment made for such shares. Certificates for the shares of Common Stock so
purchased, together with any other securities or property to which the Holder
hereof is entitled upon such exercise, shall be delivered to the Holder hereof
by the Company at the Company's expense within five (5) business days after the
rights represented by this Warrant have been so exercised. In case of a purchase
of less than all the shares which may be purchased under this Warrant, the
Company shall cancel this Warrant and execute and deliver a new Warrant or
Warrants of like tenor for the
1.
<PAGE> 2
balance of the shares purchasable under the Warrant surrendered upon such
purchase to the Holder hereof within five (5) business days. Each stock
certificate so delivered shall be in such denominations of Common Stock as may
be requested by the Holder hereof and shall be registered in the name of such
Holder. Notwithstanding anything to the contrary set forth above, each exercise
of the Warrant shall cover at least the lesser of (i) 10,000 shares of Common
Stock or (ii) the total number of shares of Common Stock subject to the Warrant.
1.2 NET ISSUE EXERCISE.
(a) This Section 1.2 shall not apply and shall have no force or
effect if, in accordance with the terms of the Series B Preferred Stock and
Warrant Purchase Agreement dated as of even date herewith between the Company
and the original holder of this Warrant (the "Purchase Agreement"), the shares
of Common Stock issuable upon exercise of this Warrant have been registered for
resale under the Securities Act of 1933, as amended, on a registration statement
on Form S-3, or another appropriate form.
(b) Notwithstanding any provisions herein to the contrary, if
the fair market value of one share of the Company's Common Stock is greater than
the Stock Purchase Price (at the date of calculation as set forth below), in
lieu of exercising this Warrant for cash, the Holder may elect to receive shares
equal to the value (as determined below) of this Warrant (or the portion thereof
being canceled) by surrender of this Warrant at the principal office of the
Company together with the properly endorsed Form of Subscription and notice of
such election in which event the Company shall issue to the Holder a number of
shares of Common Stock computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be issued to the
Holder
Y = the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised,
the portion of the Warrant being canceled
(at the date of such calculation)
A = the fair market value of one share of
the Company's Common Stock (at the date of
such calculation)
B = Stock Purchase Price (as adjusted to the
date of such calculation)
For purposes of the above calculation, fair market value of one share of Common
Stock shall be the average of the closing bid price of the Company's Common
Stock for the ten (10) trading days immediately preceding the date of exercise
as quoted on the principal exchange or market on which such securities are
traded.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company
covenants and agrees that all shares of Common Stock which may be issued upon
the exercise of
2.
<PAGE> 3
the rights represented by this Warrant will, upon issuance, be duly authorized,
validly issued, fully paid and nonassessable and free from all preemptive rights
of any stockholder and free of all taxes, liens and charges with respect to the
issue thereof. The Company further covenants and agrees that, during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved, for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant,
a sufficient number of shares of authorized but unissued Common Stock, or other
securities and property, when and as required to provide for the exercise of the
rights represented by this Warrant. The Company will take all such action as may
be necessary to assure that such shares of Common Stock may be issued as
provided herein without violation of any applicable law or regulation, or of any
requirements of any domestic securities exchange upon which the Common Stock may
be listed; provided, however, that the Company shall not be required to effect a
registration under Federal or State securities laws with respect to such
exercise other than as provided pursuant to the Purchase Agreement. The Company
will not take any action which would result in any adjustment of the Stock
Purchase Price (as set forth in Section 3 hereof) if the total number of shares
of Common Stock issuable after such action upon exercise of all outstanding
warrants, together with all shares of Common Stock then outstanding and all
shares of Common Stock then issuable upon exercise of all options and upon the
conversion of all convertible securities then outstanding, would exceed the
total number of shares of Common Stock then authorized by the Company's
Certificate of Incorporation.
3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The
Stock Purchase Price and the number of shares purchasable upon the exercise of
this Warrant shall be subject to adjustment from time to time upon the
occurrence of certain events described in this Section 3. Upon each adjustment
of the Stock Purchase Price, the Holder of this Warrant shall thereafter be
entitled to purchase, at the Stock Purchase Price resulting from such
adjustment, the number of shares obtained by multiplying the Stock Purchase
Price in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment, and dividing
the product thereof by the Stock Purchase Price resulting from such adjustment.
3.1 DEFINITIONS.
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares
(including treasury shares) of Common Stock issued or sold (or, pursuant to
Section 3.2 or 3.3, deemed to be issued) by the Company after the date hereof,
whether or not subsequently reacquired or retired by the Company, other than
(a) (i) shares issued upon the exercise of the Warrants
and (ii) such number of additional shares as may become issuable upon the
exercise of the Warrants by reason of adjustments required pursuant to the
anti-dilution provisions applicable to such Warrants as in effect on the date
hereof; and
(b) (i) shares issued upon the exercise of options granted
or to be granted under the Company's stock option plans as in effect on the date
hereof or under any other employee stock option or purchase plan or plans
adopted or assumed after such date by the Company's Board of Directors; provided
in each such case that the exercise or purchase price for
3.
<PAGE> 4
any such share shall not be less than 85% of the fair market value (determined
in good faith by the Company's Board of Directors) of the Common Stock on the
date of grant, and (ii) such additional number of shares as may become issuable
pursuant to the terms of any such plans by reason of adjustments required
pursuant to anti-dilution provisions applicable to such securities in order to
reflect any subdivision or combination of Common Stock, by reclassification or
otherwise, or any dividend on Common Stock payable in Common Stock.
(c) Common Stock issuable upon exercise or conversion of
any options, warrants or other rights outstanding on the date of this Warrant.
(d) The issuance of the Company's Series B Preferred Stock
or the Common Stock issued or issuable upon conversion of the Series B Preferred
Stock.
(e) The issuance of any capital stock of the Company for
which an adjustment is made pursuant to Section 3.5,3.6 or 3.7 of this Warrant.
"CLOSING BID PRICES" shall mean for any security as of any date, the
closing bid price of such security on the principal securities exchange or trade
market where such security is listed or trades as reported by Bloomberg, L.P.
("Bloomberg"), or if the foregoing does not apply, the closing bid price of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price is reported
for such security by Bloomberg, the average of the bid prices of any market
makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc.
"CONVERTIBLE SECURITIES" shall mean any evidences of indebtedness,
shares of stock (other than Common Stock) or other securities directly or
indirectly convertible into or exchangeable for Additional Shares of Common
Stock.
"CURRENT MARKET PRICE" shall mean, on any date specified herein, the
average of the daily Closing Bid Prices during the 10 consecutive trading days
commencing 15 trading days before such date, except that, if on any such date
the shares of Common Stock are not listed or admitted for trading on any
national securities exchange or quoted in the over-the-counter market, the
Current Market Price shall be the Fair Value on such date.
"FAIR VALUE" shall mean, on any date specified herein (i) in the case of
cash, the dollar amount thereof, (ii) in the case of a security admitted for
trading on any national securities exchange or quoted in the over-the-counter
market, the Current Market Price, and (iii) in all other cases determined in
good faith jointly by the Company and the holder; provided, however, that if
such parties are unable to reach agreement within a reasonable period of time,
the Fair Value shall be determined in good faith by an independent investment
banking firm selected jointly by the Company and the holder, or if that
selection cannot be made within ten days, by an independent investment banking
firm selected by the American Arbitration Association in accordance with its
rules, and provided further, that the Company shall pay all of the fees and
expenses of any third parties incurred in connection with determining Fair
Value.
"OPTIONS" shall mean any rights, options or warrants to subscribe for,
purchase or otherwise acquire either Additional Shares of Common Stock or
Convertible Securities.
4.
<PAGE> 5
3.2 ADJUSTMENT OF PURCHASE PRICE.
3.2.1 ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In case the
Company at any time or from time to time after the date hereof shall issue or
sell Additional Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Section 3.3), without consideration or for
a consideration per share less than the fair market value of such additional
shares of Common Stock as determined in good faith by the Board of Directors of
the Company as in effect immediately prior to such issue or sale, then, and in
each such case, the Purchase Price shall be reduced, concurrently with such
issue or sale, to a price (calculated to the nearest .001 of a cent) determined
by multiplying such Purchase Price by a fraction
(a) the numerator of which shall be the sum of (i) the number of
shares of Common Stock outstanding immediately prior to such issue or sale and
(ii) the number of shares of Common Stock which the gross consideration received
by the Company for the total number of such Additional Shares of Common Stock so
issued or sold would purchase at such Current Market Price, and
(b) the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such issue or sale, provided that,
for the purposes of this Section 3.2.1, (x) immediately after any Additional
Shares of Common Stock are deemed to have been issued pursuant to Section 3.3,
such Additional Shares shall be deemed to be outstanding, and (y) treasury
shares shall not be deemed to be outstanding.
3.2.2 EXTRAORDINARY CASH DIVIDENDS AND DISTRIBUTIONS. In case
the Company at any time or from time to time after the date hereof shall
declare, order, pay or make a cash dividend or other cash distribution on the
Common Stock, then, in each such case, the Purchase Price in effect immediately
prior to the close of business on the record date fixed for the determination of
holders of any class of securities entitled to receive such dividend or
distribution shall be reduced, effective as of the close of business on such
record date, to a price determined by multiplying such Purchase Price by a
fraction
(x) the numerator of which shall be the Current Market Price in
effect on such record date or, if the Common Stock trades on an ex-dividend
basis, on the date prior to the commencement of ex-dividend trading, less the
Fair Value of such dividend or distribution applicable to one share of Common
Stock, and
(y) the denominator of which shall be such Current Market Price.
3.3 TREATMENT OF OPTIONS AND CONVERTIBLE SECURITIES. In case the
Company at any time or from time to time after the date hereof shall issue,
sell, grant or assume, or shall fix a record date for the determination of
holders of any class of securities of the Company entitled to receive, any
Options or Convertible Securities (whether or not the rights thereunder are
immediately exercisable), then, and in each such case, the maximum number of
Additional Shares of Common Stock (as set forth in the instrument relating
thereto, without regard to any provisions contained therein for a subsequent
adjustment of such number) issuable upon the exercise of such Options or, in the
case of Convertible Securities and Options therefor,
5.
<PAGE> 6
the conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common stock issued as of the time of such issue, sale,
grant or assumption or, in case such a record date shall have been fixed, as of
the close of business on such record date (or, if the Common Stock trades on an
ex-dividend basis, on the date prior to the commencement of ex-dividend
trading), provided that such Additional Shares of Common Stock shall not be
deemed to have been issued unless the consideration per share (determined
pursuant to Section 3.4) of such shares would be less than the fair market value
of such shares as determined in good faith by the Board of Directors of the
Company as in effect on the date of and immediately prior to such issue, sale,
grant or assumption or immediately prior to the close of business on such record
date (or, if the Common Stock trades on an ex-dividend basis, on the date prior
to the commencement of ex-dividend trading), as the case may be, and provided,
further, that
(a) whether or not the Additional Shares of Common Stock
underlying such Options or Convertible Securities are deemed to be issued, no
further adjustment of the Purchase Price shall be made upon the subsequent issue
or sale of Convertible Securities or shares of Common Stock upon the exercise of
such Options or the conversion or exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company, or decrease in the number of Additional
Shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof (by change of rate or otherwise), the Purchase Price computed upon the
original issue, sale, grant or assumption thereof (or upon the occurrence of the
record date, or date prior to the commencement of ex-dividend trading, as the
case may be, with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it affects such
Options, or the rights of conversion or exchange under such Convertible
Securities, which are outstanding at such time;
(c) upon the expiration (or purchase by the Company and
cancellation or retirement) of any such Options which shall not have been
exercised or the expiration of any rights of conversion or exchange under any
such Convertible Securities which (or purchase by the Company and cancellation
or retirement of any such Convertible Securities the rights of conversion or
exchange under which) shall not have been exercised, the Purchase Price computed
upon the original issue, sale, grant or assumption thereof (or upon the
occurrence of the record date, or date prior to the commencement of ex-dividend
trading, as the case may be, with respect thereto), and any subsequent
adjustments based thereon, shall, upon such expiration (or such cancellation or
retirement, as the case may be), be recomputed as if:
(i) in the case of Options for Common Stock or
Convertible Securities, the only Additional Shares of Common Stock issued or
sold were the Additional Shares of Common Stock, if any, actually issued or sold
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities and the consideration received therefor was the
consideration actually received by the Company for the issue, sale, grant or
assumption of all such Options, whether or not exercised, plus the consideration
actually received by the Company upon such exercise, or for the issue or sale of
all such Convertible Securities which
6.
<PAGE> 7
were actually converted or exchanged, plus the additional consideration, if any,
actually received by the Company upon such conversion or exchange, and
(ii) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued or sold upon the
exercise of such Options were issued at the time of the issue or sale, grant or
assumption of such Options, and the consideration received by the Company for
the Additional Shares of Common Stock deemed to have then been issued was the
consideration actually received by the Company for the issue, sale, grant or
assumption of all such Options, whether or not exercised, plus the consideration
deemed to have been received by the Company (pursuant to Section 3.4) upon the
issue or sale of such Convertible Securities with respect to which such Options
were actually exercised;
(d) no readjustment pursuant to subdivision (b) or (c) above
shall have the effect of increasing the Purchase Price by an amount in excess of
the amount of the adjustment thereof originally made in respect of the issue,
sale, grant or assumption of such Options or Convertible Securities; and
(e) in the case of any such Options which expire by their terms
not more than 30 days after the date of issue, sale, grant or assumption
thereof, no adjustment of the Purchase Price shall be made until the expiration
or exercise of all such Options, whereupon such adjustment shall be made in the
manner provided in subdivision (c) above.
3.4 COMPUTATION OF CONSIDERATION. For the purposes of this Section,
(a) the consideration for the issue or sale of any Additional
Shares of Common Stock shall, irrespective of the accounting treatment of such
consideration,
(i) insofar as it consists of cash, be computed at the
amount of cash received by the Company, without deducting any expenses paid or
incurred by the Company or any commissions or compensation paid or concessions
or discounts allowed to underwriters, dealers or others performing similar
services in connection with such issue or sale,
(ii) insofar as it consists of property (including
securities) other than cash, be computed at the Fair Value thereof at the time
of such issue or sale, and
(iii) in case Additional Shares of Common Stock are
issued or sold together with other stock or securities or other assets of the
Company for a consideration which covers both, be the portion of such
consideration so received, computed as provided in clauses (i) and (ii) above,
allocable to such Additional Shares of Common Stock, such allocation to be
determined in the same manner that the Fair Value of property not consisting of
cash or securities is to be determined as provided in the definition of "Fair
Value" herein;
(b) Additional Shares of Common Stock deemed to have been issued
pursuant to Section 3.3, relating to Options and Convertible Securities, shall
be deemed to have been issued for a consideration per share determined by
dividing
(i) the total amount, if any, received and receivable by
the Company as consideration for the issue, sale, grant or assumption of the
Options or Convertible
7.
<PAGE> 8
Securities in question, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without
regarding to any provision contained therein for a subsequent adjustment of such
consideration to protect against dilution) payable to the Company upon the
exercise in full of such Options or the conversion or exchange of such
Convertible Securities or, in the case of Options for Convertible Securities,
the exercise of such Options for Convertible Securities and the conversion or
exchange of such Convertible Securities, in each case computing such
consideration as provided in the foregoing subdivision (a),
by
(ii) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number to protect against
dilution) issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities; and
(c) Additional Shares of Common Stock deemed to have been
issued pursuant to Section 3.2.1 relating to stock dividends, stock splits,
etc., shall be deemed to have been issued for no consideration.
3.5 SUBDIVISION OR COMBINATION OF STOCK. In case the Company
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Stock Purchase Price in effect immediately prior
to such subdivision shall be proportionately reduced, and conversely, in case
the outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
3.6 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY,
RECLASSIFICATION. If at any time or from time to time the Holders of Common
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(a) Common Stock or any shares of stock or other securities
which are at any time directly or indirectly convertible into or exchangeable
for Common Stock, or any rights or options to subscribe for, purchase or
otherwise acquire any of the foregoing by way of dividend or other distribution,
(b) any cash paid or payable otherwise than as a cash
dividend, or
(c) Common Stock or additional stock or other securities or
property (including cash) by way of spinoff, split-up, reclassification,
combination of shares or similar corporate rearrangement, (other than shares of
Common Stock issued as a stock split or adjustments in respect of which shall be
covered by the terms of Section 3.1 above), then and in each such case, the
Holder hereof shall, upon the exercise of this Warrant, be entitled to receive,
in addition to the number of shares of Common Stock receivable thereupon, and
without payment of any additional consideration therefor, the amount of stock
and other securities and property (including cash in the cases referred to in
clause (b) above and this clause (c)) which such Holder would hold on the date
of such exercise had he been the holder of record of such
8.
<PAGE> 9
Common Stock as of the date on which holders of Common Stock received or became
entitled to receive such shares or all other additional stock and other
securities and property.
3.7 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. If any recapitalization, reclassification or reorganization of the capital
stock of the Company, or any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets or other
transaction shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities, or other assets or property (an
"Organic Change"), then, as a condition of such Organic Change, lawful and
adequate provisions shall be made by the Company whereby the Holder hereof shall
thereafter have the right to purchase and receive (in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby) such shares of stock,
securities or other assets or property as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby; provided,
however, that in the event the value of the stock, securities or other assets or
property (determined in good faith by the Board of Directors of the Company)
issuable or payable with respect to one share of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby is in excess of the Stock Purchase Price hereof
effective at the time of a merger and securities received in such
reorganization, if any, are publicly traded, then this Warrant shall expire
unless exercised prior to or simultaneous with such Organic Change. In the event
of any Organic Change, appropriate provision shall be made by the Company with
respect to the rights and interests of the Holder of this Warrant to the end
that the provisions hereof (including, without limitation, provisions for
adjustments of the Stock Purchase Price and of the number of shares purchasable
and receivable upon the exercise of this Warrant) shall thereafter be
applicable, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise hereof. The Company will not effect any such
consolidation, merger or sale unless, prior to the consummation thereof, the
successor corporation (if other than the Company) resulting from such
consolidation or the corporation purchasing such assets shall assume by written
instrument reasonably satisfactory in form and substance to the Holders of a
majority of the warrants to purchase Common Stock then outstanding, executed and
mailed or delivered to the registered Holder hereof at the last address of such
Holder appearing on the books of the Company, the obligation to deliver to such
Holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such Holder may be entitled to purchase.
3.8 CERTAIN EVENTS. If any change in the outstanding Common
Stock of the Company or any other event occurs as to which the other provisions
of this Section 3 are not strictly applicable or if strictly applicable would
not fairly protect the purchase rights of the Holder of the Warrant in
accordance with such provisions, then the Board of Directors of the Company
shall make an adjustment in the number and class of shares available under the
Warrant, the Stock Purchase Price or the application of such provisions, so as
to protect such purchase rights as aforesaid. The adjustment shall be such as
will give the Holder of the Warrant upon exercise for the same aggregate Stock
Purchase Price the total number, class and kind of shares as he would have owned
had the Warrant been exercised prior to the event and had he continued to hold
such shares until after the event requiring adjustment.
9.
<PAGE> 10
3.9 NOTICES OF CHANGE.
(a) Within 10 business days after any adjustment in the number
or class of the shares subject to this Warrant and of the Stock Purchase Price,
the Company shall give written notice thereof to the Holder, setting forth in
reasonable detail and certifying the calculation of such adjustment.
(b) The Company shall give written notice to the Holder at least
15 business days prior to the date on which the Company closes its books or
takes a record for determining rights to receive any dividends or distributions.
(c) The Company shall also give written notice to the Holder at
least 15 business days prior to the date on which an Organic Change shall take
place.
4. ISSUE TAX. The issuance of certificates for shares of Common Stock
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax (other than any applicable income taxes) in
respect thereof; provided, however, that the Company shall not be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the then
Holder of the Warrant being exercised.
5. CLOSING OF BOOKS. The Company will at no time close its transfer
books against the transfer of any warrant or of any shares of Common Stock
issued or issuable upon the exercise of any warrant in any manner which
interferes with the timely exercise of this Warrant.
6. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Other than as
set forth herein, nothing contained in this Warrant shall be construed as
conferring upon the Holder hereof the right to vote or to consent or to receive
notice as a shareholder of the Company or any other matters or any rights
whatsoever as a shareholder of the Company. No dividends or interest shall be
payable or accrued in respect of this Warrant or the interest represented hereby
or the shares purchasable hereunder until, and only to the extent that, this
Warrant shall have been exercised. No provisions hereof, in the absence of
affirmative action by any holder, and no mere enumeration herein of the rights
or privileges of the holder hereof, shall give rise to any liability of such
Holder for the Stock Purchase Price or as a shareholder of the Company, whether
such liability is asserted by the Company or by its creditors.
7. WARRANTS TRANSFERABLE. Subject to compliance with applicable federal
and state securities laws, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the holder hereof (except
for transfer taxes), upon surrender of this Warrant properly endorsed. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that this Warrant, when endorsed in blank, shall be deemed negotiable,
and that the holder hereof, when this Warrant shall have been so endorsed, may
be treated by the Company, at the Company's option, and all other persons
dealing with this Warrant as the absolute owner hereof for any purpose and as
the person entitled to exercise the rights represented by this Warrant, or to
the transfer hereof on the books of the Company any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may treat
the registered owner hereof as the owner for all purposes.
10.
<PAGE> 11
8. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and
obligations of the Company, of the holder of this Warrant and of the holder of
shares of Common Stock issued upon exercise of this Warrant, shall survive the
exercise of this Warrant.
9. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
10. NOTICES. Any notice, request or other document required or permitted
to be given or delivered to the holder hereof or the Company shall be delivered
or shall be sent by certified mail, postage prepaid, to each such holder at its
address as shown on the books of the Company or to the Company at the address
indicated therefor in the first paragraph of this Warrant or such other address
as either may from time to time provide to the other.
11. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon any
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets. All of the obligations of the
Company relating to the Common Stock issuable upon the exercise of this Warrant
shall survive the exercise and termination of this Warrant. All of the covenants
and agreements of the Company shall inure to the benefit of the successors and
assigns of the holder hereof.
12. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of California.
13. LOST WARRANTS. The Company represents and warrants to the Holder
hereof that upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant, the Company, at its expense, will
make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Warrant.
14. FRACTIONAL SHARES. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the holder entitled to such fraction a sum in cash equal to such
fraction multiplied by the then effective Stock Purchase Price.
15. SPECIFIC PERFORMANCE. The parties hereto hereby declare that it is
impossible to measure in money the damages which will accrue to a party hereto
or to their heirs, personal representatives, or assigns by reason of a failure
to perform any of the obligations under this Warrant and agree that the terms of
this Warrant shall be specifically enforceable. If any party hereto or his
heirs, personal representatives, or assigns institutes any action or proceeding
to specifically enforce the provisions hereof, any person against whom such
action or proceeding is brought hereby waives the claim or defense therein that
such party or such personal representative has an adequate remedy
11.
<PAGE> 12
at law, and such person shall not offer in any such action or proceeding the
claim or defense that such remedy at law exists.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized this ______ day of December,
1998.
AMERICAN TECHNOLOGY CORPORATION,
a Delaware corporation
By: /s/ CORNELIUS J. BROSNAN
----------------------------
Cornelius J. Brosnan
President
ATTEST:
/s/ ROBERT PUTNAM
- -------------------------
Robert Putnam
Assistant Secretary
12.
<PAGE> 13
EXHIBIT A
SUBSCRIPTION FORM
Date: _________________, _____
American Technology Corporation
13114 Evening Creek Drive South
San Diego, California 92128
Attn: President
Ladies and Gentlemen:
? The undersigned hereby elects to exercise the warrant issued to it by
American Technology Corporation (the "Company") and dated December
_____, 1998 Warrant No. W-___ (the "Warrant") and to purchase thereunder
__________________________________ shares of the Common Stock of the
Company (the "Shares") at a purchase price of Six Dollars ($6.00) per
Share or an aggregate purchase price of
__________________________________ Dollars ($__________) (the "Purchase
Price").
Pursuant to the terms of the Warrant the undersigned has delivered the aggregate
Purchase Price herewith in full in cash or by certified check or wire transfer.
Very truly yours,
--------------------------------
By:
-----------------------------
Title:
--------------------------
13.
<PAGE> 1
Exhibit 10.13
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into effective as of the 17th day of July, 1998,
between AMERICAN TECHNOLOGY CORPORATION, a Delaware publicly traded corporation
(the "Company"), and Cornelius J. Brosnan ("Employee").
Employee, in consideration of the covenants and agreements hereinafter
contained, agrees as follows with respect to the employment of the Company of
Employee and Employee's future business activities.
1. Employment: Term of Employment. The Company hereby employs Employee and
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth. Subject to the provisions for termination as hereinafter
provided, Employee's term of employment by the Company shall be from the date of
this Agreement until July 31, 2001, and said employment shall continue after
such date until either party shall deliver written notice to the other party
hereto to the effect that the employment hereunder shall terminate thirty (30)
days from the giving of such notice. This Agreement will supersede all prior
written and oral agreements entered into by and between Company and Employee
concerning employment other than outstanding stock options.
2. Services to be Rendered by Employee. Employee shall be subject to the
direction of the Board of Directors, or a duly authorized committee thereof and
his duties shall be those generally vested in the office of President and Chief
Executive Officer for the Company and he shall have such other powers and duties
as may be reasonably prescribed by the Board of Directors, or a duly authorized
committee thereof, and shall perform such duties as from time to time may be
decided upon by the Board of Directors, or a duly authorized committee thereof,
of the Company, including but not limited to, speaking for and promoting the
sale of the Company's services and products as public spokesman both in print,
television ads and other media.
The Company shall have the non-exclusive right to use Employee's name, picture
or other likeness and biographical material concerning him, in connection with
advertising, promotion and publicizing the Company and its activities, so long
as this Agreement is in effect (and for a reasonable period, not to exceed one
year, thereafter to utilize expendable materials and supplies). Employee shall
be allowed to review and approve all such uses prior to initial use or
publication. The Company shall have the right to use non-expendable media
thereafter at its discretion (e.g. historical media, media productions for
consumers and businesses, etc.). Such use shall be fair and not misleading or
unflattering and when practical indicate Employee is not affiliated with the
Company.
The Employee agrees that he will serve the Company faithfully, diligently,
competently and to the best of his abilities, devoting all his business time,
efforts, energy, skills and attention to the activities of the Company and the
promotion of its interests. Employee shall not serve as an officer or director
or similar capacity with any other entity except with the prior consent of the
Company.
3. Compensation.
(a) For the services to be rendered by Employee during his employment by the
Company, the Company shall pay Employee a Base Salary of Two Hundred Forty
Thousand Dollars ($240,000) per annum during the term of this Agreement,
prorated for any partial period and paid in conformity with the Company's normal
payroll period. Employee's salary shall be reviewed by the Board of Directors,
or a duly authorized committee thereof, from time to time in its discretion, and
Employee will receive such salary increases, if any, as the Board of Directors,
or a duly authorized committee thereof, in their sole discretion determines. The
Employee shall be paid an initial transfer payment as approved by the Board of
Directors.
(b) Employee shall be shall be eligible for bonuses, at such time and in such
amounts as shall be determined at the discretion of the Board of Directors, or a
duly authorized committee thereof, based on its assessment of Employee's
performance of his duties and on the financial performance of the Company.
(c) The Employee's place of employment shall be considered San Diego County,
California (or other mutually agreed upon location). The Company shall pay
actual out-of-pocket moving costs (as approved in advance). The Company shall
pay up to a maximum of $18,000 of selling costs on Employees current residence
upon sale, such amount to be grossed up for tax effect. The Company shall pay
such reasonable temporary living expenses until the move as approved by the
Board of Directors for a period not to exceed four months without further
authorization.
<PAGE> 2
(d) Employee shall be entitled to participate in and receive benefits under the
Company's executive benefit plans as in effect from time to time, including,
medical insurance, sick leave, and vacation time, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and Company policies. Should this Agreement be terminated for any reason,
Employee shall have the option, to the extent allowable by the policies, to
continue any insurance in force by taking over the payment of the premiums for
Employee and his family.
(e) The Company shall pay or reimburse Employee for all expenses normally
reimbursed by the Company and reasonably incurred by him in furtherance of his
duties hereunder and authorized by the Company, including without limitation,
expenses for entertainment, traveling, meals, hotel accommodations,
out-of-pocket home office expenses and the like upon submission by him of
vouchers or an itemized list thereof as the Company; may from time to time adopt
and authorize, and as may be required in order to permit such payments as proper
deductions to the Company under the Internal Revenue Code of 1986 and the rules
and regulations adopted pursuant thereto now or hereafter in effect.
(f) All amounts payable or which become payable under any provision of this
Agreement will be subject to any deductions authorized in writing by Employee
and any deductions and withholdings required by law.
(g) The Company shall pay costs of and use of an automobile primarily for
business use on terms as approved by the Board of Directors, or a duly
authorized committee thereof, from time to time but not to exceed $8,000 per
annum. Employee shall pay reasonable amounts for personal use as required under
the Internal Revenue Code of 1986 and the rules and regulations adopted pursuant
thereto now or hereafter in effect.
4. Indemnification.
(a) If, after the date of the commencement of the Employment Period, the
Employee is made a party or is threatened to be made a party to any action, suit
or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was an officer of the Company
or is or was serving at the request of the Company as a director, officer,
member, employee or agent of another corporation or partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether or not the basis of such Proceeding is an alleged act or failure
to act in an official capacity as a director, officer, member, employee or
agent, he shall be indemnified and held harmless by the Company to the fullest
extent authorized by Delaware law, as the same exists or may hereafter be
amended, against all expense, liability and loss (including, without limitation,
attorneys' fees, judgments, fines and amounts paid or to be paid in settlement)
reasonably incurred or suffered by the Employee in connection therewith,
including, without limitation, payment of expenses incurred in defending a
Proceeding prior to the final disposition of such Proceeding (subject to receipt
of an undertaking by the Employee to repay such amount if it shall ultimately be
determined that the Employee is not entitled to be indemnified by the Company
under Delaware law), and such indemnification shall continue as to the Employee
even if he has ceased to be an officer, member, employee or agent of the Company
or other enterprise and shall inure to the benefit of his heirs, executors and
administrators.
(b) The right of indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferred in this
Section 4 shall not be exclusive of any other right that the Employee may have
or hereafter may acquire under any statute, provision of the Certificate of
Incorporation or Bylaws of the Company, agreement, vote of shareholders or
disinterested directors or otherwise.
5. Termination of Employment.
(a) The Company shall have the right at its option to terminate the employment
of Employee hereunder by giving written notice thereof to the Employee in the
event of any of the following:
(1) The Company may terminate this Agreement at any time with good
cause, as determined by the Board of Directors of the Company, or a duly
authorized committee thereof, acting in good faith and upon reasonable
grounds, whereupon all compensation to Employee shall cease as of the
effective date of termination. As used in this paragraph, the term "good
cause" shall mean (i) dishonesty by Employee detrimental to the best
interests of the Company, (ii) continuing inattention to or neglect of
the duties to be performed by Employee, (iii) willful disloyalty of
Employee to Company, (iv) engaging in any substantiated act involving
moral turpitude (v) conviction by a court of competent jurisdiction of
Employee in any fraud or felony, (vi) engaging in any act which, in each
case, subjects, or if generally known would subject, the Company to
public ridicule or gross embarrassment, (vii) willful failure or refusal
to perform such duties as may be relegated to Employee commensurate with
Employee's position, (viii) the imparting of any material confidential
information by Employee in violation of this Agreement, or (ix) any
breach of this Agreement by
<PAGE> 3
Employee.
(2) If the Company gives Employee thirty days advance written notice of
termination of employment.
(3) If the Employee dies during the term of employment, the Employee's
employment hereunder and Employee's compensation and other rights under
this Agreement and as an employee of the Company (except as to
compensation and rights accrued prior thereto and except as expressly
provided in the next succeeding sentence) shall terminate thirty (30)
days following the date of death. In such event, the Company shall pay
to the Employee's designated executor or administrator of the Employee's
estate, all compensations and benefits accrued which would otherwise be
payable to the Employee through the thirtieth (30) day following the
date of death. Indemnification rights endure as provided for in Section
4.
(4) If the Employee is unable for any reason to carry out or to perform
the duties required of him hereunder and does not resume his duties
prior to the termination date specified in the Company's written notice
of termination; provided, however, if the Employee shall fail to carry
out or to perform the duties required of him because of mental or
physical disability for a six consecutive month period during the term
hereof and following such period he is unable to perform his duties
hereunder because of mental or physical disability, as determined by the
Board of Directors of the Company, or a duly authorized committee
thereof, acting in good faith and upon reasonable grounds, he shall be
entitled to receive his then Base Salary he would otherwise be entitled
to pursuant to Paragraph 3 hereof for a period of not longer than nine
(9) months after the termination of his employment pursuant to this
Paragraph 5(a) (4). If Employee shall receive any amount during the time
of any incapacity by reason of any disability insurance or any other
insurance plan, senior executive loss or income policy, disability
policy or any other plan or scheme of a like nature funded by the
Company, any payments of Base Salary or benefits of this section may be
reduced by a like amount.
(5) If this Agreement is terminated by the Company pursuant to Paragraph
5(a)(2) hereof, then Employee shall be entitled to severance payments
equal to three (3) months (plus one additional month for each month of
employment up to a maximum of six months) multiplied by his then monthly
Base Salary payable within thirty (30) days after such effective
termination of Employee's employment by the Company.
(b) The Employee shall have the right at his sole option to terminate employment
hereunder under the following conditions:
(1) at any time upon thirty (30) days written notice.
(2) upon written notice by Employee to the Company within thirty (30)
days of and indicating that a change in control of the Company
("Corporate Transaction") has occurred and therefore Employee elects to
terminate as provided herein. A Corporate Transaction or other
qualifying event shall be deemed to have occurred if (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Exchange Act)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the Company's
then outstanding securities; or (ii) the Company sells, transfers or
otherwise disposes of all or substantially all of the assets of the
Company; or (iii) a merger or acquisition in which the Company is not
the surviving entity (except for a merger into a wholly-owned
subsidiary, and except for a transaction the sole purpose of which is to
change domicile).
(3) if termination by the Employee is pursuant to 5 (b) (1) then no
severance or termination payments shall be payable. If termination is
noticed pursuant to 5 (b) (2) hereof then Employee shall be entitled to
a payment equal to the greater of the remaining months of this Agreement
multiplied by the then monthly Base Salary or twelve (12) multiplied by
the then monthly Base Salary payable in one lump sum within sixty (60)
days. In addition, the Employee shall be entitled to recover legal fees
and costs incurred by Employee should the Company not make timely
payment prescribed by this section and should the Employee prevail in
any action filed thereabouts.
(c) Upon termination of this Agreement, Employee shall immediately resign all
offices held with the Company and all Affiliates (any entity with a 30% or more
equity ownership by or of the Company) thereof, and, except as set forth in this
Section 5, Employee shall not be entitled to receive any termination or
severance payment or compensation for loss of office or otherwise. If Employee
fails to immediately resign as herein provided, then Employee irrevocably
appoints the Secretary of the Company in his name and on his behalf to sign any
resignation confirmation or do anything necessary or requisite to give effect to
such resignation(s). On the effective date of termination of this Agreement,
Employee will deliver to the Company, in a reasonable state of repair, all
property and equipment of the Company, both real and personal owned, leased or
bailed to
<PAGE> 4
Employee and used by or in the possession of Employee.
6. Confidential Information and Trade Secrets. Employee covenants and agrees
with the Company that Employee will not, during the term of this Agreement and
thereafter directly or indirectly use, communicate, disclose or disseminate to
anyone (except to the extent reasonably necessary for Employee to perform
Employee's duties hereunder, except as required by law or except if generally
available to the public otherwise than through use, communication, disclosure or
dissemination by Employee) any Confidential Information (as hereinafter defined)
concerning the businesses or affairs of the Company or of any of its affiliates
or subsidiaries which Employee may have acquired in the course of or as incident
to Employee's employment or prior dealings with the Company or with any of its
affiliates or subsidiaries.
"Confidential Information" shall mean (a) all knowledge, information and
material concerning the Company or its business or the business of any of its
affiliates or subsidiaries that shall become known to Employee as a consequence
of Employee's relationship with the Company, (b) all information that has been
disclosed to the Company by any third party under an agreement or circumstances
requiring such information to be kept confidential, and (c) all knowledge,
information or material concerning Inventions that are, under this Agreement,
owned by Company or assigned by Employee to Company; provided, that Confidential
Information shall not include knowledge, information or material that is or
becomes generally known or available to others in businesses engaged in by the
Company or to the public (other than through unauthorized disclosure).
Confidential Information shall include without limitation (a) information of a
technical nature, such as information regarding past, present and future
research, financial data, product information, marketing plans, computer
programs (whether in source or object code form or other form and whether
contained on program listings, magnetic tape, magnetic disks, CD ROMs or other
media), logic, flow charts, specifications, documentation and ideas relating to
the activities of Company, (b) information of a business nature, such as
information regarding past, present and future client or consumer development,
strategies, procurement specifications, cost and financial data, contracts,
quotations and names of actual and prospective clients, consumers or customers,
and (c) all documents, drawings, reports, client and consumer lists, and other
physical embodiments of all such information.
"Inventions" shall mean each of the following, but only to the extent they
relate to the business of commerce conducted by the Company or its Affiliates or
are made by Employee with the equipment, supplies, facilities or trade secret
information of the Company or which result from any work performed by the
Employee for the Company: all inventions, discoveries, developments, ideas,
works, improvements, enhancements, works of authorship, products and computer
software, whether or not patentable, and anything else that is subject to or
potentially subject to the patent, copyright or trade secret laws of any
jurisdiction.
The Employee agrees that as to any Inventions made by him during the term of his
employment, solely or jointly with others, shall belong to the Company and the
Employee promises to assign such Inventions to the Company. The Employee also
agrees that the Company shall have the right to keep such Inventions as trade
secrets, if the Company chooses. The Employee agrees to assign to the Company
the Employee's rights in any other Inventions where the Company is required to
grant those rights to the United States government or any agency thereof. In
order to permit the Company to claim rights to which it may be entitled, the
Employee agrees to disclose to the Company in confidence all Inventions which
the Employee makes arising out of the Employee's employment and all patent
applications filed by the Employee within one year after the termination of his
employment. The Employee shall assist the Company in obtaining patents on all
Inventions, designs, improvements, and discoveries patentable by the Company in
the United States and in all foreign countries, and shall execute all documents
and do all things necessary to obtain letters patent, to vest the Company with
full and extensive title thereto, and to protect the same against infringement
by others.
7. Non-Competition Covenant. Employee acknowledges that Employee's services and
responsibilities are of particular significance to the Company and that
Employee's position with the Company will give Employee close knowledge of its
policies and trade secrets. Since the Company is in a technical, creative and
competitive business, Employee's continued and exclusive service to Company
under this Agreement is of a high degree of importance.
Employee covenants and agrees with the Company that Employee will not, during
the term of this Agreement and for a period of two years after the termination
of Employee's employment hereunder in any manner, directly or indirectly, (i)
induce or attempt to influence any present or future officer, employee, lessor,
lessee, licensor or licensee of Company or its subsidiaries or its affiliates to
leave its respective employ; further, during the term described, Employee will
not be involved in or participate in a competitive company that solicits or
diverts or services any of the customers, consumers or clients that the Company
or its subsidiaries or its affiliates has or had in the one (1) year previous to
the date of termination of this Agreement, (ii) engage, in the state of
California where the Company currently operates or the other 49 states in
America that the Company
<PAGE> 5
is planning to do business, in any businesses that during the term of this
Agreement is engaged in by the Company or its subsidiaries or affiliates, and
(iii) except for ownership of no more than 1% of the capital stock, be a
stockholder of any corporation, or directly or indirectly own, manage, operate,
conduct, control or participate in the ownership, management, operation,
conduct, control of, accept employment with, or be connected in any other manner
with, any business which engages in any direct competitive activity including,
without limitation, any business which engages in licensing sound reproduction
or jet engine noise reduction technology in any geographic region indicated in
this paragraph.
8. Right to Injunctive Relief. Employee acknowledges that the remedy at law for
any breach or threatened breach by Employee of the covenants contained in
paragraphs 6 and 7 would be wholly inadequate, and therefore the Company or its
subsidiaries or its affiliates shall be entitled to preliminary and permanent
injunctive relief and specific performance thereof. Paragraphs 6 and 7
constitute independent and separable covenants that shall be enforceable
notwithstanding rights or remedies that the Company or its subsidiaries or it
affiliates may have under any other provision of this Agreement, or otherwise.
If any or all of the foregoing provisions of paragraphs 6 and 7 are held to be
unenforceable for any reason whatsoever, it shall not in any way invalidate or
affect the remainder or this Agreement which shall remain in full force and
effect. If the period of time or geographical areas specified in paragraphs 6
and 7 are determined to be unreasonable in any judicial proceeding, the period
of time or areas of restriction shall be reduced so that this Agreement may be
enforced in such areas and during such period of time as shall be determined to
be reasonable.
9. Employee Acknowledgment. Employee has carefully read and considered the
provisions hereof, and having done so, agrees that restrictions set forth in
paragraphs 6, 7, and 8 (including, but not limited to, the time periods of
restrictions) are fair and reasonable and are reasonably required for the
protection of the interests of Company.
10. Stock Options. The Employee has been granted stock options on 250,000 common
shares, subject to vesting, in connection with this employment agreement.
Immediately prior to the closing of a transaction as described in Section
5(b)(2) ("Corporate Transaction"), the exercisability of each option granted to
you to purchase shares of Common Stock that is outstanding immediately prior to
the closing of such Corporate Transaction, will be automatically accelerated so
that each such option will, immediately prior to the closing date for the
Corporate Transaction, become fully exercisable with respect to the total
number of shares issuable upon exercise thereof and may be exercised prior to
the closing of such Corporate Transaction for all or any portion of such shares.
The Company shall use its best efforts to register the stock options during the
first twelve months of employment.
11. Severability. Each paragraph and subparagraph of this Agreement shall be
construed and considered separate and severable from the validity and
enforceability of any other provision contained in this Agreement.
12. Assignment. The rights of the Company (but not its obligations) under this
Agreement may, without the consent of the Employee, be assigned by the Company
to any parent, subsidiary, or successor of the Company; provided that such
parent, subsidiary or successor acknowledges in writing that it is also bound by
the terms and obligations of this Agreement. Except as provided in the preceding
sentence, the Company may not assign all or any of its rights, duties or
obligations hereunder without prior written consent of Employee. The Employee
may not assign all or any of his rights, duties or obligations hereunder without
the prior written consent of the Company.
13. Notices. All notices, requests, demands and other communications shall be in
writing and shall be defined to have been duly given if delivered or if mailed
by registered mail, postage prepaid: (a) If to Employee, addressed to him at the
following address as may be changed in writing from time to time:
Cornelius J. Brosnan
14609 Howe Drive
Leawood, KS 66224
(b) If to the Company, addressed to:
American Technology Corporation
13114 Evening Creek Drive South
San Diego, California 92128
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
14. Title and Headings. Titles and headings to paragraphs hereof are for
purposes of references only and shall in no way limit, define or otherwise
affect the provisions hereof.
<PAGE> 6
15. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
16. Counterparts. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be necessary
in making proof of this Agreement to produce or account for more than one
original counterpart.
17. Cumulative Rights. Each and all of the various rights, powers and remedies
of the Company and Employee in this Agreement shall be considered as cumulative,
with and in addition to any other rights, powers or remedies of the Company or
the Employee and no one of them as exclusive of the others or as exclusive of
any other rights, powers and remedies allowed by law. The exercise or partial
exercise of any right, power or remedy shall neither constitute the election
thereof nor the waiver of any other right, power or remedy. Sections 4, 6, 7 and
8 hereof shall continue in full force and effect notwithstanding the Employee's
termination of employment and the termination of this Agreement.
18. Remedies. The Employee and the Company both acknowledge that each may have
no adequate remedy at law if either violates any of the terms contained in
Sections 6, 7 and 8. In such event, either party shall have the right, in
addition to any other rights it may have, to obtain relief to restrain any
breach hereof or otherwise to specifically enforce any of the provisions hereof.
19. Waiver of Breach. The waiver by one party to this Agreement of a breach of
any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the said party .
20. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and may be modified or amended only by a written instrument
executed by parties hereto. Effective on the date hereof, any prior employment
agreements between the Company and the Employee shall terminate.
21. Attorney's Fees. In the event that either party must institute legal action
to compel the other to comply with the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees and costs.
22. Good Faith. Each of the parties hereto agrees that he or it shall act in
good faith in all actions taken under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
/s/ RICHARD M. WAGNER July 17th, 1998
American Technology Corporation
Richard M. Wagner, Corporate Secretary
/s/ CORNELIUS J. BROSNAN July 17th, 1998
Cornelius J. Brosnan, Employee
<PAGE> 1
Exhibit 10.13.2
AMERICAN TECHNOLOGY CORPORATION
-------------------------------
SPECIAL STOCK OPTION AGREEMENT
----------------
GRANTED UNDER THE APPROVAL OF THE BOARD OF DIRECTORS OF AMERICAN TECHNOLOGY
CORPORATION
THIS STOCK OPTION AGREEMENT, dated as of July 15, 1998 (the "Date of
Grant"), is granted by AMERICAN TECHNOLOGY CORPORATION, a Delaware corporation
("Company"), to Cornelius J. Brosnan (the "Optionee"), whose status with the
Company is described on the signature page hereof below his signature.
WHEREAS, the Optionee is now an employee of the Company and the Company
desires to have the Optionee remain in its service and desires to encourage
stock ownership by the Optionee and to increase the Optionee's proprietary
interest in the Company's success; and as an inducement thereto has determined
to grant to the Optionee the option herein provided for, to the end that the
Optionee may thereby be assisted in obtaining an interest, or an increased
interest, as the case may be, in the stock ownership of the Company;
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties hereto hereby agree as follows:
1. GRANT AND VESTING.
(a) Pursuant to the Unanimous Consent of Directors of the Company dated July 15,
1998, the Company hereby grants to the Optionee an option (the "Option") to
purchase up to 240,000 shares of the Company's common stock, $.00001 par value
per share (the "Option Shares") at the price of $8.50 per share (the "Purchase
Price" or "Exercise Price") representing the closing bid price on July 15, 1998.
(b) This option shall vest and become exercisable at the rate of 7,500 option
shares commencing at the end of the second full month of employment and on each
full month anniversary of employment thereafter with all shares vesting and
become exercisable on or before April 30, 2001.
(c) Subject to the provisions hereof, immediately prior to the closing of a
Corporate Transaction ("Corporate Transaction"), the exercisability of each
option granted to purchase shares of Common Stock that is outstanding
immediately prior to the closing of such Corporate Transaction, will be
automatically accelerated so that each such option will, immediately prior to
the closing date for the Corporate Transaction, become fully exercisable with
respect to the total number of shares issuable upon exercise thereof and may be
exercised prior to the closing of such Corporate Transaction for all or any
portion of such shares. A Corporate Transaction or other qualifying event shall
be deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding securities; or (ii) the Company sells,
transfers or otherwise disposes of all or substantially all of the assets of the
Company; or (iii) a merger or acquisition in which the Company is not the
surviving entity (except for a merger into a wholly-owned subsidiary, and except
for a transaction the sole purpose of which is to change domicile).
(d) This Option is granted separately at the discretion of the Board of
Directors and is not an option pursuant to the Company's option plans. Both the
Purchase Price and the number of Option Shares purchasable may be adjusted
pursuant to Paragraph 9 hereof.
2. TERM. This Option is exercisable during the period beginning with the
Date of Grant and ending July 15, 2003, at 5:00 p.m. (Pacific Time), except as
provided in Paragraph 7 hereof.
3. EXERCISE OF OPTION. During the Optionee's life, this Option may only
be exercised by him or her in whole or in part. This Option may only be
exercised by presentation at the principal offices of the Company in San Diego,
California of written notice to the Company's Secretary advising the Company of
the Optionee's election to purchase Option Shares, specifying the number of
Option Shares being purchased, accompanied by payment. No Option Shares shall be
issued until full payment is made therefor. Payment shall be made either (i) in
cash, represented by bank or cashier's check, certified check or money order; or
(ii) by advising the Company, at the time the Option is exercised,
<PAGE> 2
to withhold from exercise under the Option the appropriate number of Option
Shares, the aggregate market value (closing bid price) of which on the date of
exercise of the Option is equal to the aggregate cash purchase price of the
Option Shares being exercised and purchased under the Option, and such
withholding shall constitute full payment for the non-withheld Option Shares
issued upon exercise, or (iii) at the discretion of the Board of Directors, by
delivery of the Optionee's personal recourse note with interest and terms
acceptable to the Board of Directors.
4. ISSUANCE OF OPTION SHARES; RESTRICTIVE LEGEND. (a) Upon proper
exercise of this Option, the Company shall mail or deliver to the Optionee, as
promptly as practicable, a stock certificate or certificates representing the
Option Shares purchased, subject to clause (b) below. The Company shall not be
required to sell or issue any shares under the Option if the issuance of such
shares shall constitute a violation of any applicable law or regulation or of
any requirements of any national securities exchange upon which the Company's
common stock may be listed.
(b) Upon any exercise of this Option, if a registration statement under
the Securities Act of 1933 (the "Act") is not in effect with respect to the
Option Shares, then the Company shall not be required to issue any Option Shares
unless the Company has received evidence reasonably satisfactory to it to the
effect that the Optionee is acquiring such shares for investment and not with a
view to the distribution thereof. Any reasonable determination in this
connection by the Company shall be final, binding and conclusive.
(c) Unless and until removed as provided below, each certificate
evidencing unregistered Option Shares shall bear a legend in substantially the
following form:
"The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or under the securities laws
of any state and may not be sold or transferred except upon such
registration or upon receipt by this Corporation of an opinion or
counsel satisfactory to this Corporation, in form and substance
satisfactory to this Corporation, that registration is not required for
such sale or transfer. "
The Company shall issue a new certificate which does not contain such
legend if (i) the shares represented by such certificate are sold pursuant to a
registration statement (including a current prospectus) which has become
effective under the Act, or (ii) the staff of the Securities and Exchange
Commission shall have issued a "no action" letter, reasonably satisfactory to
the Company's counsel, to the effect that such shares may be freely sold and
thereafter traded publicly without registration under the Act, or (iii) the
Company's counsel, or other counsel acceptable to the Company, shall have
rendered an opinion satisfactory to the Company to the effect that such shares
may be freely sold and thereafter publicly traded without registration under the
Act. The Company agrees that if it should cause the registration of any stock
options of any senior officers that it will include the option shares of the
Optionee with any registration statement, as long as the shares qualify to be so
registered, at no cost to Optionee. The Company shall not be obligated to take
any other affirmative action in order to cause the exercise of the Option or the
issuance of any Option Shares to comply with any law or regulation of any
governmental authority.
5. TRANSFER OF OPTION SHARES. Option Shares issued upon exercise of this
Option which have not been registered under the Act shall be transferable by a
holder thereof only upon compliance with the conditions in this Paragraph.
Before making any transfer of Option Shares, the holder of the shares shall give
written notice to the Company of the holder's intention to make the transfer,
describing the manner and circumstances of the transfer. If in the opinion of
the Company's counsel, or of other counsel acceptable to the Company, the
proposed transfer may be effected without registration under the Act, the
Company shall so notify the holder and the holder shall be entitled to transfer
such shares as described in the holder's notice to the Company. If such counsel
opines that the transfer may not be made without registration under the Act,
then the Company shall so notify the holder, in which event the holder shall not
be entitled to transfer the shares until (i) the Company notifies the holder
that it is permissible to proceed with the transfer, or (ii) registration of the
shares under the Act has become effective. The Company may issue "stop transfer"
instructions to its transfer agent with respect to any or all of the Option
Shares as it deems necessary to prevent any violation of the Act.
6. TRANSFER OR ENCUMBRANCE OF THIS OPTION PROHIBITED. This Option may
not be transferred or assigned in any manner by the Optionee, except by will or
trust upon the Optionee's death or by operation of law under the laws of descent
and distribution. The same restriction on transfer or assignment shall apply to
any heirs, devisees, beneficiaries or other persons acquiring this Option or an
interest herein under such an instrument or by operation of law. Further, this
Option may not be pledged, hypothecated or otherwise encumbered, by operation of
law or otherwise, nor shall it be subject to execution, attachment or similar
process.
2
<PAGE> 3
7. TERMINATION OF SERVICE, DEATH, OR DISABILITY.
(a) Except as may be otherwise expressly provided in this Agreement,
this Option shall terminate and any vested options at such termination shall no
longer be exercisable as follows:
(i) Upon termination of the Optionee's employment with the
Company for cause;
(ii) At the expiration of twelve (12) months from the date of
the Optionee's resignation;
(iii) At the expiration of twelve (12) months from the date of
Optionee's termination of the Optionee's employment with
the Company without cause, for any reason other than
death; provided, that if the Optionee dies within such
twelve-month period, subclause (iv) below shall also
apply; or
(iv) At the expiration of twelve (12) months after the date of
death of the Optionee.
(b) "Employment with the Company" shall include employment with any
parent or subsidiary of the Company, and this Option shall not be affected by
the Optionee's transfer of employment among the Company and any parent or
subsidiary thereof. An Optionee's employment with the Company shall not be
deemed interrupted or terminated by a bona fide leave of absence (such as
sabbatical leave or employment by the Government) duly approved, military leave
or sick leave. This Option shall not be affected in the event the Optionee
suffers a significant diminution in his duties or any significant reduction in
his overall compensation. After the death of the Optionee, his executors,
administrators or personal representatives, or any person or persons to whom the
Option may be transferred by will, trust or by the laws of descent and
distribution, shall have the right, at any time prior to termination hereof, to
exercise this Option pursuant to its terms.
(c) This Option confers no right upon the Optionee with respect to the
continuation of his employment (or his position as an officer, director or other
provider of services) with the Company or any parent or subsidiary of the
Company, and shall not interfere with the right of the Company, or any parent or
subsidiary Company, to terminate such relationship(s) at any time in accordance
with law and any agreements then in force.
8. NO RIGHTS AS STOCKHOLDER. The Optionee shall have no rights as a
stockholder with respect to Option Shares until the date of issuance of a stock
certificate for such shares. No adjustment for dividends, or otherwise, except
as provided in Paragraph 9, shall be made if the record date therefor is prior
to the date of exercise of such Option.
9. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of this
Option shall not limit or affect in any way the right or power of the Company or
its shareholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of bonds,
debentures, preferred or prior preference stock ahead of or affecting the Option
Shares or the rights thereof, or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.
However,
(a) If, prior to the Company's delivery of all the Option Shares subject
to this Option, the Company shall effect a subdivision (split) or combination
(reverse split) of shares or other capital readjustment, the payment of a common
stock dividend, or other increase or reduction of the number of shares of common
stock outstanding, without receiving compensation therefor in money, services or
property, then (i) in the event of an increase in the number of such shares
outstanding, the Purchase Price shall be proportionately reduced and the number
of Option Shares then still purchasable shall be proportionately increased; and
(ii) in the event of a reduction in the number of such shares outstanding, the
Purchase Price payable per share shall be proportionately increased and the
number of Option Shares then still purchasable shall be proportionately reduced.
(b) If while this Option remains outstanding the Company is reorganized,
merged, consolidated or party to a plan of share exchange with another
corporation, or if the Company sells or otherwise disposes of all or
substantially all its property or assets to another corporation, then subject to
the provisions of clause (ii) below, (i) after the effective date of such
reorganization, merger, consolidation, exchange or sale, as the case may be, the
Optionee shall be entitled, upon exercise of this Option, to receive, in lieu of
the Option Shares, the number and class of shares of such stock, other
securities, cash and other property or rights as the holders of shares of the
Company's common stock received pursuant to the terms of the reorganization,
merger, consolidation, exchange or sale and to which he would have been entitled
if, immediately prior to such reorganization, merger, consolidation, exchange or
sale, he had been the holder of record of a number of shares of common stock
equal to the number of Option Shares as to which this Option shall be so
exercised; and (ii) this Option may be canceled by the Board of Directors of the
Company as of the effective date of any such reorganization, merger,
consolidation, exchange or sale; provided that (x) such reorganization, merger,
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<PAGE> 4
consolidation, exchange or sale results in a change in control of the Company
rather than a mere change of form or domicile of the Company, (y) written notice
of such cancellation is given to the Optionee or other holder of this Option not
less than 45 days prior to such effective date, and (z) the holder shall have
the right to exercise the Option in full during such 45-day period preceding the
effective date of such reorganization, merger, consolidation, exchange or sale.
(c) In case the Company shall determine to offer to the holders of its
common stock rights to subscribe pro rata for any new or additional shares of
common stock, or any securities convertible into common stock, then the Optionee
shall be entitled to participate in such pro rata offering in the same manner
and to the same extent as if this Option had been exercised at the Purchase
Price then in effect and the number of Option Shares then purchasable upon
exercise hereof had been issued to the Optionee pursuant to the terms hereof.
(d) Except as herein before expressly provided, the issue by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the Purchase Price or the number of Option Shares then
subject to this Option.
10. NOTIFICATION TO COMPANY OF CERTAIN SALES. The Optionee or other
holder of Option Shares who sells any of such shares shall notify the Company of
such fact in writing within 30 days after the date of sale, if:
(a) At the time the Option Shares were sold, less than ONE year had
elapsed since the date the Option Shares were purchased by the Optionee, and
less than TWO years had elapsed since the Date of Grant of this Option; or
(b) the Optionee was not an employee of the Company (or of a parent or
subsidiary thereof) at all times during the period beginning on the Date of
Grant of this Option and ending on the date three (3) months prior to the date
this Option was exercised to purchase the Option Shares sold.
11. PAYMENT OF WITHHOLDING TAXES. The exercise of any Option is subject
to the condition that if at any time the Company shall determine, in its
discretion, that the satisfaction of withholding tax or other withholding
liabilities under any federal, state or local law is necessary or desirable as a
condition of, or in connection with, such exercise or a later lapsing of time or
restrictions on or disposition of the shares of Common Stock received upon such
exercise, then in such event, the exercise of the Option shall not be effective
unless such withholding shall have been effected or obtained in a manner
acceptable to the Company.
12. NOTICES, ETC. Any notice hereunder by the Optionee shall be given to
the Company in writing, and such notice and any payment by the Optionee
hereunder shall be deemed duly given or made only upon receipt thereof at the
Company's office at 13114 Evening Creek Dr. South, San Diego, California 92128,
or at such other address as the Company may designate by notice to the Optionee.
Any notice or other communication to the Optionee hereunder shall be in writing
and shall be deemed duly given or made if mailed or delivered to the Optionee at
the last address as the Optionee may have on file with the Company's Secretary.
This Option shall be governed under and construed in accordance with the laws of
the State of California. This address shall be binding on the Company and the
Optionee and all successors, assigns, heirs, devisees and personal
representatives thereof.
NOTE: This option must match the Control copy maintained by the Company, in all
particulars.
IN WITNESS WHEREOF, the parties hereto have executed this Stock Option Agreement
as of the day and year first above written.
AMERICAN TECHNOLOGY CORPORATION
By /s/ ELWOOD G. NORRIS
-------------------------------------
ELWOOD G. NORRIS, DIRECTOR
ATTEST:
By /s/ RICHARD WAGNER
---------------------------------
RICHARD WAGNER, SECRETARY
OPTIONEE NAME AND STATUS;
CORNELIUS J. BROSNAN, EMPLOYEE
ORIGINAL to Optionee / COPY to Company
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<PAGE> 1
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into effective as of the 1st day of June, 1998,
between AMERICAN TECHNOLOGY CORPORATION, a Delaware publicly traded corporation
(the "Company"), and James Croft ("Employee").
Employee, in consideration of the covenants and agreements hereinafter
contained, agrees as follows with respect to the employment of the Company of
Employee and Employees future business activities.
1. Employment: Term of Employment. The Company hereby employs Employee and
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth. Subject to the provisions for termination as hereinafter
provided, Employee's term of employment by the Company shall be from the date of
this agreement until September 30, 2001, and automatically renewed for one year
periods thereafter unless thirty (30) days written notice of termination is sent
prior to the annual renewal date. This Agreement will supersede all prior
written and oral agreements entered into by and between Company and Employee.
2. Services to be Rendered by Employee. Employee shall be subject to the
direction of the Company's Chief Executive Officer and his duties shall be those
generally vested in the office of Vice President of Engineering for the
corporation and he shall have such other powers and duties as may be reasonably
prescribed by the Company's Chief Executive Officer, Board of Directors, or a
duly authorized committee thereof, and shall perform such duties as from time to
time may be decided upon by the Company's Chief Executive Officer, Board of
Directors, or a duly authorized committee thereof, including but not limited to,
speaking for and promoting the sale of the Company's product lines as public
spokesman both in print and television ads.
The Employee agrees that he will serve the Company faithfully and to the best of
his abilities, devoting substantially all his time, energy and skill to the
activities of the Company and the promotion of its interests. Employee shall not
serve as an officer or director or similar capacity with any other entity except
with the consent of the Company. The Company has agreed to accommodate
Employee's position with Definitive Audio to the extent of an average of one day
per month so long as the prime focus of Employee's time and activities are in
support of the Company's objectives.
3. Compensation.
(a) For the services to be rendered by Employee during his employment by the
Company, the Company shall pay Employee a Base Salary of One Hundred Ten
Thousand Dollars ($110,000) per annum during the term of this agreement,
prorated for any partial period and paid in conformity with the Company's normal
payroll period. Employee's salary shall be reviewed by the Company's Chief
Executive Officer from time to time in his discretion, and Employee will receive
such salary increases, if any, as the Chief Executive Officer in his sole
discretion determines.
(b) Employee shall be entitled to participate in any bonus pool or similar
program established by the Board of Directors.
(c) The Employee's place of employment shall be considered San Diego County,
California (or other mutually agreed upon location).
(d) Employee shall be entitled to participate in and receive benefits under the
Company's executive benefits plans as in effect from time to time, including,
medical insurance, sick leave, and vacation time, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and Company policies. Initial vacation time shall be at least three weeks per
annum.
(e) The Company shall pay or reimburse Employee for all expenses normal
reimbursed by the Company and reasonably incurred by him in furtherance of his
duties hereunder and authorized by the Company, including without limitation,
expenses for entertainment, traveling, meals, hotel accommodations and the like
upon submission by him of vouchers or an itemized list thereof as the Company;
may from time to time adopt and authorize, and as may be required in order to
permit such payments as proper deductions to the Company under the Internal
Revenue Code of 1986 and the rules and regulations adopted pursuant thereto now
or hereafter in effect.
(f) All amounts payable or which become payable under any provision of this
Agreement will be subject to any deductions authorized in writing by you and any
deductions and withholdings required by law.
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4. Indemnification.
(a) If, after the date of the commencement of the Employment Period, the
Employee is made a party or is threatened to be made a party to any action, suit
or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was an officer of the Company
or is or was serving at the request of the Company as a director, officer,
member, employee or agent of another corporation or partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether or not the basis of such Proceeding is an alleged act or failure
to act in an official capacity as a director, officer, member, employee or
agent, he shall be indemnified and held harmless by the Company to the fullest
extent authorized by Delaware law, as the same exists or may hereafter be
amended, against all expense, liability and loss (including, without limitation,
attorneys' fees, judgments, fines and amounts paid or to be paid in settlement)
reasonably incurred or suffered by the Employee in connection therewith,
including, without limitation, payment of expenses incurred in defending a
Proceeding prior to the final disposition of such Proceeding (subject to receipt
of an undertaking by the Employee to repay such amount if it shall ultimately be
determined that the Employee is not entitled to be indemnified by the Company
under Delaware law), and such indemnification shall continue as to the Employee
even if he has ceased to be an officer, member, employee or agent of the Company
or other enterprise and shall inure to the benefit of his heirs, executors and
administrators.
(b) The right of indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferred in this
Section 4 shall not be exclusive of any other right that the Employee may have
or hereafter may acquire under any statute, provision of the Certificate of
Incorporation or Bylaws of the Company, agreement, vote of shareholders or
disinterested directors or otherwise.
5. Termination of Employment.
(a) The Company shall have the right at its option to terminate the employment
of Employee hereunder by giving written notice thereof to the Employee in the
event of any of the following:
(1) The Company may terminate this Agreement at any time with good
cause, as determined by the Board of Directors of the Company, or a duly
authorized committee thereof, acting in good faith and upon reasonable
grounds, whereupon all compensation to Executive shall cease as of the
effective date of termination. As used in this paragraph, the term "good
cause" shall mean (i) dishonesty by Executive detrimental to the best
interests of the Company, (ii) continuing inattention to or neglect of
the duties to be performed by Employee, (iii) willful disloyalty of
Employee to Company, (iv) the death or disability of Employee, (v)
conviction by a court of competent jurisdiction of Employee in any
fraud, or (vi) the imparting of any material confidential information by
Employee in violation of this Agreement.
(2) If the Company gives Employee thirty days advance written notice of
termination of employment.
(3) If this Agreement is terminated by the Company pursuant to Paragraph
5(a)(2) hereof, then Employee shall be entitled to severance payments
equal to six (6) months of his then monthly Base Salary and any bonus on
an as if perfected basis payable in one lump sum within thirty (30) days
after such effective termination of Employee's employment by the Company
irrespective of the remaining term of this agreement.
(b)The Employee shall have the right at his sole option to terminate employment
hereunder at any time upon thirty (30) days written notice.
6. Soliciting Customers. The Employee agrees that he will not for a period of
one (1) year immediately following the termination of his employment with the
Company, either directly or indirectly make known to any competing person, firm,
or corporation the names or addresses of any of the customers of the Company or
any other information pertaining to them that is not in the public domain.
7. Trade Secrets of the Company. The Employee prior to and during the term of
employment under this Agreement has had and will have access to and become
acquainted with various trade secrets, consisting of devices, secret inventions,
processes, and compilations of information, records, and specifications which
are owned by the Company, and which are regularly used or to be used in the
operation of the business of the Company. The Employee shall not disclose any of
the aforesaid trade secrets, directly or indirectly, or use them in any way,
either during the term of this agreement or for a period of 36 months
thereafter, except as required in the course of his employment. All files,
records, documents, drawings, specifications, equipment, and similar items
relating to the business of the Company, whether prepared by the Employee or
otherwise coming into his possession, shall remain the exclusive property of the
Company and shall not be removed under any circumstances from the premises of
the Company where the work is being carried on without prior written consent of
the Company or consistent with the Company's normal business practices.
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<PAGE> 3
8. Inventions and Patents.
(a) Employee has provided the Company with a list of audio properties developed
by Employee prior to employment. The Company shall separately negotiate for
license(s) for any of these listed properties should the Company desire to use
them in any of its product programs. Other inventions shall be assumed to fall
under the provisions of this Section 8.
(b) The Employee agrees that as to any inventions made by him during the term
of his employment, solely or jointly with others, which are made with the
equipment, supplies, facilities or trade secret information of the Company, or
which relate at the time of the conception or reduction to purchase of the
invention to the business of the Company or the Company's actual or demonstrably
anticipated research and development, or which result from any work performed by
the Employee for the Company, shall belong to the Company and the Employee
promises to assign such inventions to the Company. The Employee also agrees that
the Company shall have the right to keep such inventions as trade secrets, if
the Company chooses. The Employee agrees to assign to the Company the
Executive's rights in any other inventions where the Company is required to
grant those rights to the United States government or any agency thereof. In
order to permit the Company to claim rights to which it may be entitled, the
Employee agrees to disclose to the Company in confidence all inventions which
the Employee makes arising out of the Employee's employment and all patent
application filed by the Employee within one year after the termination of his
employment.
(c) The Employee shall assist the Company in obtaining patents on all
inventions, designs, improvements, and discoveries patentable by the Company in
the United States and in all foreign countries, and shall execute all documents
and do all things necessary to obtain letters patent, to vest the Company with
full and extensive title thereto, and to protect the same against infringement
by others.
9. Severability. Each paragraph and subparagraph of this Agreement shall be
construed and considered separate and severable from the validity and
enforceability of any other provision contained in this Agreement.
10. Assignment. The rights of the Company (but not its obligations) under this
Agreement may, without the consent of the Employee, be assigned by the Company
to any parent, subsidiary, or successor of the Company; provided that such
parent, subsidiary or successor acknowledges in writing that it is also bound by
the terms and obligations of this Agreement. Except as provided in the preceding
sentence, the Company may not assign all or any of its rights, duties or
obligations hereunder without prior written consent of Employee. The Employee
may not assign all or any of his rights, duties or obligations hereunder without
the prior written consent of the Company.
11. Notices. All notices, requests, demands and other communications shall be in
writing and shall be defined to have been duly given if delivered or if mailed
by registered mail, postage prepaid: (a) If to Employee, addressed to him at the
following address as may be changed in writing from time to time:
James Croft
---------------------
---------------------
(b) If to the Company, addressed to:
American Technology Corporation
13114 Evening Creek Dr. South
San Diego, California 92128
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
12. Title and Headings. Titles and headings to paragraphs hereof are for
purposes of references only and shall in no way limit, define or otherwise
affect the provisions hereof.
13. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
14. Counterparts. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be necessary
in making proof of this Agreement to produce or account for more than one
original counterpart.
15. Cumulative Rights. Each and all of the various rights, powers and remedies
of the Company and Employee in this Agreement shall be considered as cumulative,
with and in addition to any other rights, powers or remedies of the Company or
the Employee and no one of them as exclusive of the others or as exclusive of
any other rights, powers and remedies allowed by law. The exercise or partial
exercise of any right, power or remedy shall neither constitute the election
thereof nor the waiver of any other right, power or remedy. Sections 4, 6, 7 and
8 hereof shall continue in full force and effect notwithstanding the Employee's
termination of employment and the termination of this Agreement.
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16. Remedies. The Employee and the Company both acknowledge that each may have
no adequate remedy at law if either violates any of the terms contained in
Sections 6, 7 and 8. In such event, either party shall have the right, in
addition to any other rights it may have, to obtain relief to restrain any
breach hereof or otherwise to specifically enforce any of the provisions hereof.
17. Waiver of Breach. The waiver by one party to this Agreement of a breach of
any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the said party.
18. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and may be modified or amended only by a written instrument
executed by parties hereto. Effective on the date hereof, any prior employment
agreements between the Company and the Employee shall terminate.
19. Attorney's Fees. In the event that either party must institute legal action
to compel the other to comply with the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees and costs.
20. Good Faith. Each of the parties hereto agrees that he or it shall act in
good faith in all actions taken under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
/s/ ELWOOD G. NORRIS July 8, 1998
American Technology Corporation
Elwood G. Norris, Director
/s/ROBERT PUTNAM July 8, 1998
Robert Putnam, Vice President
/s/ JAMES CROFT July 8, 1998
James Croft, Employee
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Exhibit 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
American Technology Corporation
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (File No. 333-09265, File No. 333-09269, File No.
333-23845 and File No. 333-59929) and Forms S-3 (File No. 333-27455 and File No.
333-36003) of our report dated November 6, 1998, except for Note 13, which is
as of December 28, 1998 relating to the financial statements of American
Technology Corporation appearing in the Company's Annual Report on Form 10-KSB
for the year ended September 30, 1998.
/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP
Denver, Colorado
December 28, 1998
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 1998.
</LEGEND>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,034,577
<SECURITIES> 14,645
<RECEIVABLES> 88,737
<ALLOWANCES> 17,000
<INVENTORY> 87,292
<CURRENT-ASSETS> 1,266,721
<PP&E> 542,129
<DEPRECIATION> 372,762
<TOTAL-ASSETS> 1,683,745
<CURRENT-LIABILITIES> 280,833
<BONDS> 0
0
0
<COMMON> 114
<OTHER-SE> 1,402,798
<TOTAL-LIABILITY-AND-EQUITY> 1,683,745
<SALES> 194,758
<TOTAL-REVENUES> 244,758
<CGS> 407,123
<TOTAL-COSTS> 407,123
<OTHER-EXPENSES> 3,651,760
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 926,555
<INCOME-PRETAX> (4,593,713)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,593,713)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,593,713)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
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