-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QwShMMc/7U96Mi3DIMye7b72+z1GHP+8hTaQKaAqiQGzjv9BnEjMt/CWNhH3HbnK g2cTbhwMGbr2CBwJooYMog== 0000936392-98-001670.txt : 19981230 0000936392-98-001670.hdr.sgml : 19981230 ACCESSION NUMBER: 0000936392-98-001670 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN TECHNOLOGY CORP /DE/ CENTRAL INDEX KEY: 0000924383 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 870361799 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-24248 FILM NUMBER: 98777005 BUSINESS ADDRESS: STREET 1: 13114 EVENING CREEK DRIVE SOUTH CITY: SAN DIEGO STATE: CA ZIP: 92128 BUSINESS PHONE: 6196792114 10KSB 1 FORM 10-KSB 1 ================================================================================ 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 -------- ---------- (State or other jurisdiction of (I.R.S. Empl. Ident. No.) incorporation or organization) 13114 Evening Creek Drive South, San Diego, California 92128 - ------------------------------------------------------ ----- (Address of principal executive offices) (Zip Code) (619) 679-2114 -------------- (Issuer's telephone number) 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 ------------------------------- (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 ================================================================================ 1 2 TABLE OF CONTENTS PART I
PAGE 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
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 2 3 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. 3 4 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 4 5 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. 5 6 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. 6 7 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. 7 8 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, 8 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. 9 10 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 10 11 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. 11 12 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 12 13 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:
Bid Quotations High Low ------- --------- 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
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: 13 14 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. 14 15 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. 15 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. 16 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. 17 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 18 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 19 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:
NAME AGE POSITION AND OFFICES 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)
(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. 20 21 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 21 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 $100,000 during the fiscal year ended September 30, 1998 (each a "Named Executive Officer"). SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation Name and Fiscal Other Annual Securities Underlying All Other Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation - ------------------ ------ --------- -------- --------------- --------------------- ------------ 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)
(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 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
Percent of Total Number of Options Granted Exercise Expiration Name Options Granted to Employees in Fiscal Year Price Date ---- --------------- --------------------------- -------- ---------- 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
(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:
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 ---- ----------- ------------- ----------- ------------- 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
(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 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.
Name and Address Amount & Nature of Beneficial of Beneficial Title of Class Owner Ownership (1) Percent of Class - -------------- ---------------- --------------- ---------------- 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
24 25 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)
* 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 26
EXHIBIT INDEX 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
26 27 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
- ----------------- (b) Reports on Form 8-K - None 27 28 AMERICAN TECHNOLOGY CORPORATION INDEX TO FINANCIAL STATEMENTS ================================================================================ 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
F-1 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 30 AMERICAN TECHNOLOGY CORPORATION BALANCE SHEET
September 30, 1998 ------------ 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 ============
See accompanying summary of accounting policies and notes to financial statements. F-3 31 AMERICAN TECHNOLOGY CORPORATION STATEMENTS OF OPERATIONS
Years Ended September 30, 1998 1997 ------------ ----------- 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 ============ ===========
See accompanying summary of accounting policies and notes to financial statements. F-4 32 AMERICAN TECHNOLOGY CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended September 30, 1998 and 1997 - --------------------------------------------------------------------------------
Common Stock Series A Convertible Preferred Stock --------------------- ------------------------------------- Additional Paid-in Notes Shares Amount Capital Shares Amount Receivable --------- ------ ------------ ------ ------- ---------- 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) ============ ==== ============ ====== ========== ========= Net unrealized gain on securities Total Accumulated available Stockholders' Deficit for sale Equity ----------- ----------- ------------ 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 =========== ========= ===========
See accompanying summary of accounting policies and notes to financial statements. F-5 F-5 33 AMERICAN TECHNOLOGY CORPORATION STATEMENTS OF CASH FLOWS
Years Ended September 30, 1998 1997 ----------- ----------- 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 =========== ===========
See accompanying summary of accounting policies and notes to financial statements. F-6 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 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 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 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:
Gross Estimate Unrealized Fair Cost Gains Value ---- ---------- -------- Common Stock $203 $14,441 $14,645 ==== ======= =======
2. INVENTORIES At September 30, 1998, inventories consisted of the following: Finished goods $28,258 Consigned finished goods 43,200 Work-in-process 7,847 Raw materials 7,987 ------- $87,292 =======
3. EQUIPMENT Equipment consisted of the following at September 30, 1998: Machinery and equipment $ 413,278 Office furniture and equipment 91,409 Leasehold improvements 37,442 --------- Accumulated depreciation (372,762) --------- Net equipment $ 169,367 =========
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 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:
Years ended September 30, 1998 1997 - ------------------------- ------------ ---------- 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 ------------ ---------- $ -- $ -- ============ ==========
A reconciliation of income taxes at the federal statutory rate of 34% to the effective tax rate is as follows:
Years ended September 30, 1998 1997 - ------------------------- ----------- --------- 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 ----------- --------- $ -- $ -- =========== =========
F-11 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: 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) $ -- ===========
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 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:
Number Exercise Price Expiration Date ------- -------------- ---------------- 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 =======
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 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:
Years ended September 30, 1998 1997 - ------------------------- ------------- ------------- 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)
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:
Weighted Average Shares Exercise Price ---------------- -------------- 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 ========
F-14 42 AMERICAN TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS ================================================================================ 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 ========
The following table summarizes information about stock options outstanding at September 30, 1998:
Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ------------- ----------- ----------- --------- ----------- --------- $ 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 ============= =========== =========== ========= =========== =========
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: Years ending: 1999 $ 96,603 2000 83,625 -------- $180,228 ========
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 43 AMERICAN TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS ================================================================================ Years ending: 1999 $31,452 2000 16,648 2001 10,000 ------- $58,100 =======
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: Years ending: 1999 $18,868 2000 14,151 ------- $33,019 =======
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 44 AMERICAN TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS ================================================================================ 12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Years ended September 30, 1998 1997 - ------------------------- -------- -------- 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 -- ======== ========
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:
Pro Forma As Actual Adjustment Adjusted ------------ ---------- ------------ 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 ============ ========== ============
F-17 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 EX-3.1.4 2 EXHIBIT 3.1.4 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. 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. 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. 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. 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. 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. 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. 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. 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. EX-4.4 3 EXHIBIT 4.4 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 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 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 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 EX-4.5 4 EXHIBIT 4.5 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; 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. 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. 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 EX-4.6 5 EXHIBIT 4.6 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 17. 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. 18. 19 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. 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: -------------------------- EX-4.7 6 EXHIBIT 4.7 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. EX-10.13 7 EXHIBIT 10.13 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. 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 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 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 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. 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 EX-10.13.2 8 EXHIBIT 10.13.2 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, 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 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, 3 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 4 EX-10.14 9 EXHIBIT 10.14 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. 1 2 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. 2 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. 3 4 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 4 EX-23.1 10 EXHIBIT 23.1 1 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 EX-27.1 11 EXHIBIT 27.1
5 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. YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 1,034,577 14,645 88,737 17,000 87,292 1,266,721 542,129 372,762 1,683,745 280,833 0 0 0 114 1,402,798 1,683,745 194,758 244,758 407,123 407,123 3,651,760 0 926,555 (4,593,713) 0 (4,593,713) 0 0 0 (4,593,713) (0.42) (0.42)
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