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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED SEPTEMBER 30, 1996
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)
12725 Stowe Drive, Poway, California 92064
(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. [____]
State issuer's revenues for its most recent fiscal year. $933,643
The aggregate market value of the voting stock held by non-affiliates of the
registrant on December 1, 1996 was approximately $30,310,000 based on an average
of the closing bid and ask price $5.06 as reported on the NASD's OTC Electronic
Bulletin Board system.
At December 1, 1996, 8,676,759 shares of common stock, par value $.00001 per
share (the registrant's only class of voting stock) were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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TABLE OF CONTENTS
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PART I
ITEM 1. Description of Business 2
ITEM 2. Description of Property 11
ITEM 3. Legal Proceedings 12
ITEM 4. Submission of Matters to a Vote of Security Holders 12
PART II
ITEM 5. Market for Common Equity and Related
Stockholder Matters 12
ITEM 6. Management's Discussion and Analysis or Plan of Operation 12
ITEM 7. Financial Statements 17
ITEM 8. Changes in and Disagreement with Accountants on 17
Accounting and Financial Disclosure
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 17
ITEM 10. Executive Compensation 18
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 19
ITEM 12. Certain Relationships and Related Transactions 20
ITEM 13. Exhibits and Reports on Form 8-K 21
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FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 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 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. 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
COMPANY DEVELOPMENT
American Technology Corporation ("Issuer" or "Company") 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. On June 19, 1992 the Company
redomiciled from the State of Utah to the State of Delaware. On July 14, 1992,
the Company completed a 1-for-5 reverse stock split resulting in 7,291,228
common shares, par value $.00001, being issued and outstanding after the reverse
split. The Company's shares trade in the over-the-counter market on the National
Association of Securities Dealers OTC Bulletin Board system under the symbol
"ATCO."
From its inception in 1980 to 1984 the Company was primarily engaged in the
development of a patented 2-speed long play cassette recorder ("X-TEN(R)"). On
September 30, 1984, the Company acquired 100% of the outstanding shares of
Norcom Electronics Corporation which was engaged in development of patented
ear-radio and ear-microphone
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technology. Both technologies feature small electronics for placement in or
around the entrance to the ear canal to perform desired functions. From 1984
through 1987, the Company was engaged in various licensing and development
activities with respect to the X-TEN, ear-radio and ear-microphone technology.
In March, 1988 the Company assigned certain ear-microphone technology to Norris
Communications, Inc. ("NCI") in return for 700,000 shares of NCI common stock
and a 1% royalty on gross sales resulting from the exploitation of certain
products using the ear-microphone technology ("EarPHONE"). The Company retained
its ear-radio technology. The ear-microphone technology was subsequently sold by
NCI to Jabra Corporation which is commercializing the EarPHONE for cellular
phone, computer, multi-media and other customers. (See "Certain Relationships
and Related Transactions").
From 1988 to early 1992 the Company was inactive due to inadequate financial
resources. In early 1992 the Company was brought into good standing and
restructured to take advantage of new financing opportunities designed to allow
the Company to pursue development of its products and technologies. There were
no changes to management resulting from this reactivation.
Since the 1992 restructuring, Company operations have focused on developing its
various technology assets. The Company's address is 12725 Stowe Drive, Poway,
California, and its telephone number is 619-679-2114. Its Internet site is
located at WWW.ATCSD.COM.
BUSINESS
OVERVIEW
The Company is engaged in the development, manufacturing and marketing of
consumer electronic products and electronic technologies. The Company's
ear-radio technology was commercialized through the 1993 introduction of the FM
ear-radio and the 1995 introduction of the AM ear-radio. During fiscal 1996
substantially all of the Company's revenues resulted from the manufacturing and
marketing of its "FM Sounds" FM digital scanning ear-radio and its "AM Sounds"
AM ear-radio. The Company seeks to expand its ear-radio distribution while
developing additional technology assets.
Management anticipates that its HyperSonic Sound (HSS) reproduction technology
will become its primary business focus, although there can be no assurance the
Company can successfully exploit this new technology. HyperSonic Sound is 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, management believes HSS technology offers higher quality sound
with less distortion while using less power, space, and weight and at a lower
cost.
INDUSTRY BACKGROUND
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
recreate the top end of the audio spectrum, to mid-range speakers, and woofers
to address the lower frequencies. All conventional loudspeakers 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)
has 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, the Company
believes loudspeakers are still relatively inefficient in converting electrical
energy into acoustic or mechanical sound energy and their design contributes to
various forms of sound distortion.
The loudspeaker market is an important segment of the electronics industry.
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 speakers, loudspeakers encompass a wide range in size, quality and
cost. The manufacture and sale of loudspeakers is highly competitive and
includes both
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large international consumer electronic companies and specialty branded
loudspeaker manufacturers. The Company 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.
HYPERSONIC SOUND STRATEGY
The Company's objective is to become a leader in developing, marketing and
licensing proprietary sound reproduction technologies and systems that address
large and expanding domestic and international consumer electronics markets. The
Company seeks to have its HSS technology become a significant alternative to
conventional loudspeakers in target market segments. The Company also intends to
implement a branding strategy to make HSS synonymous with innovative
high-quality sound reproduction. The Company believes that positioning itself as
a licensor of the HSS technology and establishing technology collaboration
arrangements with manufacturers will facilitate the rapid adoption of HSS
technology. Key elements of the Company's strategy include:
1. Build on technical achievements to allow licensees to produce commercially
viable products for consumers - The Company's new technology is in an early
stage of development. The Company intends to rapidly convert its
proof-of-concept demonstration into designs and materials that licensees can use
to produce commercially viable sound reproduction systems to meet consumer
demand across a variety of market segments.
2. Expand patent coverage - The Company has filed multiple initial patent
applications worldwide and expects to continue to file amendments, continuations
and additional patents as development progresses.
3. Implement a segmented licensing approach - The Company has developed a
segmented licensing approach to target individual market segments. Manufacturers
of electronic components will be offered licenses to produce HSS enabled
electronic products and HSS emitters (specialized ultrasonic devices essentially
taking the place of loudspeakers). The Company may sell circuit board level
electronic components or an ASIC (Application Specific Integrated Circuit)
containing necessary electronics to make electronic implementation simpler. The
Company may also arrange for the production of and market customized ultrasonic
materials to its specifications to be used in HSS emitters.
4. Identify and determine market segment needs - The Company has identified and
is focusing its licensing efforts on three initial market segments, home audio
and video, mobile electronics and computers. The Company is in the early stages
of working with manufacturers in each of these segments to identify market
requirements and customize the HSS technology. The Company believes that its HSS
technology can become an important competitive feature for manufacturers and can
also enable such manufacturers to achieve a premium price or premium margins for
their products.
5. Establish cross segment relationships to facilitate standards - The Company
believes that mass and successful implementation of HSS technology requires the
cooperation of manufacturers of electronic components. The Company believes that
developing standards for HSS enabling electronics and ultrasonic HSS emitters
will accelerate adoption of the technology across market segments. Therefore the
Company is targeting long-term relationships with multiple entities to provide a
competitive advantage in protecting the Company's market position.
6. Support licensees and develop a market position - The Company intends to
support its licensees with technical support and an ongoing research and
development effort. The Company intends to require branding of HSS devices to
create consumer awareness.
Although the Company intends that a significant portion of its margins will come
from licensing, the Company may also sell HSS materials or components. The
Company may also produce and sell HSS equipment to either accelerate market
entry or meet specialized market needs.
There can be no assurance that the Company can commercialize its HSS technology
nor be successful in implementing the above strategies. (See "Management's
Discussion and Analysis or Plan of Operation").
HYPERSONIC SOUND TECHNOLOGY
Background and Stage of Development
The Company's HSS technology was invented by Elwood G. Norris, a director of the
Company, who manages the Company's research and development and technical
activities. Mr. Norris also invented the Company's ear-radio and GPS technology
(see below). The Company acquired the basic concepts for the HSS technology
(previously called the Sonic Generator technology) from Mr. Norris in 1992.
During fiscal 1996, the Company devoted a significant portion of its research
and development activities on HSS technology. In July 1996 the Company produced
a laboratory proof-
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of-concept demonstration capable of producing sound in the air using
ultrasonics. In October 1996 the Company produced a second generation portable
demonstration system with improved electronics. The portable system consists of
a standard CD player, an off-the-shelf amplifier modified by the Company, custom
electronics and modified commercial ultrasonic emitters. The Company believes
that custom ultrasonic emitters will be required to produce a commercially
viable system.
The Company is continuing to improve its proprietary electronics and is working
with multiple producers of ultrasonic devices to develop custom emitters to the
Company's specifications. The Company believes, but there can be no assurance,
that it can have commercially acceptable designs and sources of materials for
use by licensees during fiscal 1997.
Technology Description
HSS technology is partially based on a phenomenon in music known as Tartini
tones 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. H. von Helmholtz, a German physiologist and physicist, in 1856
published the results of his combination tone experiments proving the effect
resulted from the non-linearity of air and developed descriptive mathematics
which remain valid today. Although others have experimented with these
principles in the past, the Company believes it has created novel and
proprietary methods to use this concept to produce sufficient sound volume and
quality capable of being commercially exploited. The Company's breakthroughs and
its process are the subject of multiple pending patents (see below).
Mr. Norris, who has previous patents in the fields of ultrasonics and audio,
applied aspects of the electrical concept of mixing of multiple electrical
signals to produce new audio by-products. 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 actually is created
within the beam of ultrasonic energy being emitted. Accordingly if the beam is
directed towards a wall, the sound emanates from the surface and if the beam is
directed to a person the sound emanates at 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 Company's use of ultrasonic frequencies to carry intelligence is compatible
with existing recording and transmission technology. The generation of the
ultrasonic frequencies employed by HSS technology requires modification to
existing electronic amplifiers (radios, televisions, telephones, etc.). But
since HSS technology requires less wattage (similar to a tweeter requiring less
wattage than a sub-woofer) to reproduce sound, the Company believes electronic
products that are HSS enabled can be produced at the same or less cost than
current systems and in a smaller size. The Company has designed and is
continuing to improve electronic specifications to be used to enable electronic
devices to produce the ultrasonic output (as compared to audio output in a
traditional system) necessary to drive HSS ultrasonic emitters.
HSS technology uses ultrasonic emitters (transducers which convert electrical
energy to high frequency acoustical energy). Certain crystals and ceramics and
other materials produce high frequency movement when voltage is supplied, these
are piezoelectric elements. 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. The Company 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. In commercial application, the Company believes its
ultrasonic emitters will be about the size of a hockey puck but may be designed
and configured in a variety of designs and shapes to produce desired effects.
Ultrasonics are employed in a wide variety of medical applications where it is
directly coupled to the body rather than air. The Company's technology uses
relatively small amounts of ultrasonic sound energy which dissipates or is
absorbed rapidly in the air. The Company employs frequencies above those that
may be harmful to pets but within those used by medical devices directly
coupling to the body to image fetuses and the brain. The Company believes that
the frequencies and amount of energy employed in the HSS technology is harmless.
The Company also believes the emission of such frequencies is not subject of
governmental regulation.
The Company believes that its HSS technology, the combination of proprietary
electronics and custom ultrasonic emitters, will offer the following advantages:
- Coverage of the entire audible range (20 Hz to 20,000 Hz) with
one small device - no woofer, mid-range and tweeter
combination and no crossover network to divide the signal
amongst such devices
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- Sound quality is not dependent on size
- Elimination of speaker enclosures, their cost and bulk
- Reduction of the effect of room acoustics on sound enjoyment
- Small size and low weight as compared to conventional speakers
- Improved phase coherency (frequency time alignment)
- Reduced distortion
- Lower power requirement and greater efficiency
- Ability to manipulate or selectively position or diffuse the
source of sound
Target License Market Segments
The Company has targeted home audio and video, mobile electronics and computers
as primary license segments. As of the date of this report the Company has not
finalized the details of its proposed licensing terms and conditions and has not
entered into any license agreements on HSS technology. However, the Company has
commenced discussions with manufacturers in each of primary segments as part of
its strategy to determine market requirements. Management is encouraged by the
technical and marketing interest in its new sound technology and is pursuing its
strategy as outlined above.
Home audio and video includes component, rack and compact audio systems for the
home as well as televisions and home theater systems. The Company intends to
focus initially on manufacturers in the mid to high-end range of this segment.
This segment is experiencing growth from home theater and large screen
televisions and is expected to experience growth from the introduction of the
high-capacity DVD (digital versatile disc). According to the Electronic
Industries Association (EIA) households with the equipment to enjoy home theater
doubled in 1995 to about 10 million U.S. homes. The EIA also estimates over 24
million color televisions were sold in the U.S. in 1995 including over 10.5
million stereo equipped televisions. Based on EIA sales data, the Company
estimates that there were approximately 8 million audio systems (component, rack
and compact) sold in the U.S. in 1995. EIA also estimates that U.S. factory
sales of home theater and aftermarket loudspeakers exceeded $600 million in
1995. Manufacturers in this segment include major international consumer
companies (e.g. Sony, Phillips, Sanyo, Sharp, JVC and others) and specialty
audio component manufacturers (e.g. Carver Corporation, Marantz, NAD and
others).
The Company believes its HSS technology will offer the home audio and video
market an improved full-spectrum sound source with less distortion and less room
interference. The ability to place and manipulate sound in a room without large
multiple speakers is expected to be attractive to consumers.
Mobile electronics include autosound sales to OEM (original equipment
manufacturers) and auto aftermarkets. According to Wards Automotive forecasts
over 40 million cars and light trucks will be sold worldwide in 1996 including
over 15 million in the U.S. According to EIA estimates, factory installed U.S.
autosound revenues exceeded $3.5 billion in 1995 and over 20 million aftermarket
units were sold in 1995 in a market exceeding $1.9 billion. Major suppliers of
autosound equipment include Sony, Kenwood, Panasonic, Pioneer, Jensen, Foster,
Onkyo, Oxford and others.
The Company believes sound quality, size, weight and cost are critical factors
in the autosound market. The Company's HSS technology is expected to offer
improved sound (especially bass) from a small, light-weight system that can be
competitively priced by manufacturers. The technology also offers many options
for the placement of sound within the automobile interior which is expected to
be an attractive feature to consumers.
The market for computer sound, primarily multimedia applications is growing
rapidly. According to market researcher Dataquest, in 1995 multimedia equipped
desktop personal computer shipments were 20.9 million units, more than double
the 1994 shipments. In addition to OEM computer sound markets there is a growing
aftermarket for computer speakers. Major suppliers of computer sound equipment
include OEM's such as Apple, IBM, Packard Bell, Compaq and others and
manufacturers such as JBL, Sony, Yamaha, Bose, Panasonic, Foster and others.
The Company believes limitations on size, sound quality and cost are critical
factors in the computer sound market. The Company expects HSS technology to
offer size, cost and quality advantages to manufacturers and consumers in this
rapidly growing market.
The Company recently hired a Vice President of Market Development to direct the
Company's HSS technology marketing and licensing activities.
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Other HSS Market Opportunities
While the Company's strategy is to focus on licensing to the above market
segments, HSS technology is expected to have utility in diverse applications
including telephones and answering machines, portable consumer electronics,
hearing aids, headphones, cinema/theater, public address and outdoor sound
systems, use with noise cancellation systems, military uses and many other
applications. The Company also believes there is a significant opportunity for
HSS enabled devices designed to retrofit existing stereo equipment to provide
theater-like sound. The Company may license, design, develop, manufacture and/or
distribute products for these or other specialized applications.
Collaboration with Carver Corporation
In October 1996 the Company announced that it was collaborating with Carver
Corporation on the development of a high-quality home audio sound system using
Carver audio components and the Company's HSS technology. Carver Corporation is
a recognized brand in high-fidelity home audio components. The Company
anticipates, but there can be no assurance, that the collaboration will lead to
a future licensing agreement when the Company determines license details and is
able to provide or arrange for commercially viable HSS emitters.
The Company plans to establish other collaborative arrangements or strategic
relationships in other market segments to aid in the early adoption of HSS
technology.
Although the Company's strategy is to license broadly, it may provide limited
exclusivity in certain market segments or sub-segments or may enter into
exclusive arrangements with others to enter particular market segments.
EAR RADIO TECHNOLOGY
Product Description
The Company's patented ear-radio technology allows the placement of a fully
operational radio device adapted in size and configuration for placement and
retention at the entrance of the ear canal.
FM and AM versions of the ear-radio utilizing this technology have been
developed and are being manufactured for and marketed by the Company. The FM
ear-radio measures 1/2" by 1-1/2" by 1/4", utilizes approximately 40
transistors, features digital scanning touch-tuning and weighs less than 1/4th
ounce. The AM ear-radio measures 1-1/4" by 5/8" by 3/8" and weighs less than
1/4th ounce and features sound quality comparable to much larger radios. The
Company produces standard and Japanese frequency FM radios and standard AM
radios. The radios come in a variety of colors and are packaged for either
retail or bulk shipment. The radios generally retail for $12.95 to $29.95
depending on the outlet and the accessories included.
FM and AM ear-radios accounted for substantially all of the Company's revenues
during fiscal 1996 during which it sold approximately 90,000 ear-radios to
customers.
Further applications of this technology have been identified, but not yet
produced, including fixed-frequency AM, FM or TV band units for use in special
station or program promotions, and fixed-frequency AM or FM units for use in
specialized local broadcast environments for various events.
The Company is the holder of patent number 4,539,708 granted September 3, 1985
and patent number 5,313,663 granted May 17, 1994 including claims relating to
AM, FM, VHF and UHF frequency bands, as well as IR (Infrared). (See
"Intellectual Property Rights and Proprietary Information").
The Company anticipates that it will be required to update its ear-radio designs
and packaging from time to time to meet market expectations for performance and
packaging. The Company is currently developing an improved FM ear-radio
anticipated for introduction during the second half of fiscal 1997.
Marketing Strategy
The Company's existing FM and AM ear-radios and products and accessories under
development are targeted for the portable audio products segment of the consumer
electronics market. The Company's marketing strategy is to wholesale its
ear-radios to a variety of organizations and companies already established to
market and distribute the products to retailers and consumers. This strategy is
designed to allow the Company to focus its efforts on manufacturing and new
product development while limiting marketing and distributing personnel and
associated costs. However, this strategy also limits the Company's ability to
control and direct the marketing, distribution and end-pricing of its product.
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To date, the Company has focused on four primary market segments for ear-radio
marketing and distribution:
- Retail outlets - The Company directly and also through established
manufacturer representatives, promotes its products to local,
regional and national retail distributors such as electronic
stores, drug stores, computer stores and other retailers.
- Catalog distribution - The Company's personnel contact catalog
companies directly and through third-party agents. To date the
Company's radios have been illustrated and offered in a diverse
range of catalogs.
- Television - The radios have been displayed and sold by various
television marketers. The Company's marketing plan includes
pursuing additional television outlets for its products.
- Premium/Incentive/Specialty - The Company targets corporate and
other organizations to use the radios as premiums, incentives,
prizes and for promotions. The radios are designed for logo
placement and use in such promotions. The Company has attended
premium/incentive trade shows as well as initiated direct contact
with large users of prizes and premiums. Specialty applications
would also include fixed frequency radios for use by a specific
radio station or sports team or other program interested in
featuring their activity or organization.
Additionally, the Company has focused efforts on export sales to take advantage
of a demand for innovative electronic products and accessories worldwide. In
fiscal 1996 approximately 27% of the Company's sales were export sales shipped
to customers outside the United States.
The Company seeks to develop, acquire or distribute for others additional
products and accessories through the Company's distribution network.
The Company has two full-time marketing personnel assigned to ear-radio
marketing and sales activities. The Company had thirteen independent sale
representatives in the U.S. and Canada at September 30, 1996.
Assembly and Production
The Company uses a combination of its own assembly and subcontract assembly
companies to produce ear-radios from components and subassemblies purchased from
others, some of which are manufactured to the Company's specifications. The
Company tests, packages and ships the ear-radios from its Poway, California
location but may subcontract some of these steps in the future. The Company
performs its own engineering and quality control.
The Company believes there are secondary suppliers of components and
subassemblies such that it is not reliant on one supplier, although delays could
result should the Company be required to change 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 impact on the Company's results of operations.
In July 1995 the Company, through the services of its agent Mitsui U.S.A., Inc.,
entered into a subcontract manufacturing agreement with Zhuhai Huasheng
Enterprise Group Co., Ltd. of mainland China to produce FM ear-radios. This
relationship has resulted in added capacity and reduced costs. The Company
believes this supplier is also capable of producing AM ear-radios, currently
assembled by the Company, as well as the improved model FM ear-radio and other
products when and as desired by the Company. The Company believes that there are
a number of electronic product subcontract assembly companies located in North
America and overseas that are qualified to produce the Company's electronic
products should the existing supplier be unable or unwilling to do so, however
any disruption of supply could cause additional costs and delays and could have
a material adverse impact on the Company's results of operations.
The Company produces both to order and for inventory for future orders. Most
orders have generally been filled within forty-five days, however any future
large orders could exceed the Company's production and financial capacity and
adversely affect the Company's operations. Because the policy is to fill orders
promptly, the Company does not maintain and does not expect in the future to
maintain a significant backlog of sales on its products.
PORTABLE GPS TECHNOLOGY, OTHER TECHNOLOGIES AND INVESTMENTS
Portable GPS Technology
In late 1994 the Company innovated a proprietary method of tracking persons and
objects utilizing Global Positioning System ("GPS") technology. A substantial
portion of the Company's 1995 research and development budget was
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expended in furthering this technology. The Company has designed a portable
device as a simple solution to (1) finding another person or object or (2)
finding a known location. It 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. The Company has produced a proof-of-concept demonstration system.
The field of GPS technology involves a large number of companies with
substantial resources devoting significant funds to research and development and
launching many new products. It is very competitive with frequent introduction
of new features and rapidly declining prices. With the nature of this intense
competition in mind, the Company has taken extended steps in its attempts to
protect this product concept. This has included filing two U.S. patent
applications and reviewing the applications with a U.S. patent examiner
specializing in GPS technology. Since these applications are pending, there can
be no assurance any patent will issue nor if issued that they will provide
meaningful protection from competition.
With the current emphasis on HSS technology, the Company has postponed further
development on its GPS technology pending an evaluation of patent protection
that may be available and further market evaluation due to significant
competition and the rapidly changing nature of the GPS equipment market. The
Company anticipates the issuance of its patent during fiscal 1997 with the
ultimate claim set allowed to be a determining factor on future activity with
respect to this technology. The Company believes that certain features of its
patent, if allowed, may be licensable to the GPS industry.
Other Technologies
The Company has other technology and product concepts in early stages of
development. There can be no assurance that these concepts will develop into
viable research projects nor that the Company will have the personnel and
financial resources to develop additional technologies.
Investment in Norris
The Company at September 30, 1996 held 225,300 common shares (less than 1%) of
Norris Communications Inc. (NCI), a San Diego-based NASDAQ quoted company
engaged in the development, manufacture and marketing of electronic products.
These shares remain from the 700,000 shares received by the Company in 1988 from
the sale to NCI of a newly formed subsidiary (now Jabra Corporation) that owned
the Company's ear-microphone technology (see "Item 12. Certain Relationships and
Related Transactions"). These shares had a market value of approximately
$190,000 at September 30, 1996.
The Company also retains a 1% royalty on gross sales of Jabra Corporation
products incorporating a wireless receiver sold until the expiration of the last
patent relating to the EarPHONE technology. Jabra has not yet introduced a
wireless receiver product and therefore the Company has not received any
royalties and there can be no assurance it will receive any royalties in the
future.
CUSTOMERS
For the fiscal year ended September 30, 1996 two customers accounted for 25% of
sales. Target Stores, Inc. accounted for approximately 11% of sales and RTA
International, Inc. accounted for approximately 14% of sales, with no other
single customer accounting for more than 10% of sales.
The Company expects that the addition of retail outlets, expansion of radio
distribution and the introduction of additional products and accessories will
reduce the reliance on individual customers.
COMPETITION
The Company faces competition from a large number of international manufacturers
of consumer electronic and audio equipment products. Consumer tastes and demand
can change quickly.
Ear-Radios
The Company's ear-radio products compete directly with a number of manufacturers
of miniature radios such as pocket and credit card size radios. Most of the
Company's competitors have greater financial, manufacturing and marketing
resources and can command more retail and consumer exposure than that of the
Company. Barriers to entry by new competitors are not significant and new
competitors in consumer electronics are continually commencing operations.
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The technology of electronics and electronic components, features and
capabilities is also rapidly changing, in many cases rapidly obsoleting existing
products and technologies.
The Company believes that its ear-radio is a one of a kind product featuring a
radio entirely placed at the entrance to the ear canal. This feature along with
the quality of each radios sound and the FM's digital touch tuning are believed
to be the most important competitive features important to customers. The
Company believes that its patents provide it some protection and a barrier to
entry into the U.S. from competitors offering a similar radio device, however
patents are subject to loss, circumvention and other risks (see "Intellectual
Property Rights and Proprietary Information").
HyperSonic Sound Technology
The Company has made substantial inquiry and search but is not aware of any
previous or other sound reproduction system that has successfully employed the
concepts similar to those developed by the Company. Although others have
attempted to use the combination tone concept to produce sound, to the knowledge
of the Company none have been able to produce sufficient sound volume and
quality to make a commercially viable system.
Although most loudspeakers are of the direct radiating type, their have been a
many attempts to innovate new methods of sound reproduction to overcome
limitations of traditional loudspeakers. For example direct radiating flat-panel
loudspeakers overcome some of the size limitations, but they are generally
limited by sound quality and frequency range. 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 the Company's HyperSonic Sound
technology.
The Company's method of sound reproduction will also compete with existing
loudspeakers. In addition to the companies described above in "Target License
Market Segments" many who currently provide loudspeakers with their consumer
electronic products, the Company 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 the
Company and have existing proven technology and products, marketing data,
customer relationships and distribution channels. There can be no assurance that
the Company's HSS technology, if implemented commercially, will be competitive
in the entrenched loudspeaker market.
The Company believes that its success will be dependent upon creating
relationships with electronic equipment manufacturers by providing them the
ability to offer improved sound in a small light-weight unit at competitive
prices with additional advantages such as the ability to spatially orient sound
in novel ways. The Company believes it will compete on the uniqueness of its
proprietary technology and designs, system features and price, ease of use,
quality of marketing and ability to identify and meet consumer needs. There can
be no assurance that based on these factors the Company can be competitive with
existing or future products, technologies or services of its competitors.
GOVERNMENT REGULATION
The Company is subject to regulation by federal, state and local governmental
authorities in connection with its assembly and production operations. The
Company's electronic products are also subject to various regulations and are
required to meet the specifications of agencies such as the Federal
Communications Commission (FCC). The Company 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.
The Company does not believe its ultrasonic emitters, which emit ultrasonic
waves into the air and not 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 the Company's proposed commercialization of HSS systems.
The Company 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.
INTELLECTUAL PROPERTY RIGHTS AND PROPRIETARY INFORMATION
The Company operates in an industry where innovations, investment in new ideas
and protection of its resulting intellectual property rights are important to
success. The Company 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.
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The Company currently holds U.S. patent #4,215,377 granted July 29, 1980 on
certain long-play cassette technology and two issued U.S. patents #4,539,708
granted September 3, 1985 and #5,313,663 granted May 17, 1994 on the ear-radio
technology. The Company has two patents pending on its GPS technology and three
patents pending on its HSS technology and is currently preparing and intends to
file additional HSS technology patent applications.
The Company 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, the Company'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 the
Company's products or technology will be granted.
In addition to such factors as innovation, technological expertise and
experienced personnel, the Company believes that a strong patent position will
be important to compete effectively through licensing in the sound reproduction
industry. The Company is investing significant management, legal and financial
resources towards 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 the Company
is not aware of any existing patents that would inhibit its ability to license
the HSS technology, there can be no assurance that others will not assert claims
in the future. While sometimes licences to third-party technology are available,
there can be no assurance thereof or that such claims, with or without merit,
would not have a material adverse effect on the Company.
The validity of the Company's existing patents have not been adjudicated by any
court. Competitors may bring legal action to challenge the validity of the
Company'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 or the loss of patent protection
on the Company's technology or the circumvention of its patents, when and if
granted, by its competitors could have a material adverse effect on the
Company's ability to compete successfully in its business.
The Company also files for tradename and trademark protection when appropriate.
Marks for which the Company has registrations or applications to register in the
U.S. or foreign countries include HyperSonic, HSS and Supernatural Sound. There
can be no assurance any degree of protection will be granted or that if granted
that tradenames or trademarks can be successfully defended or protected.
The Company's policy is to enter into nondisclosure agreements with each
employee and consultant or third party to whom any of the Company's proprietary
information is disclosed. These agreements prohibit the disclosure of
confidential information to anyone outside the Company, 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 the
Company will have adequate remedies for any breach or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors.
RESEARCH AND DEVELOPMENT COSTS
For the fiscal years ended September 30, 1996 and 1995, the Company spent
$160,934 and $278,997, 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 the Company's currently owned
technologies or in other areas.
EMPLOYEES
At December 1, 1996 the Company in addition to its two executive officers,
employed nine persons, including three part-time employees. One person was
engaged in purchasing, two in engineering/quality control, one in production
management, two in general/administrative and three in marketing and sales. The
Company also employs or leases assembly personnel from time to time on an as
needed basis and uses outside consultants for various services.
The Company has experienced no work stoppages and is not a party to a collective
bargaining agreement. The Company believes its relations with its employees are
good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company currently subleases space and certain services from NCI (of which
Elwood Norris is an officer, director and approximately 2% shareholder). The
Company currently pays approximately $2,000 per month for approximately 2,400
square feet at 12725 Stowe Drive, Poway, California pursuant to an agreement
expiring January 31, 1997. The
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Company also pays for certain other shared services. The Company believes that
the terms of this arrangement are no less favorable than could be obtained from
an independent and unaffiliated party.
The Company believes there is other space available in the general vicinity such
that a termination of the arrangement would not have a materially adverse impact
on the Company. The Company also believes it will require additional space with
the next twelve months consistent with its planned growth and that such space is
available in the general vicinity.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any threatened or pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year to a vote
of security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company'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 the Company's Shares
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, 1995 and 1996.
<TABLE>
<CAPTION>
Bid Quotations
High Low
---- ---
<S> <C> <C>
Fiscal Year Ended September 30, 1995
First Quarter $ 0.9375 $ 0.25
Second Quarter $ 0.75 $ 0.3125
Third Quarter $ 0.50 $ 0.25
Fourth Quarter $ 0.46875 $ 0.3125
Fiscal Year Ending September 30, 1996
First Quarter $ 0.46875 $ 0.25
Second Quarter $ 1.3125 $ 0.21875
Third Quarter $ 2.25 $ 0.875
Fourth Quarter $ 7.375 $ 5.6875
</TABLE>
The above quotations reflect inter-dealer prices, without retail markup,
markdown or commission and may not represent actual transactions.
The Company had 1,280 holders of record of its Common Stock at December 1, 1996
with 8,676,759 shares issued and outstanding. The Company has never paid a cash
dividend on its Common Stock and does not expect to pay one in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
From 1988 to early 1992 the Company was inactive. In early 1992 the Company
commenced its current business activities. Although the Company owns several
technologies, initial efforts concentrated on developing and producing the
ear-radios of which the FM version was introduced in September 1993 and the AM
version in July 1995.
The Company is focusing its primary efforts on expanding ear-radio distribution
and completing the development and licensing its HSS technology. The
introduction of new technologies and products and the continuation of research
will require additional funds to be generated from operations, additional sales
of the NCI stock, the sale of additional Company equity or from other sources.
There can be no assurance additional funding will be available in the future.
Demand for the Company's ear-radios is subject to significant month to month
variability resulting from the limited marketing penetration achieved to date by
the Company. Initial sales have been concentrated on a few customers and
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there can be no assurance of future orders from these or new customers. The
markets for the Company's product and proposed products and technologies are
subject to rapidly changing customer tastes and a high level of competition.
Demand for the Company's products is influenced by demographic trends in
society, marketing and advertising expenditures, product positioning in retail
outlets, technological developments and general economic conditions. Because
these factors can change rapidly, customer demand can also shift quickly. The
Company may not be able to respond to changes in customer demand because of the
time to change or introduce products, production limitations and because of
limited financial resources. See also "Business Risks" below.
RESULTS OF OPERATIONS
Net sales for the fiscal year ended September 30, 1996 were $933,643,
substantially all from ear-radio sales, representing a 48% decrease from net
sales for fiscal 1995 of $1,801,562, also substantially all from ear-radio
sales. The stronger results in the prior year included initial opening stocking
orders and significant foreign orders which accounted for 31% of sales in fiscal
1995 versus 27% in fiscal 1996, a decrease of approximately $315,000. During
fiscal 1996 the Company encountered foreign competition for its FM ear-radio
which due to the Company's U.S. patent had a greater impact on foreign sales.
The Company has responded to increased competition by (1) contracting for
off-shore assembly to reduce production costs and (2) reducing prices to make
the ear-radios attractive to large chain retailers.
Management believes it has successfully completed the transition from in-house
FM ear-radio assembly to off-shore contract assembly for the current version of
the FM ear-radio. This transition resulted in short periods without supply which
also impacted fiscal 1996 sales. Management believes the change has resulted in
reduced per unit costs, working capital requirements and increased capacity.
However, reliance on off-shore assembly imposes certain risks including delays,
shortages and quality issues. Since the May 1996 employment of a full-time
marketing executive focusing on ear-radio sales which coincided with the
transition described above, the Company has been successful in adding new sales
representatives and obtaining new ear-radio accounts. Management, based on
existing orders, anticipates that ear-radio sales will exceed $600,000 for the
first fiscal quarter of fiscal 1997 (ends December 31, 1996), a traditionally
strong seasonal quarter.
Cost of sales for the fiscal 1996 were $797,154 resulting in a gross margin of
$136,489 or 15% of net sales. This compares to a gross margin of 24% for the
fiscal year ended September 30, 1995. Gross margins were impacted by the factors
described above including reduced selling prices being introduced prior to the
completion of the transition to off-shore production. The Company anticipates
improved margins and is targeting an average of 20% in future quarters, however
there can be no assurance thereof as gross margins are highly dependent on sales
volumes and prices, production costs and overhead allocations.
Research and development costs for fiscal 1996 were $160,934 compared to
$278,997 for fiscal 1995, an decrease of $118,063. In fiscal 1995 the Company
made a significant investment in developing the GPS technology and in
contracting for new radio designs. Outside contract costs decreased by $120,000
in fiscal 1996 accounting for the the difference from fiscal 1995. Fiscal 1996
research and development was primarily focused on developing the HSS technology
which was performed primarily by Company personnel.
Research and development costs vary quarter to quarter and year to year due to
the timing of projects, the availability of funds for research and development
and the timing and extent of use of outside consulting, design and development
firms. The Company expects fiscal 1997 research and development costs to
increase as a result of expanding development of the HSS technology.
Selling, general and administrative expenses for fiscal 1996 of $555,950
remained relatively constant compared to fiscal 1995. The Company reduced
occupancy costs by approximately $53,000 with the transition to off-shore
assembly which was offset in part by the addition of marketing and sales
personnel. Management anticipates that selling, general and administrative costs
will increase in fiscal 1997 due to the recent addition of a full-time licensing
executive for HSS technology and a requirement for increased space to
accommodate HSS technology related operations.
The Company experienced a loss from operations of $580,395 during the fiscal
year ended September 30, 1996 compared to a loss from operations of $434,145 for
fiscal 1995. This increase in the operating loss of $146,250 from 1995 to 1996
resulted primarily from the decreased sales and related gross margins net of
reduced research and development expenses.
During the 1996 fiscal year the Company sold 36,700 shares of NCI common stock
to a creditor for $55,050 in debt reduction. In fiscal 1995 the Company sold
25,000 shares of NCI for a gain of $71,078. The timing and amount of Norris
stock sales by the Company can have an impact on net operations. The decision on
timing of sales is dependent on NCI stock prices, management's expectations as
to NCI future operations and Company financial requirements.
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Interest expense increased in fiscal 1996 to $42,046 resulting primarily from
interest paid primarily in common stock on convertible notes subsequently
converted to common stock. At September 30, 1996 the Company had no long-term
debt.
The Company reported a net loss of $560,448 for fiscal 1996 and a net loss of
$368,201 for fiscal 1995. At September 30, 1996, the Company had net loss
carryforwards of approximately $1,959,000 for federal tax purposes expiring from
1999 to 2010. A valuation allowance has been recorded to offset the net deferred
tax asset as management has determined that it is more likely than not that the
deferred tax asset will not be utilized. The amount and timing of the
utilization of the Company's net loss carryforwards may be limited under the
Internal Revenue Code (see notes to financial statements).
Future operations are subject to significant variability as a result of product
sales and margins, timing of new product offerings, decisions regarding future
research and development, variability in other expenditures, and gains from NCI
stock sales when and if made.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company recommenced operations in January 1992, the Company has had
significant negative cash flow from operating activities. The negative cash flow
from operating activities was $611,350 for the fiscal year ended September 30,
1996 and $174,971 for the fiscal year ended September 30, 1995. During fiscal
1996 in addition to the net loss of $560,448 as adjusted for non-cash gains and
expenses to $515,300 the major increase was in inventories of $82,000 in
anticipation of first quarter 1997 increased shipments. At September 30, 1996
the Company had approximately 75 days sales in accounts receivable which is in
part due to the decreased fiscal 1996 sales. However retail chains often require
60-90 day terms on sales and therefore receivables can vary dramatically due to
quarterly and seasonal variations in sales.
At September 30, 1996 the Company had working capital of $1,047,787 and at
September 30, 1995 had working capital of $564,356. Included in working capital
is the unrealized holding gain in the shares held by the Company in NASDAQ
quoted NCI. At September 30, 1996 the Company owned 225,300 shares of NCI with a
market value of $190,153 compared to 262,000 shares at a value of $491,250 at
September 30, 1995. This investment is carried on the balance sheet as a current
asset of the Company at market value pursuant to Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments
in Debt and Equity Securities" which was adopted by the Company effective
September 30, 1994. Although the shares of NCI have experienced significant
price and volume variability, these shares have provided and are an unused
source of liquidity for the Company.
Since the Company's reorganization in January 1992 and through September 30,
1996, the Company has financed its operations primarily through the sale of
common equity and convertible notes and proceeds from the sale of shares of NCI.
During fiscal 1996 the Company obtained $1.3 million from the sale of equity and
convertible notes. During fiscal 1996 the Company acquired approximately $42,000
of new equipment primarily associated with HSS technology research.
In September 1996, the Company renewed a one year bank line of credit for
$40,000 secured by substantially all assets including inventories, accounts
receivable, and equipment. At September 30, 1996 the Company had no balance on
this bank line of credit.
Other than the unused bank line and the NCI shares, the Company has no other
material unused sources of liquidity at this time. The Company expects to incur
additional operating losses as a result of continued product sale operations and
as a result of expenditures for research and development and marketing costs for
HSS technology and other products and technologies. The Company could be
required to curtail research and development expenditures if there is a cash
shortage. The timing and amounts of the Company's expenditures and the extent of
operating losses will depend on many factors, some of which are beyond the
Company's control. At the current rate of expenditures, the Company will require
significantly improved gross margins from sales or additional funds for the next
twelve months. The Company anticipates that the commercialization of HSS
technology will require increased personnel and operating costs. Potential
sources of any such required funds may include the bank line of credit, sale of
additional NCI shares, additional bank financing, other debt financing, and
additional offerings of the Company's equity securities. There can be no
assurance that any funds will be available from these or other potential sources
and the lack of such capital could have a material adverse affect on the
Company's business.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets" and SFAS No. 123, "Accounting for Stock Based
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<PAGE> 15
Compensation." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reported at the lower of the carrying amount or
their estimated recoverable amount. The adoption of this statement in the first
quarter of fiscal 1997 by the Company is not expected to have an impact on the
financial statements.
SFAS No. 123 encourages the accounting for stock-based employee compensation
programs to be reported within the financial statements on a fair value based
method. If the fair value based method is not adopted, then the statement
requires pro-forma disclosure of net income and earnings per share as if the
fair value based method had been adopted. While the Company is evaluating the
impact of the pronouncement, it expects to continue to account for stock options
utilizing the "intrinsic value based method" as is allowed by the statement and
therefore does not expect SFAS No. 123 to have a material impact on its
financial position, results of operations and cash flows.
BUSINESS RISKS
This report contains a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed below, 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. The company 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 - The Company has an accumulated deficit of $2,025,937
with net losses of $560,448 for fiscal 1996 and $368,201 for fiscal 1995. The
Company expects to incur additional operating losses in future quarters until
and if it is able to generate operating revenues and margins sufficient to
support expenditures. There is no assurance that the Company will be able to
achieve or sustain significant periods of profitability in the future. The sales
of the Company's products are also subject to significant quarterly and seasonal
variability. The Company has been in the past and may in the future be reliant
on a limited number of customers, the loss of which could have an adverse effect
on operating results.
Need for Additional Financing; Insufficient Funds for the Next Twelve Months -
Based on the current rate of expenditures and anticipated additional
expenditures, the Company does not have sufficient funds for the next twelve
months and will require funds from the sale of products or licensing or sale of
technology or from other sources or will be required to scale back or curtail
certain activities. Potential sources of future funds may include the exercise
of outstanding options and warrants, sale of additional Company equity
securities, some form of debt financing or the sale or licensing of certain of
the Company's technologies.
HSS Technology in Development; No Assurance of Completion; May Be Subject to
Delays - The Company's HSS technology is in development and has not been
developed to the point of commercialization. There can be no assurance that a
commercially viable system can be completed due to the inherent risks of new
technology development, limitations on financing, competition, obsolescence,
loss of key technical personnel and other factors. The Company has not generated
any revenues from its HSS technology to date, and has no agreements or
arrangements providing any assurance of revenues in the future. The Company's
various development projects are high risk in nature, where unanticipated
technical obstacles can arise at any time and result in lengthy and costly
delays or result in determination that further development is unfeasible. There
can be no assurance of timely completion of commercially viable HSS technology
or that if available that it will perform on a cost-effective basis, or that if
introduced, that it will achieve market acceptance.
Future Dependent on Market Acceptance of the Company's HSS Technology - The
future of the Company is largely dependent upon the success of the Company's HSS
technology or the development of new technologies. There can be no assurance the
Company can introduce any of its technologies or that if introduced they will
achieve market acceptance sufficient to sustain the Company or achieve
profitable operations.
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 the
Company 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 the Company's
competitors may succeed in developing technologies and products that are more
effective than any of those being developed by the Company, rendering the
Company's technology and products obsolete or noncompetitive.
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Patents and Proprietary Rights Subject to Uncertainty - The Company has two U.S.
patents on ear-radios which it relies on to protect its market position in the
U.S. The Company has three patents pending on its HSS technology and the Company
is considering additional patent applications. There can be no assurance that
any patents held by the Company will not be challenged and invalidated, that
patents will issue from any of the Company's pending applications or that any
claims allowed from existing or pending patents will be of sufficient scope or
strength or be issued in all countries where the Company's products can be sold
or licensed to provide meaningful protection or any commercial advantage to the
Company. Competitors of the Company may also be able to design around the
Company'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 the Company. There
is no assurance however, that the Company'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 the
Company's products, or delay or preclude new product development and
commercialization by the Company. If infringement claims against the Company are
deemed valid, the Company 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 the Company's future patent and/or technology
license positions, or to defend against infringement claims. A successful
challenge to the Company's HSS technology could have a materially adverse effect
on the Company and its business prospects. There can be no assurance that any
application of the Company's technologies will not infringe upon the proprietary
rights of others or that licenses required by the Company from others will be
available on commercially reasonable terms, if at all.
Ear Radio Assembly Dependent on Subcontractor: Possible Disruptions in
Components - With respect to the assembly of the Company's FM ear-radio which
accounts for substantially all of the Company's revenues, the Company is
dependent on a foreign subcontractor. The Company believes that there are a
number of electronic product subcontract assembly companies located in North
America and overseas that are qualified to produce the Company's ear-radio
should the existing supplier be unable or unwilling to do so, however any
disruption of supply could cause additional costs and delays and could have a
material adverse impact on the Company's results of operations. The assembly of
ear-radios is dependent upon the availability of electronic components. The
Company believes there are secondary suppliers of components and subassemblies
such that it is not reliant on one supplier, although delays could result should
the Company be required to change 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 impact on
the Company's results of operations.
Performance Dependent on Key Personnel; Limited Key Person Life Insurance;
Success Dependent on Additional Personnel - The Company's performance is
substantially dependent on the performance of its executive officers and key
technical employees. Given the Company's early stage of development, the Company
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 policy on Elwood G. Norris, inventor of the Company's technologies,
the Company does not have "key person" life insurance policies on any other
person. The loss of the services of Mr. Norris could have a material adverse
effect on the business, operating results or financial condition of the Company.
The Company's future success and growth also depends on its continuing ability
to identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be able to attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. The
inability to attract and retain the necessary technical and managerial personnel
could have a material adverse effect upon the Company's business, operating
results or financial condition.
General Conflicts of Interest Due to Part-Time Management and Relationships - As
more fully disclosed in "Management" below, the Company's chief executive
officers and Mr. Norris the inventor of the Company's technologies, devote only
part-time services to the Company and have other employment and business
interests to which they devote attention and will continue to do so resulting in
certain conflicts of interest. Officer and director Robert Putnam also acts as
secretary of NCI and Secretary and Treasurer of Patriot Scientific Corporation
where he reports to Mr. Norris and therefore the possibility exists that these
other relationships could affect Mr. Putnam's independence as a director of the
Company.
Market Volatility - The Company's shares are traded on the OTC Electronic
Bulletin Board, a screen-based trading system operated by the National
Association of Securities Dealers, Inc. Securities traded on the Bulletin Board
are, for the most part thinly traded. The Company's shares have experienced in
the past and are expected to experience in the future significant price and
volume volatility, increasing the risk of ownership to investors.
16
<PAGE> 17
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item begin on page F-1 (immediately
following page 22 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 and executive officers of the Issuer, their ages,
positions held in the Company and duration as director, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES DIRECTOR SINCE
<S> <C> <C> <C>
Robert Putnam 38 Director and President and CEO 1984
Elwood G. Norris 58 Director 1980
Richard M. Wagner 51 Director and Secretary 1986
</TABLE>
The terms of all directors will expire at the next annual meeting of the
Company'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 the Company 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 the Company's affairs. The Company maintains a key
person insurance policy on Mr. Norris in the amount of $2 million.
BIOGRAPHICAL INFORMATION
ROBERT PUTNAM. Mr. Putnam has been a director of the Company since 1984 and also
served as Secretary/Treasurer until February 1994 when he was appointed
President and CEO. Since 1988 he has also served as Secretary of Norris
Communications Inc. (NCI), a public company engaged in electronic product
development, distribution and sales. Since 1989 he has also served as
Secretary/Treasurer and Director of Patriot Scientific Corporation ("Patriot").
Patriot is a public company engaged in the development of microprocessor
technology, digital modem products and radar and antenna engineering. He
received a B.A. degree in Mass Communication/Advertising from Brigham Young
University in 1983. Mr. Putnam devotes approximately 70% of his time to the
Company.
ELWOOD G. NORRIS. Mr. Norris has been a director of the Company since August
1980. He served as President from August 1980 to February 1994. He currently
manages the Company's research and development activities. He has been a
director of NCI since 1988 and has served as its Chief Technology Officer since
October 1995. From 1988 to October 1995 he served as NCI President. Since August
1989, he has served as director of Patriot and served as Chairman and Chief
Executive Officer 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, upon the illness and subsequent death of its
Chairman, President and Chief Executive Officer. 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 the Company's ear-radio,
HyperSonic Sound and other technologies. Mr. Norris devotes only part-time
services to the Company approximating 20-30 hours per week.
RICHARD M. WAGNER has served as a director 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. to provide full-service real estate services. He received
a Masters of Science degree from San Diego State University in 1974.
CONFLICTS OF INTEREST
Certain conflicts of interest now exist and will continue to exist between the
Company and its officers and directors due to the fact that they have other
employment or business interests to which they devote some attention and they
are
17
<PAGE> 18
expected to continue to do so. The Company has not established policies or
procedures for the resolution of current or potential conflicts of interest
between the Company and its management or management-affiliated entities. There
can be no assurance that members of management will resolve all conflicts of
interest in the Company's favor. The officers and directors are accountable to
the Company as fiduciaries, which means that they are legally obligated to
exercise good faith and integrity in handling the Company's affairs. Failure by
them to conduct the Company's business in its best interests may result in
liability to them.
It is conceivable that the respective areas of interest of the Company, Patriot
and NCI could overlap or conflict. The Company 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.
Officer and director Robert Putnam also acts as secretary of NCI and Secretary
and Treasurer of Patriot where he reports to the Board of Directors of each, of
which Mr. Norris is Chairman. The possibility exists that these other
relationships could affect Mr. Putnam's independence as a director of the
Company. The Company has not provided a method of resolving this conflict 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 the Company 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 the
Company.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Act") requires the
Company's officers, directors and persons who own more than 10% of a class of
the Company'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 the Company with copies of all Section
16(a) forms they file.
Based solely on a review of copies of such reports furnished to the Company and
written representations that no other reports were required during the fiscal
year ended September 30, 1996, the Company believes that all persons subject to
the reporting requirements pursuant to Section 16(a) filed the required reports
on a timely basis with the SEC, except as follows:
- Mr. David G. Norris, a former director who resigned on
September 9, 1996, filed his final Form 4 after the due date
for such form.
ITEM 10. EXECUTIVE COMPENSATION.
There is shown below information concerning the compensation of the Company's
chief executive officer (a Named Officer) for the fiscal year ended September
30, 1996. Compensation for the other four most highly compensated executive
officers (also Named Officers) is not required nor presented as no such other
executive officer's salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Name and Fiscal
Principal Position Year Salary
------------------ ---- ------
<S> <C> <C> <C>
Robert Putnam, President and CEO 1996 $73,109 None
1995 $45,462 None
1994 $26,000 None
</TABLE>
Except for stock options, discussed below, no named person received any form of
non-cash compensation from the Company in the fiscal year ended September 30,
1996, 1995 nor 1994 or currently receives any such compensation. The Company
does not provide health, medical, life or disability insurance benefits for any
person.
OPTION GRANTS
Shown below is further information on grants of stock options pursuant to the
Company's 1992 Stock Option Plans to the Named Officer reflected in the Summary
Compensation Table shown above.
18
<PAGE> 19
OPTION GRANTS TABLE FOR FISCAL YEAR ENDED SEPTEMBER 30, 1996
Percent of Total
<TABLE>
<CAPTION>
Number of Options Granted Exercise Expiration
Name Options Granted to Employees in Fiscal Year Price Date
---- --------------- --------------------------- ----- ----
<S> <C> <C> <C> <C>
Robert Putnam 200,000 30.6% $0.50 2/21/2001
</TABLE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
There were no options exercised by Named Officers during the fiscal year ended
September 30, 1996. The following table provides information on unexercised
options at September 30, 1996:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held At In-The-Money Options At
September 30, 1996 September 30, 1996 (1)
------------------ ----------------------
Name Exercisable Exercisable
<S> <C> <C>
Robert Putnam 350,000 $2,187,500
</TABLE>
(1) Based on the last sale price at the close of business on the last
trading day of the fiscal year of $6.75 per share.
The Company 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,
1996, the Company did not adjust or amend the exercise price of stock options
awarded to the Named Officer nor other persons, and the Company has no defined
benefit or actuarial plans covering any person.
COMPENSATION OF DIRECTORS
No direct or indirect remuneration has been paid or is payable by the Company to
the directors in their capacity as directors. It is anticipated that during the
next twelve months that the Company will not pay any direct or indirect
remuneration to any directors of the Company in their capacity as directors
other than in the form of reimbursement of expenses of attending directors' or
committee meetings. However directors have received in the past and may receive
in the future stock options pursuant to the Company's stock option plans.
EMPLOYMENT CONTRACTS
The Company has no employment contracts with any executive officer or other key
person.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of December 1, 1996, the stock ownership of
each officer and director of the Company, of all officers and directors of the
Company as a group, and of each person known by the Company 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 as such shares. No person listed below has any option, warrant
or other right to acquire additional securities of the Company, except as
otherwise noted.
<TABLE>
<CAPTION>
Name and Address Amount & Nature
of Beneficial of Beneficial
Title of Class Owner Ownership Percent of Class
- -------------- ---------------- --------- ----------------
<S> <C> <C> <C>
Common Stock EIwood G. Norris 3,281,475 (1) 34.3%
par value 12725 Stowe Dr.
$.00001 Poway, California 92064
SAME Robert Putnam 620,000 (2) 6.9%
12725 Stowe Dr.
Poway, California 92064
SAME Richard M. Wagner 40,000 (3) 0.5%
12725 Stowe Dr.
Poway, California 92064
ALL DIRECTORS & OFFICERS
AS A GROUP (3 PERSONS) 3,941,475 (4) 39.7%
</TABLE>
19
<PAGE> 20
(1) Includes 780,000 Common Shares issuable upon the exercise of
outstanding stock options and 100,000 Common Shares issuable upon the
exercise of outstanding stock purchase warrants.
(2) Includes 350,000 Common Shares issuable upon the exercise of
outstanding stock options.
(3) Includes 25,000 Common Shares issuable upon the exercise of
outstanding stock options.
(4) Includes 1,155,000 Common Shares issuable upon the exercise of
outstanding stock options and 100,000 Common Shares issuable upon the
exercise of outstanding stock purchase warrants. For purposes of this
computation the number of outstanding shares is increased to include
the 1,255,000 shares issuable upon the exercise of the options and
warrants.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company is obligated to pay to Elwood G. Norris, a director, a 1% royalty on
all sales of radio equipment based on the gross amount received by the Company
less returns and allowances pursuant to a September 3, 1985 royalty agreement.
Pursuant to an Addendum Agreement dated December 2, 1996 the Company is also
obligated to pay Mr. Norris a 2% royalty on gross revenues received by the
Company from the GPS and HSS technologies.
Elwood Norris, a director of the Company, is also Chairman and Chief Technology
Officer of NCI. He is the beneficial owner of 484,538 shares of NCI
(representing approximately 2% of its issued and outstanding shares at November
30, 1996) and Robert Putnam (the President of the Company) is Secretary of and
the beneficial owner of 40,000 shares of NCI (representing less than 1% of its
issued and outstanding shares).
Pursuant to an agreement dated as at March 23, 1988 between the Company and NCI,
the Company sold NCI all of the issued and outstanding shares in its
wholly-owned subsidiary Norcom Communications Corporation (now Jabra
Corporation) in consideration of receiving 700,000 common shares of NCI, subject
to escrow and earn-out provisions which were subsequently fulfilled. At the time
of the sale of Jabra to NCI, Jabra had a book value of $400. The Company still
owns 225,300 of these common shares of NCI as of the date of this annual report.
In 1993 NCI entered into agreements selling a portion of its ownership in Jabra
to an investment group which has resulted in Norris no longer owning a majority
interest in Jabra nor controlling its affairs. Although the Company was a
signatory to certain sections of these agreements relating to the EarPHONE
technology and royalties, the Company was not a beneficiary or material party to
these transactions by NCI.
The Company and Mr. Norris are each entitled to 1% royalties on certain gross
invoice amounts received by Jabra on devices using the EarPHONE technology. The
Company received its royalty right under agreements dated January 25, 1988 and
March 22, 1988 by which the Company transferred all right, title and interest in
and to the EarPHONE to Jabra. The March 1988 and January 1988 agreements fail to
address specifically the payment of royalties pertaining to licensing the
EarPHONE technology, however the Company believes that the royalties will be due
on all amounts received by Jabra on applicable technology whether from gross
invoice amounts or royalties or other payments. By letter agreement dated
January 14, 1993 it was clarified that the Company's 1% royalty would be due
only on gross sales of Jabra products incorporating a wireless receiver sold
until the expiration of the last patent relating to the EarPHONE technology.
Jabra has not yet introduced a wireless product and therefore the Company has
not received any royalties and there can be no assurance it will receive any
royalties in the future.
On June 4, 1996, the Company paid $50,788 to Elwood G. Norris reducing the
principal balance of a 1991 note due and payable on October 1, 1996 to $100,000.
In connection with the placement of $220,000 of convertible notes to other
unrelated investors, the balance of the note to Mr. Norris was converted into a
new note on terms comparable to the unrelated investors. Accordingly the Company
executed a new unsecured 8% Convertible Subordinated Promissory Note due May 31,
1999 payable to Mr. Norris for $100,000. Pursuant to the conversion terms of the
note, Mr. Norris converted the principal amount of the note into 100,000 shares
of the Company's common stock at the conversion price of $1.00 per share on
September 27, 1996. On the same terms as the other investors, Mr. Norris was
also granted warrants to purchase up to 100,000 of the Company's common shares
until May 31, 1998 at an exercise price of $1.00 per share.
During the fiscal year ended September 30, 1996, the Company paid $39,086 to NCI
for rent of its operating facility under the present and a prior arrangement
(See "Item 2. Description of Property"). The Company also paid NCI for contract
manufacturing services on ear-radio production totaling $37,300 and $11,885 for
other services during fiscal 1996. The Company believes these services were
performed on terms comparable to those from independent parties.
20
<PAGE> 21
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 the
Company as indicated.
EXHIBIT INDEX
2.1 Share Exchange Agreement among the Company, Norcom
Communications Corporation, and Norris Communications Corp.,
dated for reference March 23, 1988 filed as Exhibit 8.1 to the
Company's Form 10-SB effective August 1, 1994
2.1.1 Amendment of Agreement among the Company, Norcom
Communications Corporation, and Norris Communications Corp.,
dated for reference March 23, 1988 filed as Exhibit 8.1.1 to
the Company's Form 10-SB effective August 1, 1994
2.2 Articles and Certificate of Merger of American Technology
Corporation (Utah) into American Technology Corporation
(Delaware) dated June 19, 1992 filed as Exhibit 8.2 to the
Company's Form 10-SB effective August 1, 1994
2.2.1 Agreement and Plan of Merger of American Technology
Corporation (Utah) and American Technology Corporation
(Delaware) dated June 19, 1992 filed as Exhibit 8.2.1 to the
Company's Form 10-SB effective August 1, 1994
3.1 Certificate of Incorporation of American Technology
Corporation (Delaware) dated March 1, 1992, filed as Exhibit
2.1 to the Company's Form 10-SB effective August 1, 1994
3.2 Bylaws of American Technology Corporation (Delaware) filed as
Exhibit 2.3 to the Company's Form 10-SB effective August 1,
1994
4.1 Form of Stock Purchase Warrant dated February 29, 1996,
exercisable to purchase 250,000 common shares at $0.50 per
share until February 23, 1999, granted to investors filed as
Exhibit 4.1 to the Company's Form 8-K dated March 12, 1996
4.2 Form of 8% Convertible Subordinated Promissory Note due May
31, 1999 aggregating $220,000 granted to investors filed as
Exhibit 4.2 to the Company's Form 8-K dated June 12, 1996
4.3 Form of Stock Purchase Warrant dated as of May 31, 1996,
exercisable to purchase 220,000 common shares at $1.00 per
share until May 31, 1998, granted to investors filed as
Exhibit 4.3 to the Company's Form 8-K dated June 12, 1996
4.4 8% Convertible Subordinated Promissory Note due May 31, 1999
payable to Elwood G. Norris for $100,000 filed as Exhibit 4.4
to the Company's Form 8-K dated June 12, 1996
4.5 Stock Purchase Warrant exercisable to purchase 100,000 common
shares at $1.00 per share until May 31, 1998 granted to Elwood
G. Norris filed as Exhibit 4.5 to the Company's Form 8-K dated
June 12, 1996
4.6 Form of 6% Convertible Subordinated Promissory Note due July
31, 1998 aggregating $700,000 granted to six investors filed
as Exhibit 4.6 to Form 8-K dated August 19, 1996
10.1 Technology Transfer Agreement among the Company, Norris
Communications Corp., Elwood G. Norris and Norcom Electronics
Corporation dated January 25, 1988 filed as Exhibit 6.1 to the
Company's Form 10-SB effective August 1, 1994
10.1.1 Assignment Agreement among the Company, Norcom Electronics
Corporation, Norcom Communications Corporation and Elwood G.
Norris dated March 22, 1988 filed as Exhibit 6.1.1 to the
Company's Form 10-SB effective August 1, 1994
10.2 Royalty Agreement between the Company and Elwood G. Norris
dated September 3, 1985 filed as Exhibit 6.2 to the Company's
Form 10-SB effective August 1, 1994
21
<PAGE> 22
10.3 Assignment of Technology Agreement between the Company and
Elwood G. Norris dated March 2, 1992 filed as Exhibit 6.3 to
the Company's Form 10-SB effective August 1, 1994
*10.3.1 Addendum Agreement to Assignment of Technology Agreement
between the Company and Elwood G. Norris dated December 2,
1996
10.4 Property Reimbursement Agreement between the Company and
Elwood G. Norris dated March 2, 1992 filed as Exhibit 6.4 to
the Company's Form 10-SB effective August 1, 1994
10.5 Promissory Note between the Company and Elwood G. Norris dated
September 30, 1991 filed as Exhibit 6.5 to the Company's Form
10-SB effective August 1, 1994
10.6 Bonus and Stock Agreement between the Company and Robert
Putnam dated March 2, 1992 filed as Exhibit 6.6 to the
Company's Form 10-SB effective August 1, 1994
10.7 Agreement and Plan of Reorganization by and among Norris
Communications Corp., Norcom Communications Corporation and
Jabra Corporation also executed in part by American Technology
Corporation dated January 15, 1993 filed as Exhibit 6.7 to the
Company's Form 10-SB effective August 1, 1994
10.7.1 Amendment No. 1 dated May 28, 1993 to Agreement and Plan of
Reorganization by and among Norris Communications Corp.,
Norcom Communications Corporation and Jabra Corporation also
executed in part by American Technology Corporation filed as
Exhibit 6.7.1 to the Company's Form 10-SB effective August 1,
1994
10.7.2 Letter Agreement between the Company, Elwood Norris and Norcom
Communications Corporation dated January 14, 1993 filed as
Exhibit 6.7.2 to the Company's Form 10-SB effective August 1,
1994
10.8 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 the Company's Form 10-SB
effective August 1, 1994
10.8.1 Standard form of Incentive Stock Option Plan Agreement filed
as Exhibit 6.8.1 to the Company's Form 10-SB effective August
1, 1994
10.9 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 the Company's Form 10-SB
effective August 1, 1994
10.9.1 Standard form of Non-Statutory Stock Option Plan Agreement
filed as Exhibit 6.9.1 to the Company's Form 10-SB effective
August 1, 1994
10.10 Manufacturing Contract between the Company and Zhuhai Huasheng
Enterprise Group Co., Ltd. dated July 20, 1995 filed as
Exhibit 10.10 to the Company's Form 10-KSB for September 30,
1995
*23.1 Consent of BDO Seidman, LLP
*27.1 Financial Data Schedule
- ------------------------
(b) The Company filed one report on Form 8-K during the last fiscal quarter of
the year ended September 30, 1996. The report dated August 19, 1996 reported an
Item 5 event related to the placement of $700,000 of convertible notes.
22
<PAGE> 23
AMERICAN TECHNOLOGY CORPORATION
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-2
Balance Sheet as of September 30, 1996 F-3
Statements of Operations for the Years Ended
September 30, 1996 and 1995 F-4
Statements of Stockholders' Equity for the
Years Ended September 30, 1996 and 1995 F-5
Statements of Cash Flows for the Years Ended
September 30, 1996 and 1995 F-6
Summary of Accounting Policies F-7 - F-8
Notes to Financial Statements F-9 - F-14
F-1
<PAGE> 24
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
American Technology Corporation
Poway, California
We have audited the accompanying balance sheet of American Technology
Corporation as of September 30, 1996 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 examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also 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, 1996, 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 19, 1996
F-2
<PAGE> 25
AMERICAN TECHNOLOGY CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 1996
- --------------------------------------------------------------------------------
<S> <C>
ASSETS (Note 5)
CURRENT ASSETS:
Cash $ 657,331
Investment securities (Note 1) 190,153
Trade accounts receivable, less allowance
of $10,000 for doubtful accounts 195,457
Inventories (Note 2) 313,930
Prepaid expenses 58,906
- --------------------------------------------------------------------------------
Total current assets 1,415,777
Equipment, net (Note 3) 93,409
Other assets:
Purchased technology, net of accumulated
amortization of $60,000 40,000
Patents 36,205
Other 10,071
- --------------------------------------------------------------------------------
Total other assets 86,276
$ 1,595,462
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES (Note 5):
Accounts payable (Note 4) $ 348,187
Accrued liabilities 19,803
- --------------------------------------------------------------------------------
Total current liabilities 367,990
Commitments and contingency (Notes 4 and 9)
STOCKHOLDERS' EQUITY (Note 7):
Common stock $.00001 par value; 20,000,000 shares
authorized: issued and outstanding, 8,611,759 86
Additional paid-in capital 3,063,373
Accumulated deficit (2,025,937)
Net unrealized gain on securities available for sale 189,950
- --------------------------------------------------------------------------------
Total stockholders' equity 1,227,472
- --------------------------------------------------------------------------------
$ 1,595,462
================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-3
<PAGE> 26
AMERICAN TECHNOLOGY CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<S> <C> <C>
Years Ended September 30, 1996 1995
- --------------------------------------------------------------------------------
NET SALES (Note 8) $ 933,643 $ 1,801,562
Cost of goods sold 797,154 1,370,375
- --------------------------------------------------------------------------------
Gross profit 136,489 431,187
- --------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling, general and administrative 555,950 586,335
Research and development 160,934 278,997
- --------------------------------------------------------------------------------
Total operating expenses 716,884 865,332
- --------------------------------------------------------------------------------
Loss from operations (580,395) (434,145)
OTHER INCOME (EXPENSES):
Gain on sale of investment securities (Note 1) 55,019 71,078
Interest expense (42,046) (10,375)
Other 6,974 5,241
- --------------------------------------------------------------------------------
Total other income 19,947 65,944
- --------------------------------------------------------------------------------
NET LOSS $ (560,448) $ (368,201)
================================================================================
NET LOSS PER SHARE OF COMMON STOCK $ (.08) $ (.05)
================================================================================
AVERAGE WEIGHTED NUMBER OF
COMMON SHARES OUTSTANDING 7,464,588 7,291,228
================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-4
<PAGE> 27
AMERICAN TECHNOLOGY CORPORATION
STATEMENT OF STOCKHOLDERS EQUITY
Years Ended September 30, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in
Shares Amount Capital
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 7,291,228 $73 $1,567,805
Net loss for the year -- -- --
Net unrealized loss on securities available
for sale -- -- --
- ------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995 7,291,228 73 1,567,805
Issuances of common stock:
Private placement at $.50 per unit, consisting
of one share and one warrant 250,000 2 124,998
Upon exercise of stock options 171,667 2 87,082
Upon conversion of 8% Convertible Notes at
$1.00 per share 320,000 3 319,997
Upon conversion of 6% Convertible Notes at
$2.00 per share 350,000 4 699,996
Upon exercise of warrants at $1.00 per share 220,000 2 219,998
For interest on Convertible Notes 8,864 -- 11,797
Value assigned to private placement warrants -- -- 12,500
Value assigned to warrants granted with 8%
Convertible Notes -- -- 19,200
Net loss for the year -- -- --
Net unrealized loss on securities available
for sale (Note 1) -- -- --
- ------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996 8,611,759 $86 $3,063,373
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized
Gain on
Securities Total
Accumulated Available Stockholders'
Deficit For Sale Equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 $(1,097,288) 1,044,891 $ 1,515,481
Net loss for the year (368,201) -- (368,201)
Net unrealized loss on securities available
for sale -- (563,875) (563,875)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995 (1,465,489) 481,016 583,405
Issuances of common stock:
Private placement at $.50 per unit, consisting
of one share and one warrant -- -- 125,000
Upon exercise of stock options -- -- 87,084
Upon conversion of 8% Convertible Notes at
$1.00 per share -- -- 320,000
Upon conversion of 6% Convertible Notes at
$2.00 per share -- -- 700,000
Upon exercise of warrants at $1.00 per share -- -- 220,000
For interest on Convertible Notes -- -- 11,797
Value assigned to private placement warrants -- -- 12,500
Value assigned to warrants granted with 8%
Convertible Notes -- -- 19,200
Net loss for the year (560,448) -- (560,448)
Net unrealized loss on securities available
for sale (Note 1) -- (291,066) (291,066)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996 $(2,025,937) $ 189,950 $ 1,227,472
=====================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-5
<PAGE> 28
AMERICAN TECHNOLOGY CORPORATION
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
Years Ended September 30, 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (560,448) $(368,201)
Adjustments to reconcile net
loss to cash used in operating activities:
Gain on sale of investment securities (55,019) (71,078)
Gain on sale of equipment (5,323) --
Allowance for doubtful accounts -- (10,000)
Depreciation and amortization 74,493 76,486
Common stock issued for interest 11,797 --
Warrants granted with 8% convertible notes 19,200 --
Changes in operating assets and liabilities:
Prepaid expenses (49,544) 14,716
Trade accounts receivable (82,165) 99,080
Inventories (28,555) (30,241)
Accounts payable 78,466 115,654
Accrued liabilities (14,252) (10,694)
Accrued interest on note payable - stockholder -- 9,307
- -----------------------------------------------------------------------------------
Net cash used in operating activities (611,350) (174,971)
- -----------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds received from sale of investment securities -- 71,092
Purchase of equipment (42,715) (85,659)
Proceeds from sale of equipment 6,198 --
Patent costs paid (36,205) --
- -----------------------------------------------------------------------------------
Net cash used in investing activities (72,722) (14,567)
- -----------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds received from line of credit -- 25,000
Payment on line of credit (25,000) --
Principal payment on note payable stockholder (44,584) --
Proceeds from issuance of common stock 125,000 --
Proceeds from exercise of common stock warrants 220,000 --
Proceeds from exercise of stock options 87,084 --
Proceeds from issuance of convertible notes 920,000 --
- -----------------------------------------------------------------------------------
Net cash provided by financing activities 1,282,500 25,000
- -----------------------------------------------------------------------------------
Increase (decrease) in cash 598,428 (164,538)
CASH, BEGINNING OF YEAR 58,903 223,441
- -----------------------------------------------------------------------------------
CASH, END OF YEAR $ 657,331 $ 58,903
===================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-6
<PAGE> 29
AMERICAN TECHNOLOGY CORPORATION
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION American Technology Corporation (the "Company"),
AND a Delaware corporation, is engaged in the
BUSINESS development, manufacture and marketing of
electronic products and technologies.
The Company's plan of operation for the next
twelve months is to expand distribution of its
ear-radio products, seek additional products for
distribution, introduce to market the Company's
sound reproduction technology and to continue
research and development on existing and new
technologies. Management estimates a base level
of operating expenditures aggregating
approximately $1,000,000 during the next twelve
months. Based on that level of expenditures,
management anticipates that minimum additional
funding of approximately $350,000 is required.
Additionally, expanded radio distribution and the
introduction of the Company's sound reproduction
technology may require additional personnel and
resources, which currently, are not estimable by
management. Therefore, the Company believes it
may require funds from sale or licensing of
products or technologies, the sale of equity
securities, the placement of debt securities, the
exercise of outstanding warrants or other
sources.
There can be no assurance that any funds required
during the next twelve months or thereafter can
be generated from operations or that such
required funds will be available from the
aforementioned or other potential sources. The
lack of sufficient funds from operations or
additional capital could force the Company to
curtail or scale back operations and would
therefore have an averse effect on the Company's
business.
USE OF The preparation of financial statements in
ESTIMATES 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.
INVESTMENT Investment securities classified as available for
SECURITIES 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 Equipment is stated at cost. Depreciation is
DEPRECIATION computed over the estimated useful lives of
approximately three to seven years using the
straight line method.
PURCHASED Purchased technology is capitalized at cost and
TECHNOLOGY is amortized using the straight-line method over
its estimated useful life of five years.
F-7
<PAGE> 30
AMERICAN TECHNOLOGY CORPORATION
SUMMARY OF ACCOUNTING POLICIES
PATENTS Patents are carried at cost and, when granted,
will be amortized over their estimated useful
lives.
REVENUE Sales are recorded in the periods that products
RECOGNITION are shipped.
INCOME TAXES The Company accounts for income taxes under
Statement of Financial Accounting Standards No.
109 ("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.
NET LOSS Net loss per common share is based on the
PER SHARE weighted average number of shares outstanding
during each period presented. Options and
warrants to purchase stock are included as common
stock equivalents, when dilutive.
STATEMENTS OF For purposes of the statement of cash flows, the
CASH FLOWS Company considers all highly liquid investments
purchased with an original maturity of three
months or less to be cash equivalents.
RECENT ACCOUNTING The Financial Standards Board has recently issued
PRONOUNCEMENTS Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets" and SFAS No. 123,
"Accounting for Stock Based Compensation". SFAS
No. 121 requires that long-lived assets and
certain identifiable intangibles be reported at
the lower of the carrying amount or their
estimated recoverable amount. The adoption of
this statement in the first quarter of fiscal
1997 by the Company is not expected to have an
impact on the financial statements. SFAS No. 123
encourages the accounting for stock-based
employee compensation programs to be reported
within the financial statements on a fair value
based method. If the fair value based method is
not adopted, then the statement requires
pro-forma disclosure of net income and earnings
per share as if the fair value based method had
been adopted. While the Company is evaluating the
impact of the pronouncement, it expects to
continue to account for stock options utilizing
the "intrinsic value based method" as is allowed
by the statement and therefore does not expect
SFAS No. 123 to have a material impact on its
financial position, results of operations and
cash flows. Both statements are effective for
fiscal years beginning after December 15, 1995.
F-8
<PAGE> 31
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. INVESTMENT The Company's investment in securities consists
SECURITIES of 225,300 shares of Norris Communications Inc.
common stock, an affiliated corporation. At
September 30, 1996 the Company's market value of
available for sale securities consisted of:
<TABLE>
<CAPTION>
Gross Estimated
Unrealized Fair
Cost Gains Value
---- ----- -----
<S> <C> <C> <C>
Common Stock $203 $189,950 $190,153
</TABLE>
The Company realized gains of $55,019 and $71,078
on the sale of investment securities for the
years ended September 30, 1996 and 1995 (see Note
9).
2. INVENTORIES At September 30, 1996 inventories consisted of
the following:
<TABLE>
<S> <C>
Finished goods $ 3,681
Work-in-process 202,944
Raw materials 107,305
----------
$ 313,930
==========
</TABLE>
3. EQUIPMENT Equipment consisted of the following at September
30, 1996:
<TABLE>
<S> <C>
Machinery and equipment $ 231,962
Office furniture and equipment 45,682
Leasehold improvements 6,726
----------
284,370
Less accumulated depreciation 190,961
----------
Net equipment $ 93,409
==========
</TABLE>
Depreciation expense was approximately $52,000
and $56,000 for the years ended September 30,
1996 and 1995.
4. RELATED PARTY Facility Lease
TRANSACTIONS
The Company's research, assembly and shipping and
office facilities are subleased under a sub-lease
agreement expiring in January 1997 with an
affiliated corporation, requiring monthly rental
payments of approximately $2,000. Total rent
expense under operating lease agreements was
approximately $39,000 and $67,000 for the years
ended September 30, 1996 and 1995.
F-9
<PAGE> 32
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Outside Manufacturing Services
An affiliated company provides certain outside
manufacturing services to the Company. For the
years ended September 30, 1996 and 1995 total
services provided amounted to approximately
$49,000 and $107,000. At September 30, 1996
approximately $31,600 is due to this affiliated
corporation for such services and is included in
accounts payable in the accompanying balance
sheet.
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, 1996 and 1995,
total royalties paid by the Company on radio
sales were approximately $9,000 and $17,500.
5. LINE OF CREDIT The Company has a $40,000 line of credit
agreement with a bank. The line bears interest at
2.25% over the bank's prime lending rate (total
10.5% at September 30, 1996). The line expires on
March 13, 1997 and is secured by substantially
all of the Company's assets. At September 30,
1996, the Company had no borrowings under the
line of credit. The Company has not used this
credit line since the September 3, 1996 renewal
of the line.
6. INCOME TAXES Income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended September 30, 1996 1995
-----------------------------------------------------------
<S> <C> <C>
Current -
State $ - $ -
Deferred (benefit):
Federal (287,000) (128,000)
State (51,000) (22,000)
---------- ---------
(338,000) (150,000)
Change in valuation allowance 338,000 150,000
---------- ---------
$ - $ -
========== =========
</TABLE>
A reconciliation of income taxes at the federal
statutory rate of 34% to the effective tax rate
is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Income taxes (benefit) computed
at the federal statutory rate $(191,000) $ (125,000)
Tax effect of change in valuation
allowance 240,000 146,000
State income taxes, net of
federal tax benefit (33,000) (22,000)
Other (16,000) 1,000
--------- ----------
$ - $ -
========= ==-=======
</TABLE>
F-10
<PAGE> 33
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, 1996 are as
follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS:
<S> <C>
Tax loss carryforwards $724,000
Tax credit carryforward 18,000
Accruals and other 6,000
Allowances 4,000
--------
Gross deferred tax asset 752,000
Less valuation allowance 670,000
--------
82,000
--------
DEFERRED TAX LIABILITIES:
Unrealized gain on investment securities (76,000)
Equipment (6,000)
--------
(82,000)
--------
Net deferred tax (asset) liability $ -
========
</TABLE>
A valuation allowance has been recorded to offset
the net deferred tax asset as management has
determined that it is more likely than not that
the deferred tax asset will not be realized.
At September 30, 1996, the Company for federal
income tax purposes has net operating loss
carryforwards of approximately $1,959,000 which
expire through 2010 of which certain amounts are
subject to limitations under the Internal Revenue
Code of 1986, as amended.
7. STOCKHOLDERS' PRIVATE OFFERINGS AND WARRANTS
EQUITY
During fiscal 1996 the Company completed a
private offering of 250,000 units, consisting of
one share of the Company's common stock and one
warrant to purchase one share of common stock at
$0.50 per share through February 23, 1999.
During fiscal 1996 the Company completed two
subordinated convertible note offerings. Eight
percent convertible notes due May 31, 1999 were
sold for cash of $220,000 and an additional
$100,000 was issued to a director and stockholder
to refinance the $100,000 balance remaining on
such stockholder note with a due date of October
1, 1996. An aggregate of 320,000 warrants
expiring May 31, 1998 were granted to the note
holders each exercisable into one common share at
an exercise price of $1.00 per share. All
$320,000 of the 8% convertible notes plus accrued
interest were converted to common stock prior to
the end of the fiscal year and 220,000 of the
warrants were exercised.
The second note offering consisted of 6%
subordinated convertible notes due July 31, 1998
sold for cash of $700,000. The 6% convertible
notes were convertible into common stock at a
price ranging from $0.80 per share to $2.00 per
share. Prior to the end of fiscal year all of
these notes and accrued interest were converted
to common stock at $2.00 per share.
F-11
<PAGE> 34
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
At September 30, 1996 the Company had the
following warrants outstanding arising from the
above offerings, each exercisable into one common
share:
<TABLE>
<CAPTION>
Exercise Expiration
Number Price Date
------ -------- ----------
<S> <C> <C>
250,000 $0.50 February 23, 1999
100,000 $1.00 May 31, 1998
-------
350,000
=======
</TABLE>
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, 1996, there were options
outstanding and exercisable covering 790,000
shares of common stock at prices ranging from
$0.50 to $2.15 per share expiring beginning 1997
through 2001.
<TABLE>
<CAPTION>
Year Ended September 30, 1996 1995
---------------------------------------------------------------
<S> <C> <C>
Options outstanding, beginning of year 450,000 450,000
Options granted 417,500 50,000
Options exercised (56,667) -
Options expired or canceled (20,833) (50,000)
------- -------
Options outstanding, end of year 790,000 450,000
======= =======
</TABLE>
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, 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 ten years of the date they were
granted. As of September 30, 1996, there were
options outstanding and exercisable covering
796,000 shares of common stock at prices ranging
from $0.50 to $2.25 per share expiring beginning
1996 through 2001.
<TABLE>
<CAPTION>
Year Ended September 30, 1996 1995
--------------------------------------------------------------
<S> <C> <C>
Options outstanding, beginning of year 799,000 627,000
Options granted 236,000 185,000
Options exercised (115,000) -
Options expired or canceled (124,000) (13,000)
-------- -------
Options outstanding, end of year 796,000 799,000
======== =======
</TABLE>
F-12
<PAGE> 35
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. CUSTOMERS, The Company's financial instruments that are
FINANCIAL exposed to concentrations of credit risk consist
INSTRUMENTS, primarily of cash and trade accounts receivable.
CONCENTRATIONS
OF CREDIT RISK The Company's cash equivalents are in demand
AND EXPORT deposit accounts placed with major financial
SALES 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.
The carrying amounts of financial instruments
including cash, accounts receivable, accounts
payable and accrued liabilities approximated fair
value because of the immediate or short-term
maturity of these instruments.
During the year ended September 30, 1996, sales
to six individual customers accounted for 54% of
total net sales. During the year ended September
30, 1995, sales to one individual customer
accounted for 15% of total net sales.
The Company markets its ear-radio to four major
segments of customers, including retail outlets,
catalog distribution, television and
premium/specialty markets. At September 30, 1996
total trade accounts receivable included
approximately $106,000 due from a retail outlet
for which extended credit terms were granted.
Export sales were approximately 27% and 31% of
sales for the years ended September 30, 1996 and
1995. A summary of the Company's sales by
geographical areas is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Foreign sales:
Europe $147,300 $ 282,900
Asia 34,300 159,900
Australia 31,300 65,500
South America 24,700 24,300
Other 11,500 31,500
-------- ----------
Total foreign sales 249,100 564,100
Domestic sales 684,543 1,237,462
-------- ----------
$933,643 $1,801,562
======== ==========
</TABLE>
The Company has no foreign assets.
9. SUBCONTRACTOR The Company is dependent on a foreign
AND SUPPLIER subcontractor for the assembly of its are a
AGREEMENTS number of electronic product subcontract FM
ear-radio which accounted for substantially
assembly companies located all of the Company's
revenues in North America and overseas that are
during the year ended September 30, 1996.
qualified to produce the Company's The Company
believes that there FM ear-radio should the
existing supplier be unable or unwilling to do
so, however any disruption of supply could cause
additional costs and delays and could have an
adverse impact on the Company's operations. The
assembly of ear-radios is dependent upon the
availability of electronic components. The
Company believes there are secondary suppliers of
components and subassemblies such that it is not
reliant on one supplier, although delays could
result should the Company be required to change
suppliers of longer lead time components or
subassemblies. Any significant
F-13
<PAGE> 36
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 an adverse
impact on the Company's operations.
<TABLE>
<S> <C> <C>
10. SUPPLEMENTAL 1996 1995
DISCLOSURE OF ---- ----
CASH FLOW Non-cash financing activities:
INFORMATION Convertible notes exchanged
for common stock $1,020,000 $ -
Convertible note issued to
refinance stockholder note 100,000 -
Investment securities exchanged
for reduction in accounts payable 55,050 -
Interest paid by issuance of common
stock 30,997 -
Value of warrants assigned to
financing costs (other assets) 12,500 -
Cash paid for interest 11,049 1,000
</TABLE>
F-14
<PAGE> 37
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 13, 1996
By: /s/ Robert Putnam
_____________
Robert Putnam
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 13, 1996 By /s/ Robert Putnam
_____________
Robert Putnam, President
CEO and Director
(Principal Executive, Financial and
Accounting Officer)
Date: December 13, 1996 By /s/ Richard M. Wagner
_________________
Richard M. Wagner
Secretary and Director
Date: December 13, 1996 By /s/ Elwood G. Norris
________________
Elwood G. Norris
Director
<PAGE> 1
EXHIBIT 10.3.1
ADDENDUM AGREEMENT
ASSIGNMENT OF TECHNOLOGY
This Agreement is an Addendum to an Agreement dated March 2, 1992, for
Assignment of Technology by and between Elwood G. Norris, a resident of the
State of California (herein referred to as NORRIS), and American Technology
Corporation, a Utah corporation at the time of signature in 1992 and now a
Delaware corporation (referred to herein as COMPANY).
WHEREAS, NORRIS and COMPANY entered into an Assignment of Technology on
March 2, 1992 (attached hereto as Exhibit 1) providing for an Assignment of
certain technologies from NORRIS to the COMPANY;
WHEREAS, the parties hereto desire to continue this Agreement under
terms of an extension;
NOW, THEREFORE, the parties agree as follows:
1. EXTENSION
Pursuant to paragraph 11 of the referenced Agreement for ASSIGNMENT OF
TECHNOLOGY, the parties hereto desire to extend the referenced Agreement for an
additional period of five (5) years to March 2, 2002. All provisions of the
previous Agreement are to be carried forward, except where they have been
expressly modified by the following terms.
2. TECHNICAL DEVELOPMENTS
Based on the occurrence of development of improvements by NORRIS during
the present term of agreement, further improvements and inventions are probable
during the term of extension. Specifically, Technology Section 3 of Exhibit A
(referred as the TRACKER) has been modified and enhanced with GPS (Global
Positioning System) technology and includes two pending patent applications.
Section 4 of Exhibit A (identified as the SONIC GENERATOR) has been the subject
of further invention and development and has been modified and enhanced
(Acoustical Heterodyne or HyperSonic Sound), including three patent
applications. It is mutually acknowledged that the original characterization of
these respective areas shall be carried forward into newly developed
technologies, and shall be referred to hereafter as technologies relating to the
TRACKER and SONIC GENERATOR.
3. ROYALTIES
In consideration of new technologies developed by NORRIS and
improvements anticipated over the next five years in both TRACKER and SONIC
GENERATOR, ATC agrees to pay a royalty of two percent (2%) of gross revenues
received by COMPANY from the sale or license or other exploitation of TRACKER
technology and SONIC GENERATOR technology, less proceeds allocated for tax,
shipping, and credit for returns. This royalty shall be payable for a period of
ten (10) years commencing on March 1, 1997 or during any period of time which
revenues are received from product or licensing which is subject to an existing
patent assigned to the COMPANY by NORRIS under this Agreement, whichever period
is longer.
1
<PAGE> 2
4. REPORTS AND TIME OF ROYALTY PAYMENTS
For the purpose of computing the royalties referred to in Paragraph 3
of this Agreement, the year shall be divided into quarters, beginning January 1,
April 1, July 1, and October 1 of each year. Within thirty (30) days after the
end of each quarter, COMPANY shall submit a written report to NORRIS setting
forth the referenced gross revenue received during the preceding quarter.
COMPANY's remittance for the full amount of royalties due for such quarter shall
accompany such reports. COMPANY agrees to keep complete and correct account of
sales and licensing fees embodying the above-mentioned inventions, and NORRIS or
its representative shall have the right to examine books of account at all
reasonable times to the extent and insofar as is necessary to verify the
accuracy of the above-mentioned reports.
5. TRANSFER OF TECHNOLOGY
In accordance with the terms of the referenced Agreement, NORRIS hereby
acknowledges his ongoing responsibility of disclosing and transferring to the
COMPANY all information and property interests as required under the parent
agreement during this period of extension.
EXECUTED AS OF THIS 2nd day of December, 1996.
AMERICAN TECHNOLOGY CORPORATION
By: /S/ROBERT PUTNAM
Robert Putnam
President and CEO
By: /S/ELWOOD G. NORRIS
Elwood G. Norris
2
<PAGE> 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 and File No. 333-09269) of American
Technology Corporation of our report dated November 19, 1996, 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, 1996.
/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP
Denver, Colorado
December 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR
ENDED SEPTEMBER 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 657,331
<SECURITIES> 190,153
<RECEIVABLES> 205,457
<ALLOWANCES> 10,000
<INVENTORY> 313,930
<CURRENT-ASSETS> 1,415,777
<PP&E> 284,370
<DEPRECIATION> 190,961
<TOTAL-ASSETS> 1,595,462
<CURRENT-LIABILITIES> 367,990
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 1,227,386
<TOTAL-LIABILITY-AND-EQUITY> 1,595,462
<SALES> 933,643
<TOTAL-REVENUES> 933,643
<CGS> 797,154
<TOTAL-COSTS> 797,154
<OTHER-EXPENSES> 716,884
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,046
<INCOME-PRETAX> (560,448)
<INCOME-TAX> 0
<INCOME-CONTINUING> (560,448)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (560,448)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
