<PAGE> 1
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED SEPTEMBER 30, 1997
Commission File No. 0-24248
AMERICAN TECHNOLOGY CORPORATION
(Name of small business issuer in its charter)
Delaware 87-0361799
- -------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
13114 Evening Creek Drive South, San Diego, California 92128
(Address of principal executive offices) (Zip Code)
(619) 679-2114
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, $.00001 par value
-------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The Company's revenues for its most recent fiscal year were $967,408.
The aggregate market value of the voting stock held by non-affiliates of the
registrant on November 20, 1997 was approximately $35,180,000 based on an
average of the closing bid and ask price of $5.22 as reported on the NASD's OTC
Electronic Bulletin Board system.
At November 20, 1997, 10,065,002 shares of common stock, par value $.00001 per
share (the registrant's only class of voting stock), were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
================================================================================
1
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
PART I
<S> <C>
ITEM 1. Description of Business 2
ITEM 2. Description of Property 12
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 13
Stockholder Matters
ITEM 6. Management's Discussion and Analysis or Plan of Operation 13
ITEM 7. Financial Statements 19
ITEM 8. Changes in and Disagreement with Accountants on
Accounting and Financial Disclosure 19
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; 19
Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation 21
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 23
ITEM 12. Certain Relationships and Related Transactions 23
ITEM 13. Exhibits, Lists and Reports on Form 8-K 24
</TABLE>
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-KSB
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21A OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE "SAFE
HARBOR" PROVISIONS THEREOF. THEREFORE THE COMPANY IS INCLUDING THIS STATEMENT
FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH SAFE
HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE COMPANY'S CURRENT VIEWS
WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE
DISCUSSED HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR ANTICIPATED RESULTS. IN THIS REPORT, THE WORDS
"ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND SIMILAR
EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED TO
CONSIDER THE SPECIFIC RISK FACTORS DESCRIBED BELOW AND NOT TO PLACE UNDUE
RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY
ARISE AFTER THE DATE HEREOF.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY DEVELOPMENT
American Technology Corporation ( the "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
2
<PAGE> 3
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 ("JABRA") which is commercializing the EarPHONE for
cellular phone, computer, multi-media and other customer uses. 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 13114 Evening Creek Drive
South, San Diego, California, and its telephone number is 619-679-2114. Its
Internet site is located at www.atcsd.com.
BUSINESS
OVERVIEW
The Company is engaged in the development, manufacturing and marketing of
consumer electronic products and acoustic 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 1997 substantially
all of the Company's revenues resulted from the manufacturing and marketing of
its "FM Sounds" FM digital scanning ear radio. The Company intends to introduce
new radio and related products and expand its ear radio distribution while
developing new technology assets.
The Company's HyperSonic(TM) Sound (HSS) reproduction technology has become its
primary business focus, although there can be no assurance the Company can
successfully exploit this new technology. HSS technology utilizes a new method
of sound reproduction -- sound is generated in the air using ultrasonic
frequencies, those above the normal range of hearing. A patents-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. The sound produced by the HSS technology is also significantly more
directional over greater distances with less volume loss than traditional sound
reproduction methods thereby offering a number of application advantages to
users.
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
re-create the top end of the audio spectrum, to mid-range speakers, and woofers
to address the lower frequencies. 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)
have evolved from vacuum tubes to solid state digital circuits and recording
technology has progressed from analog grooves in records to digital coding on
compact discs that are read by a laser. Loudspeaker industry developments have
focused primarily on improving individual elements such as magnets, coils, cones
and enclosures. However, compared to the improvements in electronics, the
Company believes loudspeakers are still relatively inefficient in converting
electrical energy into acoustic 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 sound systems, loudspeakers encompass a wide range in size, quality
and cost. The manufacture and sale of loudspeakers is highly competitive and
3
<PAGE> 4
includes both 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 believes that
it is becoming increasingly difficult for manufacturers to differentiate their
sound reproduction products and a novel method of reproduction with new features
will find a receptive audience.
The Company's marketing of the HSS technology continues to evolve as a result of
market awareness, technical developments, changes in patent and protection
strategies and reactions from prospective users of the technology. Rather than
broadly licensing large market segments or industries, the Company is focusing
its efforts on original equipment manufacturers ("OEMs") desiring to implement
the HSS technology in specific products. The Company's strategy is to establish
business relationships with leading participants in various segments of the
electronics and sound reproduction markets. The Company believes this strategy
will enable it to take advantage of the superior financial resources,
technological capabilities, proprietary positions and market presence of these
companies in establishing and maintaining HSS technology in sound reproduction.
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 targeted 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.
Management believes the scope and breadth of its patents will be an
important factor in the exploitation of HSS technology.
3. Implement a segmented licensing approach. The Company has developed a
segmented licensing approach to target individual fields of use for the
HSS technology. 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 four initial fields
of use (a) computers, monitors (b) high end televisions, (c) home
theater/professional audio, and (d) communications. The Company is
working with manufacturers in each of these fields of use to identify
market requirements and customize 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 premium
price or premium margins for their products.
5. Establish cross segment relationships to facilitate standards. The
Company believes that successful implementation of HSS technology
requires the cooperation of manufacturers of electronic components. The
Company believes that developing standards for HSS-enabled electronics
and ultrasonic HSS emitters will accelerate adoption of the technology
across targeted fields of use. 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 and build consumer awareness.
The Company's strategy is to develop strategic arrangements with manufacturers
in the targeted fields of use with limited exclusivity to accelerate
implementation and market introduction and to allow the selected manufacturers
to
4
<PAGE> 5
differentiate product offerings from competitors. The Company has not yet
entered into any strategic arrangements and there can be no assurance the
Company will be successful in implementing its strategy or exploiting its HSS
technology.
Although the Company anticipates generating a significant portion of its
revenues from licensing, the Company may also sell HSS materials or components.
The production and sale of HSS equipment may also 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 "Business Risks."
HYPERSONIC SOUND TECHNOLOGY
Background and Stage of Development
The Company's HSS technology was invented by Elwood G. Norris, a director and
Chief Technology Officer of the Company, who manages the Company's research and
development and technical activities. Mr. Norris also invented the Company's ear
radio, Global Positioning System ("GPS") and Engine Plasma Displacement ("EPD")
technology for jet engine noise reduction. The Company acquired the basic
concepts of HSS technology (previously called the Sonic Generator technology)
from Mr. Norris in 1992. During fiscal 1996 and 1997, the Company devoted a
significant portion of its research and development activities on HSS
technology. In July 1996 the Company produced a laboratory proof-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. In September 1997 the Company
produced a portable stereo demonstration system and in October 1997, developed
test equipment for evaluation by selected companies interested in collaborating
on further development. During fiscal 1997 the Company's development efforts
also focused on significantly expanding the pending patents portfolio on HSS
technology and designing, developing and testing improved electronics and
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 assist in developing 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 1998. However, the development of
the Company's HSS technology has taken longer than anticipated by the Company's
management and could be subject to additional delays. There are inherent risks
in new technology development, many beyond the control of management. See
"Business Risks."
In May 1997 the inventor of the HSS technology, Mr. Norris, was awarded the 1997
Discover Magazine Award for Technical Innovation in the Sound category for the
Company's HSS technology. Winners in a total of eight categories were selected
from over 4,000 entries. The annual awards are designed to recognize and promote
new technological innovations and the winners are selected by an expert panel of
judges. Winners were also featured in the July issue of Discovery magazine. In
November 1997 HSS technology won a Popular Science 1997 "Best of What's New
Award" from among thousands of new products. These awards and recognition have
provided broad marketing exposure for the HSS technology to prospective users.
HSS technology has also been featured in over 30 journal articles providing
additional marketing exposure.
The Company continues to devote significant resources in preparing and filing
patent applications related to various aspects of the HSS technology. A total of
eleven HSS technology patents have been filed and others are in various stages
of preparation.
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. In 1856, H. von Helmholtz, a German physiologist and physicist,
published the results of his combination tone experiments proving the effect
resulted from the non-linearity of air. He also 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 efficiently 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.
Mr. Norris, who has previous patents in the fields of ultrasonics and audio,
applied aspects of the electrical concept of mixing multiple electrical signals
to produce new audio by-products. HSS technology employs a method where
5
<PAGE> 6
ultrasonic frequencies are created electronically using proprietary techniques
to carry intelligence (e.g. music, voice) and these ultrasonic frequencies are
then emitted into the air using an ultrasonic emitter. Since the audible sound
is created in the air, sound does not appear on the surface of the ultrasonic
emitter (a significant departure from a loudspeaker) but is actually created
within the beam of ultrasonic energy being emitted. Accordingly, if the beam is
directed towards a wall, the sound emanates from the surface and if the beam is
directed to a person the sound emanates from the person. This directionality
allows sound to be manipulated in space or diffused from a surface in a wide
variety of ways to produce desired effects. The sound also does not dissipate
over distance as it does with traditional speakers, providing greater volume at
selected distant points with less energy.
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.). However,
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 lower 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, known as piezoelectric elements, produce high frequency
movement when voltage is supplied. These piezoelectric elements are used to emit
ultrasonic energy in applications such as sonar, ultrasonic cleaning, industrial
inspection and medical ultrasound. Such ultrasonic devices are incapable of
producing frequencies in the audible range. However, 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. The Company believes its
ultrasonic emitters will be designed and configured in a variety of designs,
shapes and sizes to produce desired effects in commercial applications.
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 to
governmental regulation.
The Company believes its HSS technology, comprised of 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
- Sound quality that is not dependent on the size of the emitting face
or speaker enclosure
- Elimination of speaker enclosures and their cost and bulk
- Reduction of the effect of room acoustics on sound quality
- 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
- Ability to deliver a beam of sound over greater distances
- Elimination of magnets, their weight and adverse effects on video
monitors
- Elimination of feedback in professional applications
There can be no assurance these advantages can be successfully implemented
commercially.
Target License Market Segments
The Company has targeted four initial fields of use which include computers and
monitors, high end televisions, home theater/professional audio systems and
communications. 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 the primary segments. The Company
recently demonstrated the application of HSS technology in a personal computer
for a prospective customer to demonstrate the advantages of directed sound,
small size and high sound quality. Management is encouraged by the technical and
marketing interest in its new sound technology and is pursuing its targeted
implementation strategy.
6
<PAGE> 7
The market for computer sound, primarily multimedia applications, is growing
rapidly. According to market researcher The Yankee Group, 1996 multimedia
equipped desktop personal computer worldwide shipments were 38.8 million units,
with a total market value of $90 billion. There is also a growing demand for
improved sound in notebook and other small computers with worldwide annual sales
exceeding 70.86 million units in 1996 according to Dataquest. An increasing
number of computer video monitors are incorporating sound. In 1996 over 65
million monitors were sold, according to Dataquest. 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, NEC, Mitsubishi,
Phillips, Yamaha, Bose, Panasonic, Foster and others.
The Company believes limitations in 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
large and growing market.
High end televisions and home theater systems are growing segments of the
consumer electronics market. Home theater audio systems include component and
rack audio systems for the home as well as specifically targeted home theater
systems. Professional audio systems include systems used by studios and other
professionals in the creation or production of audio and video material. The
Company intends to focus initially on manufacturers in the mid to high-end range
of these segments. Home theater and large screen televisions are expected to
experience continued growth from the introduction of the high-capacity DVD
(digital versatile disc). Over 14 million televisions 19" and larger were sold
in the U.S. in 1996 according to the Consumer Electronics Manufacturers
Association (CEMA). In addition, almost 1 million projection televisions were
sold in the same period. According to the Electronic Industries Association
(EIA), households with the equipment to enjoy home theater in 1996 included
approximately 15 million U.S. homes.
EIA also estimates that U.S. factory sales of home theater and aftermarket
loudspeakers exceeded $944 million in 1996. Manufacturers in these segments
include major international consumer companies, such as Sony, AIWA, Phillips,
Samsung, Mitsubishi, Toshiba, Sanyo, Sharp, JVC and others, and specialty audio
component manufacturers such as Carver Corporation, Marantz, NAD and others.
The market for professional audio systems is also growing. The domestic U.S.
market for public address systems exceeded $447 million in 1995 according to EIA
and the market for other professional equipment including sound modules,
synthesizers, digital pianos, signal processing equipment and other products are
experiencing growth.
The Company believes its HSS technology will offer the home audio/video and
professional markets improved full-spectrum sound source with less distortion
and less room-acoustic interference. The ability to place and manipulate sound
in a room without large multiple speakers is expected to be attractive to
consumers. The lack of feedback is an important feature for professionals.
The communications market for HSS technology includes all types of telephones,
answering machines, speaker and conference phones and audio and video
conferencing systems. The U.S. market for telephones and answering machines was
worth $3.5 billion in 1996, according to the Polk Company. Leading manufacturers
include AT&T (Lucent and the new Lucent/Phillips joint venture), Motorola,
Ericsson, General Electric, Nokia, and Uniden. In addition, audio and video
conferencing equipment sales exceeded $4.2 billion in the North America in 1996
according to the International Teleconferencing Association. Leading vendors in
this industry include Picturetel, Sony, Intel and Polycom.
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 military applications, portable consumer electronics, hearing aids,
headphones, cinema/theater, public address and outdoor sound systems, use with
noise cancellation systems, 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.
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 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
7
<PAGE> 8
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 1997 during which it sold approximately 107,000 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 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 has developed an improved FM ear radio but management has
not established a date for introduction. The Company is currently selling to
customers from inventory and has not yet determined product plans for fiscal
1998. The current assembly contract has expired and the Company has not decided
where or if to continue ear radio production. See "Assembly and Production."
The Company has also designed and developed a mini-headphone radio (HeadGear)
scheduled for introduction by mid-1998. Incorporating ear radio technology, the
HeadGear is smaller than similar headphone radio products currently on the
market. The intended retail price range is $29.95 and up. The Company has filed
one patent application for this product. There can be no assurance this product
can be introduced to market or that it will be successful.
Management is also seeking compatible products and accessories developed by
others for distribution. There can be no assurance the Company can obtain rights
to manufacture and/or distribute any other products or accessories.
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 which relate to AM, FM, VHF
and UHF frequency bands, as well as IR (Infrared) frequency bands. See
"Intellectual Property Rights and Proprietary Information."
Marketing Strategy
The Company's existing FM and AM ear radios and products and accessories under
development or acquired in the future are targeted for the portable audio
products segment of the consumer electronics market. According to CEMA, the U.S.
wholesale portable radio market in 1996 was approximately $42 million. 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.
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 electronics 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.
The Company has two full-time marketing personnel assigned to ear radio
marketing and sales activities. The Company had seventeen independent sale
representatives in the U.S. and Canada at September 30, 1997. The Company also
8
<PAGE> 9
employs international distributors from time to time. However due to foreign
competition and a marketing focus on domestic sales, export sales in fiscal 1997
were only 2% of sales versus 27% in fiscal 1996.
Assembly and Production
The Company primarily uses 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 San Diego, California location but may subcontract
some of these steps in the future. The Company performs limited assembly work
from time to time. The Company performs its own engineering and quality control.
The Company believes there are secondary suppliers of components and
subassemblies available 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 resulted in added capacity and reduced costs. This agreement
terminated in July 1997 and the Company is currently reviewing its future plans
for ear radio product production at this or other assembly sites. 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 Company change assembler or should
a future assembler be unable or unwilling to produce, 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 meet orders 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 Company's 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 ear radio products.
PORTABLE GPS TECHNOLOGY, EPD TECHNOLOGY AND OTHER TECHNOLOGIES AND INVESTMENTS
Portable GPS Technology
In late 1994 the Company innovated a proprietary method of tracking persons and
objects utilizing GPS technology. A substantial portion of the Company's 1995
research and development budget was 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 utilizing the GPS technology.
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 a very competitive field with frequent
introductions 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, including the filing of two U.S.
patent applications and reviewing the applications with a U.S. patent examiner
specializing in GPS technology. Patent number 5,689,269 was granted November 18,
1997 and one patent is pending. There can be no assurance the pending patent
will issue or that, if issued, that it or the issued patent 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 believes, but can make no assurance, the remaining pending patent will
issue during the next fiscal year, however there can be no assurance thereof.
The ultimate claim set allowed is expected to be a determining factor on future
activity with respect to this technology. The Company believes that certain
features of its pending patent, if allowed, may be licensable to the GPS
industry.
EPD Technology
The Company has filed an initial U.S. patent application regarding a new method
and system for reducing noise in jet engines, the EPD technology. This
technology, invented by Mr. Norris, relates to canceling acoustic waves produced
by a jet engine by stimulating a plasma within the engine to propagate an
acoustic interference wave. Mr. Norris has previously performed rudimentary
experiments on this technology, however the Company has not yet developed a
9
<PAGE> 10
proof-of-concept device or demonstration. There can be no assurance that the
Company's concepts will function as theorized or that any practical product or
technology can ever result from the concepts. In addition, the Company has
performed only limited competitive research and there can be no assurance that
the concepts innovated by the Company are new or unique or that they are
functionally better than existing and proposed methods for jet engine noise
reduction.
The Company's strategy is to develop a proof-of-concept demonstration of the EPD
technology and seek a collaborative arrangement to further develop this
technology. Management has not developed a timetable for this project nor
identified personnel for further development. Although management believes there
is a significant market for an improved system for jet engine noise reduction,
there can be no assurance when or if the EPD technology can be exploited by the
Company.
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
At September 30, 1997, the Company held 225,300 common shares (less than 1%) of
Norris Communications Inc. (NCI), a San Diego-based OTC Bulletin Board-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) that owned
the Company's ear-microphone technology. See "Certain Relationships and Related
Transactions." These shares had a market value of approximately $29,000 at
September 30, 1997.
By agreement dated October 31, 1997, the Company sold and canceled its 1%
royalty interest on gross sales of JABRA's EarPHONE technology products
incorporating a wireless receiver to JABRA for $15,000. There was no assurance
of any future royalties.
CUSTOMERS
For the fiscal year ended September 30, 1997, three customers accounted for 57%
of the Company's sales. Target Stores, Inc., CR McMullen Co., and Eddie Bauer
accounted for approximately 30%, 14% and 13% of sales, respectively, with no
other single customer accounting for more than 10% of sales.
The Company expects that it will continue to rely on a number of large
individual customers for future revenues and the loss of any customer could have
a material adverse effect on the Company's financial condition and results of
operations.
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.
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, there have been
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,
10
<PAGE> 11
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 differentiate their products. Specifically, the manufacturers could
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.
Ear Radio Products
The Company's ear radio products compete directly with a number 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. 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 act as a
barrier to entry into the U.S. from foreign competitors offering a similar radio
device, however the Company recognizes patents are subject to loss,
circumvention and other risks. See "Intellectual Property Rights and Proprietary
Information."
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 (the "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 rather than electromagnetic waves, are the subject of
existing governmental regulation. However there can be no assurance that
interpretations of existing regulations or imposition of new regulations could
not have an adverse impact on the Company's proposed commercialization of HSS
technology.
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.
The Company currently holds 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 holds U.S. patent #5,689,269 granted November 18, 1997
and has one patent pending on its GPS technology. The Company has one patent
pending on its EPD technology, one patent pending on the HeadGear product, and
eleven patents pending on its HSS technology. The Company 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 toward HSS technology patents. The electronics industry is
characterized by frequent litigation regarding patent and other intellectual
property rights.
11
<PAGE> 12
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 licenses 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 patent protection or the loss of
patent protection on the Company's technology, or the circumvention of the
Company's patents, when and if granted, by the Company's 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 and HSS. 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, 1997 and 1996, the Company spent
$566,288 and $160,934, 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 November 1, 1997 the Company in addition to its four executive officer
employees, employed sixteen persons, including four part-time employees. Of such
employees, one person was engaged in purchasing, five 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.
During most of fiscal 1997, the Company's research, assembly and shipping and
office facilities were subleased under a $2,000 monthly sub-lease agreement
which expired in January 1997 with an affiliated corporation NCI, and thereafter
was month to month until July 1997. On July 11, 1997, the Company entered into a
three year lease located at 13114 Evening Creek Drive South, San Diego,
California. To meet the credit requirements of the landlord, both the Company
and NCI entered into a joint lease agreement for approximately 12,925 square
feet with aggregate monthly payments of $13,830 inclusive of utilities and
costs. The Company is occupying approximately 7,500 square feet of the jointly
leased office space with its share of monthly payments being approximately
$8,000.
The Company believes this facility is adequate to meet its needs for the next
twelve months given management's current plans. However should the Company
expand its operations, it may be required to obtain additional space or
alternative space. The Company believes there is adequate availability of office
space in the general vicinity to meet its future needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
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.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET INFORMATION
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 Common
Stock has often been sporadic and limited.
The following table sets forth the high and low bid quotations for the Common
Stock for the fiscal years ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
Bid Quotations
High Low
---- ---
<S> <C> <C>
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
Fiscal Year Ending September 30, 1997
First Quarter $7.375 $3.375
Second Quarter $5.438 $3.375
Third Quarter $6.625 $3.50
Fourth Quarter $6.531 $5.00
</TABLE>
The above quotations reflect inter-dealer prices, without retail markup,
markdown or commission and may not represent actual transactions.
The Company has made application to trade its shares of Common Stock on the
National Association of Securities Dealers Automated Quotation System (NASDAQ).
There is no assurance shares of the Company's Common Stock will commence trading
on NASDAQ or that, if quoted thereon, the Company will continue to meet the
minimum listing requirements.
The Company had 1,237 holders of record of its Common Stock at November 20, 1997
with 10,065,002 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.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a description of equity securities sold by the Company during
the year ended September 30, 1997 that were not registered under the Securities
Act:
1. The Company issued a Stock Purchase Warrant to Renwick Corporate
Finance, Inc. ("Renwick") dated February 5, 1997 exercisable to
purchase 90,000 shares of Common Stock at $5.00 per share until
February 5, 2000. The Company expensed $33,300 as the value assigned
to consulting services in connection with this Stock Purchase
Warrant. The issuance was exempt by reason of Section 4(2) of the
Securities Act of 1933, as amended (the "Act") in reliance on the
private nature of the transaction, restrictions on transfer and based
on representations of Renwick.
2. On March 25, 1997 the Company completed the private offering and sale
for cash of an aggregate of $1,000,000 of unsecured 6% Convertible
Subordinated Promissory Notes due March 1, 1999 ("Notes") to sixteen
private investors (eleven accredited U.S. investors and five foreign
investors). The securities were sold by the Company without an
underwriter. The principal and interest amount of each Note is
convertible on one or more occasions into shares of Common Stock, at
a price which is the lower of (i) $3.50 per share or (ii) 85% of five
days market price prior to conversion but not less than $2.50 per
share or (iii) for any conversions on or after March 1, 1998 the
average of the closing bid prices for the prior thirty days but in no
event less than $1.00 per share. The Notes may be called by the
Company for conversion if the market price exceeds $9.00 per share
for ten consecutive days and certain conditions are met. Each
purchaser was granted a warrant to purchase 50 common shares of the
Company at $5.00 per share until March 1, 2000 ("Warrant") for each
$1,000 of Notes purchased. The Warrants are exercisable, in the
aggregate, into 50,000 shares. These securities were offered and sold
without registration under the Act, in reliance upon the exemption
provided by Regulation D thereunder and an appropriate legend was
placed on the Notes and Warrants. The Company filed a registration
statement, which became effective on
13
<PAGE> 14
May 28, 1997, on shares of Common Stock issuable on conversion of the
Notes and on exercise of the Warrants. Net proceeds from the sale of
the Notes was approximately $950,000.
3. On August 25, 1997 the Company completed the private offering and
sale for cash at $10.00 per share a total of 350,000 shares of Series
A Convertible Preferred Stock, par value $.00001 ("Preferred Stock")
to eight institutional and three accredited individual investors
("Preferred Shareholders") for an aggregate of $3,500,000. The
securities were sold by the Company without an underwriter. The
dollar amount of Preferred Stock, increased by $.60 per share of
Preferred Stock per annum and subject to other adjustments, is
convertible on one or more occasions into shares of Common Stock at a
conversion price which is 85% of the average of the closing bid
prices of the Company's Common Stock each day for the five trading
days immediately preceding the date of conversion provided that in no
event shall such amount to be multiplied by 85% be less than $3.00
per share or greater than $5.75 per share. The shares of Preferred
Stock may be called by the Company for conversion if the common stock
market price exceeds $14.00 per share for ten days and certain
conditions are met. The Preferred Stock is subject to mandatory
conversion after one year, subject to certain conditions. Each
purchaser was granted a warrant to purchase 500 common shares of the
Company at $7.50 per share until August 1, 2000 ("Warrant") for each
1,000 shares of Preferred Stock. The Warrants are exercisable, in the
aggregate, into 175,000 shares. These securities were offered and
sold without registration under the Act, in reliance upon the
exemption provided by Regulation D thereunder and an appropriate
legend was placed on the Preferred Stock and Warrants. The Company
filed a registration statement, which became effective on September
30, 1997, on shares of Common Stock issuable on conversion of the
Preferred Stock and the Warrants. Net proceeds from the sale of the
Preferred Stock was approximately $3,321,000.
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 FM ear
radios beginning in September 1993 and the AM ear radios beginning in July 1995.
The Company is focusing its primary efforts on completing development and
commercializing its HSS technology and expanding ear radio and related product
distribution.
Demand for the Company's ear radio products is subject to significant month to
month variability resulting from the limited market penetration achieved to date
by the Company. Initial sales have been concentrated with a few customers and
there can be no assurance of future orders from these or new customers. The
markets for the Company's products and future products and technologies are
subject to rapidly changing customer tastes and a high level of competition.
Demand for the Company's products is influenced by demographic trends in
society, marketing and advertising expenditures, product positioning in retail
outlets, technological developments, seasonal variations and general economic
conditions. Because these factors can change rapidly, customer demand can also
shift quickly. The Company may not be able to respond to changes in customer
demand because of the time required to change or introduce products, production
limitations and because of limited financial resources. For fiscal 1998 the
Company is also evaluating plans for ear radio and related products and the
choices made may impact future results. The Company's current FM radio off-shore
production agreement has expired and the Company has not yet determined where,
when or if it will produce additional FM radios for sale.
The HSS technology 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
beyond the Company's control. The Company has not generated any revenues from
the 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. 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, it will achieve market
acceptance.
The future of the Company is largely dependent upon the success of the HSS
technology or the development of new technologies. There can be no assurance the
Company can introduce any of its technologies or that if introduced they will
achieve market acceptance sufficient to sustain the Company or achieve
profitable operations. See also "Business Risks."
14
<PAGE> 15
RESULTS OF OPERATIONS
Net sales for the fiscal year ended September 30, 1997 (fiscal 1997) were
$967,408, a 4% increase over sales of $933,643 for the prior fiscal year.
Substantially all revenues for both years were from ear radio sales. Commencing
in fiscal 1996, the Company encountered foreign-based competition for its FM ear
radio which due to the Company's U.S. patent had a greater impact on foreign
sales. The Company has taken and expects to continue to take actions to preclude
the sale of infringing radios in the U.S. The Company also responded to
increased competition by (1) contracting for off-shore assembly to reduce
production costs and (2) reducing prices to make the ear radios attractive to
large chain retailers. The improved sales results in fiscal 1997 include sales
to several large chain retailers, which sales are highly seasonal. The foreign
competition dramatically reduced foreign sales in fiscal 1997, which accounted
for 27% of sales in fiscal 1996 and only 2% of sales in fiscal 1997.
During fiscal 1996 management changed to off-shore assembly of the FM ear radio,
resulting 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. The Company's assembly agreement
off-shore has expired and the Company has not elected to renew the agreement.
The Company is evaluating its ear radio and related consumer product offerings
for fiscal 1998 with the goal of expanding revenues from additional products
developed internally (such as HeadGear) and obtaining distribution rights to
compatible products. In the meantime the Company is continuing to sell FM ear
radios from inventory and believes, should it elect to do so, that it could
obtain a domestic or off-shore assembler for the FM ear radio.
The Company was successful in fiscal 1997 in adding new sales representatives
and obtaining new ear radio accounts but at reduced unit prices. Although unit
ear radio sales increased 19% to 107,000 units, dollar sales increased only 4%
due to reduced average unit prices. The Company's sales are subject to
significant month to month and quarter to quarter variability based on the
timing of orders, new accounts, lost accounts and other factors. The Company's
sales are affected by a variety of factors including seasonal requirements of
customers. The Company's is also exposed due to its reliance on a limited number
of customers.
Cost of sales for the year ended September 30, 1997 were $809,437 resulting in a
gross margin of $157,971 or 16%. This compares to a gross margin of 15% for the
prior year. Fiscal 1997 margins reflect the impact of reduced manufacturing
costs for the entire year from off-shore assembly. Gross margin percentage is
highly dependent on sales prices, production volumes, costs and manufacturing
overhead allocations. Past margins are not necessarily indicative of future
margins given the uncertainty and timing of both existing product sales and new
product offerings.
Research and development costs for the year ended September 30, 1997 were
$566,288 compared to $160,934 for the prior year. The $405,354 increase resulted
primarily from an increase in HSS technology development activities and related
costs. In the current fiscal year personnel costs increased by approximately
$175,000, equipment and component costs by $55,000 and outside design and
consulting increased by approximately $167,000 as compared to the prior year.
Research and development costs vary quarter by quarter due to the timing of
projects, the availability of funds for research and development and the timing
and extent of use of outside consulting, design and development firms. The
Company expects fiscal 1998 research and development costs to be at higher
levels due to increased staffing and expanded use of outside design and
consultants primarily associated with HSS technology development. The Company is
seeking additional engineering and support personnel to further expand research
and development on HSS and other technologies in future periods.
Selling, general and administrative expenses increased from $555,950 for the
year ended September 30, 1996 to $1,616,568 for the year ended September 30,
1997. The $1,060,618 increase included a $273,000 non-employee non-cash
compensation expense related to the granting of stock options and warrants
during fiscal 1997, a $41,000 increase in commissions primarily associated with
large accounts, a $303,000 increase in personnel costs primarily associated with
HSS technology marketing, a $93,000 increase in marketing travel and related
costs, a $135,000 increase in costs associated with marketing and promoting the
HSS technology, a $25,000 increase in office related costs primarily associated
with the new lease of larger space and more personnel, and an $140,000 increase
in professional and financing fees associated with preparing HSS technology
licensing information and new financings. Management anticipates that selling,
general and administrative costs will continue at higher levels in fiscal 1998
due to the recent executive additions and expanded HSS technology marketing
personnel, travel and related operations and costs.
As a result of the above factors, the Company experienced a loss from operations
of $2,024,885 during the year ended September 30, 1997, compared to a loss from
operations of $580,395 for the comparable year ended September 30, 1996. The
increase in the operating losses resulted primarily from increases in research
and development costs and selling, general and administrative costs associated
with the HSS technology. The Company expects to incur continued operating losses
until it is able to commercialize its HSS or other technologies and produce
revenues sufficient to support operating costs. There can be no assurance the
Company will be successful in such efforts.
15
<PAGE> 16
During the year ended September 30, 1996, the Company recognized a gain of
$55,019 from the sale of NCI shares. No sales were made in fiscal 1997. During
the second fiscal 1997 quarter, the Company incurred $125,200 of non-cash
interest expense consisting of $2,500 of value assigned to stock purchase
warrants and $122,700 as embedded interest on convertible notes based on the
difference between the conversion price and the market price at the issue date.
A like amount was recorded as paid in capital. Through September 30, 1997 an
additional $18,461 of non-cash interest was paid or payable in common shares
related to the convertible notes.
The Company reported a net loss of $2,144,363 for the year ended September 30,
1997, compared to a net loss of $560,448 for the year ended September 30, 1996.
The Company has federal net loss carryforwards of approximately $3,600,000 for
federal tax purposes expiring through 2012. The amount and timing of the
utilization of the Company's net loss carryforwards may be limited under Section
382 of the Internal Revenue Code. A valuation allowance has been recorded to
offset the related net deferred tax asset as management was unable to determine
that it is more likely than not that the deferred tax asset will be realized.
See Note 6 to the accomanying financial statements.
The net loss available to common stockholders for the fiscal year ended
September 30, 1997 was increased in computing loss per share of common stock by
an imputed deemed dividend in the amount of $617,646 or $.07 per share. The
imputed deemed dividend resulted from a discount provision included in the
Series A Convertible Preferred Stock issued in August 1997. This imputed deemed
dividend is not a contractual obligation on the part of the Company to pay such
imputed dividend.
Future operations are subject to significant variability as a result of product
sales and margins, timing of new product offerings, the success and timing of
new technology exploitation, decisions regarding future research and development
and variability in other expenditures.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company recommenced operations in January 1992, the Company has had
significant negative cash flow from operating activities. The negative cash flow
from operating activities was $1,572,425 for the fiscal year ended September 30,
1997 and $611,350 for the fiscal year ended September 30, 1996. During fiscal
1997, the net loss of $2,144,363 included non-cash expenses of $723,595
resulting in an adjusted net cash loss of $1,420,768. In addition to this amount
of $1,420,768, cash was used in operating activities through an increase in
customer accounts receivable of $111,717 and a $227,319 decrease in accounts
payable. Operating cash was provided by a $31,630 reduction in prepaid expenses,
a $124,116 reduction in inventories and a $31,633 increase in accrued
liabilities.
At September 30, 1997 the Company had approximately 115 days sales in accounts
receivable as compared to 75 days at September 30, 1996. The unusually high
level of receivables at September 30, 1997 was due to sales to Target and CR
McMullen on terms demanded by the large retail chains that often require 90-120
day terms on sales. However, receivables can vary dramatically due to quarterly
and seasonal variations in sales and timing of shipments to and receipts from
large customers.
For the year ended September 30, 1997, the Company used approximately $177,000
for the purchase of laboratory equipment and made a $101,000 investment in
patents. The Company estimates a significant level of investments in patents in
fiscal 1998 and requirements for additional equipment for developing HSS and
other technologies. Dollar amounts of these patent investments and equipment
additions are not currently estimable by management.
At September 30, 1997, the Company had working capital of $3,719,807 and at
September 30, 1996 had working capital of $1,047,787. Included in working
capital is the unrealized holding gain in the shares held by the Company in
NASDAQ quoted NCI. At September 30, 1997 and 1996, the Company owned 225,300
shares of NCI with a market value of $29,289 and $190,153, respectively. This
investment is carried on the balance sheet as a current asset of the Company at
market value pursuant to Statement of Financial Accounting Standards No. 115
(SFAS No. 115), "Accounting for Certain Investments in Debt and Equity
Securities" which was adopted by the Company effective September 30, 1994.
Although the shares of NCI have experienced significant price and volume
variability, these shares have provided a source of liquidity for the Company.
Since the Company's reorganization in January 1992 and through June 30, 1997,
the Company has financed its operations primarily through the sale of common
equity, exercise of stock options, issuances of convertible notes and proceeds
from the sale of shares of NCI. Included in the exercise of stock options in
fiscal 1997 was a net of $153,250 financed by officer loans. These sources plus
the recent sale of $3.3 million (net proceeds) of convertible preferred stock
provided $4,531,553 of net cash from financing activities during fiscal 1997,
significantly improving the Company's financial position.
16
<PAGE> 17
Other than cash of $3.3 million at September 30, 1997 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 timing and amounts of the Company's expenditures and the
extent of operating losses will depend on many factors, some of which are beyond
the Company's control. The Company anticipates that the commercialization of HSS
technology will require increased personnel and operating costs. The Company
believes it has sufficient financial resources for the next twelve months of
operations. However this estimate is subject to significant variability and
change due to management decisions regarding technologies, operations and the
result of outside factors. The long-term success of the Company is dependent
upon achieving a level of revenues adequate to support the Company's capital and
operating requirements.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued a number of new
pronouncements for future implementation as discussed in the footnotes to the
Company's financial statements (see page F-8). As discussed in the notes to the
financial statements, the implementation of these new pronouncements is not
expected to have a material effect on the financial statements.
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 $4,170,300
with net losses of $2,144,363 for fiscal 1997 and $560,448 for fiscal 1996. 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 subject to significant quarterly and seasonal
variability. The Company has been and is expected to continue to be reliant on a
limited number of customers, the loss of which would have an adverse effect on
the Company's financial condition and results of operations.
HSS Technology in Development; No Assurance of Completion; May Be Subject to
Additional Delays -The 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 the HSS technology to date, and has no agreements or
arrangements providing any assurance of revenues in the future. The development
of HSS technology has taken longer than anticipated by management and could be
subject to additional delays. There can be no assurance of timely completion of
commercially viable 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. 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.
Future Dependent on Market Acceptance of the HSS Technology - The future of the
Company is largely dependent upon the success of the 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.
17
<PAGE> 18
New Technology Faces Many Barriers and Risks - The introduction of new
technology, such as HSS, targeted for wide use often faces barriers to
commercialization and many risks that cannot currently be identified. The HSS
technology employs ultrasonics. Although ultrasonics are employed in a wide
variety of medical and industrial applications, there can be no assurance that
the Company will not face barriers to introduction due to the use of
ultrasonics. The Company's technology uses relatively small amounts of
ultrasonic energy which dissipates rapidly in air. The Company employs
frequencies above those that may be harmful to pets but within those used by
medical devices directly coupled to the body to image fetuses and the brain.
Although the Company believes the frequencies and the amount of energy employed
is harmless, and that the emission of such frequencies is not presently subject
to government regulation, there can be no assurance that barriers to
commercialization will not develop or that the use of such ultrasonics will not
be subject to future regulation or interpretation of existing regulation.
Dependence On Third Party Strategic Alliances and Business Relationships - The
Company's strategy is to establish business relationships with leading
participants in various segments of the electronics and sound reproduction
markets. The Company believes this strategy will enable it to take advantage of
the superior financial resources, technological capabilities, proprietary
positions and market presence of these companies in establishing and maintaining
HSS technology in sound reproduction. Although the Company's strategy is to
establish closer relationships with selected companies through specific product
collaborations, there can be no assurance that HSS technology can be developed
to commercialization for such uses or that the Company can successfully
collaborate to develop commercial products to exploit the HSS technology.
The Company's success will depend on its ability to enter into additional
strategic arrangements with new partners on commercially reasonable terms. Any
future relationships may require the Company to share control over its
development, manufacturing and marketing programs or to relinquish rights to
certain versions of its technology.
Patents and Proprietary Rights Subject to Uncertainty - The Company possesses
two U.S. patents on ear radios which the Company relies on to protect its market
position in the U.S. The Company has eleven 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. There can be no assurance the patents will 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 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 Subcontractors; 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 subcontract assemblers. 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.
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 maintain any
18
<PAGE> 19
"key person" life insurance policies. The loss of the services of Mr. Norris
could have a material adverse effect on the business, operating results or
financial condition of 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 "Item 9" below, certain of the Company's officers,
including 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.
No Active Trading Market; Market Volatility - The Company's shares are traded on
the OTC Bulletin Board, a screen-based trading system operated by the National
Association of Securities Dealers, Inc. Securities traded on the OTC Bulletin
Board are, for the most part, thinly traded and are subject to special
regulations not imposed on securities listed or traded on the NASDAQ system or
on a national securities exchange. The Company's shares, like that of the
securities of other small, growth-oriented companies, have experienced in the
past and are expected to experience in the future significant price and volume
volatility thereby increasing the risk of ownership to investors. Historically,
the Company's Common Stock has experienced low trading volume. There can be no
assurance that the market price of the Common Stock will remain at its present
level, and any future changes in market price cannot be predicted as to timing
or extent. Past performance of the Common Stock does not guarantee and should
not be construed to imply future performance. Factors such as announcements by
the Company or its competitors concerning technological innovations, new
commercial products or procedures, proposed government regulations and
developments or disputes relating to patents or proprietary rights may have a
significant effect on the market price of the Common Stock. Changes in the
market price of the Common Stock may have no connection with the Company's
actual financial results.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item begin on page F-1 (immediately
following page 27 of this report) with the index to financial statements
followed by the financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The present directors, executive officers and significant employees of the
Company, their ages, positions held in the Company and duration as director, are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES
<S> <C> <C>
Dale Williams 58 Chairman of the Board of Directors,
President and Chief Executive Officer
Elwood G. Norris 59 Director and Chief Technology Officer
Richard M. Wagner 52 Director and Secretary
Joel A. Barker 52 Director
Cornelius J. Brosnan 50 Director
Robert Putnam 39 Vice President, Treasurer and Assistant Secretary
James Croft 44 Vice President Engineering (1)
(1) A significant employee of the Company.
</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
19
<PAGE> 20
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
DALE WILLIAMS. Mr. Williams was appointed as Chairman, President and Chief
Executive Officer effective September 1, 1997. In May 1997, Mr. Williams was
engaged as a strategic planning and business development consultant for the HSS
technology. Since March 1995, Mr. Williams, through his wholly-owned Spectrum
Technology Inc., has been advising technology companies on business acquisition
and market development strategies. From January 1990 to March 1995 he was
founder and Chief Executive Officer of Beacon Light Products Inc., a private
company manufacturing advanced electronic control products. He has held
executive positions with technology companies including Intel, Monolithic
Memories Inc. (Advanced Micro Devices) and Rockwell International. Mr. Williams
has an B.S. in Electronics Engineering from California State University and an
MBA from the University of Southern California.
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 as Chief Technology
Officer. He has been a director and Chairman of NCI, a public company engaged in
electronic product development, distribution and sales, since 1988. He has
served as Chief Technology Officer to NCI since October 1995. From 1988 to
October 1995 he served as NCI President and Chief Executive Officer and in
January 1997 he was reappointed as Chief Executive Officer. Since August 1989,
he has served as director of Patriot Scientific Corporation ("Patriot"), a
public company engaged in the development of microprocessor technology, digital
modem products and radar and antenna engineering. He also served as Chairman and
Chief Executive Officer of Patriot until June 1994. From June 1995 until June
1996 when he was reappointed Chairman, Mr. Norris served as temporary President
and Chief Executive Officer of Patriot. He is an electronics engineer and an
inventor with over 20 U.S. patents, primarily in the fields of electrical and
acoustical engineering. He is the inventor of the Company's ear radio,
HyperSonic Sound, EPD technology and other technologies. Mr. Norris devotes only
part-time services to the Company, approximating 15-30 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. which provide full-service real estate services. He
received a Masters of Science degree from San Diego State University in 1974.
JOEL A. BARKER. Mr. Barker was elected as a Director in March 1997. Since 1978
Mr. Barker has been President of Infinity Limited, Inc. and he has engaged as a
futurist in speaking, consulting, publishing and video production popularizing
the concept of paradigm shifts, change and vision. He is the author of the two
successful books, Future Edge and Paradigms: The Business of Discovering the
Future. He is the author and host of five futurist videos and is a frequent
speaker and consultant to major world corporations and government agencies in
North America, Europe and Asia. From 1975 to 1978 he was Director of the Futures
Studies Department of the Science Museum of Minnesota. Mr. Barker obtained a
B.S. in English Education from the University of Minnesota in 1966.
CORNELIUS J. BROSNAN. Mr. Brosnan was appointed as a Director in October 1997.
Since June 1997 he has been Vice President of Strategic Planning for Sprint PCS.
From May 1995 to June 1997 he was Vice President, Product Planning Center for
Samsung North America. From 1992 to May 1995 he held various executive positions
at AT&T including serving as General Manager of Cordless Telephones, New
Business Development Director for Consumer Products, Engineering Director for
Interactive TV Services and the last position as Program Director for Broadband
Networks. Mr. Brosnan received a B.A. in Political Science degree from
Middlebury College in 1969.
ROBERT PUTNAM. Mr. Putnam served as a director of the Company from 1984 until
September 1997. He also served as Secretary/Treasurer until February 1994, then
President and CEO through August 1997, and currently serves as Vice President,
Treasurer and Assistant Secretary. Since 1988 he has served as Secretary of NCI
and from 1995 as a Director of NCI. Since 1989 he has also served as
Secretary/Treasurer and Director of Patriot. He received a B.A. degree in Mass
Communication/Advertising from Brigham Young University in 1983. Mr. Putnam
devotes approximately 20-25 hours per week to the Company.
JAMES CROFT. Mr. Croft joined the Company in October 1997 as Vice President of
Engineering for HSS technology. From October 1992 to October 1997 he was an
executive with Carver Corp., a publicly traded high-end audio supplier. He was
appointed Vice President of Marketing and Product Development for Carver Corp.
in March 1993 and Vice President Research and Development in February 1995. From
1990 through October 1992, Mr. Croft was employed by Dahlquist, Inc., a
loudspeaker manufacturer, the latest position being its Vice President of
Research and Development.
20
<PAGE> 21
Mr. Croft is a Vice President of Definitive Audio, Inc., a Seattle audio
specialty retailer which he co-founded in 1975 and managed until 1985.
CONFLICTS OF INTEREST
Certain conflicts of interest now exist and will continue to exist between the
Company and certain of its officers and directors due to the fact that they have
other employment or business interests to which they devote some attention and
they are 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.
Mr. Norris and Mr. Putnam are officers and directors of multiple public
companies as outlined above and Mr. Putnam is subordinate to Mr. Norris in these
relationships. The Company has not provided a method of resolving any potential
conflicts arising from these relationships and probably will not do so, partly
due to inevitable extra expense and delay any such measures would occasion. Mr.
Norris and Mr. Putnam are obligated to perform their duties in good faith and to
act in the best interest of 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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, 1997, 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.
ITEM 10. EXECUTIVE COMPENSATION.
There is shown below information concerning the compensation of the two
individuals who acted as the Company's chief executive officer (each a "Named
Executive Officer") for the fiscal year ended September 30, 1997. Compensation
for the other four most highly compensated executive officers of the Company is
not required nor presented as no such other executive officer's salary and bonus
exceeded $100,000 during the fiscal year ended September 30, 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------------ -----------------------
Name and Fiscal Other Annual Securities Underlying
Principal Position Year Salary($) Bonus($) Compensation($) Options(#)
- ------------------ ------ --------- --------- -------------- ---------------------
<S> <C> <C> <C> <C> <C>
Dale Williams, Chairman, 1997 $13,846 $43,750(3) $55,600(4) 862,000(6)
President and CEO (1)
Robert Putnam, Vice President 1997 $77,192 - $ 8,522(5) -
Treasurer and
Asst. Secretary (2) 1996 $73,109 - - 200,000
1995 $45,462 - - -
</TABLE>
(1) Appointed Chairman, President and CEO on September 1, 1997. Served
as a consultant from June 1997 through August 1997.
(2) Service as President and CEO until September 1, 1997.
(3) Represents consulting bonus paid by the issuance of 7,500 shares of
Common Stock.
(4) Represents consulting fees paid from June 1997 through August 1997.
(5) Represents automobile lease paid by the Company.
(6) Options on a total of 612,000 common shares subject to vesting.
21
<PAGE> 22
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,
1997, 1996 nor 1995 or currently receives any such compensation.
OPTION GRANTS
Shown below is further information on grants of stock options to the Named
Executive Officers reflected in the Summary Compensation Table shown above.
OPTION GRANTS FOR FISCAL YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Percent of Total
Number of Options Granted Exercise Expiration
Name Options Granted to Employees in Fiscal Year Price Date
---- --------------- --------------------------- -------- ----------
<S> <C> <C> <C> <C>
Dale Williams 862,000(1) 82% $5.81 8/31/2002
</TABLE>
(1) Options on a total of 250,000 common shares were vested and
exercisable at issuance, the balance vesting monthly over 36 months
at the rate of 17,000 shares per month, subject to partial
acceleration for certain events including a major license agreement.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information on unexercised options at September 30,
1997:
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Unexercised Value of Unexercised
Options Held At In-The-Money Options At
Shares Acquired Value September 30, 1997 September 30, 1997(1)
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dale Williams - - 250,000 612,000 - -
Robert Putnam 150,000 (2) $676,875 200,000 - $988,000 -
</TABLE>
(1) Based on the last sale price at the close of business on the last
trading day of the fiscal year of $5.44 per share.
(2) In connection with the exercise of these options, the Company made
an interest bearing demand loan of $82,500 to Mr. Putnam. Mr. Putnam
exercised the option by cash payment to the Company of $82,500.
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 SEC regulations.
During the fiscal year ended September 30, 1997, the Company did not adjust or
amend the exercise price of stock options awarded to the Named Officers 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.
EMPLOYMENT CONTRACTS
Mr. Putnam had no employment contract while he was President and CEO of the
Company. Effective September 1, 1997 the Company entered into three year
employment contract with Mr. Williams, Chairman, President and CEO. The
agreement provides for a base salary of $20,000 per month, subject to future
reviews. The agreement provides for a minimum performance bonus of 50% of base
compensation in the first year, payable early if a significant license agreement
is attained. Future bonuses are at the discretion of the Board of Directors. The
Company may terminate the employment with or without cause (as defined), but
termination without cause (other than disability or death) results in a
severance payment equal to twelve months of the then monthly base salary and any
bonus on an as if perfected basis payable in one lump sum. Likewise upon a
change in control, as defined in the agreement, Mr. Williams may elect to
terminate employment and obtain a payment equal to the remaining months of the
agreement multiplied by the base salary and any bonus on an as if perfected
basis payable in one lump sum. Mr. Williams has agreed not to disclose trade
secrets during employment and for three years thereafter and has agreed to
assign inventions to the Company (as defined) during employment to the Company.
In connection with the employment agreement, the Company granted Mr. Williams
options to purchase up to 862,000 common shares at $5.81 per share, with 250,000
shares vesting on the date of the grant and the balance over three years with
certain amounts subject to acceleration for certain events.
22
<PAGE> 23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of November 20, 1997, the stock ownership of
each Named Executive Officer (see Item 10) and directors of the Company, of all
executive 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 Elwood G. Norris 3,224,438(1) 30.9%
par value 13114 Evening Creek Drive South
$.00001 San Diego, California 92128
SAME Dale Williams 325,500(2) 3.1%
13114 Evening Creek Drive South
San Diego, California 92128
SAME Joel A. Barker 19,000(3) * %
13114 Evening Creek Drive South
San Diego, California 92128
SAME Cornelius J. Brosnan -0- * %
13114 Evening Creek Drive South
San Diego, California 92128
SAME Richard M. Wagner 44,600 * %
13114 Evening Creek Drive South
San Diego, California 92128
SAME Robert Putnam 620,000(4) 6.0%
13114 Evening Creek Drive South
San Diego, California 92128
ALL DIRECTORS & EXECUTIVE OFFICERS 4,233,538(5) 38.6%
AS A GROUP (6 PERSONS)
</TABLE>
* Less than 1%.
(1) Includes 280,000 Common Shares issuable upon the exercise of
outstanding stock options and 100,000 Common Shares issuable upon
the exercise of outstanding stock purchase warrants within 60 days
of November 20, 1997.
(2) Includes 318,000 Common Shares issuable upon the exercise of
outstanding stock options within 60 days of November 20, 1997.
(3) Includes 10,000 Common Shares issuable upon the exercise of
outstanding stock options within 60 days of November 20, 1997.
(4) Includes 200,000 Common Shares issuable upon the exercise of
outstanding stock options within 60 days of November 20, 1997.
(5) Includes 808,000 Common Shares issuable upon the exercise of
outstanding stock options and 100,000 Common Shares issuable upon
the exercise of outstanding stock purchase warrants within 60 days
of November 20, 1997.
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, CEO and Chief
Technology Officer of NCI. He is the beneficial owner of 709,838 shares of NCI
(representing approximately 1% of its issued and outstanding shares at October
31, 1997) and Robert Putnam (the Vice President, Treasurer and Asst. Secretary
of the Company) is Secretary of NCI and the beneficial owner of 40,000 shares of
NCI (representing less than 1% of its issued and outstanding shares).
23
<PAGE> 24
Pursuant to an agreement dated 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) in consideration of the
Company's receipt of 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. 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 introduced a
wireless product and therefore there can be no assurance of future royalties. On
October 31, 1997, the Company agreed to sell and cancel its 1% royalty interest
to JABRA for $15,000, subject to receipt of funds by November 15, 1997.
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, 1997, the Company paid $15,000 to NCI
for rent of its operating facility The Company also paid NCI for contract
manufacturing services on ear radio production totaling $48,000 during fiscal
1997. The Company believes these services were performed on terms comparable to
those from independent parties.
On July 11, 1997, the Company entered into a three year lease. To meet the
credit requirements of the landlord, both the Company and NCI entered into a
joint lease agreement for approximately 12,925 square feet with aggregate
monthly payments of $13,830 inclusive of utilities and costs. The Company is
occupying approximately 7,500 square feet of the jointly leased office space
with its share of monthly payments being approximately $8,000. Accordingly the
Company could become obligated for the entire lease should NCI default on its
share of payments thereon.
In January 1997 the Company made unsecured cash demand loans with interest at 7%
per annum to two officers aggregating $173,250 (Mr. Putnam as to $82,500 and Mr.
Norris as to $90,750). The proceeds of the loans were used by the officers to
exercise Company stock options. Each officer made a $10,000 principal payment
plus interest during the year. Although the notes are payable on demand, the
Board of Directors has advised the officers that they shall have until September
30, 1998 to repay the notes.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The following is a list and index of Exhibits required by Item
601 of Regulation S-B. Except for those exhibits indicated by an asterisk which
are filed herewith, the remaining exhibits listed below are incorporated by
reference to the exhibit (of the number indicated) previously filed by the
Company as indicated.
EXHIBIT INDEX
2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION
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
24
<PAGE> 25
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. ARTICLES AND BYLAWS
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
3.1.1 Amendment to Certificate of Incorporation of American Technology
Corporation dated March 24, 1997 and filed with Delaware on April 22,
1997. Filed as Exhibit 3.1.1 to the Company's Form 10- QSB for March
31, 1997
3.1.2 Certificate of Designations of Series A Convertible Preferred Stock
filed with Delaware on August 15, 1997. Filed as Exhibit 3.1.2 to the
Company's Form 8-K dated August 29, 1997.
3.1.3 Corrected Certificate of Designations of Series A Convertible
Preferred Stock dated and filed with Delaware on August 25, 1997.
Filed as Exhibit 3.1.3 to the Company's Form 8-K dated August 29,
1997.
3.2 Bylaws of American Technology Corporation (Delaware) filed as Exhibit
23 to the Company's Form 10-SB effective August 1, 1994
4. INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS
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
4.7 Form of 6% Convertible Subordinated Promissory Note due March 1, 1999
aggregating $1,000,000 granted to sixteen investors filed as Exhibit
4.7 to the Company's Form 8-K dated April 1, 1997
4.8 Form of Stock Purchase Warrant exercisable at $5.00 per share until
March 1, 2000 granted to sixteen investors for an aggregate of 50,000
common shares filed as Exhibit 4.8 to the Company's Form 8-K dated
April 1, 1997
4.9 Stock Purchase Warrant issued to Renwick Corporate Finance, Inc. dated
as of February 5, 1997 exercisable to purchase 90,000 common shares at
$5.00 per share until February 5, 2000 filed as Exhibit 4.9 to the
Company's Form 10-QSB for March 31, 1997
25
<PAGE> 26
4.10 Form of Stock Purchase Warrant exercisable at $7.50 per share until
August 1,2000 granted to eleven investors for an aggregate of 175,000
common shares and filed as Exhibit 4.10 to the Company's Form 8-K
dated August 29, 1997
4.11 Form of Registration Rights Agreement dated as of August 12, 1997 by
and between the Company and Eleven Purchasers of Series A Convertible
Preferred Stock filed as Exhibit 4.11 to the Company's Form S-3 dated
May 20, 1997
4.12 Reference is made to Exhibits 3.1 through 3.2.
10. MATERIAL CONTRACTS
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
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
26
<PAGE> 27
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
10.11 Demand Promissory Note for $82,500 due from Robert Putnam dated
January 17, 1997 filed as Exhibit 10.11 to the Company's Form 10-QSB
for March 31, 1997
10.12 Demand Promissory Note for $90,750 due from Elwood G. Norris dated
January 21, 1997 filed as Exhibit 10.12 to the Company's Form 10-QSB
for March 31, 1997
10.13 Sublease Agreement between Global Associates, Ltd. and Norris
Communications, Inc. and the Company dated July 11, 1997 filed as
Exhibit 10.13 to the Company's Form 10-QSB for June 30, 1997
10.14 1997 Employee Stock Compensation Plan of the Company dated March 10,
1997 filed as Exhibit 10.11 to the Company's Form S-8 dated March 24,
1997
*10.15 Employment Agreement dated as of September 1, 1997 between the Company
and Dale Williams
*10.15.1 Stock Option Agreement dated September 1, 1997 between the Company and
Dale Williams
*10.16 Employment Agreement dated as of September 1, 1997 between the Company
and Elwood G. Norris
*10.17 Employment Agreement dated as of September 1, 1997 between the
Company and Robert Putnam
23. CONSENTS OF EXPERTS AND COUNSEL
*23.1 Consent of BDO Seidman, LLP
27. FINANCIAL DATA SCHEDULE
*27.1 Financial Data Schedule
- ----------
(b) Reports on Form 8-K -The Company filed one report on Form 8-K (amended by a
Form 8-K/A) during the last fiscal quarter of the year ended September 30, 1997.
The report dated August 29, 1997 reported an Item 5 event related to the
placement of $3,500,000 of Convertible Preferred Stock. This filing was amended
by a Form 8-K/A dated September 18, 1997.
27
<PAGE> 28
AMERICAN TECHNOLOGY CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-2
Balance Sheet as of September 30, 1997 F-3
Statements of Operations for the Years Ended
September 30, 1997 and 1996 F-4
Statements of Stockholders' Equity for the
Years Ended September 30, 1997 and 1996 F-5
Statements of Cash Flows for the Years Ended
September 30, 1997 and 1996 F-6
Summary of Accounting Policies F-7 - F-9
Notes to Financial Statements F-10 - F-17
</TABLE>
F-1
<PAGE> 29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
American Technology Corporation
San Diego, California
We have audited the accompanying balance sheet of American Technology
Corporation as of September 30, 1997 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, 1997, 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 5, 1997
F-2
<PAGE> 30
AMERICAN TECHNOLOGY CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 1997
- ----------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 3,338,458
Investment securities available for sale (Note 1) 29,289
Trade accounts receivable (Note 8), less allowance
of $7,800 for doubtful accounts 307,174
Inventories (Note 2) 189,815
Prepaid expenses and other 27,376
- ----------------------------------------------------------------------------------------------
Total current assets 3,892,112
EQUIPMENT, NET (Note 3) 196,422
OTHER ASSETS:
Patents 137,440
Other 25,904
- ----------------------------------------------------------------------------------------------
Total other assets 163,344
- ----------------------------------------------------------------------------------------------
$ 4,251,878
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable (Note 4) $ 120,869
Accrued liabilities 51,436
- ----------------------------------------------------------------------------------------------
Total current liabilities 172,305
LONG-TERM LIABILITIES
6% Convertible notes and accrued interest (Note 5) 386,651
- ----------------------------------------------------------------------------------------------
Total liabilities 558,956
COMMITMENTS AND CONTINGENCY (Notes 4 and 9)
STOCKHOLDERS' EQUITY (Note 7):
Preferred stock, $.00001 par value, authorized
5,000,000 shares:
Series A Convertible preferred stock, 350,000 shares designated, issued and
outstanding (liquidation preference of $10 per share) 3,321,153
Common stock, $.00001 par value; 20,000,000 shares
authorized: issued and outstanding, 9,758,779 98
Additional paid-in capital 4,666,035
Notes receivable (Note 4) (153,150)
Accumulated deficit (4,170,300)
Net unrealized gain on securities available for sale 29,086
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 3,692,922
- ----------------------------------------------------------------------------------------------
$ 4,251,878
==============================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-3
<PAGE> 31
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
NET SALES (Note 8) $ 967,408 $ 933,643
Cost of goods sold (Note 4) 809,437 797,154
- --------------------------------------------------------------------------------
Gross profit 157,971 136,489
- --------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling, general and administrative 1,616,568 555,950
Research and development 566,288 160,934
- --------------------------------------------------------------------------------
Total operating expenses 2,182,856 716,884
- --------------------------------------------------------------------------------
Loss from operations (2,024,885) (580,395)
OTHER INCOME (EXPENSE):
Gain on sale of investment securities (Note 1) -- 55,019
Interest expense (146,331) (42,046)
Other 26,853 6,974
- --------------------------------------------------------------------------------
Total other income (expense) (119,478) 19,947
- --------------------------------------------------------------------------------
NET LOSS $(2,144,363) $ (560,448)
================================================================================
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS (NOTE 11) $(2,762,009) $ (560,448)
================================================================================
NET LOSS PER SHARE OF COMMON STOCK $ (.30) $ (.08)
================================================================================
AVERAGE WEIGHTED NUMBER OF
COMMON SHARES OUTSTANDING 9,268,128 7,464,588
================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-4
<PAGE> 32
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended September 30, 1997 and 1996
- --------------------------------------------------------------------------------------------------------------------
Common Stock Series A Convertible
Additional Preferred Stock
Paid-in Notes
Shares Amount Capital Shares Amount Receivable
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 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
(Note 7) 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 -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996 8,611,759 86 3,063,373 -- -- --
Issuances of common stock:
Upon exercise of stock options
(Note 4) 592,500 6 343,644 -- -- (173,150)
For compensation and services 40,327 1 201,413 -- -- --
Upon conversion of 6% convertible
notes at $3.50 per share (Note 5) 178,571 2 624,998 -- -- --
For accrued interest on 6%
convertible notes (Note 5) 2,659 -- 9,310 -- -- --
Cash-less exercise of options 292,963 3 (3) -- -- --
Upon exercise of warrants at
$0.50 per share (Note 7) 40,000 -- 20,000 -- -- --
Value assigned to 50,000 warrants
granted with 6% convertible notes
(Note 5) -- -- 2,500 -- -- --
Value assigned to 90,000 warrants
granted as consulting services
(Note 7) -- -- 33,300 -- -- --
Value assigned to 97,500 options
granted for services -- -- 244,800 -- -- --
Non-cash interest on convertible
notes (Note 7) -- -- 122,700 -- -- --
Issuance of preferred stock, net of
offering costs (Note 7) 350,000 3,321,153 --
Payment on notes receivable (Note 4) -- -- -- -- -- 20,000
Net loss for the year -- -- -- -- -- --
Net unrealized loss on securities
available for sale -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 9,758,779 $ 98 $ 4,666,035 350,000 $ 3,321,153 $ (153,150)
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Net Unrealized
Gain on
Securities Total
Accumulated Available Stockholders'
Deficit For Sale Equity
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, OCTOBER 1, 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
(Note 7) -- -- 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 -- (291,066) (291,066)
- ---------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996 (2,025,937) 189,950 1,227,472
Issuances of common stock:
Upon exercise of stock options
(Note 4) -- -- 170,500
For compensation and services -- -- 201,414
Upon conversion of 6% convertible
notes at $3.50 per share (Note 5) -- -- 625,000
For accrued interest on 6%
convertible notes (Note 5) -- -- 9,310
Cash-less exercise of options -- -- --
Upon exercise of warrants at
$0.50 per share (Note 7) -- -- 20,000
Value assigned to 50,000 warrants
granted with 6% convertible notes
(Note 5) -- -- 2,500
Value assigned to 90,000 warrants
granted as consulting services
(Note 7) -- -- 33,300
Value assigned to 97,500 options
granted for services -- -- 244,800
Non-cash interest on convertible
notes (Note 7) -- -- 122,700
Issuance of preferred stock, net of
offering costs (Note 7) -- -- 3,321,153
Payment on notes receivable (Note 4) -- -- 20,000
Net loss for the year (2,144,363) -- (2,144,363)
Net unrealized loss on securities
available for sale -- (160,864) (160,864)
- ---------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 $(4,170,300) $ 29,086 $ 3,692,922
=================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-5
<PAGE> 33
AMERICAN TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30, 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,144,363) $ (560,448)
Adjustments to reconcile net
loss to cash used in operating activities:
Gain on sale of investment securities -- (55,019)
Gain on sale of equipment -- (5,323)
Depreciation and amortization 97,920 74,493
Common stock issued for interest 9,310 11,797
Common stock issued for services 201,414 --
Warrants granted for services 33,300 --
Warrants granted with convertible notes 2,500 19,200
Options granted for services 244,800 --
Non-cash interest expense on convertible notes 134,351 --
Changes in operating assets and liabilities:
Prepaid expenses and other 31,630 (49,544)
Trade accounts receivable (111,717) (82,165)
Inventories 124,116 (28,555)
Accounts payable (227,319) 78,466
Accrued liabilities 31,633 (14,252)
- ------------------------------------------------------------------------------------------
Net cash used in operating activities (1,572,425) (611,350)
- ------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of equipment (176,766) (42,715)
Proceeds from sale of equipment -- 6,198
Patent costs paid (101,235) (36,205)
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (278,001) (72,722)
- ------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net 3,321,153 --
Proceeds from exercise of common stock warrants 20,000 220,000
Proceeds from exercise of stock options 343,650 87,084
Proceeds loaned on notes receivable - officers for
option exercise (173,250) --
Principal payments received on notes receivable - officers 20,000 --
Proceeds from issuance of convertible notes 1,000,000 920,000
Payment on line of credit -- (25,000)
Principal payment on note payable stockholder -- (44,584)
Proceeds from issuance of common stock -- 125,000
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,531,553 1,282,500
- ------------------------------------------------------------------------------------------
Increase in cash 2,681,127 598,428
CASH, BEGINNING OF YEAR 657,331 58,903
- ------------------------------------------------------------------------------------------
CASH, END OF YEAR $ 3,338,458 $ 657,331
==========================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-6
<PAGE> 34
AMERICAN TECHNOLOGY CORPORATION
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION American Technology Corporation (the "Company"), a
AND Delaware corporation, is engaged in the development,
BUSINESS manufacture and marketing of consumer electronic
products and acoustic technologies.
USE OF The preparation of financial statements in conformity
ESTIMATES with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
FINANCIAL INSTRUMENTS The Company's financial instruments that are exposed to
AND CONCENTRATIONS OF concentrations of credit risk consist primarily of cash
CREDIT RISK and trade accounts receivable.
The Company's cash is placed in quality money market
accounts with major financial institutions. The
investment policy limits the Company's exposure to
concentrations of credit risk. Such deposit accounts at
times may exceed federally insured limits. The Company
has not experienced any losses in such accounts.
Concentrations of credit risk with respect to the trade
accounts receivable are limited due to the wide variety
of customers and markets which comprise the Company's
customer base, as well as their dispersion across many
different geographic areas. The Company routinely
assesses the financial strength of its customers and, as
a consequence, believes that the trade accounts
receivable credit risk exposure is limited. Generally,
the Company does not require collateral or other
security to support customer receivables.
The carrying amounts of financial instruments including
cash, trade accounts receivable, notes
receivable-officers, accounts payable and accrued
liabilities approximated fair market value because of
the immediate or short-term maturity of these
instruments. The difference between the carrying amount
of the Company's convertible notes and their fair market
value is not considered significant.
INVESTMENT Investment securities classified as available for sale
SECURITIES 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 computed
DEPRECIATION over the estimated useful lives of three years using the
straight line method.
PATENTS Patents are carried at cost and, when granted, will be
amortized over their estimated useful lives. The
carrying value of patents is periodically reviewed and
impairments, if any, are recognized when the expected
future benefit to be derived from individual intangible
assets is less than its carrying value.
REVENUE Sales are recorded in the periods that products are
RECOGNITION shipped.
F-7
<PAGE> 35
AMERICAN TECHNOLOGY CORPORATION
SUMMARY OF ACCOUNTING POLICIES
RESEARCH AND Research and development costs are expensed as incurred.
DEVELOPMENT COSTS
INCOME TAXES The Company accounts for income taxes under
Statement of Financial Accounting Standards ("SFAS") No.
109. Temporary differences are differences between the
tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in
taxable or deductible amounts in future years.
NET LOSS Net loss per common share is based on the weighted
PER SHARE average number of shares outstanding during each period
presented. Options and warrants to purchase stock and
debt convertible into common shares are included as
common stock equivalents, when dilutive.
Net loss available to common stockholders was reduced in
computing net loss per share by an imputed deemed
dividend from a discount provision included in the
Series A Preferred Stock (see Note 7). The deemed
dividend is amortized to the earliest period at which
the preferred stock became convertible. Since the Series
A Stock was convertible at issuance, the entire imputed
conversion discount of $617,646 is recognized as a
deemed dividend for the fiscal year ended September 30,
1997. This imputed dividend is not a contractual
obligation on the part of the Company to pay such
imputed dividend. Loss per share available to common
stockholders is calculated as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net loss $(2,144,363) $ (560,448)
Series A preferred stock dividends
based on imputed discount at
issuance (617,646) --
----------- -----------
Net loss available to common
stockholders $(2,762,009) $ (560,448)
=========== ===========
Net loss per share of common
stock $ (.30) $ (.08)
=========== ===========
Average weighted number of
common shares outstanding 9,268,128 7,464,588
=========== ===========
</TABLE>
STOCK OPTIONS The Company applies APB Opinion 25, "Accounting for
Stock Issued to Employees," and related Interpretations
in accounting for all stock option plans. Under APB
Opinion 25, compensation cost is recognized for stock
options granted to employees when the option price is
less than the market price of the underlying common
stock on the date of grant.
SFAS Statement No. 123, "Accounting for Stock-Based
Compensation," requires the Company to provide pro forma
information regarding net income as if compensation cost
for the Company's stock option plans had been determined
in accordance with the fair value based method
prescribed in SFAS No. 123. To provide the required pro
forma information, the Company estimates the fair value
of each stock option at the grant date by using the
Black-Scholes option-pricing model.
STATEMENTS OF For purposes of the statement of cash flows, the Company
CASH FLOWS considers all highly liquid investments purchased with
an original maturity of three months or less to be cash
equivalents.
F-8
<PAGE> 36
AMERICAN TECHNOLOGY CORPORATION
SUMMARY OF ACCOUNTING POLICIES
RECENT ACCOUNTING The Financial Accounting Standards Board has issued
PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share" and Statement of Financial
Accounting Standards No. 129 "Disclosures of Information
About an Entity's Capital Structure." SFAS No. 128
provides a different method of calculating earnings per
share than is currently used in accordance with
Accounting Principles Board Opinion No. 15, "Earnings
Per Share." SFAS No. 128 provides for the calculation of
"Basic" and "Dilutive" earnings per share. Basic
earnings per share includes no dilution and is computed
by dividing income available to common shareholders by
the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings
per share. SFAS No. 129 establishes standards for
disclosing information about an entity's capital
structure. SFAS No. 128 and SFAS No. 129 are effective
for financial statements issued for periods ending after
December 15, 1997. Their implementation is not expected
to have a material effect on the financial statements.
The Financial Accounting Standards Board has also issued
SFAS No. 130 "Reporting Comprehensive Income" and SFAS
No. 131 "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards
for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive
income is defined to include all changes in equity
except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be
recognized under current accounting standards as
components of comprehensive income be reported in a
financial statement that displays with the same
prominence as other financial statements. SFAS No. 131
supersedes SFAS No. 14 "Financial Reporting for Segments
of a Business Enterprise." SFAS No. 131 establishes
standards on the way that public companies report
financial information about operating segments in annual
financial statements and requires reporting of selected
information about operating segments in interim
financial statements issued to the public. It also
establishes standards for disclosure regarding products
and services, geographic areas and major customers. SFAS
No. 131 defines operating segments as components of a
company about which separate financial information is
available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate
resources and in assessing performance.
SFAS No. 130 and No. 131 are effective for financial
statements for periods beginning after December 15, 1997
and require comparative information for earlier years to
be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate
the impact, if any, the standards may have on the future
financial statement disclosures. Results of operations
and financial position, however, will be unaffected by
implementation of these standards.
F-9
<PAGE> 37
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. INVESTMENT The Company's investment in securities consists of
SECURITIES 225,300 shares of Norris Communications Inc. common
stock, an affiliated corporation. At September 30, 1997
the Company's market value of available for sale
securities consisted of:
<TABLE>
<CAPTION>
Gross Estimated
Unrealized Fair
Cost Gains Value
------ ---------- ---------
<S> <C> <C> <C>
Common Stock $ 203 $ 29,086 $ 29,289
</TABLE>
The Company realized gains of $55,019 on the sale of
investment securities for the year ended September 30,
1996.
2. INVENTORIES At September 30, 1997 inventories consisted of the
following:
<TABLE>
<S> <C>
Finished goods $ 9,912
Work-in-process 125,980
Raw materials 53,923
--------
$189,815
========
</TABLE>
3. EQUIPMENT Equipment consisted of the following at September 30,
1997:
<TABLE>
<S> <C>
Machinery and equipment $367,460
Office furniture and equipment 63,837
Leasehold improvements 29,838
--------
461,135
Less accumulated depreciation 264,713
--------
Net equipment $196,422
========
</TABLE>
Depreciation expense was approximately $74,000 and
$52,000 for the years ended September 30, 1997 and 1996.
4. RELATED PARTY Facility Lease
TRANSACTIONS Through July 1997, the Company's research, assembly and
shipping and office facilities were subleased under a
$2,000 monthly sub-lease agreement with an affiliated
corporation Norris Communications, Inc. ("NCI"). On July
11, 1997, the Company entered into a three year lease.
To meet the credit requirements of the landlord, both
the Company and NCI entered into a joint lease agreement
for approximately 12,925 square feet with aggregate
monthly payments of $13,830 inclusive of utilities and
costs. The Company is occupying approximately 7,500
square feet of the jointly leased office space with its
share of monthly payments being approximately $8,000.
Accordingly the Company could become obligated for the
entire lease should NCI default on its share of payments
thereon.
Total rent expense under operating lease agreements was
approximately $32,000 and $39,000 for the years ended
September 30, 1997 and 1996.
Outside Manufacturing Services
NCI has provided certain outside manufacturing services
to the Company. For the years ended September 30, 1997
and 1996 total services provided amounted to
approximately $48,000 and $49,000. At September 30, 1997
approximately $1,600 is due to NCI for such services and
is included in accounts payable in the accompanying
balance sheet.
F-10
<PAGE> 38
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
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, 1997 and 1996, total royalties paid
by the Company on radio sales were approximately $7,900
and $9,000.
The Company is also obligated to pay the
stockholder/director royalties of 2% on gross revenues
of the Company's sound reproduction and global
positioning satellite technologies. As of September 30,
1997 no amounts have been paid nor are due under this
agreement.
Notes Receivable-Officers
In January 1997 the Company made unsecured cash demand
loans to two officers aggregating $173,250 in connection
with the exercise of stock options. Notes
receivable-officers, represents the balance of principal
and accrued interest at 7% per annum on these demand
notes. Each officer made a $10,000 principal plus
interest payment during the year. Such notes are
presented as a reduction from stockholders' equity in
the accompanying financial statements.
5. CONVERTIBLE NOTES During fiscal 1997, the Company raised $1,000,000
through the issuance of 6% convertible subordinated
promissory notes (the "Convertible Notes"). The
Convertible Notes are unsecured and are due on March 1,
1999. Interest on the Convertible Notes is payable in
cash upon maturity or in common stock upon conversion.
Principal and interest due under the Convertible Notes
may be converted, at the option of the holder, into
shares of the Company's common stock at a price which is
the lower of (i) $3.50 per share or (ii) 85% of the ten
day average closing bid price prior to conversion but
not less than $2.50 per share or (iii) for conversions
on or after March 1, 1998, the average closing bid price
for the prior thirty days but in no event less than
$1.00 per share. The Convertible Notes may be called by
the Company for conversion if the market price exceeds
$9.00 per share for ten days and other conditions have
been met. As the market price of the Company's common
stock exceeded the conversion price of the Convertible
Notes at the date of issuance, the Company recognized
embedded interest expense of $122,700 upon issuance of
the Convertible Notes.
The Convertible Notes were issued with detachable
warrants which grant the holders the right to acquire up
to 50,000 shares of the Company's common stock at a per
share price of $5.00. The warrants expire on March 1,
2000. The warrants were determined to have a value of
$2,500, which amount was recorded as additional paid-in
capital.
During 1997, holders of $625,000 of the Convertible
Notes converted their notes, and accrued interest
thereon, into 181,230 shares of the Company's common
stock. At September 30, 1997, the remaining $375,000 of
Convertible Notes, and accrued interest thereon of
$11,651 would have been convertible into approximately
110,500 shares of the Company's common stock.
Subsequent to September 30, 1997, an additional $25,872
of Convertible Notes, and accrued interest thereon, was
converted into 7,392 shares of common stock reducing the
principal amount to $350,000.
F-11
<PAGE> 39
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. INCOME TAXES Income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended September 30, 1997 1996
------------------------------------------------------------
Current -
<S> <C> <C>
State $ - $ -
Deferred (benefit):
Federal (597,000) (287,000)
State (105,000) (51,000)
--------- ---------
(702,000) (338,000)
Change in valuation allowance 702,000 338,000
--------- ---------
$ - $ -
========= =========
</TABLE>
A reconciliation of income taxes at the federal
statutory rate of 34% to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Income taxes (benefit) computed
at the federal statutory rate $ (729,000) $ (191,000)
Tax effect of change in valuation
allowance 638,000 240,000
Nondeductible compensation and
interest expense 168,000 -
State income taxes (benefit), net
of federal tax benefit (127,000) (33,000)
Other 50,000 (16,000)
---------- -----------
$ - $ -
========== ===========
</TABLE>
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,
1997 are as follows:
<TABLE>
<S> <C>
DEFERRED TAX ASSETS:
Tax loss carryforwards $1,352,000
Tax credit carryforward 23,000
Accruals and other 12,000
Allowances 3,000
----------
Gross deferred tax asset 1,390,000
Less valuation allowance (1,372,000)
----------
18,000
----------
DEFERRED TAX LIABILITIES:
Unrealized gain on investment securities (12,000)
Equipment (6,000)
----------
(18,000)
----------
Net deferred tax asset (liability) $ -
==========
</TABLE>
A valuation allowance has been recorded to offset the
net deferred tax asset as management has been unable to
determine that it is more likely than not that the
deferred tax asset will be realized.
At September 30, 1997, the Company for federal income
tax purposes has net operating loss carryforwards of
approximately $3,600,000 which expire through 2012 of
which certain amounts are subject to limitations under
the Internal Revenue Code of 1986, as amended.
F-12
<PAGE> 40
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. STOCKHOLDERS' Fiscal 1996 Private Offerings
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 1997 a total of 40,000
of these warrants were exercised for proceeds of
$20,000.
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 prior to
September 30, 1996.
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 September 30, 1996 all of
these notes and accrued interest were converted to
common stock at $2.00 per share.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of
preferred stock, $.00001 par value, without any action
by the stockholders. The board of directors has the
authority to divide any and all shares of preferred
stock into series and to fix and determine the relative
rights and preferences of the preferred stock, such as
the designation of series and the number of shares
constituting such series, dividend rights, redemption
and sinking fund provisions, liquidation and dissolution
preferences, conversion or exchange rights and voting
rights, if any. With respect to voting rights, if the
preferred stock were permitted to vote in the election
of directors or on other matters, each such share would
be entitled to one vote, and such shares may vote with
the shares of Common Stock or may vote as a separate
class. Issuance of preferred stock by the board of
directors could result in such shares having dividend
and/or liquidation preferences senior to the rights of
the holders of Common Stock and could dilute the voting
rights of the holders of Common Stock.
The Company has designated 350,000 shares of its
preferred stock as Series A Convertible Preferred Stock
("Series A Stock") all of which were issued at September
30, 1997. The Series A Stock was sold at $10.00 per
share in a private offering for gross proceeds of
$3,500,000 and net proceeds, after $178,847 of offering
costs, of $3,321,153.
The Series A Stock is non-voting except in certain
matters affecting the Preferred Stockholders. The
holders of Series A Stock shall be entitled to
dividends, when, as, and if declared by the Board of
Directors. The Preferred Stock has a liquidation
preference of $10.00 per preferred share plus $0.60 per
share per annum from issuance and certain other
adjustments. There is no further participation after the
liquidation preference is paid. There are no mandatory
or optional redemption rights. In a merger or
consolidation, the Preferred Stock shall retain the same
economic benefits as the Preferred Stock just prior to
such transaction. As long as the Company is in
compliance in all material respects with its obligations
to the Preferred Stockholders and the underlying common
shares are registered, all the Preferred Stock not
already converted shall be converted to Common Stock in
accordance with the conversion terms on August 25, 1998.
F-13
<PAGE> 41
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Each share of Series A Stock is convertible (minimum
conversions of 10,000 Series A shares or the balance
held by each holder) into that number of Common Shares
determined by dividing $10.00, plus an amount accruing
at $0.60 per annum, by 85% of the average of the closing
bid prices of the Company's Common Stock each day for
the five trading days immediately preceding the date of
conversion provided that in no event shall such amount
to be multiplied by 85% be less than $3.00 per share or
greater than $5.75 per share. The Company may force
conversion of the Series A Stock if the closing bid
price of the Common Stock equals or exceeds $14.00 per
share for ten consecutive trading days and certain other
conditions are met.
The Company granted the holders of Series A Stock
warrants to purchase an aggregate of 175,000 Common
Shares at $7.50 per share until August 1, 2000.
At September 30, 1997 the 350,000 shares of Series A
Stock would have been convertible into approximately
777,000 common shares. Subsequent to September 30, 1997
a total of 110,000 shares of Series A Stock (original
issue value of $1,100,000) were converted into 245,189
shares of common stock.
Warrants
In addition to the warrants described above, during
fiscal 1997 the Company granted warrants to purchase
90,000 shares at $5.00 per share in connection with
consulting services. These warrants were valued at
$33,300.
At September 30, 1997 the Company had the following
warrants outstanding arising from the above offerings
and transactions, each exercisable into one common
share:
<TABLE>
<CAPTION>
Number Exercise Price Expiration Date
------- -------------- ---------------
<S> <C> <C>
210,000 $0.50 February 23, 1999
100,000 $1.00 May 31, 1998
50,000 $5.00 March 1, 2000
175,000 $7.50 August 1, 2000
90,000 $5.00 February 5, 2000
-------
625,000
=======
</TABLE>
1997 Employee Stock Compensation Plan ("ESC")
Effective March 10, 1997, the Company adopted the ESC
Plan, expiring March 9, 2000, reserving for issuance
100,000 shares of the Company's Common Stock. The ESC
Plan provides for compensation awards of the Company's
common stock to non-executive employees (as defined), at
the discretion of the ESC Plan committee. During fiscal
1997, the Company issued 40,327 shares of common stock
under the Plan recording non-cash compensation expense
of $201,414 for awards valued at an estimated fair
market value ranging from $3.75 to $6.38 per share.
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, 1997, there were options outstanding
covering 477,000 shares of Common Stock under this plan.
F-14
<PAGE> 42
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
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, 1997, there were options
outstanding covering 333,500 shares under this plan.
During fiscal 1997, the Company granted 97,500 options
under this plan to non-employees recording non-cash
compensation expense of $244,800. Also during fiscal
1997, 292,963 common shares were issued in connection
with the cashless exercise of stock options under this
plan relating to 350,000 shares.
Other Stock Options
During fiscal 1997 the Company granted to an executive
officer options on up to 862,000 Common Shares vesting
over a period of three years, subject to acceleration.
These options are exercisable at $5.81 per share until
August 31, 2002.
Stock Option Pro Forma and Summary Information
FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), requires the Company to
provide pro forma information regarding net loss and net
loss per share as if compensation costs for the
Company's stock option plans and other stock awards had
been determined in accordance with the fair value based
method prescribed in SFAS No. 123. The Company estimates
the fair value of each stock award (those under the
stock option plans described above plus the 90,000
warrants for consulting services) at the grant date by
using the Black-Scholes option-pricing model with the
following weighted average assumptions used
respectively; dividend yield of zero percent for all
years; expected volatility of 45 percent: risk-free
interest rates of 5.7 to 6.5 percent; and expected lives
of 2 to 5 years.
Under the accounting provisions for SFAS No. 123, the
Company's net loss per common share would have been
increased by the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
----------- -----------
<S> <C> <C>
Net loss
As reported $(2,144,363) $(560,448)
Pro forma (2,578,188) (680,773)
Net loss per common share
As reported $(.30) $(.08)
Pro forma $(.34) $(.09)
</TABLE>
During the initial phase-in period of SFAS No. 123, the
effect on pro forma results are not likely to be
representative of the effects on pro forma results in
future years since options vest over several years and
additional awards could be made each year.
A summary of the status of the Company's stock option
plans as of September 30, 1997 and 1996 and changes
during the years ended on those dates is presented
below:
F-15
<PAGE> 43
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
<S> <C> <C>
FISCAL 1996:
Outstanding October 1, 1995 1,249,000 $0.54
Granted 653,500 $0.62
Canceled/expired (144,833) $0.50
Exercised (171,667) $0.51
---------
Outstanding September 30, 1996 1,586,000 $0.58
=========
Exercisable at September 30, 1996 1,586,000 $0.58
=========
Weighted average fair value of
options granted during the year $0.37
=====
FISCAL 1997:
Outstanding October 1, 1996 1,586,000 $0.58
Granted 1,054,000 $5.66
Canceled/expired (25,000) $0.50
Exercised (942,500) $0.57
---------
Outstanding September 30, 1997 1,672,500 $3.79
=========
Exercisable at September 30, 1997 1,016,500 $2.55
=========
Weighted average fair value of
options granted during the year $1.51
=====
</TABLE>
The following table summarizes information about stock
options outstanding at September 30, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 9/30/97 Life Price at 9/30/97 Price
<S> <C> <C> <C> <C> <C> <C>
$0.50-$0.55 580,000 3.40 $0.52 580,000 $0.52
$1.59-$2.25 38,500 0.81 1.95 38,500 1.95
$4.00-$4.48 107,000 2.06 4.26 63,000 4.31
$5.06-$5.90 947,000 4.89 5.81 335,000 5.82
-------------------------------------------------------------------------
$0.50-$5.90 1,672,500 4.10 $3.79 1,016,500 $2.55
===========================================================================
</TABLE>
8.CUSTOMERS, The Company's financial instruments that are exposed to
FINANCIAL concentrations of credit risk consist primarily of cash
INSTRUMENTS, and trade accounts receivable.
CONCENTRATIONS
OF CREDIT RISK The Company's cash equivalents are in demand deposit
AND EXPORT accounts placed with major financial institutions. The
SALES 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, 1997, sales to three
individual customers accounted for 30%, 14% and 13% of
total net sales. During the year ended September 30,
1996, sales to two individual customers accounted for
14% and 11% of total net sales.
F-16
<PAGE> 44
AMERICAN TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
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, 1997 total trade accounts receivable
included approximately $245,153 due from retail outlets
for which extended credit terms were granted.
Export sales were approximately 2% and 27% of sales for
the years ended September 30, 1997 and 1996. A summary
of the Company's sales by geographical areas is as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Foreign sales:
Europe $ -- $147,300
Asia 4,000 34,300
Australia -- 31,300
South America 3,500 24,700
Other 8,200 11,500
-------- --------
Total foreign sales 15,700 249,100
Domestic sales 951,708 684,543
-------- --------
$967,408 $933,643
======== ========
</TABLE>
The Company has no foreign assets.
9. SUBCONTRACTOR The Company is dependent on a foreign subcontractor for
AND SUPPLIER the assembly of its FM ear-radio which accounted for
AGREEMENTS substantially all of the Company's revenues during the
year ended September 30, 1997. 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 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 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>
<CAPTION>
10. SUPPLEMENTAL 1997 1996
DISCLOSURE OF ---- ----
<S> <C> <C>
CASH FLOW Non-cash financing activities:
INFORMATION Convertible notes exchanged
for common stock $ 625,000 $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 16,310 30,997
Value of warrants assigned to
financing costs (other assets) -- 12,500
Cash paid for interest 170 11,049
</TABLE>
F-17
<PAGE> 45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN TECHNOLOGY CORPORATION
December 1, 1997
By:/s/ DALE WILLIAMS
----------------------------------
Dale Williams
Chairman, President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C>
Date: December 1, 1997 By /s/ DALE WILLIAMS
-------------------------------------------------
Dale Williams, Chairman, President and
Chief Executive Officer and Director
(Principal Executive Officer)
Date: December 1, 1997 By /s/ ROBERT PUTNAM
-------------------------------------------------
Robert Putnam, Vice President, Treasurer and
Assistant Secretary
(Principal Financial and Accounting Officer)
Date: December 1, 1997 By /s/ RICHARD M. WAGNER
-------------------------------------------------
Richard M. Wagner
Secretary and Director
Date: December 1, 1997 By /s/ ELWOOD G. NORRIS
-------------------------------------------------
Elwood G. Norris
Chief Technology Officer and Director
Date: December 1, 1997 By
-------------------------------------------------
Joel A. Barker
Director
Date: December 1, 1997 By /s/ CORNELIUS J. BROSNAN
-------------------------------------------------
Cornelius J. Brosnan
Director
</TABLE>
<PAGE> 1
Exhibit 10.15.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into effective as of the 1st day of September, 1997,
between AMERICAN TECHNOLOGY CORPORATION, a Delaware publicly traded corporation
(the "Company"), and Dale Williams ("Employee").
Employee, in consideration of the covenants and agreements hereinafter
contained, agrees as follows with respect to the employment of the Company of
Employee and Employees future business activities.
1. Employment: Term of Employment. The Company hereby employs Employee and
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth. Subject to the provisions for termination as hereinafter
provided, Employee's term of employment by the Company shall be from the date of
this agreement until August 31, 2000, and said employment shall continue after
such date until either party shall deliver written notice to the other party
hereto to the effect that the employment hereunder shall terminate thirty (30)
days from the giving of such notice. This Agreement will supersede all prior
written and oral agreements entered into by and between Company and Employee.
2. Services to be Rendered by Employee. Employee shall be subject to the
direction of the Board of Directors, or a duly authorized committee thereof and
his duties shall be those generally vested in the office of Chairman, President
and Chief Executive Officer for the corporation and he shall have such other
powers and duties as may be reasonably prescribed by the Board of Directors, or
a duly authorized committee thereof, and shall perform such duties as from time
to time may be decided upon by the Board of Directors, or a duly authorized
committee thereof, of the Company, including but not limited to, speaking for
and promoting the sale of the Company's product lines as public spokesman both
in print and television ads.
The Employee agrees that he will serve the Company faithfully and to the best of
his abilities, devoting substantially all his time, energy and skill to the
activities of the Company and the promotion of its interests. Employee shall not
serve as an officer or director or similar capacity with any other entity except
with the consent of the Board of Directors.
3. Compensation.
(a) For the services to be rendered by Employee during his employment by the
Company, the Company shall pay Employee a Base Salary of twenty thousand dollars
($20,000) per month during the term of this agreement, prorated for any partial
month and paid in conformity with the Company's normal payroll period.
Employee's salary shall be reviewed by the Board of Directors from time to time
in its discretion, and Employee will receive such salary increases, if any, as
the Board of Directors in its sole discretion determines.
(b) In addition to the Base Salary during the first year of the term of
employment, the Employee will receive an Annual Bonus equal to, or greater than,
50% of Employee's Base Salary. The amount of which shall be based upon the
Employee's achievement of specific quantitative and non-quantitative objectives
related to the fiscal year business plan established by the Company's Board of
Directors prior to the annual period in question, and approved by the Board
based upon milestones, to be paid within 60 days of employment anniversary.
Company agrees to a first year Annual Bonus of $120,000 as a minimum to be paid
early, upon the achievement of a significant licensing agreement. Additional
bonuses and future year bonuses shall be at the discretion of the Board of
Directors.
(c) The Employee's place of employment shall be considered San Diego County,
California (or other mutually agreed upon location) and it is contemplated that
the Employee will relocate to San Diego County or vicinity within a reasonable
period during the Employment Period. Until the Employee's residence is relocated
or for a period of one year, the Company shall pay reasonable commuting expenses
from time to time to Boise, Idaho from San Diego and shall pay reasonable
lodging expenses while in San Diego for such term. The Company shall also pay
Employee a maximum of $25,000 of moving and relocation expenses to San Diego
plus any gross up for taxes for any non-deductible expenses.
(d) Employee shall be entitled to participate in and receive benefits under the
Company's executive benefits plans as in effect from time to time, including
auto, medical insurance, sick leave, and vacation time, subject to and on a
basis consistent with the terms, conditions and overall administration of such
plans and Company policies. Employee shall be reimbursed for his current medical
insurance coverage until the Company has a medical program in which the Employee
is eligible to participate.
1
<PAGE> 2
(e) The Company shall pay or reimburse Employee for all expenses normal
reimbursed by the Company and reasonably incurred by him in furtherance of his
duties hereunder and authorized by the Company, including without limitation,
expenses for entertainment, traveling, meals, hotel accommodations and the like
upon submission by him of vouchers or an itemized list thereof as the Board of
Directors; may from time to time adopt and authorize, and as may be required in
order to permit such payments as proper deductions to the Company under the
Internal Revenue Code of 1986 and the rules and regulations adopted pursuant
thereto now or hereafter in effect.
(f) All amounts payable or which become payable under any provision of this
Agreement will be subject to any deductions authorized in writing by you and any
deductions and withholdings required by law.
4. Indemnification.
(a) If, after the date of the commencement of the Employment Period, the
Employee is made a party or is threatened to be made a party to any action, suit
or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director or officer of
the Company or is or was serving at the request of the Company as a director,
officer, member, employee or agent of another corporation or partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether or not the basis of such Proceeding is an alleged act or
failure to act in an official capacity as a director, officer, member, employee
or agent, he shall be indemnified and held harmless by the Company to the
fullest extent authorized by Delaware law, as the same exists or may hereafter
be amended, against all expense, liability and loss (including, without
limitation, attorneys' fees, judgments, fines and amounts paid or to be paid in
settlement) reasonably incurred or suffered by the Employee in connection
therewith, including, without limitation, payment of expenses incurred in
defending a Proceeding prior to the final disposition of such Proceeding
(subject to receipt of an undertaking by the Employee to repay such amount if it
shall ultimately be determined that the Employee is not entitled to be
indemnified by the Company under Delaware law), and such indemnification shall
continue as to the Employee even if he has ceased to be a director, officer,
member, employee or agent of the Company or other enterprise and shall inure to
the benefit of his heirs, executors and administrators.
(b) The right of indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferred in this
Section 4 shall not be exclusive of any other right that the Employee may have
or hereafter may acquire under any statute, provision of the Certificate of
Incorporation or Bylaws of the Company, agreement, vote of shareholders or
disinterested directors or otherwise.
5. Termination of Employment.
(a) The Company shall have the right at its option to terminate the employment
of Employee hereunder by giving written notice thereof to the Employee in the
event of any of the following:
(1) If the Board of Directors of the Company, or a duly authorized
committee thereof, acting in good faith and upon reasonable grounds,
determines that the Employee should be terminated for Cause. For
purposes of this Agreement, "Cause" means, in each case as determined in
good faith by the Board, Employee's (i) personal dishonesty, willful
misconduct, or breach of fiduciary duty involving personal profit,
and/or (ii) conviction of any felony law, and/or (iii) a determination
or request by an appropriate regulatory authority that Employee be
removed or disqualified from acting as an officer of the Company, and/or
(iv) willful breach of a material provision of this Agreement after
written notice, in reasonable detail as the alleged breach, has been
given to you by the Board and you have had a reasonable opportunity to
cure such breach. Notwithstanding the foregoing, the Employee shall not
be deemed to have been terminated for Cause unless and until there shall
have been delivered to the Employee (i) a copy of a resolution, duly
adopted by the Board (excluding the Employee) at a meeting of the Board
called and held for the purpose (after reasonable notice to the Employee
of the meeting of the Board at which the motion is to be considered,
which notice shall specify in reasonably detailed terms the facts and
circumstances constituting Cause, and after the Employee, together with
his counsel, having been afforded at such meeting an opportunity to be
heard before the Board), finding that the Employee was guilty of conduct
constituting Cause; (ii) a certificate of the Secretary or an Assistant
Secretary of the Company stating that such resolution was in fact duly
adopted by the Board (excluding the Employee); and (iii) a Notice of
Termination in the form specified in the following sentence. A Notice of
Termination shall indicate the specific termination provision in this
Agreement relied upon and set forth in reasonable detail the facts and
circumstances of the Employee's employment under the provision so
indicated and the actual termination effective date.
(2) If the Company gives Employee thirty days advance written notice of
termination of employment.
2
<PAGE> 3
(3) If the Employee dies during the term of employment, the Employee's
employment hereunder and Employee's compensation and other rights under
this Agreement and as an employee of the Company (except as to
compensation rights accrued prior thereto and except as expressly
provided in the next succeeding sentence) shall terminate thirty (30 )
days following the date of death. In such event, the Company shall pay
to the Employee's designated executor or administrator of the Employee's
estate, all compensations and benefits accrued which would otherwise be
payable to the Employee through the thirtieth (30) day following the
date of death.
(4) If the Employee is unable for any reason to carry out or to perform
the duties required of him hereunder and does not resume his duties
prior to the termination date specified in the Company's written notice
of termination; provided, however, if the Employee shall fail to carry
out or to perform the duties required of him because of mental or
physical disability for a six consecutive month period during the term
hereof and following such period he is unable to perform his duties
hereunder because of mental or physical disability, as determined by the
Board of Directors of the Company, or a duly authorized committee
thereof, acting in good faith and upon reasonable grounds, he shall be
entitled to receive his then Base Salary he would otherwise be entitled
to hereunder during the term of this Agreement pursuant to Paragraph 3
hereof for a period of not longer than twelve (12) months after the
termination of his employment pursuant to this Paragraph 5(a) (4).
(5) If this Agreement is terminated by the Company pursuant to Paragraph
5(a)(2) hereof, then Employee shall be entitled to severance payments
equal to twelve (12) months of his then monthly Base Salary and any
bonus on an as if perfected basis payable in one lump sum within thirty
(30) days after such effective termination of Employee's employment by
the Company irrespective of the remaining term of this agreement.
(b) The Employee shall have the right at his sole option to terminate employment
hereunder under the following conditions:
(1) at any time upon thirty (30) days written notice.
(2) upon written notice by Employee to the Company within thirty (30)
days of and indicating that a change in control of the Company
("Corporate Transaction") has occurred and therefore Employee elects to
terminate as provided herein. A Corporate Transaction of the Company
shall mean a change in control of a nature that would be required to be
reported in response to Item 5(f) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); provided that, without limitation, such a change in
control or other qualifying event shall be deemed to have occurred if
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined
voting power of the Company's then outstanding securities; or (ii) the
Company sells, transfers or otherwise disposes of all or substantially
all of the assets of the Company; or (iii) a merger or acquisition in
which the Company is not the surviving entity (except for a merger into
a wholly-owned subsidiary, and except for a transaction the sole purpose
of which is to change domicile.
(3) if termination by the Employee is pursuant to 5 (b) (1) then no
severance or termination payments shall be payable. If termination is
noticed pursuant to 5 (b) (2) hereof then Employee shall be entitled to
a payment equal to the remaining months of this Agreement multiplied by
the Base Salary and any bonus on an as if perfected basis payable in one
lump sum within sixty (60) days. In addition, the Employee shall be
entitled to recover legal fees and costs incurred by Employee should the
Company not make timely payment prescribed by this section and should
the Employee prevail in any action filed thereabout.
6. Soliciting Customers. The Employee agrees that he will not for a period of
one (1) year immediately following the termination of his employment with the
Company, either directly or indirectly make known to any competing person, firm,
or corporation the names or addresses of any of the customers of the Company or
any other information pertaining to them that is not in the public domain.
7. Trade Secrets of the Company. The Employee prior to and during the term of
employment under this Agreement has had and will have access to and become
acquainted with various trade secrets, consisting of devices, secret inventions,
processes, and compilations of information, records, and specifications which
are owned by the Company, and which are regularly used or to be used in the
operation of the business of the Company. The Employee shall not disclose any of
the aforesaid trade secrets, directly or indirectly, or use them in any way,
either during the term of this agreement or for a period of 36 months
3
<PAGE> 4
thereafter, except as required in the course of his employment. All files,
records, documents, drawings, specifications, equipment, and similar items
relating to the business of the Company, whether prepared by the Employee or
otherwise coming into his possession, shall remain the exclusive property of the
Company and shall not be removed under any circumstances from the premises of
the Company where the work is being carried on without prior written consent of
the Company or consistent with the Company's normal business practices.
8. Inventions and Patents.
(a) The Employee agrees that as to any inventions made by him during the term
of his employment, solely or jointly with others, which are made with the
equipment, supplies, facilities or trade secret information of the Company, or
which relate at the time of the conception or reduction to purchase of the
invention to the business of the Company or the Company's actual or demonstrably
anticipated research and development, or which result from any work performed by
the Employee for the Company, shall belong to the Company and the Employee
promises to assign such inventions to the Company. The Employee also agrees that
the Company shall have the right to keep such inventions as trade secrets, if
the Company chooses. The Employee agrees to assign to the Company the Employee's
rights in any other inventions where the Company is required to grant those
rights to the United States government or any agency thereof. In order to permit
the Company to claim rights to which it may be entitled, the Employee agrees to
disclose to the Company in confidence all inventions which the Employee makes
arising out of the Employee's employment and all patent application filed by the
Employee within one year after the termination of his employment.
(b) The Employee shall assist the Company in obtaining patents on all
inventions, designs, improvements, and discoveries patentable by the Company in
the United States and in all foreign countries, and shall execute all documents
and do all things necessary to obtain letters patent, to vest the Company with
full and extensive title thereto, and to protect the same against infringement
by others. Any assistance after termination shall be at the Company's expense.
9. Stock Options.
(a) The Employee has been granted stock options on 862,000 shares, subject to
vesting, in connection with this employment agreement. The Board of Directors
may reset the option price on these options one time during the first year if a
decline in the market price is, in the Board of Directors opinion, primarily the
result of a general decline due to market correction or conditions. The Company
agrees that if it should cause the registration of any stock options of any
senior officers that it will include the option shares of the Employee with any
registration statement, subject to qualification, at no cost to Employee.
Subject to Board of Director approval, the Company may file a registration
statement on Form S-8, if so registrable on such form, covering the shares
issuable on option exercise.
(b) Subject to the provisions of Section 9(b) hereof, immediately prior to the
closing of a transaction as described in Section 5(b)(2) ("Corporate
Transaction"), the exerciseability of each option granted to you to purchase
shares of Common Stock that is outstanding immediately prior to the closing of
such Corporate Transaction, will be automatically accelerated so that each such
option will, immediately prior to the closing date for the Corporate
Transaction, become fully exerciseable with respect to the total number of
shares issuable upon exercise thereof and may be exercised prior to the closing
of such Corporate Transaction for all or any portion of such shares.
10. Severability. Each paragraph and subparagraph of this Agreement shall be
construed and considered separate and severable from the validity and
enforceability of any other provision contained in this Agreement.
11. Assignment. The rights of the Company (but not its obligations) under this
Agreement may, without the consent of the Employee, be assigned by the Company
to any parent, subsidiary, or successor of the Company; provided that such
parent, subsidiary or successor acknowledges in writing that it is also bound by
the terms and obligations of this Agreement. Except as provided in the preceding
sentence, the Company may not assign all or any of its rights, duties or
obligations hereunder without prior written consent of Employee. The Employee
may not assign all or any of his rights, duties or obligations hereunder without
the prior written consent of the Company.
4
<PAGE> 5
12. Notices. All notices, requests, demands and other communications shall be in
writing and shall be defined to have been duly given if delivered or if mailed
by registered mail, postage prepaid: (a) If to Employee, addressed to him at the
following address as may be changed in writing from time to time:
Dale Williams
5800 Sterling Drive
Boise, Idaho 83703
(b) If to the Company, addressed to:
American Technology Corporation
13114 Evening Creek Dr. South
San Diego, California 92128
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
13. Title and Headings. Titles and headings to paragraphs hereof are for
purposes of references only and shall in no way limit, define or otherwise
affect the provisions hereof.
14. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
15. Counterparts. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be necessary
in making proof of this Agreement to produce or account for more than one
original counterpart.
16. Cumulative Rights. Each and all of the various rights, powers and remedies
of the Company and Employee in this Agreement shall be considered as cumulative,
with and in addition to any other rights, powers or remedies of the Company or
the Employee and no one of them as exclusive of the others or as exclusive of
any other rights, powers and remedies allowed by law. The exercise or partial
exercise of any right, power or remedy shall neither constitute the election
thereof nor the waiver of any other right, power or remedy. Sections 4, 6, 7 and
8 hereof shall continue in full force and effect notwithstanding the Employee's
termination of employment and the termination of this Agreement.
17. Remedies. The Employee and the Company both acknowledge that each may have
no adequate remedy at law if either violates any of the terms contained in
Sections 6, 7 and 8. In such event, either party shall have the right, in
addition to any other rights it may have, to obtain relief to restrain any
breach hereof or otherwise to specifically enforce any of the provisions hereof.
18. Waiver of Breach. The waiver by one party to this Agreement of a breach of
any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the said party .
19. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and may be modified or amended only by a written instrument
executed by parties hereto. Effective on the date hereof, any prior employment
agreements between the Company and the Employee shall terminate.
20. Attorney's Fees. In the event that either party must institute legal action
to compel the other to comply with the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees and costs.
21. Good Faith. Each of the parties hereto agrees that he or it shall act in
good faith in all actions taken under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as
of the date first above written.
/s/ Richard M. Wagner August 28, 1997
- -----------------------------
Richard M. Wagner, Secretary
/s/ Dale Williams August 28, 1997
- ------------------------------
Dale Williams, Employee
<PAGE> 1
Exhibit 10.15.1.1
AMERICAN TECHNOLOGY CORPORATION
------------------------------
STOCK OPTION AGREEMENT
----------------
GRANTED UNDER THE APPROVAL OF THE BOARD OF DIRECTORS OF
AMERICAN TECHNOLOGY CORPORATION
THIS STOCK OPTION AGREEMENT, dated as of September 1, 1997 (the "Date of
Grant"), is granted by AMERICAN TECHNOLOGY CORPORATION, a Delaware corporation
("Company"), to Dale Williams (the "Optionee"), whose status with the Company is
described on the signature page hereof below his signature.
WHEREAS, the Optionee is now an officer of the Company and the Company
desires to have the Optionee remain in its service and desires to encourage
stock ownership by the Optionee and to increase the Optionee's proprietary
interest in the Company's success; and as an inducement thereto has determined
to grant to the Optionee the option herein provided for, to the end that the
Optionee may thereby be assisted in obtaining an interest, or an increased
interest, as the case may be, in the stock ownership of the Company;
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties hereto hereby agree as follows:
1. GRANT AND VESTING.
(a) Pursuant to the Unanimous Consent of Directors of the Company dated August
26, 1997, the Company hereby grants to the Optionee an option (the "Option") to
purchase up to 862,000 shares of the Company's common stock, $.00001 par value
per share (the "Option Shares") at the price of $5.81 per share (the "Purchase
Price" or "Exercise Price") representing the closing bid price on August 29,
1997.
(b) This option shall vest and become exercisable with respect to 250,000 option
shares on this grant date and the balance of 612,000 option shares vesting and
becoming exercisable at the rate of 17,000 option shares on each full month
anniversary of employment thereafter with all shares vesting and become
exercisable on August 31, 2000.
(c) Additionally 306,000 option shares (deducted from the farthest out months
vesting) shall vest and become exercisable upon the achievement of a significant
licensing agreement during Optionee's employment, as determined by the Board of
Directors in its sole discretion.
(d) Subject to the provisions hereof, immediately prior to the closing of a
transaction as described in Section 5(b)(2) of the Optionee's Employment
Agreement dated September 1, 1997 ("Corporate Transaction"), the exerciseability
of each option granted to purchase shares of Common Stock that is outstanding
immediately prior to the closing of such Corporate Transaction, will be
automatically accelerated so that each such option will, immediately prior to
the closing date for the Corporate Transaction, become fully exerciseable with
respect to the total number of shares issuable upon exercise thereof and may be
exercised prior to the closing of such Corporate Transaction for all or any
portion of such shares.
(e) This Option is granted separately at the discretion of the Board of
Directors and is not an option pursuant to the 1992 option plans. Both the
Purchase Price and the number of Option Shares purchasable may be adjusted
pursuant to Paragraph 9 hereof.
2. TERM. This Option is exercisable during the period beginning with the
Date of Grant and ending August 31, 2002, at 5:00 p.m. (Pacific Time), except as
provided in Paragraph 7 hereof.
3. EXERCISE OF OPTION. During the Optionee's life, this Option may only
be exercised by him or her in whole or in part. This Option may only be
exercised by presentation at the principal offices of the Company in San Diego,
California of written notice to the Company's Secretary advising the Company of
the Optionee's election to purchase Option Shares, specifying the number of
Option Shares being purchased, accompanied by payment. No Option Shares shall be
issued until full payment is made therefor. Payment shall be made either (i) in
cash, represented by bank or cashier's check, certified check or money order; or
(ii) by advising the Company, at the time the Option is exercised, to withhold
from exercise under the Option the appropriate number of Option Shares, the
aggregate market value (closing bid price) of which on the date of exercise of
the Option is equal to the aggregate cash purchase price of the
<PAGE> 2
Option Shares being exercised and purchased under the Option, and such
withholding shall constitute full payment for the non-withheld Option Shares
issued upon exercise, or (iii) at the discretion of the Board of Directors, by
delivery of the Optionee's personal recourse note with interest and terms
acceptable to the Board of Directors.
4. ISSUANCE OF OPTION SHARES; RESTRICTIVE LEGEND. (a) Upon proper
exercise of this Option, the Company shall mail or deliver to the Optionee, as
promptly as practicable, a stock certificate or certificates representing the
Option Shares purchased, subject to clause (b) below. The Company shall not be
required to sell or issue any shares under the Option if the issuance of such
shares shall constitute a violation of any applicable law or regulation or of
any requirements of any national securities exchange upon which the Company's
common stock may be listed.
(b) Upon any exercise of this Option, if a registration statement under
the Securities Act of 1933 (the "Act") is not in effect with respect to the
Option Shares, then the Company shall not be required to issue any Option Shares
unless the Company has received evidence reasonably satisfactory to it to the
effect that the Optionee is acquiring such shares for investment and not with a
view to the distribution thereof. Any reasonable determination in this
connection by the Company shall be final, binding and conclusive.
(c) Unless and until removed as provided below, each certificate
evidencing unregistered Option Shares shall bear a legend in substantially the
following form:
"The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or under the securities laws
of any state and may not be sold or transferred except upon such
registration or upon receipt by this Corporation of an opinion or
counsel satisfactory to this Corporation, in form and substance
satisfactory to this Corporation, that registration is not required for
such sale or transfer. "
The Company shall issue a new certificate which does not contain such
legend if (i) the shares represented by such certificate are sold pursuant to a
registration statement (including a current prospectus) which has become
effective under the Act, or (ii) the staff of the Securities and Exchange
Commission shall have issued a "no action" letter, reasonably satisfactory to
the Company's counsel, to the effect that such shares may be freely sold and
thereafter traded publicly without registration under the Act, or (iii) the
Company's counsel, or other counsel acceptable to the Company, shall have
rendered an opinion satisfactory to the Company to the effect that such shares
may be freely sold and thereafter publicly traded without registration under the
Act. The Company agrees that if it should cause the registration of any stock
options of any senior officers that it will include the option shares of the
Optionee with any registration statement, as long as the shares qualify to be so
registered, at no cost to Optionee. The Company shall not be obligated to take
any other affirmative action in order to cause the exercise of the Option or the
issuance of any Option Shares to comply with any law or regulation of any
governmental authority.
5. TRANSFER OF OPTION SHARES. Option Shares issued upon exercise of this
Option which have not been registered under the Act shall be transferable by a
holder thereof only upon compliance with the conditions in this Paragraph.
Before making any transfer of Option Shares, the holder of the shares shall give
written notice to the Company of the holder's intention to make the transfer,
describing the manner and circumstances of the transfer. If in the opinion of
the Company's counsel, or of other counsel acceptable to the Company, the
proposed transfer may be effected without registration under the Act, the
Company shall so notify the holder and the holder shall be entitled to transfer
such shares as described in the holder's notice to the Company. If such counsel
opines that the transfer may not be made without registration under the Act,
then the Company shall so notify the holder, in which event the holder shall not
be entitled to transfer the shares until (i) the Company notifies the holder
that it is permissible to proceed with the transfer, or (ii) registration of the
shares under the Act has become effective. The Company may issue "stop transfer"
instructions to its transfer agent with respect to any or all of the Option
Shares as it deems necessary to prevent any violation of the Act.
6. TRANSFER OR ENCUMBRANCE OF THIS OPTION PROHIBITED. This Option may
not be transferred or assigned in any manner by the Optionee, except by will or
trust upon the Optionee's death or by operation of law under the laws of descent
and distribution. The same restriction on transfer or assignment shall apply to
any heirs, devisees, beneficiaries or other persons acquiring this Option or an
interest herein under such an instrument or by operation of law. Further, this
Option may not be pledged, hypothecated or otherwise encumbered, by operation of
law or otherwise, nor shall it be subject to execution, attachment or similar
process.
7. TERMINATION OF SERVICE, DEATH, OR DISABILITY.
(a) Except as may be otherwise expressly provided in this Agreement,
this Option shall terminate and any vested options at such termination shall no
longer be exercisable as follows:
2
<PAGE> 3
(i) Upon termination of the Optionee's employment with the
Company for cause;
(ii) At the expiration of twelve (12) months from the date of
the Optionee's resignation;
(iii) At the expiration of twelve (12) months from the date of
Optionee's termination of the Optionee's employment with
the Company without cause, for any reason other than death;
provided, that if the Optionee dies within such
twelve-month period, subclause (iv) below shall also apply;
or
(iv) At the expiration of twelve (12) months after the date of
death of the Optionee.
(b) "Employment with the Company" shall include employment with any
parent or subsidiary of the Company, and this Option shall not be affected by
the Optionee's transfer of employment among the Company and any parent or
subsidiary thereof. An Optionee's employment with the Company shall not be
deemed interrupted or terminated by a bona fide leave of absence (such as
sabbatical leave or employment by the Government) duly approved, military leave
or sick leave. This Option shall not be affected in the event the Optionee
suffers a significant diminution in his duties or any significant reduction in
his overall compensation. After the death of the Optionee, his executors,
administrators or personal representatives, or any person or persons to whom the
Option may be transferred by will, trust or by the laws of descent and
distribution, shall have the right, at any time prior to termination hereof, to
exercise this Option pursuant to its terms.
(c) This Option confers no right upon the Optionee with respect to the
continuation of his employment (or his position as an officer, director or other
provider of services) with the Company or any parent or subsidiary of the
Company, and shall not interfere with the right of the Company, or any parent or
subsidiary Company, to terminate such relationship(s) at any time in accordance
with law and any agreements then in force.
8. NO RIGHTS AS STOCKHOLDER. The Optionee shall have no rights as a
stockholder with respect to Option Shares until the date of issuance of a stock
certificate for such shares. No adjustment for dividends, or otherwise, except
as provided in Paragraph 9, shall be made if the record date therefor is prior
to the date of exercise of such Option.
9. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of this
Option shall not limit or affect in any way the right or power of the Company or
its shareholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of bonds,
debentures, preferred or prior preference stock ahead of or affecting the Option
Shares or the rights thereof, or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.
However,
(a) If, prior to the Company's delivery of all the Option Shares subject
to this Option, the Company shall effect a subdivision (split) or combination
(reverse split) of shares or other capital readjustment, the payment of a common
stock dividend, or other increase or reduction of the number of shares of common
stock outstanding, without receiving compensation therefor in money, services or
property, then (i) in the event of an increase in the number of such shares
outstanding, the Purchase Price shall be proportionately reduced and the number
of Option Shares then still purchasable shall be proportionately increased; and
(ii) in the event of a reduction in the number of such shares outstanding, the
Purchase Price payable per share shall be proportionately increased and the
number of Option Shares then still purchasable shall be proportionately reduced.
(b) If while this Option remains outstanding the Company is reorganized,
merged, consolidated or party to a plan of share exchange with another
corporation, or if the Company sells or otherwise disposes of all or
substantially all its property or assets to another corporation, then subject to
the provisions of clause (ii) below, (i) after the effective date of such
reorganization, merger, consolidation, exchange or sale, as the case may be, the
Optionee shall be entitled, upon exercise of this Option, to receive, in lieu of
the Option Shares, the number and class of shares of such stock, other
securities, cash and other property or rights as the holders of shares of the
Company's common stock received pursuant to the terms of the reorganization,
merger, consolidation, exchange or sale and to which he would have been entitled
if, immediately prior to such reorganization, merger, consolidation, exchange or
sale, he had been the holder of record of a number of shares of common stock
equal to the number of Option Shares as to which this Option shall be so
exercised; and (ii) this Option may be canceled by the Board of Directors of the
Company as of the effective date of any such reorganization, merger,
consolidation, exchange or sale; provided that (x) such reorganization, merger,
consolidation, exchange or sale results in a change in control of the Company
rather than a mere change of form or domicile of the Company, (y) written notice
of such cancellation is given to the Optionee or other holder of this Option
3
<PAGE> 4
not less than 45 days prior to such effective date, and (z) the holder shall
have the right to exercise the Option in full during such 45-day period
preceding the effective date of such reorganization, merger, consolidation,
exchange or sale.
(c) In case the Company shall determine to offer to the holders of its
common stock rights to subscribe pro rata for any new or additional shares of
common stock, or any securities convertible into common stock, then the Optionee
shall be entitled to participate in such pro rata offering in the same manner
and to the same extent as if this Option had been exercised at the Purchase
Price then in effect and the number of Option Shares then purchasable upon
exercise hereof had been issued to the Optionee pursuant to the terms hereof.
(d) Except as herein before expressly provided, the issue by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, for cash or property, or for labor or services either upon direct
sale or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the Purchase Price or the number of Option Shares then
subject to this Option.
10. NOTIFICATION TO COMPANY OF CERTAIN SALES. The Optionee or other
holder of Option Shares who sells any of such shares shall notify the Company of
such fact in writing within 30 days after the date of sale, if:
(a) At the time the Option Shares were sold, less than ONE year had
elapsed since the date the Option Shares were purchased by the Optionee, and
less than TWO years had elapsed since the Date of Grant of this Option; or
(b) the Optionee was not an employee of the Company (or of a parent or
subsidiary thereof) at all times during the period beginning on the Date of
Grant of this Option and ending on the date three (3) months prior to the date
this Option was exercised to purchase the Option Shares sold.
11. PAYMENT OF WITHHOLDING TAXES. The exercise of any Option is subject
to the condition that if at any time the Company shall determine, in its
discretion, that the satisfaction of withholding tax or other withholding
liabilities under any federal, state or local law is necessary or desirable as a
condition of, or in connection with, such exercise or a later lapsing of time or
restrictions on or disposition of the shares of Common Stock received upon such
exercise, then in such event, the exercise of the Option shall not be effective
unless such withholding shall have been effected or obtained in a manner
acceptable to the Company.
12. NOTICES, ETC. Any notice hereunder by the Optionee shall be given to
the Company in writing, and such notice and any payment by the Optionee
hereunder shall be deemed duly given or made only upon receipt thereof at the
Company's office at 13114 Evening Creek Dr. South, San Diego, California 92128,
or at such other address as the Company may designate by notice to the Optionee.
Any notice or other communication to the Optionee hereunder shall be in writing
and shall be deemed duly given or made if mailed or delivered to the Optionee at
the last address as the Optionee may have on file with the Company's Secretary.
This Option shall be governed under and construed in accordance with the laws of
the State of California. This address shall be binding on the Company and the
Optionee and all successors, assigns, heirs, devisees and personal
representatives thereof.
NOTE: This option must match the Control copy maintained by the Company, in all
particulars.
IN WITNESS WHEREOF, the parties hereto have executed this Stock Option Agreement
as of the day and year first above written.
AMERICAN TECHNOLOGY CORPORATION
By /s/ Robert Putnam
----------------------------------
ROBERT PUTNAM, PRESIDENT
ATTEST:
By /s/ Richard Wagner
--------------------------------
RICHARD WAGNER, SECRETARY
OPTIONEE NAME AND STATUS;
DALE WILLIAMS, EMPLOYEE
ORIGINAL to Optionee / COPY to Company
4
<PAGE> 1
Exhibit 10.16
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into effective as of the 1st day of September, 1997,
between AMERICAN TECHNOLOGY CORPORATION, a Delaware publicly traded corporation
(the "Company"), and Elwood G. Norris ("Employee").
Employee, in consideration of the covenants and agreements hereinafter
contained, agrees as follows with respect to the employment of the Company of
Employee and Employees future business activities.
1. Employment: Term of Employment. The Company hereby employs Employee and
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth. Subject to the provisions for termination as hereinafter
provided, Employee's term of employment by the Company shall be from the date of
this agreement until August 31, 2000, and said employment shall continue after
such date until either party shall deliver written notice to the other party
hereto to the effect that the employment hereunder shall terminate thirty (30)
days from the giving of such notice. This Agreement will supersede all prior
written and oral agreements entered into by and between Company and Employee.
2. Services to be Rendered by Employee. Employee shall be subject to the
direction of the Board of Directors, or a duly authorized committee thereof and
his duties shall be those generally vested in the office of Chief Technology
Officer for the corporation and he shall have such other powers and duties as
may be reasonably prescribed by the Board of Directors, or a duly authorized
committee thereof, and shall perform such duties as from time to time may be
decided upon by the Board of Directors, or a duly authorized committee thereof,
of the Company, including but not limited to, speaking for and promoting the
sale of the Company's product lines as public spokesman both in print and
television ads. Employee shall devote a sufficient amount of his productive
time, energy and ability during the term of this Agreement to the proper and
efficient conduct of the Company's business during the term of this Agreement
however the Employee shall be only required to devote part time and attention to
the Company's business expected to range from approximately 15-30 hours per week
unless otherwise agreed by the parties.
Employee shall at all times faithfully, industriously, and to the best of his
ability, experience and talent, perform the duties that may be reasonably
required to the reasonable satisfaction of the Board of Directors.
As is the present case, Employee may from time to time work for other persons or
entities in any capacity, including but not limited to an officer, director,
employee or consultant, and conduct other business activities so long as such
work or activities do not adversely and directly impact on his duties and
obligations to the Company as has been reasonably performed in the past. The
Company acknowledges that Employee is an officer and director of Norris
Communications, Inc. and Patriot Scientific Corporation and has duties thereto.
3. Compensation.
(a) For the services to be rendered by Employee during his employment by the
Company, the Company shall pay Employee a Base Salary of eight thousand dollars
($8,000) per month during the term of this agreement, prorated for any partial
month and paid in conformity with the Company's normal payroll period.
Employee's salary shall be reviewed by the Board of Directors from time to time
in its discretion, and Employee will receive such salary increases, if any, as
the Board of Directors in its sole discretion determines.
(b) Employee shall be entitled to participate in any bonus pool, stock option
plan or similar program established by the Board of Directors.
(c) The Employee's place of employment shall be considered San Diego County,
California (or other mutually agreed upon location).
(d) Employee shall be entitled to participate in and receive benefits under the
Company's executive benefits plans as in effect from time to time, including
auto, medical insurance, sick leave, and vacation time, subject to and on a
basis consistent with the terms, conditions and overall administration of such
plans and Company policies.
(e) The Company shall pay or reimburse Employee for all expenses normal
reimbursed by the Company and reasonably incurred by him in furtherance of his
duties hereunder and authorized by the Company, including without limitation,
expenses for entertainment, traveling, meals, hotel accommodations and the like
upon submission by him of vouchers or an itemized list thereof as the Board of
Directors; may from time to time adopt and authorize, and as may be required in
order to permit
1
<PAGE> 2
such payments as proper deductions to the Company under the Internal Revenue
Code of 1986 and the rules and regulations adopted pursuant thereto now or
hereafter in effect.
(f) All amounts payable or which become payable under any provision of this
Agreement will be subject to any deductions authorized in writing by you and any
deductions and withholdings required by law.
4. Indemnification.
(a) If, after the date of the commencement of the Employment Period, the
Employee is made a party or is threatened to be made a party to any action, suit
or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director or officer of
the Company or is or was serving at the request of the Company as a director,
officer, member, employee or agent of another corporation or partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether or not the basis of such Proceeding is an alleged act or
failure to act in an official capacity as a director, officer, member, employee
or agent, he shall be indemnified and held harmless by the Company to the
fullest extent authorized by Delaware law, as the same exists or may hereafter
be amended, against all expense, liability and loss (including, without
limitation, attorneys' fees, judgments, fines and amounts paid or to be paid in
settlement) reasonably incurred or suffered by the Employee in connection
therewith, including, without limitation, payment of expenses incurred in
defending a Proceeding prior to the final disposition of such Proceeding
(subject to receipt of an undertaking by the Employee to repay such amount if it
shall ultimately be determined that the Employee is not entitled to be
indemnified by the Company under Delaware law), and such indemnification shall
continue as to the Executive even if he has ceased to be a director, officer,
member, employee or agent of the Company or other enterprise and shall inure to
the benefit of his heirs, executors and administrators.
(b) The right of indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferred in this
Section 4 shall not be exclusive of any other right that the Employee may have
or hereafter may acquire under any statute, provision of the Certificate of
Incorporation or Bylaws of the Company, agreement, vote of shareholders or
disinterested directors or otherwise.
5. Termination of Employment.
(a) The Company shall have the right at its option to terminate the employment
of Employee hereunder by giving written notice thereof to the Employee in the
event of any of the following:
(1) If the Board of Directors of the Company, or a duly authorized
committee thereof, acting in good faith and upon reasonable grounds,
determines that the Employee should be terminated for Cause. For
purposes of this Agreement, "Cause" means, in each case as determined in
good faith by the Board, Employee's (i) personal dishonesty, willful
misconduct, or breach of fiduciary duty involving personal profit,
and/or (ii) conviction of any felony law, and/or (iii) a determination
or request by an appropriate regulatory authority that Employee be
removed or disqualified from acting as an officer of the Company, and/or
(iv) willful breach of a material provision of this Agreement after
written notice, in reasonable detail as the alleged breach, has been
given to you by the Board and you have had a reasonable opportunity to
cure such breach. Notwithstanding the foregoing, the Employee shall not
be deemed to have been terminated for Cause unless and until there shall
have been delivered to the Employee (i) a copy of a resolution, duly
adopted by the Board (excluding the Employee) at a meeting of the Board
called and held for the purpose (after reasonable notice to the Employee
of the meeting of the Board at which the motion is to be considered,
which notice shall specify in reasonably detailed terms the facts and
circumstances constituting Cause, and after the Employee, together with
his counsel, having been afforded at such meeting an opportunity to be
heard before the Board), finding that the Employee was guilty of conduct
constituting Cause; (ii) a certificate of the Secretary or an Assistant
Secretary of the Company stating that such resolution was in fact duly
adopted by the Board (excluding the Employee); and (iii) a Notice of
Termination in the form specified in the following sentence. A Notice of
Termination shall indicate the specific termination provision in this
Agreement relied upon and set forth in reasonable detail the facts and
circumstances of the Employee's employment under the provision so
indicated and the actual termination effective date.
(2) If the Company gives Employee thirty days advance written notice of
termination of employment.
(3) If the Employee dies during the term of employment, the Employee's
employment hereunder and Employee's compensation and other rights under
this Agreement and as an employee of the Company (except as to
compensation rights accrued prior thereto and except as expressly
provided in the next succeeding sentence) shall terminate thirty (30)
days following the date of death. In such event, the Company shall pay
to the Employee's designated executor
2
<PAGE> 3
or administrator of the Employee's estate, all compensations and
benefits accrued which would otherwise be payable to the Employee
through the thirtieth (30) day following the date of death.
(4) If the Employee is unable for any reason to carry out or to perform
the duties required of him hereunder and does not resume his duties
prior to the termination date specified in the Company's written notice
of termination; provided, however, if the Employee shall fail to carry
out or to perform the duties required of him because of mental or
physical disability for a six consecutive month period during the term
hereof and following such period he is unable to perform his duties
hereunder because of mental or physical disability, as determined by the
Board of Directors of the Company, or a duly authorized committee
thereof, acting in good faith and upon reasonable grounds, he shall be
entitled to receive his then Base Salary he would otherwise be entitled
to hereunder during the term of this Agreement pursuant to Paragraph 3
hereof for a period of not longer than twelve (12) months after the
termination of his employment pursuant to this Paragraph 5(a) (4).
(5) If this Agreement is terminated by the Company pursuant to Paragraph
5(a)(2) hereof, then Employee shall be entitled to severance payments
equal to twelve (12) months of his then monthly Base Salary and any
bonus on an as if perfected basis payable in one lump sum within thirty
(30) days after such effective termination of Employee's employment by
the Company irrespective of the remaining term of this agreement. Any
vested stock options shall also be exercisable in accordance with their
terms for the duration of the original option agreement term
irrespective of any contrary provisions in the option agreement.
(b) The Employee shall have the right at his sole option to terminate employment
hereunder under the following conditions:
(1) at any time upon thirty (30) days written notice.
(2) upon written notice by Employee to the Company within thirty (30)
days of and indicating that a change in control of the Company
("Corporate Transaction") has occurred and therefore Employee elects to
terminate as provided herein. A Corporate Transaction of the Company
shall mean a change in control of a nature that would be required to be
reported in response to Item 5(f) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); provided that, without limitation, such a change in
control or other qualifying event shall be deemed to have occurred if
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined
voting power of the Company's then outstanding securities; or (ii) the
Company sells, transfers or otherwise disposes of all or substantially
all of the assets of the Company; or (iii) a merger or acquisition in
which the Company is not the surviving entity (except for a merger into
a wholly-owned subsidiary, and except for a transaction the sole purpose
of which is to change domicile.
(3) if termination by the Employee is pursuant to 5 (b) (1) then no
severance or termination payments shall be payable. If termination is
noticed pursuant to 5 (b) (2) hereof then Employee shall be entitled to
a payment equal to the remaining months of this Agreement multiplied by
the Base Salary and any bonus on an as if perfected basis payable in one
lump sum within sixty (60) days. In addition, the Employee shall be
entitled to recover legal fees and costs incurred by Employee should the
Company not make timely payment prescribed by this section and should
the Employee prevail in any action filed thereabout.
6. Soliciting Customers. The Employee agrees that he will not for a period of
one (1) year immediately following the termination of his employment with the
Company, either directly or indirectly make known to any competing person, firm,
or corporation the names or addresses of any of the customers of the Company or
any other information pertaining to them that is not in the public domain.
7. Trade Secrets of the Company. The Employee prior to and during the term of
employment under this Agreement has had and will have access to and become
acquainted with various trade secrets, consisting of devices, secret inventions,
processes, and compilations of information, records, and specifications which
are owned by the Company, and which are regularly used or to be used in the
operation of the business of the Company. The Employee shall not disclose any of
the aforesaid trade secrets, directly or indirectly, or use them in any way,
either during the term of this agreement or for a period of 36 months
thereafter, except as required in the course of his employment. All files,
records, documents, drawings, specifications, equipment, and similar items
relating to the business of the Company, whether prepared by the Employee or
otherwise coming into his possession, shall remain the exclusive property of the
Company and shall not be removed under any
3
<PAGE> 4
circumstances from the premises of the Company where the work is being carried
on without prior written consent of the Company or consistent with the Company's
normal business practices.
8. Inventions and Patents. The Employee agrees that as to any inventions made by
him during the term of his employment, solely or jointly with others, which are
made using trade secret information of the Company or which relate at the time
of the conception or reduction-to-practice of an invention to the business of
the Company (which shall be limited to sound reproduction, sound attenuation,
global positioning and miniature radio technologies as currently practiced by
the Company) or the Company's actual or demonstrably anticipated research or
development as promulgated by the Board of Directors prior to any invention
thereof, or which result from any work performed by the Employee directly for
the Company at the Board of Directors direction, shall belong to the Company and
the Employee promises to assign such inventions to the Company. The Employee
also agrees that the Company shall have the right to keep such inventions as
trade secrets, if the Company chooses. The Employee agrees to assign to the
Company the Employee's rights in any such inventions where the Company is
required to grant those rights to the United States government or any agency
thereof.
The Employee shall assist the Company in obtaining such patents on all
inventions described above, and designs, improvements, and discoveries deemed
patentable by the Company in the United States and in all foreign countries, and
shall execute all documents and do all things necessary to obtain letters
patent, to vest the Company with full and extensive title thereto, and to
protect the same against infringement by others. In exchange for assignment of
any new patents to the Company, the Company and Employee shall negotiate a
royalty agreeement comparable to rates on prior assignments made to the Company
by Employee.
Employee has been an inventor for more than 30 years for his own account and for
a variety of entities and is responsible for developments for various entities.
Nothing in this Agreement is intended to restrict Employees outside activities
as an inventor other than as prescribed in this section. Accordingly, unless an
invention made by Employee relates to sound reproduction, sound attenuation,
global positioning and/or miniature radio technologies as currently practiced by
the Company, the presumption shall be that any such invention is not owned by
the Company without the written consent of Employee and the burden of proving
the invention is owned by the Company shall be that of the Company.
9. Severability. Each paragraph and subparagraph of this Agreement shall be
construed and considered separate and severable from the validity and
enforceability of any other provision contained in this Agreement.
10. Assignment. The rights of the Company (but not its obligations) under this
Agreement may, without the consent of the Employee, be assigned by the Company
to any parent, subsidiary, or successor of the Company; provided that such
parent, subsidiary or successor acknowledges in writing that it is also bound by
the terms and obligations of this Agreement. Except as provided in the preceding
sentence, the Company may not assign all or any of its rights, duties or
obligations hereunder without prior written consent of Employee. The Employee
may not assign all or any of his rights, duties or obligations hereunder without
the prior written consent of the Company.
11. Notices. All notices, requests, demands and other communications shall be in
writing and shall be defined to have been duly given if delivered or if mailed
by registered mail, postage prepaid: (a) If to Employee, addressed to him at the
following address as may be changed in writing from time to time:
Elwood G. Norris
13824 San Sebastian Way
Poway, California 92064
(b) If to the Company, addressed to:
American Technology Corporation
13114 Evening Creek Dr. South
San Diego, California 92128
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
12, Title and Headings. Titles and headings to paragraphs hereof are for
purposes of references only and shall in no way limit, define or otherwise
affect the provisions hereof.
13. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
4
<PAGE> 5
14. Counterparts. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be necessary
in making proof of this Agreement to produce or account for more than one
original counterpart.
15. Cumulative Rights. Each and all of the various rights, powers and remedies
of the Company and Employee in this Agreement shall be considered as cumulative,
with and in addition to any other rights, powers or remedies of the Company or
the Employee and no one of them as exclusive of the others or as exclusive of
any other rights, powers and remedies allowed by law. The exercise or partial
exercise of any right, power or remedy shall neither constitute the election
thereof nor the waiver of any other right, power or remedy. Sections 4, 6, 7 and
8 hereof shall continue in full force and effect notwithstanding the Employee's
termination of employment and the termination of this Agreement.
16. Remedies. The Employee and the Company both acknowledge that each may have
no adequate remedy at law if either violates any of the terms contained in
Sections 6, 7 and 8. In such event, either party shall have the right, in
addition to any other rights it may have, to obtain relief to restrain any
breach hereof or otherwise to specifically enforce any of the provisions hereof.
17. Waiver of Breach. The waiver by one party to this Agreement of a breach of
any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the said party .
18. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and may be modified or amended only by a written instrument
executed by parties hereto. Effective on the date hereof, any prior employment
agreements between the Company and the Employee shall terminate.
19. Attorney's Fees. In the event that either party must institute legal action
to compel the other to comply with the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees and costs.
20. Good Faith. Each of the parties hereto agrees that he or it shall act in
good faith in all actions taken under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
/s/ Richard M. Wagner August 28, 1997
- -----------------------------
American Technology Corporation
Richard M. Wagner, Secretary
/s/ Elwood G. Norris August 28, 1997
- -----------------------------
Elwood G. Norris, Employee
5
<PAGE> 1
Exhibit 10.17
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into effective as of the 1st day of September, 1997,
between AMERICAN TECHNOLOGY CORPORATION, a Delaware publicly traded corporation
(the "Company"), and Robert Putnam ("Employee").
Employee, in consideration of the covenants and agreements hereinafter
contained, agrees as follows with respect to the employment of the Company of
Employee and Employees future business activities.
1. Employment: Term of Employment. The Company hereby employs Employee and
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth. Subject to the provisions for termination as hereinafter
provided, Employee's term of employment by the Company shall be from the date of
this agreement until August 31, 2000, and said employment shall continue after
such date until either party shall deliver written notice to the other party
hereto to the effect that the employment hereunder shall terminate thirty (30)
days from the giving of such notice. This Agreement will supersede all prior
written and oral agreements entered into by and between Company and Employee.
2. Services to be Rendered by Employee. Employee shall be subject to the
direction of the Board of Directors, or a duly authorized committee thereof and
his duties shall be those generally vested in the office of Vice President and
Secretary/Treasurer for the corporation and he shall have such other powers and
duties as may be reasonably prescribed by the Board of Directors, or a duly
authorized committee thereof, and shall perform such duties as from time to time
may be decided upon by the Board of Directors, or a duly authorized committee
thereof, of the Company. Employee shall devote a sufficient amount of his
productive time, energy and ability during the term of this Agreement to the
proper and efficient conduct of the Company's business during the term of this
Agreement however the Employee shall be only required to devote part time and
attention to the Company's business expected to range from approximately 20-25
hours per week unless otherwise agreed by the parties.
Employee shall at all times faithfully, industriously, and to the best of his
ability, experience and talent, perform the duties that may be reasonably
required to the reasonable satisfaction of the Board of Directors.
As is the present case, Employee may from time to time work for other persons or
entities in any capacity, including but not limited to an officer, director,
employee or consultant, and conduct other business activities so long as such
work or activities do not adversely and directly impact on his duties and
obligations to the Company as has been reasonably performed in the past. The
Company acknowledges that Employee is an officer and director of Norris
Communications, Inc. and Patriot Scientific Corporation and has duties thereto.
3. Compensation.
(a) For the services to be rendered by Employee during his employment by the
Company, the Company shall pay Employee a Base Salary of three thousand five
hundred dollars ($3,500) per month during the term of this agreement, prorated
for any partial month and paid in conformity with the Company's normal payroll
period. Employee's salary shall be reviewed by the Board of Directors from time
to time in its discretion, and Employee will receive such salary increases, if
any, as the Board of Directors in its sole discretion determines.
(b) Employee shall be entitled to participate in any bonus pool or similar
program established by the Board of Directors.
(c) The Employee's place of employment shall be considered San Diego County,
California (or other mutually agreed upon location).
(d) Employee shall be entitled to participate in and receive benefits under the
Company's executive benefits plans as in effect from time to time, including
auto, medical insurance, sick leave, and vacation time, subject to and on a
basis consistent with the terms, conditions and overall administration of such
plans and Company policies.
(e) The Company shall pay or reimburse Employee for all expenses normal
reimbursed by the Company and reasonably incurred by him in furtherance of his
duties hereunder and authorized by the Company, including without limitation,
expenses for entertainment, traveling, meals, hotel accommodations and the like
upon submission by him of vouchers or an itemized list thereof as the Board of
Directors; may from time to time adopt and authorize, and as may be required in
order to permit such payments as proper deductions to the Company under the
Internal Revenue Code of 1986 and the rules and regulations adopted pursuant
thereto now or hereafter in effect.
1
<PAGE> 2
(f) All amounts payable or which become payable under any provision of this
Agreement will be subject to any deductions authorized in writing by you and any
deductions and withholdings required by law.
4. Indemnification.
(a) If, after the date of the commencement of the Employment Period, the
Employee is made a party or is threatened to be made a party to any action, suit
or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director or officer of
the Company or is or was serving at the request of the Company as a director,
officer, member, employee or agent of another corporation or partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether or not the basis of such Proceeding is an alleged act or
failure to act in an official capacity as a director, officer, member, employee
or agent, he shall be indemnified and held harmless by the Company to the
fullest extent authorized by Delaware law, as the same exists or may hereafter
be amended, against all expense, liability and loss (including, without
limitation, attorneys' fees, judgments, fines and amounts paid or to be paid in
settlement) reasonably incurred or suffered by the Employee in connection
therewith, including, without limitation, payment of expenses incurred in
defending a Proceeding prior to the final disposition of such Proceeding
(subject to receipt of an undertaking by the Employee to repay such amount if it
shall ultimately be determined that the Employee is not entitled to be
indemnified by the Company under Delaware law), and such indemnification shall
continue as to the Employee even if he has ceased to be a director, officer,
member, employee or agent of the Company or other enterprise and shall inure to
the benefit of his heirs, executors and administrators.
(b) The right of indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferred in this
Section 4 shall not be exclusive of any other right that the Employee may have
or hereafter may acquire under any statute, provision of the Certificate of
Incorporation or Bylaws of the Company, agreement, vote of shareholders or
disinterested directors or otherwise.
5. Termination of Employment.
(a) The Company shall have the right at its option to terminate the employment
of Employee hereunder by giving written notice thereof to the Employee in the
event of any of the following:
(1) If the Board of Directors of the Company, or a duly authorized
committee thereof, acting in good faith and upon reasonable grounds,
determines that the Employee should be terminated for Cause. For
purposes of this Agreement, "Cause" means, in each case as determined in
good faith by the Board, Employee's (i) personal dishonesty, willful
misconduct, or breach of fiduciary duty involving personal profit,
and/or (ii) conviction of any felony law, and/or (iii) a determination
or request by an appropriate regulatory authority that Employee be
removed or disqualified from acting as an officer of the Company, and/or
(iv) willful breach of a material provision of this Agreement after
written notice, in reasonable detail as the alleged breach, has been
given to you by the Board and you have had a reasonable opportunity to
cure such breach. Notwithstanding the foregoing, the Employee shall not
be deemed to have been terminated for Cause unless and until there shall
have been delivered to the Employee (i) a copy of a resolution, duly
adopted by the Board (excluding the Employee) at a meeting of the Board
called and held for the purpose (after reasonable notice to the Employee
of the meeting of the Board at which the motion is to be considered,
which notice shall specify in reasonably detailed terms the facts and
circumstances constituting Cause, and after the Employee, together with
his counsel, having been afforded at such meeting an opportunity to be
heard before the Board), finding that the Employee was guilty of conduct
constituting Cause; (ii) a certificate of the Secretary or an Assistant
Secretary of the Company stating that such resolution was in fact duly
adopted by the Board (excluding the Employee); and (iii) a Notice of
Termination in the form specified in the following sentence. A Notice of
Termination shall indicate the specific termination provision in this
Agreement relied upon and set forth in reasonable detail the facts and
circumstances of the Employee's employment under the provision so
indicated and the actual termination effective date.
(2) If the Company gives Employee thirty days advance written notice of
termination of employment.
(3) If the Employee dies during the term of employment, the Employee's
employment hereunder and Employee's compensation and other rights under
this Agreement and as an employee of the Company (except as to
compensation rights accrued prior thereto and except as expressly
provided in the next succeeding sentence) shall terminate thirty (30)
days following the date of death. In such event, the Company shall pay
to the Employee's designated executor or administrator of the Employee's
estate, all compensations and benefits accrued which would otherwise be
payable to the Employee through the thirtieth (30) day following the
date of death.
2
<PAGE> 3
(4) If the Employee is unable for any reason to carry out or to perform
the duties required of him hereunder and does not resume his duties
prior to the termination date specified in the Company's written notice
of termination; provided, however, if the Employee shall fail to carry
out or to perform the duties required of him because of mental or
physical disability for a six consecutive month period during the term
hereof and following such period he is unable to perform his duties
hereunder because of mental or physical disability, as determined by the
Board of Directors of the Company, or a duly authorized committee
thereof, acting in good faith and upon reasonable grounds,he shall be
entitled to receive his then Base Salary he would otherwise be entitled
to hereunder during the term of this Agreement pursuant to Paragraph 3
hereof for a period of not longer than twelve (12) months after the
termination of his employment pursuant to this Paragraph 5(a) (4).
(5) If this Agreement is terminated by the Company pursuant to Paragraph
5(a)(2) hereof, then Employee shall be entitled to severance payments
equal to twelve (12) months of his then monthly Base Salary and any
bonus on an as if perfected basis payable in one lump sum within thirty
(30) days after such effective termination of Employee's employment by
the Company irrespective of the remaining term of this agreement. Any
vested stock options shall also be exercisable in accordance with their
terms for the duration of the original option agreement term
irrespective of any contrary provisions in the option agreement.
(b) The Employee shall have the right at his sole option to terminate employment
hereunder under the following conditions:
(1) at any time upon thirty (30) days written notice.
(2) upon written notice by Employee to the Company within thirty (30)
days of and indicating that a change in control of the Company
("Corporate Transaction") has occurred and therefore Employee elects to
terminate as provided herein. A Corporate Transaction of the Company
shall mean a change in control of a nature that would be required to be
reported in response to Item 5(f) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); provided that, without limitation, such a change in
control or other qualifying event shall be deemed to have occurred if
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined
voting power of the Company's then outstanding securities; or (ii) the
Company sells, transfers or otherwise disposes of all or substantially
all of the assets of the Company; or (iii) a merger or acquisition in
which the Company is not the surviving entity (except for a merger into
a wholly-owned subsidiary, and except for a transaction the sole purpose
of which is to change domicile.
(3) if termination by the Employee is pursuant to 5 (b) (1) then no
severance or termination payments shall be payable. If termination is
noticed pursuant to 5 (b) (2) hereof then Employee shall be entitled to
a payment equal to the remaining months of this Agreement multiplied by
the Base Salary and any bonus on an as if perfected basis payable in one
lump sum within sixty (60) days. In addition, the Employee shall be
entitled to recover legal fees and costs incurred by Employee should the
Company not make timely payment prescribed by this section and should
the Employee prevail in any action filed thereabout.
6. Soliciting Customers. The Employee agrees that he will not for a period of
one (1) year immediately following the termination of his employment with the
Company, either directly or indirectly make known to any competing person, firm,
or corporation the names or addresses of any of the customers of the Company or
any other information pertaining to them that is not in the public domain.
7. Trade Secrets of the Company. The Employee prior to and during the term of
employment under this Agreement has had and will have access to and become
acquainted with various trade secrets, consisting of devices, secret inventions,
processes, and compilations of information, records, and specifications which
are owned by the Company, and which are regularly used or to be used in the
operation of the business of the Company. The Employee shall not disclose any of
the aforesaid trade secrets, directly or indirectly, or use them in any way,
either during the term of this agreement or for a period of 36 months
thereafter, except as required in the course of his employment. All files,
records, documents, drawings, specifications, equipment, and similar items
relating to the business of the Company, whether prepared by the Employee or
otherwise coming into his possession, shall remain the exclusive property of the
Company and shall not be removed under any circumstances from the premises of
the Company where the work is being carried on without prior written consent of
the Company or consistent with the Company's normal business practices.
3
<PAGE> 4
8. Inventions and Patents.
(a) The Employee agrees that as to any inventions made by him during the term
of his employment, solely or jointly with others, which are made with the
equipment, supplies, facilities or trade secret information of the Company, or
which relate at the time of the conception or reduction to purchase of the
invention to the business of the Company or the Company's actual or demonstrably
anticipated research and development, or which result from any work performed by
the Employee for the Company, shall belong to the Company and the Employee
promises to assign such inventions to the Company. The Employee also agrees that
the Company shall have the right to keep such inventions as trade secrets, if
the Company chooses. The Employee agrees to assign to the Company the
Executive's rights in any other inventions where the Company is required to
grant those rights to the United States government or any agency thereof. In
order to permit the Company to claim rights to which it may be entitled, the
Employee agrees to disclose to the Company in confidence all inventions which
the Employee makes arising out of the Employee's employment and all patent
application filed by the Employee within one year after the termination of his
employment.
(b) The Employee shall assist the Company in obtaining patents on all
inventions, designs, improvements, and discoveries patentable by the Company in
the United States and in all foreign countries, and shall execute all documents
and do all things necessary to obtain letters patent, to vest the Company with
full and extensive title thereto, and to protect the same against infringement
by others.
9. Severability. Each paragraph and subparagraph of this Agreement shall be
construed and considered separate and severable from the validity and
enforceability of any other provision contained in this Agreement.
10. Assignment. The rights of the Company (but not its obligations) under this
Agreement may, without the consent of the Employee, be assigned by the Company
to any parent, subsidiary, or successor of the Company; provided that such
parent, subsidiary or successor acknowledges in writing that it is also bound by
the terms and obligations of this Agreement. Except as provided in the preceding
sentence, the Company may not assign all or any of its rights, duties or
obligations hereunder without prior written consent of Employee. The Employee
may not assign all or any of his rights, duties or obligations hereunder without
the prior written consent of the Company.
11. Notices. All notices, requests, demands and other communications shall be in
writing and shall be defined to have been duly given if delivered or if mailed
by registered mail, postage prepaid: (a) If to Employee, addressed to him at the
following address as may be changed in writing from time to time:
Robert Putnam
14238 Bounty Way
Poway, California 92064
(b) If to the Company, addressed to:
American Technology Corporation
13114 Evening Creek Dr. South
San Diego, California 92128
or to such other address as any party hereto may request by notice given as
aforesaid to the other parties hereto.
12. Title and Headings. Titles and headings to paragraphs hereof are for
purposes of references only and shall in no way limit, define or otherwise
affect the provisions hereof.
13. Governing Law. This Agreement is being executed and delivered and is
intended to be performed in the State of California, and shall be governed by
and construed in accordance with the laws of the State of California.
14. Counterparts. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. It shall not be necessary
in making proof of this Agreement to produce or account for more than one
original counterpart.
15. Cumulative Rights. Each and all of the various rights, powers and remedies
of the Company and Employee in this Agreement shall be considered as cumulative,
with and in addition to any other rights, powers or remedies of the Company or
the Employee and no one of them as exclusive of the others or as exclusive of
any other rights, powers and remedies allowed by law. The exercise or partial
exercise of any right, power or remedy shall neither constitute the election
thereof nor the waiver of any other right, power or remedy. Sections 4, 6, 7 and
8 hereof shall continue in full force and effect notwithstanding the Employee's
termination of employment and the termination of this Agreement.
4
<PAGE> 5
16. Remedies. The Employee and the Company both acknowledge that each may have
no adequate remedy at law if either violates any of the terms contained in
Sections 6, 7 and 8. In such event, either party shall have the right, in
addition to any other rights it may have, to obtain relief to restrain any
breach hereof or otherwise to specifically enforce any of the provisions hereof.
17. Waiver of Breach. The waiver by one party to this Agreement of a breach of
any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the said party .
18. Entire Agreement. This Agreement contains the entire agreement of the
parties hereto and may be modified or amended only by a written instrument
executed by parties hereto. Effective on the date hereof, any prior employment
agreements between the Company and the Employee shall terminate.
19. Attorney's Fees. In the event that either party must institute legal action
to compel the other to comply with the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees and costs.
20. Good Faith. Each of the parties hereto agrees that he or it shall act in
good faith in all actions taken under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
/s/ Richard M. Wagner August 28, 1997
- -----------------------------
American Technology Corporation
Richard M. Wagner, Secretary
/s/ Robert Putnam August 28, 1997
- -----------------------------
Robert Putnam, Employee
<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, File No. 333-09269 and File No.
333-23845 and Forms S-3 (File No. 333-27455 and File No. 333-36003) of our
report dated November 5, 1997, 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, 1997.
/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP
Denver, Colorado
December 1, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) AUDITED
STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL
YEAR ENDED SEPTEMBER 30, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 3,338,458
<SECURITIES> 29,289
<RECEIVABLES> 315,016
<ALLOWANCES> 7,800
<INVENTORY> 189,815
<CURRENT-ASSETS> 3,892,112
<PP&E> 461,135
<DEPRECIATION> 264,713
<TOTAL-ASSETS> 4,251,878
<CURRENT-LIABILITIES> 172,305
<BONDS> 0
0
3,321,153
<COMMON> 98
<OTHER-SE> 371,671
<TOTAL-LIABILITY-AND-EQUITY> 4,251,878
<SALES> 967,408
<TOTAL-REVENUES> 967,408
<CGS> 809,437
<TOTAL-COSTS> 809,437
<OTHER-EXPENSES> 2,182,856
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146,331
<INCOME-PRETAX> (2,144,363)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,144,363)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,144,363)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
