<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
Commission File Number 0-24248
-------
AMERICAN TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 87-0361799
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
13114 Evening Creek Drive South, San Diego, California 92128
------------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(858) 679-2114
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.00001 par value
-------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding in 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 27, 1999, the aggregate market value of the voting stock of the
Registrant held by non-affiliates of the Registrant was approximately $68.7
million.
The number of shares of Common Stock, $.00001 par value, outstanding on December
27, 1999, was 11,549,489.
DOCUMENTS INCORPORATED BY REFERENCE
1
<PAGE>
Information required by Part III is incorporated by reference to portions of the
Registrant's Proxy Statement for the Year 2000 Annual Meeting of Shareholders,
which will be filed with the Securities and Exchange Commission within 120 days
after the close of the 1999 fiscal year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I
ITEM 1. Business 3
ITEM 2. Properties 13
ITEM 3. Legal Proceedings 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
ITEM 6. Selected Financial Data 14
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 21
ITEM 8. Financial Statements and Supplementary Data 21
ITEM 9. Changes in and Disagreement with Accountants on
Accounting and Financial Disclosure 21
PART III
ITEM 10. Directors and Executive Officers of the Registrant 21
ITEM 11. Executive Compensation 22
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 22
ITEM 13. Certain Relationships and Related Transactions 22
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
</TABLE>
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K 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," "PLANS," "STRATEGY," 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.
2
<PAGE>
PART I
Item 1. Business
American Technology Corporation develops, markets and licenses proprietary sound
reproduction and other technologies. Our primary business focus is on two
proprietary sound reproduction technologies:
. SFT(TM), Stratified Field(TM) Technology
. HSS(TM), HyperSonic(TM) Technology
We also market a line of portable consumer products under our own label and are
developing other new technologies. We operated in one business segment,
electronic products.
Stratified Field is an advanced speaker technology that shares certain
characteristics of electrostatic speakers. Electrostatic speakers employ a thin
plastic film to radiate sound and are known for very high sound quality and low
distortion. Our Stratified Field technology is a non-magnetic thin panel speaker
design that we believe has performance advantages over traditional speakers and
other thin panel speakers.
Our Hypersonic Sound technology is a new method of sound reproduction. Sound is
generated in an air column using ultrasonic frequencies, those above the normal
range of hearing. Our proprietary electronic process generates an ultrasonic
beam to interact in mid-air producing wide spectrum audio along the beam. The
sound beam has a very high degree of directionality and maintains sound volume
over longer distances than traditional methods of sound reproduction. We believe
HyperSonic Sound has unique features useful in new sound applications as well as
in certain traditional speaker applications.
Our objective is to be a leader in developing, marketing and licensing
innovative sound reproduction technologies that address large and expanding
domestic and international consumer and commercial electronics markets. We seek
to have our sound technologies become important alternatives to conventional
loudspeakers in target market segments. We believe it is becoming increasingly
difficult for manufacturers to differentiate their sound reproduction products
to offer consumers new choices. We also believe the rapid emergence of flat
panel computer and television monitors and the growing computer multimedia
market provide new and growing opportunities for our products.
We own other technologies in various stages of development:
. Our Magnified Force Woofer ("MFW") offers improved woofer performance.
. Our Global Positioning System ("GPS") technology provides a method to
improve searching and tracking features for objects or persons.
. Our Engine Plasma Displacement ("EPD") technology provides a method for
jet engine noise reduction.
We also label, under the American Technology brand, portable consumer products,
primarily sourced from foreign manufacturers. We currently market and distribute
approximately ten portable consumer products with retail prices ranging from
$3.50 to $51.99. All but two products are consumer electronic products. The
marketing of portable consumer products provided substantially all revenues
during fiscal 1999, 1998 and 1997. However the majority of marketing and
development costs during fiscal 1999 were incurred towards our sound
technologies.
American Technology was incorporated in the State of Utah on February 11, 1980
as Chasko, Inc. and on April 7, 1982 our name was changed to American Technology
Corporation. From inception to 1988, we were engaged in electronic product
development. From 1988 to early 1992, we were inactive due to inadequate
financial resources. In early 1992 our company was brought into good standing
and restructured. There were no changes to management resulting from this re-
activation. On June 19, 1992 we reincorporated in the State of Delaware.
Since the 1992 restructuring, our operations have focused on developing various
technology assets. Our shares trade on NASDAQ under the symbol "ATCO." Our
address is 13114 Evening Creek Drive South, San Diego, California, and our
telephone number is 858-679-2114. Our Internet site is located at www.atcsd.com.
Sound Reproduction Industry Overview
The human ear is sensitive to the rate at which sound vibrations occur or
frequencies from about 20 Hertz (Hz) to 20,000 Hz (a Hertz is equal to one
vibration per second). A wide variety of loudspeakers are produced today to
recreate
3
<PAGE>
the range of hearing. These range from tweeters that attempt to re-create the
top end of the audio spectrum, to mid-range speakers and woofers to address the
lower frequencies. Conventional loudspeakers generally are direct radiating
- --they are fundamentally a piston-like device designed to directly pump air
molecules into motion to create audible sound waves. Better sound quality and
low frequency (bass) reproduction is generally associated with larger and more
expensive speakers.
Since 1925, when C.W. Rice and E.W. Kellogg described basic, direct radiating
speaker parameters, there have been, until recently, few fundamental changes in
speaker design or in the way electrical impulses are converted to sound.
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, we believe
loudspeakers are still relatively inefficient in converting electrical energy
into acoustic energy and their design contributes to various forms of sound
distortion.
Loudspeakers are used in televisions, radios, telephones, computers,
automobiles, and a wide range of other consumer and industrial applications.
From miniature speakers in hearing aids to large home theater, public address
and concert sound systems, loudspeakers encompass a wide range in size, quality
and cost. The manufacture and sale of loudspeakers is highly competitive and
includes both large international consumer electronic companies and specialty
branded loudspeaker manufacturers. We believe the lack of fundamental innovation
and the diversity and size of the loudspeaker market presents an opportunity to
introduce new sound technology that will appeal to consumers and be cost-
effective for manufacturers.
The rapid emergence of flat panel computer and television monitors and the
growing multimedia computer market provides opportunities for thin flat panel
speaker designs. In its infancy, the market for computer flat panel monitors is
expected to grow from $1 billion in 1998 factory sales to $19 billion in 2002
according to Stanford Resources, Inc. Recently several companies have introduced
flat panel speaker designs (see "Competition") to benefit from this trend and
for other applications such as wall-mounted picture speakers. We believe the
introduction of these new products has increased market awareness for new
speaker designs and the benefits of thin panel speakers.
Our Sound Solutions
Our primary development and marketing focus is on our Stratified Field and
HyperSonic Sound technologies.
Stratified Field Technology
- ---------------------------
Stratified Field Technology, or SFT, is a thin, non-magnetic loudspeaker design
providing high quality performance for a variety of applications. The term
Stratified Field relates to the multiple layers of materials employed in the
design. We have developed a number of distinct Stratified Field designs
employing plastic film as the direct radiating element. During fiscal 1999 we
focused on bringing our best performing design to market by developing
manufacturing techniques to allow technology transfer. We believe this design
offers advantages over existing electrostatic, planar magnetic and magnetic
actuated panel designs generally associated with flat speakers (see
"Technologies" below).
Our patent-pending Stratified Field speaker competes with other flat panel and
conventional speakers. We believe we have a competitive cost of construction, as
compared to our quality of sound reproduction. Our speaker can be manufactured
flat or can be shaped in curves. Our other Stratified Field designs can be
shaped in cylinders and spheres. This flexibility provides unique product design
opportunities for consumer product manufacturers. Our design eliminates the
costs and the constraints of the normal "box" associated with loudspeakers. The
following attributes of our speakers compare well on a competitive basis to
conventional and other flat panel loudspeaker designs:
Performance Attributes
----------------------
. Consistent radiation movement over the entire surface resulting in low
distortion, smooth frequency response and low coloration of sound
. Smooth, flat frequency response across the effective sound range
. Low bass response compared to comparable size flat panels
. Accurate imaging and high sound quality
. Low mechanical vibration
. Loss-less load (no heat is produced regardless of sound pressure level)
4
<PAGE>
. No constraint on the ratio of height to width. Ability to curve and
shape the speakers to produce new product designs.
Physical Attributes
-------------------
. Thin physical format - as thin as 5 mm over the entire surface with no
protruding actuator drive mechanism
. Non-magnetic design employs no magnetic fields
. Low moving mass producing minimal vibration
. No requirement for a speaker box or enclosure
. Radiating surface can be curved, shaped or cylindrical
. Low overall weight
Manufacturing Benefits
----------------------
. Simple manufacturing process with robust design for manufacturability
. High fidelity to cost ratio
. Variable dimensions to meet custom application requirements
. Multiple product mounting options
. Low component and manufacturing costs
The above properties offer advantages for products such as flat panel video
displays, laptop computers, home audio and theater systems, installed sound
reinforcement, professional monitors, high-fidelity speakers, automotive systems
and other applications requiring physically flat or thin (in the case of curved)
panels but with high-quality audio performance.
HyperSonic Sound Technology
- ---------------------------
Our HyperSonic Sound technology utilizes a new method of sound reproduction --
sound is generated in the air using ultrasonic frequencies, those above the
normal range of hearing. A patent-pending electronic process creates and
modulates (shapes) 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, we believe HyperSonic Sound offers quality sound
while using little space. The sound produced by this technology is significantly
more directional over greater distances with less volume loss than traditional
sound reproduction methods thereby offering a number of application advantages
to users.
Our HyperSonic Sound technology, comprised of the combination of proprietary
electronics and proprietary custom ultrasonic emitters (specialized ultrasonic
devices essentially taking the place of the radiating element of a loudspeaker)
offers a number of advantages:
. The ability to create a beam of sound to place sound where you want it
. Elimination of the need for a speaker enclosure
. Reduction of the effect of room acoustics on sound quality
. Improved phase coherency (frequency time alignment)
. Ability to manipulate or selectively position or diffuse the source of
sound
. Ability to deliver a beam of sound over long distances
. Elimination of magnets, their weight and adverse effects
. Elimination of feedback in professional applications
We believe our sound technologies offer important competitive advantages for
original equipment manufacturers ("OEMs") and new features important to
consumers. However, there can be no assurance our sound technology advantages
can be successfully implemented commercially or will achieve market acceptance.
Our Strategy
The marketing of our sound technologies continues to evolve as a result of
market awareness, technical developments, changes in patent and protection
strategies and reactions from prospective users of our technologies. We are
focusing our efforts on OEMs desiring to implement our technology in specific
products or applications. Our strategy is to establish business relationships
with leading participants in selected segments of the electronics and sound
reproduction markets. We believe this strategy will enable us to take advantage
of the superior financial resources, technological
5
<PAGE>
capabilities, proprietary positions, branding, distribution and market presence
of OEMs in establishing and maintaining our technologies.
We also are implementing a branding strategy aimed to make Stratified Field and
HyperSonic Sound (SFT and HSS) synonymous with innovative, high-quality sound
reproduction. We believe we can facilitate the rapid adoption of our
technologies through licensing and technology collaboration arrangements with
contract and OEM manufacturers. Key elements of our strategy include:
1. Build on technical achievements allowing licensees to produce
commercially viable products for consumers. We are converting our
prototypes into designs and materials that licensees can use to meet
consumer demand across a variety of targeted market segments. We expect
to continue to improve our designs to benefit licensees.
2. Expand patent coverage. We have filed multiple patent applications
worldwide and expect to continue to file amendments, continuations and
additional patents as development progresses. The scope and breadth of
our patents will be an important factor in the exploitation of our
technologies.
3. Implement a segmented and flexible licensing approach. We have
identified a segmented licensing approach targeted at individual fields
of use. This approach includes developing one or more manufacturing
partners to supply product to those OEMs not wishing to produce the
core elements of our technologies. Contract manufacturers will be
offered licenses to produce speakers for our OEMs. We may also sell key
components or materials to make implementation simpler.
4. Identify and determine market segment needs. We have identified and are
focusing our Stratified Field marketing and licensing efforts on four
initial fields of use (a) computer multimedia (b) high-end televisions,
(c) consumer home audio, and (d) professional audio. We are working
with OEMs in each of these fields of use to identify market
requirements for the technology. We believe our technology can become
an important competitive feature for OEMs and can also help OEMs
achieve premium price or premium margins for their products. We have
initially focused HyperSonic Sound marketing efforts towards military
and governmental applications to further develop and fund the
technology. With recent success in designing new emitters, we believe
our HyperSonic Sound technology may also have applications in the four
segments above as well as in communications and other markets.
5. Support licensees and develop a market position. We intend to support
our licensees and manufacturers with technical support and on ongoing
research and development effort. We intend to require branding of our
devices to create and build consumer awareness.
Our strategy is to develop strategic arrangements with manufacturers in targeted
fields of use with limited exclusivity to accelerate implementation and market
introduction and to allow selected manufacturers to differentiate product
offerings from competitors. Although we anticipate generating a significant
portion of our revenues from licensing and royalties or arrangements with
contract manufacturers, we may also directly produce and sell materials or
components used in the production of our speakers. There can be no assurance
that we can be successful in implementing our strategies or commercializing our
technologies.
Our Technologies
Background
- ----------
We acquired the basic concepts of HyperSonic Sound technology from Elwood G.
Norris, a director and Chief Technology Officer, in 1992. During fiscal 1996 and
1997, we devoted a significant portion of our research and development
activities to HyperSonic sound technology proving new concepts. In July 1996, we
produced a laboratory proof-of-concept demonstration capable of producing sound
in the air using ultrasonics. In October 1996, we produced a second-generation
portable demonstration system with improved electronics. In September 1997, we
produced a portable stereo demonstration system. During fiscal 1998 we focused
research and development on our Stratified Field technology. During fiscal 1999
we innovated new modulation electronics to reduce distortion and focused
development and testing of our own ultrasonic emitter design that we believe can
be commercialized. We also significantly expanded our portfolio of patent
applications. In November 1999 we announced an initial patent on our new
HyperSonic Sound emitter.
6
<PAGE>
In late 1997 we invented basic Stratified Field concepts and demonstrated the
technology in January 1999. During fiscal 1999 we evolved several designs and
significantly expanded our patent portfolio. Recently we have completed sample
speakers and finalized the manufacturing processes. Stratified Field offers high
quality sound quality compared to its cost and size. We believe Stratified Field
has advantages for OEMs for consumer applications and have commenced marketing
the technology to prospective customers.
Stratified Field Technology
- ---------------------------
Several designs of direct radiating speakers are currently associated with
thinner or flat products. These include electrostatic speakers, planar magnetic
speakers and magnetic actuated panel speakers. An electrostatic loudspeaker
generally employs a diaphragm (generally a thin plastic film) which is tensioned
between two conductive planes. A charge is applied to the diaphragm and charges
are alternated between the two conductive planes to move the diaphragm thus
moving air to create audible tones. Based on the size of the device and the
speed of the movement of the diaphragm, various sound pressure levels and
frequencies are produced. Generally electrostatic speakers are:
. low in distortion, high in sound quality
. quite large in order to produce low frequencies
. difficult to manufacture due to high tolerances, resulting in high cost
A planar magnetic loudspeaker combines some aspects of traditional direct
radiating speakers and electrostatic designs. In the traditional planar design,
conducting wires are imbedded in the large plastic film or sheet, and magnets
are employed to create a magnetic field around the sheet to radiate sound
similar to an electrostatic speaker. Planar speakers are also generally
expensive and difficult to produce. A new flat panel design employs a magnetic
actuator or exciter to excite a rigid panel to radiate sound. This method has
recently been introduced in multi-media and home audio systems.
Stratified Field is both a departure from and a significant improvement on
electrostatic designs. While employing plastic film as the primary radiating
sound element, our designs are distinct from traditional electrostatic, planar
magnetic or magnetic actuator speaker designs. New materials and methods are
employed to overcome some of the limitations of electrostatic, planar magnetic
and magnetic actuator speaker designs. We expect Stratified Field to compete
with conventional loudspeakers due to high sound quality, competitive economics
and ease of manufacture in a variety of thin sizes and shapes. We have filed
multiple patent applications on our Stratified Field technology.
We have produced prototypes of our designs in various sizes to demonstrate
commercial applications. We are finalizing specifications, manufacturing methods
and technology transfer documentation. We believe Stratified Field is
commercially viable technology and we are marketing this technology to
prospective OEM licensees.
HyperSonic Sound Technology
- ---------------------------
HyperSonic Sound is partially based on a phenomenon in music known as Tartini
tones, which were first noted by Giuseppe Tartini, an 18th century composer.
When two sound tones are positioned relatively close together and are sufficient
in volume, then two new tones appear, one is the sum of the original tones and
one is the difference. In 1856, H. von Helmholtz, a German physiologist and
physicist, published the results of his combination tone experiments proving the
effect resulted from the non-linearity of air. Although others have experimented
with these principles in the past (the general field of experimentation being
described as parametric speakers), we believe we have created novel and
proprietary methods to efficiently use these concepts to produce sufficient
sound volume and quality capable of being commercially exploited. Our HyperSonic
Sound technology and processes are the subject of three issued patents and
multiple pending patents.
HyperSonic Sound employs a method where ultrasonic frequencies are created
electronically using proprietary techniques to carry intelligence (e.g. music,
voice), and these ultrasonic frequencies are then emitted into the air using an
ultrasonic emitter. Since the audible sound is created in the air, sound does
not appear on the surface of the ultrasonic emitter (a significant departure
from a loudspeaker) but is actually created within and throughout the beam of
ultrasonic energy being emitted. Accordingly, if the beam is directed towards a
wall, the sound emanates from the surface of the wall, and if the beam is
directed to a person, the sound emanates at the person. This directionality
allows sound to be manipulated in space or diffused from a surface in a wide
variety of ways to produce desired effects. The
7
<PAGE>
sound also does not dissipate at the same rate over distance as it does with
traditional speakers. This unique feature provides greater volume at selected
distant points with less energy.
Our technology uses ultrasonic emitters (transducers which convert electrical
energy to high frequency acoustical energy). Such ultrasonic devices are not
designed to produce frequencies in the audible range. However, we have 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. And we have developed new proprietary
emitter designs specific to our application.
We have recently innovated a new ultrasonic emitter design that can be
configured in a variety of shapes and sizes that produces the desired effects
for commercial applications. We have also innovated new electronic circuits
minimizing distortion and improving efficiency. We believe these recent
innovations provide the foundation for commercialization of HyperSonic Sound.
Other Sound Technologies
- ------------------------
During fiscal 1999 we improved a new woofer design previously invented by our
Vice President of Engineering, James Croft. During the year we developed initial
prototypes and filed for patent protection on our Magnified Force Woofer ("MFW")
technology. This technology uses a proprietary electro-acoustical system to
magnify the force of the woofer transducer to provide greater acoustical output
for a given power input and a given size. We believe that if this technology can
be commercialized it offers improved performance/cost for many types of woofer
applications including miniature multimedia, high output car stereo, home
theater and professional sound systems. We are currently developing and testing
new prototypes of our design. There is no assurance we can produce commercial
technology.
In June 1998 we acquired certain rights to a patented method of producing
powerful ultrasonic frequencies which we are targeting primarily for government
and military applications.
Portable GPS Technology
- -----------------------
In late 1994, we innovated a proprietary method of tracking persons and objects
utilizing Global Positioning System (GPS) technology. We developed a GPS design
as a simple solution to (1) finding another person or object or (2) finding a
known location. The system employs GPS technology but doesn't require
complicated longitude/latitude readouts, mapping software or recording and
storing of previous locations and movements as used in most portable GPS
devices. We produced a proof-of-concept demonstration system utilizing GPS
technology. We own two U.S. patents on our GPS designs. There can be no
assurance the patents will provide meaningful protection of our GPS technology
or that such patents will be commercially exploitable.
We have postponed further development on our GPS technology due to the
significant competition and rapidly changing nature of the GPS equipment market.
We believe that certain features of our GPS technology may be licensable to the
GPS industry; however, no resources are being devoted to developing or marketing
this technology.
EPD Technology
- --------------
We have been awarded one U.S. patent regarding our Engine Plasma Displacement
(EPD) technology, a new method and system for reducing noise in jet engines.
This technology, invented by Mr. Norris, relates to canceling acoustic waves
produced by a jet engine. Mr. Norris has previously performed rudimentary
experiments on this technology; however, we have not yet developed a proof-of-
concept device. There can be no assurance that our concepts will function as
theorized or that any practical product or technology will result from the
concepts. In addition, we have performed only limited competitive research and
there can be no assurance that the concepts innovated by us are functionally
better than existing and proposed methods for jet engine noise reduction.
Our strategy is to develop a proof-of-concept demonstration and seek a
collaborative arrangement to further develop this technology. Management has not
developed a timetable for this project, nor has it identified personnel for
further development. Although management believes there is a significant market
for an improved system for jet engine noise reduction, there can be no assurance
when or if the EPD technology can be exploited.
Markets and Licensing
Stratified Field Markets
- ------------------------
We have targeted four initial fields of use, which include consumer home audio,
computer multimedia, high-end televisions, and professional audio systems.
8
<PAGE>
We believe the market for computer sound, primarily multimedia applications, is
growing rapidly. We also believe there is a growing demand for improved sound
in notebook and other small computers and a growing aftermarket for computer
speakers. While estimates of this growth differ widely among sources, this
market segment offers opportunity to our Stratified Field technology.
Flat panel computer monitors are expected to be an increasingly important
category growing from less than 1 million units and $1 billion in worldwide
factory sales projected for 1998 to over $19 billion in 2002 according to
Stanford Resources, Inc. We believe limitations in size, sound quality and cost
are critical factors in the computer sound market. We are targeting our non-
magnetic, flat and thin designs to offer size, cost and quality advantages to
OEMs and consumers in this rapidly growing market. We believe Stratified Field
has important attributes for the emerging flat panel monitor market to provide
high quality sound in a thin format.
High-end televisions and home theater systems are growing segments of the
consumer electronics market. Home theater audio systems include component and
rack audio systems for the home as well as specifically targeted home theater
systems. We intend to focus initially on manufacturers in the mid to high-end
range of these segments. Home theater and large screen televisions are expected
to experience continued growth from the introduction of the high-capacity DVD
(digital versatile disc). According to CEMA, U.S. factory sales of televisions
25" and higher were $4.3 billion in 1997. Home theater speakers and speaker
packages had U.S. factory sales of $246 million in the first half of 1998
according to CEMA.
We believe the market for professional audio systems are also growing.
Professional audio systems include systems used by studios and other
professionals in the creation or production of audio and video material. The
market for professional equipment includes stage speakers, sound modules,
synthesizers, digital pianos and signal processing equipment among others.
Cinemas, jukebox systems and karaoke systems are also demanding increasingly
high quality sound reproduction.
Our Stratified Field technology offers the home audio/video and professional
markets improved full-spectrum sound source with less distortion. If our
Magnified Force Woofer technology can be commercialized it would be targeted for
similar customers.
HyperSonic Sound Markets
- ------------------------
We have focused HyperSonic Sound marketing efforts primarily towards military
and governmental customers. With the recent development of new emitters, we
believe our technology may have applications in consumer and commercial markets
including military applications, professional audio, public address, headphones,
cinema/theater, and outdoor sound systems.
Licensing and Contracts
- -----------------------
We seek to execute our licensing strategy through our marketing and executive
personnel and through a business development and representation agreement with
Teksel Co., Ltd. in Japan.
In June 1998, we executed our first license agreement on Stratified Field
technology with Authentic of Japan. We received an initial $50,000 non-
refundable payment. This agreement is exclusive in a narrow market segment and
for a limited customer set. Because the implementation schedule, specified in
the license agreement, has been subject to significant delays, we are working
with Authentic to modify the agreement to reflect changes in scope, royalties
and other terms. There can be no assurance this relationships will produce any
future revenues.
In August 1998, we obtained an initial military contract for $20,000 from the
U.S. Army Space and Missile Command to evaluate an application of the HSS
technology. The project was completed in January 1999. In May 1999, the Company
obtained a contract from the University of Mississippi ("NCPA") for $46,322 to
provide NCPA with three to six HSS(TM) sound sources for testing. As of
September 30, 1999 the project has generated approximately $15,500 in service
revenues. The project was completed on November 29, 1999. In September 1999, we
obtained a $44,773 contract from General Dynamics to develop a HyperSonic Sound
Engineering Model. The project is expected to be completed in January 2000. We
are seeking additional governmental and military contracts related to this
technology.
In addition to seeking OEMs to sell Stratified Field speakers, we are seeking to
develop supply agreements with contract manufacturers capable of supplying our
speakers to OEM customer specifications and produce HyperSonic
9
<PAGE>
Sound electronics and emitters. Existing product designs may be retrofitted for
Stratified Field speakers. Stratified Field offers benefits in new OEM product
designs.
Many OEMs source speaker products from outside vendors rather than manufacture
such components. Accordingly, our strategy is to develop a supply arrangement
for these OEM customers that do not wish to manufacture. We believe there are a
large number of contract manufacturers with facilities and capabilities to
manufacture Stratified Field speakers and assemble HyperSonic Sound electronics
and emitters. We have obtained oral indications of interest from two prospective
manufacturers but have no agreements related to such manufacture.
Our HyperSonic Sound technology has not previously been commercialized due to
delays in developing acceptable emitters. We previously entered into a number of
non-binding working agreements with prospects to explore the technology. These
agreements became inactive due to our delays in commercializing the technology.
Although we believe we have innovated a commercially viable emitter design,
there can be no assurance that commercially viable HyperSonic Sound systems can
be completed due to the inherent risks of new technology development,
refinement, limitations on financing, competition, obsolescence, loss of key
technical personnel, customer acceptance and other factors beyond our control.
Consumer Product Sales
To date substantially all of our revenues have been derived from portable
consumer products. We currently offer a total of ten sourced portable consumer
products (including miniature FM, AM and solar radios) targeted for niche
markets at retail prices ranging from $3.50 to $51.99. Sourcing is from three
manufacturers on both an exclusive and nonexclusive basis and for different
market territories on a product by product basis. Our market focus is in North
America.
We inventory finished goods and also offer direct factory shipment to certain
customers.
One of our products is a patented mini-headphone radio design (HeadPhone)
introduced in January 1999. Our HeadPhone is smaller than similar headphone
radio products currently on the market and offers additional features. The
retail price range is $39.99 and up. A foreign contract manufacturer
manufactures this product for us.
Our management continually seeks additional products and accessories developed
by others for distribution. There can be no assurance we can obtain rights to
manufacture and/or distribute any future products.
Selling and Marketing
One sales and marketing officer and senior executive personnel direct our sound
technology marketing. We have employed one agent, Teksel Co., Ltd. in Japan. Our
marketing activities are directed at promoting our technologies through industry
press, at industry trade shows and related marketing activities. Our sound
technology sales activities are targeted at specific prospective OEMs.
Our marketing activities have resulted in a number of awards and press articles.
In May 1997, the inventor of the HSS technology, Mr. Norris, was awarded the
1997 Discover Magazine Award for Technical Innovation in the sound category for
our HyperSonic sound 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 an expert panel of judges
selected the winners. Winners were also featured in the July issue of Discovery
magazine. In November 1997, HSS technology won a Popular Science 1997 "Best of
What's New Award" from among thousands of new products. These awards and
recognition have provided marketing exposure for the HSS technology. HSS
technology has also been featured in over 30 journal articles providing
additional marketing exposure.
We have two full-time marketing personnel assigned to consumer electronic
product marketing and sales activities. We had 39 independent representative
agencies in the U.S. and Canada at November 30, 1999.
We focus most of our consumer electronic product marketing on traditional retail
outlets and catalog distributors. We employ cooperative marketing and
advertising arrangements with our product customers from time to time.
Customers
For the fiscal year ended September 30, 1999, sales to two customers accounted
for 33% of product sales with Oshman's Sporting Goods and Big 5accounting for
approximately 20% and 13% of sales, respectively, with no other single customer
accounting for more than 10% of product sales.
10
<PAGE>
We expect that we 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 our financial condition, results of operations and cash flows.
Competition
Our technologies and products compete with those of other companies. Many of our
present and potential future competitors have, or may have, substantially
greater resources to devote to further technological and new product
developments. We believe we will compete primarily on the originality of our
concepts, the uniqueness and quality of our technology and designs, the ease and
cost of manufacturing and implementing our technologies, the ability to meet
OEMs' needs to differentiate their products, the strength of our intellectual
property and the strength of future licensee and contract supply arrangements.
There can be no assurance that based on these factors we can be competitive with
existing or future products, technologies or services of our competitors.
We are not aware of any other sound reproduction system that has successfully
employed HyperSonic Sound technology concepts similar and to the degree
developed by us. Although others have attempted to use the combination tone
concept to produce sound, to our knowledge, none have progressed to our stage of
development nor been able to produce sufficient sound volume and quality to make
a commercially viable system. We also believe our Stratified Field designs are
novel with distinct market appealing attributes compared to existing and
competing flat panel speaker designs.
One of the distinguishing features of our Stratified Field designs is their
thin, flat panel form factor. Our designs may also be easily and economically
shaped to create curves or other shapes. Other companies that are focusing
marketing efforts in the flat panel market segment include, but are not limited
to (i) high-end electrostatic flat panel manufacturers such as Martin Logan and
others, (ii) NXT Plc and their licensees employing the NXT flat panel technology
which uses a magnetic actuator to produce vibrations over a rigid panel, (iii)
NCT Group, Inc. and their Gekko line of flat panel speakers using a comparable
actuated panel, and (iv) Sonigistix's Monsoon multimedia speaker using a planar
magnetic design. There are continuing attempts by a large number of competitors
to innovate new methods of sound reproduction to overcome limitations of
traditional loudspeakers. There can be no assurance that alternate technologies
and systems have not been developed, or that such systems may currently be in
development, or will be developed by others in the future, that would be
directly competitive with our sound technology.
Our sound reproduction methods will also compete with traditional loudspeakers.
Many international manufacturers provide loudspeakers such as Sony, AIWA,
Phillips, Samsung, Mitsubishi, Toshiba, Sanyo, Sharp, JVC and others. There are
also specialty audio component manufacturers such as Marantz, NAD and others. We
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 and have proven technology and
products, marketing data, customer relationships and distribution channels.
There can be no assurance that our SFT and HSS technology, if implemented
commercially, will be competitive in the entrenched loudspeaker market with
these or other customers.
We believe our success will be dependent upon creating relationships with OEMs
by providing them the ability to differentiate their products with our sound
technology attributes.
The consumer product and consumer electronic marketplaces are extremely
competitive with a large number of suppliers. Most of our competitors have
greater financial, manufacturing and marketing resources and can command more
retail and consumer exposure. Barriers to entry by new competitors are not
significant and new competitors in consumer products and 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. We seek to
market unique products to large market segments.
With respect to our consumer product sales, which accounts for substantially all
of our revenues, we are dependent on contract suppliers for finished goods. We
source products developed by others from a variety of suppliers. The loss of a
supply of a high selling product could have a material adverse effect on our
operations. Disruption of supply could cause additional costs and delays and
could also have an adverse impact on our operations. The manufacture of
11
<PAGE>
consumer electronic products is dependent upon the availability of electronic
components. We believe there are secondary suppliers of components and
subassemblies such that the products we distribute are not reliant on one
supplier, although delays could result should there be a change in suppliers of
longer lead-time components or subassemblies. Any significant delays in
obtaining components from existing or secondary suppliers through supplier
changes or from component shortages, which are common to the electronics
industry, could have a material adverse effect on our financial condition and
results of operations.
Government Regulation
Certain of our electronic products are subject to various regulations and are
required to meet the specifications of agencies such as the Federal
Communications Commission (the "FCC"). We believe we are in substantial
compliance with all applicable regulations, and that we have all material
governmental permits, licenses, qualifications and approvals required for our
operation.
We do not believe our HyperSonic Sound technology ultrasonic emitters, which
emit ultrasonic waves into the air rather than electromagnetic waves, are out of
compliance with existing governmental regulations. However there can be no
assurance that interpretations of existing regulations or imposition of new
regulations could not have an adverse impact on the commercialization of our
technologies.
We do not believe we are materially affected, nor do we expect to be materially
affected, by the costs and effects of compliance with environmental laws.
Intellectual Property Rights and Proprietary Information
We operate in an industry where innovations, investment in new ideas and
protection of resulting intellectual property rights are important to success.
We rely on a variety of intellectual property protections for our products and
technologies, including patent, copyright, trademark and trade secret laws, and
contractual obligations, and pursue a policy of vigorously enforcing such
rights.
We own four U.S. patents and twenty U.S. patents (and additional foreign
applications) pending on our sound technologies. We are preparing and intend to
file other sound technology patent applications. We own two U.S. patents on
consumer products and two U.S. patents on our GPS technology. We have one patent
pending on our EPD technology. We have purchased one patent on transducer
technology primarily targeted for government applications.
We have an ongoing policy of filing patent applications to seek protection for
novel features of our products and technologies. Prior to the filing and
granting of patents, our 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 our products or
technology will be granted.
In addition to such factors as innovation, technological expertise and
experienced personnel, we believe that a strong patent position will be
important to compete effectively through licensing in the sound reproduction
industry. We are investing significant management, legal and financial resources
toward our technology patents. The electronics industry is characterized by
frequent litigation regarding patent and other intellectual property rights.
Others, including academic institutions and competitors, hold numerous patents
in electronics and sound reproduction. Although we are not aware of any existing
patents that would inhibit our ability to license our sound technology; there
can be no assurance that others will not assert claims in the future. There can
be no assurance that such claims, with or without merit, would not have a
material adverse effect on our financial condition or results of operations.
The validity of our existing patents has not been adjudicated by any court.
Competitors may bring legal action to challenge the validity of our existing or
future patents or may attempt to circumvent the protection provided by such
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 our technologies or the circumvention of our patents, by
competitors could have a material adverse effect on our ability to compete
successfully.
We generally take advantage of the Patent Convention Treaty procedures for
patent protection in foreign countries. This procedure is more cost efficient,
but results in a delay in the application and issuance of foreign patents;
however, any resulting foreign patents, if and when issued, enjoy the same
priority date as U.S. counterparts.
12
<PAGE>
We also file for tradename and trademark protection when appropriate. We are the
owner of federally registered trademarks on HYPERSONIC(R), HYPERCOUSTIC(R) and
HSS(R). Trademark applications have been filed for STRATIFIED FIELD TECHNOLOGY,
SFT and PICOSONIC. There can be no assurance any degree of protection will be
granted, or that if granted, that tradenames or trademarks could be successfully
maintained, defended or protected.
Our policy is to enter into nondisclosure agreements with each employee and
consultant or third party to whom any of our proprietary information is
disclosed. These agreements prohibit the disclosure of confidential information
to others, 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 we will have adequate remedies for any breach or that
our trade secrets will not otherwise become known or be independently developed
by competitors.
Research and Development
The sound reproduction market is subject to rapid changes in technology and
designs with frequent improvements and new product introductions. We believe our
future success will depend on our ability to enhance and improve existing
technologies and to introduce new technologies on a competitive basis.
Accordingly, we have in the past, and are expected in the future, to engage in
significant research and development activities. There can be no assurance,
however, that we will be able to commercialize our current or future
technologies.
For the fiscal years ended September 30, 1999, 1998 and 1997 we invested
$1,099,848, $991,238 and $566,288 respectively, on research and development.
Future levels of research and development expenditures will vary depending on
the timing of further new product development and the availability of funds to
carry on additional research and development on currently owned technologies or
in other areas.
Employees
At December 27, 1999, in addition to our three executive officer employees, we
employed 18 full-time persons. Of such employees, eight are in research,
development and technology transfer, one in shipping and distribution, five in
general and administrative and four in marketing, sales and licensing. We also
lease technical personnel from time to time on an as needed basis and use
outside consultants for various services.
We have not experienced any work stoppages and are not a party to a collective
bargaining agreement.
Item 2. Properties.
On July 11, 1997, we entered into a three-year lease for property located at
13114 Evening Creek Drive South, San Diego, California. To meet the credit
requirements of the landlord, both American Technology and e.Digital
Corporation, an affiliated company, entered into a joint lease agreement for
approximately 12,925 square feet with aggregate monthly payments of $15,122
inclusive of utilities and costs. We occupy approximately 7,500 square feet of
the jointly leased office space with our share of monthly payments approximate
$8,300.
We believe this facility is adequate to meet our needs for the next twelve
months given current plans. However should we expand our operations, we may be
required to obtain additional space or alternative space. We believe there is
adequate availability of office space in the general vicinity to meet our future
needs.
Item 3. Legal Proceedings.
We are not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
Market Information
13
<PAGE>
Our shares of common stock is traded and quoted on NASDAQ SmallCap Market under
the symbol "ATCO". Prior to July 1999 our shares were quoted on the OTC
Electronic Bulletin Board. The market for our common stock has often been
sporadic and limited.
The following table sets forth the high and low bid quotations for our common
stock for the fiscal years ended September 30, 1998 and 1999:
Bid Quotations
High Low
-------------- --------
Fiscal Year Ending September 30, 1998
First Quarter $ 6.125 $3.46875
Second Quarter $4.65625 $ 3.375
Third Quarter $11.6875 $ 4.75
Fourth Quarter $ 9.8125 $ 4.375
Fiscal Year Ending September 30, 1999
First Quarter $ 4.375 $ 4.1875
Second Quarter $ 7.25 $ 4.9688
Third Quarter $ 6.1875 $ 5.0625
Fourth Quarter $ 7.625 $ 6.75
The above quotations reflect inter-dealer prices, without retail markup,
markdown or commission and may not represent actual transactions.
We had 1,152 holders of record of our common stock at December 13, 1999 with
11,518,302 shares issued and outstanding. We have never paid a cash dividend on
our common stock and do not expect to pay any in the foreseeable future.
Item 6. Selected Financial Data
The following is a summary of selected financial data of American Technology
Corporation as of and for the five most recent fiscal periods ended. This data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Financial Statements and
the Notes thereto appearing elsewhere in this document.
<TABLE>
<CAPTION>
For the fiscal years ended September 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Net revenues $ 823,753 $ 244,758 $ 967,408 $ 933,643 $1,801,562
Gross profit (loss) 204,088 (162,365) 157,971 136,489 431,187
Net loss (3,041,634) (4,593,713) (2,144,363) (560,448) (368,201)
Net loss available
to common stockholders $(3,809,486) $(4,593,713) $(2,762,009) $ (560,448) $ (368,201)
Net loss per share-
basic and diluted $ (0.33) $ (0.42) $ (0.30) $ (0.08) $ (0.05)
Weighted average number of
shares-basic and diluted 11,408,264 10,889,654 9,268,128 7,464,588 7,291,228
<CAPTION>
As of September 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet:
Working capital $ 976,475 $ 985,888 $ 3,719,807 $1,047,787 $ 564,356
Total assets 2,161,036 1,683,745 4,251,878 1,595,462 1,121,815
Long-term obligations - - 386,651 - 144,584
Total stockholders' equity 1,597,192 1,402,912 3,692,922 1,227,472 583,405
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
14
<PAGE>
Overview
We are focused on completing the development and commercializing our proprietary
Stratified Field Technology and HyperSonic Sound technologies. Our Stratified
Field technology features a thin form factor, in a variety of shapes and sizes,
producing high fidelity, low distortion sound reproduction. Our HyperSonic Sound
technology employs a laser-like beam to project sound to any listening
environment. Our strategy is to commercialize these technologies through OEMs by
entering into licensing or contract supply agreements. There can be no assurance
we will be successful in commercially exploiting our sound technologies.
Other than an early license on our Stratified Field technology with Authentic in
Japan, we have only recently completed development of our latest designs which
we believe will meet OEM requirements and can be readily transferred to
production. We have also only recently obtained our first contract on HyperSonic
Sound technology and are commencing marketing of this technology. There can be
no assurance that commercially viable systems can be produced by customer in the
future due to the inherent risks of new technology development and transfer,
limitations on financing, competition, obsolescence, loss of key technical
personnel and other factors beyond our control. We have not generated any
significant revenues from our sound technologies to date.
Our 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 sound products
by customers or that, if available, such products will perform on a cost-
effective basis, or that, they will achieve market acceptance.
Our future is largely dependent upon the success of our sound technologies,
other technologies or the development of new technologies. We invest significant
funds in research and development and on patent applications related to our
proprietary technologies. There can be no assurance our technologies will
achieve market acceptance sufficient to sustain operations or achieve future
profits. See "Business Risks" below.
To date substantially all of our revenues have been derived from the sale of
portable consumer products. We have sourced a total of ten products (including
FM and solar radios) targeted for niche markets at retail prices ranging from
$3.50 to $51.99. Sourcing is on both an exclusive and nonexclusive basis and for
different market territories on a product by product basis. Our market focus is
in North America. We inventory finished goods as well as provide direct factory
shipment to certain customers. There can be no assurance that our line of
products can be marketed successfully.
Demand for our portable consumer products is subject to significant month to
month variability resulting from seasonal demand fluctuations and the limited
number of customers and market penetration achieved by us to date. Further,
sales have been concentrated with a few customers. We are also reliant on
outside manufacturers to supply our products and there can be no assurance of
future supply. The markets for our products and future products and technologies
are subject to rapidly changing customer tastes and a high level of competition.
Demographic trends in society, marketing and advertising expenditures, and
product positioning in retail outlets, technological developments, seasonal
variations and general economic conditions influence demand for our products.
Because these factors can change rapidly, customer demand can also shift
quickly. We 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 our limited financial resources.
Results of Operations (Fiscal Years ended September 30, 1999, 1998 and 1997)
Total revenues for the fiscal year ended September 30, 1999 ("fiscal 1999") were
$823,753, a 235% increase from revenues of $244,758 for fiscal 1998. Revenues
for fiscal 1997 were $967,408. Substantially all revenues for the three fiscal
years were from consumer product sales. The increase in product sales during
fiscal 1999 reflects new product sales of the solar powered radio's and the
continuous sales growth of the small FM sounds radio to new customers. The
decrease of $772,650 or 80% from fiscal 1997 to fiscal 1998 reflected the
phasing out and termination of an older ear radio line of consumer products.
Fiscal 1999 product sales consisted of a new line of sourced products
manufactured by others only recently introduced by us. There can be no assurance
that the new product line can be successfully marketed in any significant volume
or for any term. Consumer product sales are subject to significant month to
month and quarter to quarter variability based on the timing of orders, new
accounts, lost accounts and other factors. Our sales are further affected by a
variety of factors including seasonal requirements of customers.
15
<PAGE>
Contract and license revenues were $36,345 in fiscal 1999 compared to $50,000
for fiscal 1998. Fiscal 1999 contract and license revenues consisted of amounts
earned on development contracts for customers. Fiscal 1998 revenues were
received from one customer as a non-refundable initial license payment. There
were no comparable revenues in fiscal 1997. There can be no assurance when or if
we will realize any future payments under this or any other license agreement.
Our policy is to recognize one-time license fees upon achievement of contractual
milestones and the collection of the resulting receivable is deemed probable.
Contract fees are recorded as services are performed.
Cost of sales for the fiscal year ended September 30, 1999 were $619,665
resulting in a gross profit of $204,088 or 25%. This compares to a gross loss of
$162,365 for fiscal 1998 and a gross margin of $157,971 for fiscal 1997. The
fiscal 1999 gross profit is the result of the new product line. The prior year's
gross loss resulted from the phasing out of our previous ear radio product line
and included special closeout pricing to reduce inventory levels. Fiscal 1997
reflected gross margins from products sold prior to phasing out the line. Gross
profit percentage is highly dependent on sales prices, volumes, purchasing costs
and overhead allocations. Overall gross margins will also be impacted by future
contract and licensing revenues, if any.
Selling, general and administrative expenses reflect a decrease from fiscal year
1998 from $2,222,522 to $2,078,558 for fiscal 1999. They totaled $1,338,468 for
fiscal 1997. The $143,964 decrease in fiscal 1999 from fiscal 1998 resulted
primarily from a reduction in legal expenditures of $47,394 and a reduction in
travel expenditures and related costs of $77,280. The $884,054 increase from
fiscal 1997 to fiscal 1998 resulted primarily from the hiring of senior
executive personnel to develop marketing for our sound technologies. We may
expend additional resources on marketing our sound technologies in the future
quarters, which may increase selling, general and administrative expenses in
future periods. In fiscal 1999 we recorded in selling, general and
administrative is $137,137 of services paid through the issuance of 25,018
shares of common stock.
Research and development costs for the year ended September 30, 1999 were
$1,099,848 compared to $991,238 for the prior year. Research and development
costs were $566,288 for fiscal 1997. The $108,610 increase in fiscal 1999
resulted primarily from an increase in sound technology development activities
and related personnel and component costs. The $424,950 increase in fiscal 1998
over fiscal 1997 resulted from a substantial increase in sound technology
development and included increases in personnel costs as well as component and
equipment costs.
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. We expect
fiscal 2000 research and development costs to remain at comparable levels to
fiscal 1999 or at higher levels should we increase staffing or expand the use of
outside design and consultants.
We recorded non-cash compensation expense of $131,000 for the year ended
September 30, 1999 compared to $438,000 for fiscal 1998 and $278,100 in fiscal
1997. Non-cash compensation expense for the fiscal 1999 included the $70,000
value attributable to stock options granted to consultants on 30,000 shares of
common stock. Fiscal 1998's total of $438,000 included $122,000 for warrants
issued for services and $316,000 for the value of options granted for services.
Fiscal 1997's total of $278,100 included $33,300 for warrants issued for
services and $244,800 for the value of options granted.
As a result of the above factors, we experienced a loss from operations of
$3,105,318 during the year ended September 30, 1999, compared to a loss from
operations of $3,814,125 for the year ended September 30, 1998 and a loss from
operations of $2,024,885 for the year ended September 30, 1997. The net loss for
the year ended September 30, 1999 was $3,041,634 a decrease from the $4,593,713
reported for the prior year which was an increase from the $2,144,363 reported
for fiscal 1997. We expect to incur continued operating losses until we are able
to commercialize our technologies and produce revenues sufficient to support
operating costs. There can be no assurance we will be successful in such
efforts.
During fiscal 1998, we incurred $926,555 of non-cash interest expense including
$920,000 computed on the cashless exercise of previously issued warrants. In
fiscal 1997 we incurred $146,331 of non-cash interest. Net non-operating income
aggregated $63,684 for fiscal 1999 as compared to $779,588 in operating expense
for fiscal 1998 and $119,478 of operating expense in fiscal 1997.
We incurred a net loss of $3,041,634 for fiscal 1999, compared to a net loss of
$4,593,713 for fiscal 1998 and a net loss of $2,144,363 in fiscal 1997. We have
federal net loss carryforwards of approximately $10,500,000 for federal tax
16
<PAGE>
purposes expiring through 2019. The amount and timing of the utilization of our
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 is unable to determine that it is more likely than not
that the deferred tax asset will be realized.
The net loss available to common stockholders for fiscal 1999 was increased in
computing loss per share of common stock by an imputed deemed dividend on
warrants issued with Series B Preferred Stock in the amount of $595,000,
accretion on the stock at the stated rate of $112,852 and a $60,000 imputed
deemed dividend from a discount provision or $0.06 per share in the aggregate.
The imputed deemed dividend is not a contractual obligations to pay such imputed
dividends in cash or otherwise. There were no comparable adjustments in fiscal
1998. A $617,646 adjustment in fiscal 1997 resulted from Series A preferred
stock.
Future operations are subject to significant variability as a result of
licensing activities, product sales and margins, timing of new product
offerings, the success and timing of new technology exploitation, decisions
regarding future research and development and variability in other expenditures.
Liquidity and Capital Resources
Since we recommenced operations in January 1992, we have had significant
negative cash flow from operating activities. Our negative cash flow from
operating activities was $2,913,161 for the fiscal year ended September 30,
1999, $2,464,375 and for the fiscal year ended September 30, 1998 and $1,572,525
for fiscal year 1997. During fiscal 1999, the net loss of $3,041,634 included
non-cash expenses of $398,397 resulting in an adjusted net cash loss of
$2,643,237. In addition to this adjusted net cash loss, cash was used in
operating activities through an $86,795 increase in accounts receivable, a
$200,029 increase in inventories and a $146,111 increase in prepaid expenses and
other. Operating cash in fiscal 1999 was provided by a $131,712 increase in
accounts payable and a $31,299 increase in accrued liabilities.
At September 30, 1999 we had approximately 83 days product sales in accounts
receivable as compared to 130 days at September 30, 1998. The decrease is due
primarily to the larger sales volume and better terms with customers in the
current year. Large retail chains often require 90-120 day terms on sales. Our
receivables can vary dramatically due to overall sales volumes and due to
quarterly and seasonal variations in sales and timing of shipments to and
receipts from large customers.
For the year ended September 30, 1999, we used approximately $69,457 for the
purchase of laboratory equipment and made a $261,495 investment in patents. We
anticipate a continued investment in patents in fiscal 2000. Dollar amounts to
be invested on these patents are not currently estimable by management.
At September 30, 1999, ATC had working capital of $976,475. Included in working
capital is the unrealized holding gain in the shares we hold in e.Digital
Corporation. At September 30, 1999 we owned 225,300 shares of e.Digital with a
market value of $299,649. This investment is carried on the balance sheet as a
current asset at market value as an available for sale security
We have financed our operations primarily through the sale of common equity,
exercise of stock options, issuance's of convertible notes, proceeds from the
sale of shares of e.Digital and margins from consumer product sales. Other than
cash of $590,236 at September 30, 1999, and the e.Digital shares, we have no
other material unused sources of liquidity at this time. We expect 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
our sound and other products and technologies. The timing and amounts of these
expenditures and the extent of our operating losses will depend on many factors,
some of which are beyond our control. We anticipate that the commercialization
of our technologies may require increased operating costs, however the amounts
are not currently estimable by management.
Based on the above factors, including the current rate of expenditures,
anticipated additional expenditures and uncertainty as to future expenditures,
we do not presently have sufficient funds for the next twelve months and will
require funds from the sale or licensing of products or technology or from other
sources or will be required to scale back or curtail certain activities.
Management estimates the minimum additional funding required for the next twelve
months at approximately $2,000,000. We have been successful in obtaining equity
financing in the past from existing shareholders and others based on the
strength and appeal of our technologies. Management is reviewing financing
17
<PAGE>
proposals from prior investors and others and management is confident that the
required additional funding can be obtained. In addition to the sale of equity
securities, possible other sources for additional funding include the sale or
licensing of certain of our technologies. Margins from product sales and
revenues from licensing and other operations may also contribute financial
resources during the next twelve months. However any delays in funding or the
lack of sufficient funds could force management to curtail or scale back
operations and would therefore have an adverse effect on our business.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued a new pronouncement for
future implementation as discussed in our financial statements (see page F-10).
As discussed in the notes to the financial statements, the implementation of
these new pronouncements is not expected to have a material effect on our
financial statements.
Year 2000 Readiness Disclosure
We are aware of the issues associated with the programming code in existing
computer systems as the Year 2000 approaches. The "Year 2000" problem is
concerned with whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Year 2000 problem is pervasive and complex as the computer operation
of virtually every company will be affected in some way which could lead to
business disruptions in the U.S. and internationally.
We have identified the following areas, which could be impacted by the Year 2000
issue. They are: our products; internally used systems and software; products or
services provided by key third parties; and the inability of licensees and
prospective licensees or customers to process business transactions relating to
licensing revenue and product sales.
During the first calendar quarter ended March 31, 1999 we completed an initial
review of our internal systems. The review consisted of an evaluation of
significant internal hardware systems and major software application programs,
which are primarily, packaged third party "off-the-shelf" software programs. As
a result of this review we identified certain systems which required further
review and upgrades to be Year 2000 ready. These upgrades have been completed.
We have also installed a new business software application which we believe is
in full compliance with respect to Year 2000 issues. Our licensable technology
and consumer products do not have any material Year 2000 problems.
We continue to assess the compliance of our major customers, suppliers and
vendors. Management believes that third-party relationships upon which we rely
represent the greatest risk with respect to the Year 2000 issue, because we
cannot guarantee that third parties will be able to adequately assess and
address their Year 2000 compliance issues in a timely manner. As a consequence,
we can give no assurances that issues related to Year 2000 will not have a
material adverse effect on future results of operations or financial condition.
During the month of June 1999, we implemented our Year 2000 plan. In July 1999,
we hired a full-time Information Systems director to address all Year 2000
issues. We capitalized $19,188 for new business software and we expense
maintenance and modification costs as incurred.
Should we not be completely successful in mitigating internal and external Year
2000 risks, the likely worst case scenario could be a system failure causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, develop or distribute products, send invoices or engage
in similar normal business activities at our offices or with our vendors and
suppliers. We have no current plans to arrange for alternative sources of supply
or to stockpile inventory in preparation for the Year 2000. We do not have any
other contingency plans with respect to potential Year 2000 failures of our
suppliers or customers and at the present time, after evaluation, do not intend
to develop one. If these failures would occur, depending upon their duration and
severity, they could have a material adverse effect on our business, results of
operations and financial condition.
The information set forth above under this caption "Year 2000 Readiness
Disclosure" relates to our efforts to address the Year 2000 concerns regarding
our (a) operations, (b) products and technologies licensed or sold to third
parties and (c) major suppliers and customers. Such statements are intended as
Year 2000 Statements and Year 2000 Readiness Disclosures and are subject to the
"Year 2000 Information Readiness Act."
Business Risks
18
<PAGE>
This report contains a number of forward-looking statements which reflect our
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those discussed below and elsewhere in this Annual Report on Form 10-
K, 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. We
undertake no obligation to publicly revise these forward-looking statements, to
reflect events or circumstances that may arise after the date hereof.
Our Business May Suffer If We Are Not Profitable In The Future - We have
- --------------------------------------------------------------
incurred significant operating losses and anticipate continued losses in fiscal
2000. At September 30, 1999 we had an accumulated deficit of $11,805,647. There
is no assurance that we will be able to achieve or sustain significant periods
of profitability in the future. We may require additional capital in the future
to continue our operations. The failure to achieve profitable operations or in
the alternative to obtain sufficient capital would have an adverse effect on our
financial condition and results of operations.
If Our Technology Products Are Not Accepted By The Market, Our Business May
- --------------------------------------------------------------------------
Suffer - Our sound technologies continue to be developed, there can be no
- ------
assurance that our commercialization efforts will be successful. Our development
and commercialization efforts face the inherent risks associated with technology
development, limitations on financing, competition, obsolescence, and loss of
key technical personnel and other factors. We have not generated significant
revenues from our sound technologies to date. The failure to commercialize our
technologies and generate revenues sufficient to meet operating costs would have
a significant adverse effect on our financial condition and results of
operations.
Delays in or Lack of Success in Commercializing Our Technologies Could Impair
- -----------------------------------------------------------------------------
Our Operations - The development of our sound technologies has taken longer than
- --------------
we anticipated. Although we are introducing our technology to customers,
commercialization could be subject to additional delays. There can be no
assurance that prospective customers will adopt our technologies or if adopted
that they will timely introduce end-user products. The introduction of new
technology is high risk in nature, where unanticipated technical or market
obstacles can arise at any time and result in lengthy and costly delays or
result in determination that further commercialization efforts are unfeasible.
Should we fail to successfully develop and exploit our technologies our
financial condition and results of operations and business prospects would be
adversely effected. Our future is largely dependent upon the success of our
sound technologies or the development of new technologies. There can be no
assurance we can successfully commercialize any of our technologies or that if
introduced they will achieve market acceptance sufficient to sustain or achieve
profitable operations.
Competition and Technological Changes May Adversely Affect Our Business -
- -----------------------------------------------------------------------
Technological competition from other and longer established electronic and
loudspeaker manufacturers is significant and expected to increase. Most of the
companies with which we expect 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 our
competitors may have developed or may succeed in developing technologies and
products that are more effective than any of our, rendering our technology and
products obsolete or noncompetitive. There can be no assurance we will remain
viable or competitive in the face of competition and technological change.
If We Are Unable To Develop Our New Technologies, Our Business May Suffer - The
- -------------------------------------------------------------------------
introduction of new technology, such as sound technologies, often faces barriers
to commercialization and many risks that cannot currently be identified. Our
HyperSonic sound technology employs ultrasonics. Although ultrasonics are
employed in a wide variety of medical and industrial applications, there can be
no assurance we will not face barriers to introduction due to the use of
ultrasonics. Our technology uses relatively small amounts of ultrasonic energy
which dissipates rapidly in air. We also employ frequencies above those that may
be harmful to pets. Although we believe the frequencies and the amount of energy
employed is harmless, 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.
19
<PAGE>
If We Are Unable To Develop Relationships With Strategic Partners, Our Business
- -------------------------------------------------------------------------------
May Suffer - We cannot guarantee that we will be able to successfully
- ----------
collaborate to develop commercial products to exploit our technologies.
Our success will
depend on our ability to enter into strategic arrangements with new partners on
commercially reasonable terms. Our failure to enter into such strategic
arrangements with third parties could have a material adverse effect on our
financial condition, results of operations, cash flows and business prospects.
Any future relationships may require us to share control over development,
manufacturing and marketing programs or to relinquish rights to certain versions
of our technology.
If We Are Unable To Protect Our Intellectual Property, Our Business May Suffer -
- ------------------------------------------------------------------------------
We have both issued and pending patents on our sound reproduction technologies
and we are considering additional patent applications. There can be no assurance
that any patents held by us will not be challenged and invalidated, that patents
will issue from any of our pending applications or that any claims allowed from
existing or pending patents will be of sufficient scope or strength. There can
be no assurance our patents will be issued in all countries where our products
can be sold or licensed to provide us meaningful protection or any commercial
advantage. Our competitors may also be able to design around our patents. The
failure to protect our patents could impair our competitive position and have a
material adverse effect on our business.
If We Are Unable To Obtain Supply Of Our Electronic Components, Our Business May
- --------------------------------------------------------------------------------
Suffer - With respect to our consumer electronic product sales, which has
- ------
accounted for substantially all of our revenues, we are dependent on contract
suppliers for finished goods. We source products developed by others from a
variety of suppliers but generally each product is sole sourced. The loss of a
supply of a product could have an adverse effect on operations. Any significant
delays in obtaining components from existing or secondary suppliers through
supplier changes or from component shortages, which are common to the
electronics industry, could have a material adverse effect on our financial
condition and results of operations.
If We Are Unable To Retain Our Key Personnel Or Are Unable To Attract
- ----------------------------------------------------------------------
Additional Personnel, Our Business May Suffer - Our performance is substantially
- ---------------------------------------------
dependent on the performance of our executive officers and key technical
employees. We are dependent on our ability to retain and motivate high quality
personnel, especially highly skilled technical personnel. Our future success and
growth also depends on our continuing ability to identify, hire, train and
retain other highly qualified technical, managerial and sales personnel.
Competition for such personnel is intense, there can be no assurance that we
will be able to attract, assimilate or retain other highly qualified technical,
managerial or sales personnel in the future. The inability to attract and retain
the necessary
20
<PAGE>
technical, managerial or sales personnel in the future. The inability to attract
and retain the necessary technical, managerial or sales personnel could have a
material adverse effect upon our business, operating results or financial
condition.
Our Stock Price Is Volatile And May Continue To Be Volatile In The Future - Our
- -------------------------------------------------------------------------
shares of common stock trade on NASDAQ SmallCap Market. Our 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, our shares have experienced low trading volume and high
volatility. There can be no assurance that the market price will remain at
present levels, and any future changes in market price cannot be predicted as to
timing or extent. Past performance of does not guarantee and should not be
construed to imply future performance. We expect the volatility to continue in
the future due to a variety of factors, including:
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of American Technology due to adverse
changes in market prices, including interest rate risk and other relevant market
rate or price risks. We do not use derivative financial instruments in our
investment portfolio.
We are exposed to some market risk through interest rates, related to our
investment of current cash and cash equivalents of approximately $0.6 million.
The risk is not considered material and we manage such risk by continuing to
evaluate the best investment rates available for short-term high quality
investments.
We have no activities in long-term indebtedness and our other investments are
insignificant. At the present time we do not have any significant foreign sales
or foreign currency transactions.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this item begin on page F-1 (immediately
following page 25 of this report) with the index to financial statements
followed by the financial statements.
All financial statement schedules have been omitted because the information is
not applicable or is not material or because the information required is
included in the financial statements or the notes thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
21
<PAGE>
Information relating to the directors of American Technology Corporation is
incorporated herein by reference from the "ELECTION OF DIRECTORS -- Information
As To Nominees" and the "ELECTION OF DIRECTORS -- Executive Officers" contained
in the American Technology Proxy Statement for our 2000 Annual Meeting of
Stockholders (the "2000 Proxy Statement"), which 2000 Proxy Statement is to be
filed within 120 days of the end of the fiscal year covered by this Report
pursuant to General Instruction G(3) of Form 10-K.
Item 11. Executive Compensation.
Information relating to executive compensation is incorporated herein by
reference from the "ELECTION OF DIRECTORS -- Executive Compensation And Related
Matters" section of the 2000 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information relating to the security ownership of certain beneficial owners and
management is incorporated herein by reference from the "ELECTION OF DIRECTORS--
Beneficial Ownership Of Company Securities" section of the 2000 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Information relating to related transactions is incorporated herein by reference
from the "ELECTION OF DIRECTORS -- Executive Compensation And Related Matters"
and "ELECTION OF DIRECTORS -- Related Transactions" sections of the 2000 Proxy
Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits - The following is a list and index of Exhibits required by Item
--------
601 of Regulation S-K. 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 us as
indicated.
Exhibit Index
3. Articles and Bylaws
3.1 Certificate of Incorporation of American Technology Corporation
(Delaware) dated March 1, 1992, filed as Exhibit 2.1 to ATC's Form
10-SB effective August 1, 1994
3.1.1 Amendment to Certificate of Incorporation of American Technology
Corporation dated March 24, 1997 and filed with Delaware on April
22, 1997. Filed as Exhibit 3.1.1 to ATC's Form 10-QSB for March
31, 1997
3.1.2 Certificate of Designations of Series A Convertible Preferred
Stock filed with Delaware on August 15, 1997. Filed as Exhibit
3.1.2 to ATC's Form 8-K dated August 29, 1997.
3.1.3 Corrected Certificate of Designations of Series A Convertible
Preferred Stock dated and filed with Delaware on August 25, 1997.
Filed as Exhibit 3.1.3 to ATC's Form 8-K dated August 29, 1997.
3.1.4 Corrected Certificate of Designations of Series B Convertible
Preferred Stock filed with Delaware on December 23, 1998. Filed as
Exhibit 3.1.4 to ATC's Form 10-KSB dated December 29, 1998.
3.2 Bylaws of American Technology Corporation (Delaware) filed as
Exhibit 2.3 to ATC's Form 10-SB effective August 1, 1994
4. Instruments Defining the Rights of Holders
4.1 Form of Stock Purchase Warrant exercisable at $5.00 per share
until March 1, 2000 granted to sixteen investors for an aggregate
of 50,000 common shares filed as Exhibit 4.8 to ATC's Form 8-K
dated April 1, 1997
22
<PAGE>
4.2 Stock Purchase Warrant issued to Renwick Corporate Finance, Inc.
dated as of February 5, 1997 exercisable to purchase 90,000 common
shares at $5.00 per share until February 5, 2000 filed as Exhibit
4.9 to ATC's Form 10-QSB for March 31, 1997
4.3 Form of Stock Purchase Warrant exercisable at $7.50 per share
until August 1, 2000 granted to eleven investors for an aggregate
of 175,000 common shares and filed as Exhibit 4.10 to ATC's
Form 8-K dated August 29, 1997
4.4 Stock Purchase Warrant dated June 18, 1998 exercisable at $16.00
per share until June 18, 2000 between ATC and to L.H. Friend,
Weinress, Frankson & Presson, Inc. for an aggregate of 25,000
common shares. Filed as Exhibit 4.4 to ATC's Form 10-KSB dated
December 29, 1998.
4.5 Stock Purchase Warrant dated May 12, 1998 exercisable at $16.00
per share until May 12, 2003 between ATC and Jonathan A. Berg for
an aggregate of 50,000 common shares. Filed as Exhibit 4.5 to
ATC's Form 10-KSB dated December 29, 1998.
4.6 Form of Series B Preferred Stock and Warrant Purchase Agreement
executed with nine investors and dated December 24, 1998. Filed as
Exhibit 4.6 to ATC's Form 10-KSB dated December 29, 1998.
4.7 Form of Warrant to Purchase Common Stock granted to nine investors
for an aggregate of 172,750 shares of Common Stock dated December
24, 1998. Filed as Exhibit 4.7 to ATC's Form 10-KSB dated December
29, 1998.
4.8 Reference is made to Exhibits 3.1 through 3.2.
10. Material Contracts
10.1 Royalty Agreement between ATC and Elwood G. Norris dated September
3, 1985 filed as Exhibit 6.2 to ATC's Form 10-SB effective August
1, 1994
10.2 Assignment of Technology Agreement between ATC and Elwood G.
Norris dated March 2, 1992 filed as Exhibit 6.3 to ATC's Form 10-
SB effective August 1, 1994
10.2.1 Addendum Agreement to Assignment of Technology Agreement between
ATC and Elwood G. Norris dated December 2, 1996 filed as Exhibit
10.3.1 to ATC's Form 10-KSB for September 30, 1996
10.3 1992 Incentive Stock Option Plan adopted by the Board of Directors
on March 2, 1992 and approved by the shareholders on June 19, 1992
filed as Exhibit 6.8 to ATC's Form 10-SB effective August 1, 1994
10.3.1 Standard form of Incentive Stock Option Plan Agreement filed as
Exhibit 6.8.1 to ATC's Form 10-SB effective August 1, 1994
10.4 1992 Non-Statutory Stock Option Plan adopted by the Board of
Directors on March 2, 1992 and approved by the shareholders on
June 19, 1992 filed as Exhibit 6.9 to ATC's Form 10-SB effective
August 1, 1994
10.4.1 Standard form of Non-Statutory Stock Option Plan Agreement filed
as Exhibit 6.9.1 to ATC's Form 10-SB effective August 1, 1994
10.5 Demand Promissory Note for $82,500 due from Robert Putnam dated
January 17, 1997 filed as Exhibit 10.11 to ATC's Form 10-QSB for
March 31, 1997
10.6 Sublease Agreement between Global Associates, Ltd. and Norris
Communications, Inc. and the Company dated July 11, 1997 filed as
Exhibit 10.13 to ATC's Form 10-QSB for June 30, 1997
23
<PAGE>
10.7 1997 Employee Stock Compensation Plan of ATC dated March 10, 1997
filed as Exhibit 10.11 to ATC's Form S-8 dated March 24, 1997
10.8 Stock Option Agreement dated September 1, 1997 between ATC and
Dale Williams filed as Exhibit 10.15.1 to ATC's Form 10-KSB for
September 30, 1997
10.8.1 Separation Agreement and General Release between Dale Williams and
ATC executed on June 19, 1998 filed as Exhibit 10.15.2 to ATC's
Form 8-K dated June 29, 1998
10.8.2 Amendment to Stock Option Agreement between Dale Williams and ATC
dated as of June 12, 1998 filed as Exhibit 10.15.3 to ATC's
Form 8-K dated June 29, 1998
10.9 Employment Agreement dated as of September 1, 1997 between ATC and
Elwood G. Norris filed as Exhibit 10.16 to ATC's Form 10-KSB for
September 30, 1997
10.10 Employment Agreement dated as of September 1, 1997 between ATC and
Robert Putnam filed as Exhibit 10.17 to ATC's Form 10-KSB for
September 30, 1997
10.11 Agreement dated as of June 1, 1998, between ATC and Authentic,
Ltd. (Portions of this Exhibit have been omitted, based on a
request for confidential treatment, and have been filed with the
Securities and Exchange Commission pursuant to rule 406) as filed
as Exhibit 10.18 to ATC's 10-QSB dated August 10, 1998
10.12 1997 Stock Option Plan as adopted on January 23, 1998 filed as
Exhibit 10.1 to ATC's Form S-8 dated July 27, 1998
10.13 Employment Agreement dated July 17, 1998 between ATC and Cornelius
J. Brosnan. Filed as Exhibit 10.13 to ATC's Form 10-KSB dated
December 29, 1998.
10.13.1 Special Stock Option Agreement dated October 2, 1997 between ATC
and Cornelius J. Brosnan filed as Exhibit 10.2 to ATC's Form S-8
dated July 27, 1998
10.13.2 Stock Option Agreement dated July 15, 1998 between ATC and
Cornelius J. Brosnan. Filed as Exhibit 10.13.2 to ATC's Form 10-
KSB dated December 29, 1998.
10.14 Employment Agreement dated July 8, 1998 between ATC and James
Croft. Filed as Exhibit 10.14 to ATC's Form 10-KSB dated December
29, 1998.
*10.15 Employment Agreement dated July 8, 1998 between ATC and Robert
Todrank.
*10.16 Special Option Agreement dated July 16, 1999 between ATC and
Cornelius J. Brosnan covering 100,000 shares exercisable at $10.00
per share subject to a stock price of $25.00.
*10.17 Special Option Agreement dated July 16, 1999 between ATC and
Cornelius J. Brosnan covering 100,000 shares exercisable at $10.00
per share subject to a stock price of $50.00.
23. Consents of Experts and Counsel
*23.1 Consent of BDO Seidman, LLP
27. Financial Data Schedule
*27.1 Financial Data Schedule
_____________________________________
(b) Reports on Form 8-K - None
-------------------
24
<PAGE>
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 28, 1999
By: /s/ CORNELIUS J.BROSNAN
--------------------------
Cornelius J. Brosnan
Chairman, President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C>
Date: December 28, 1999 By /s/ CORNELIUS J. BROSNAN
-----------------------------------
Cornelius J. Brosnan, Chairman, President and
Chief Executive Officer and Director
(Principal Executive Officer)
Date: December 28, 1999 By /s/ RENEE WARDEN
-----------------------------------
Renee Warden, Chief Accounting Officer, Treasurer
and Secretary
(Principal Financial and Accounting Officer)
Date: December 28, 1999 By /s/ ELWOOD G. NORRIS
-----------------------------------
Elwood G. Norris
Chief Technology Officer and Director
Date: December 28, 1999 By /s/ RICHARD M. WAGNER
-----------------------------------
Richard M. Wagner
Director
Date: December 28, 1999 By /s/ O'CONNELL J. BENJAMIN
-----------------------------------
O'Connell J. Benjamin
Director
Date: December 28, 1999 By /s/ DAVID J. CARTER
-----------------------------------
David J. Carter
Director
</TABLE>
25
<PAGE>
American Technology Corporation
Index to Financial Statements
================================================================================
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-2
Balance Sheets as of September 30, 1999 and 1998 F-3
Statements of Operations for the Years Ended
September 30, 1999, 1998 and 1997 F-4
Statements of Comprehensive Income for the Years Ended
September 30, 1999, 1998 and 1997 F-5
Statements of Stockholders' Equity for the Years Ended
September 30, 1999, 1998 and 1997 F-6
Statements of Cash Flows for the Years Ended
September 30, 1999, 1998 and 1997 F-7
Summary of Accounting Policies F-8 - F-10
Notes to Financial Statements F-11 - F-18
Schedule II - Valuation and Qualifying Accounts F-19
</TABLE>
F- 1
<PAGE>
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 sheets of American Technology
Corporation as of September 30, 1999 and 1998 and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period then ended. We have also audited the schedule listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 and schedule are
free of material misstatement. An audit includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement and schedule 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, 1999 and 1998 and the results of its operations and its cash
flows for each of the three years in the period then ended in conformity with
generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO SEIDMAN, LLP
--------------------
BDO Seidman, LLP
Denver, Colorado
November 5, 1999
F- 2
<PAGE>
American Technology Corporation
<TABLE>
<CAPTION>
BALANCE SHEETS
September 30, 1999 1998
===========================================================================================================
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 590,236 $ 1,034,577
Investment securities available for sale [note 1] 299,648 14,644
Trade accounts receivable, less allowance of
$8,000 and $17,000 for doubtful accounts 158,533 71,738
Inventories [note 2] 287,321 87,292
Prepaid expenses and other 204,581 58,470
- -----------------------------------------------------------------------------------------------------------
Total current assets 1,540,319 1,266,721
- -----------------------------------------------------------------------------------------------------------
Equipment, net [note 3] 133,047 169,367
Patents, net 487,670 245,919
Other - 1,738
- -----------------------------------------------------------------------------------------------------------
Total assets $ 2,161,036 $ 1,683,745
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 333,754 $ 202,042
Accrued liabilities:
Payroll and related 94,695 75,241
Other 15,395 3,550
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 443,844 280,833
- -----------------------------------------------------------------------------------------------------------
Commitments and contingencies [notes 4, 8 and 9]
Stockholders' equity [notes 7 and 8]:
Series B Preferred stock, $0.00001 par value; 5,000,000 shares
authorized: 250,000 shares issued and outstanding in 1999 [note 7] 3 -
Common stock, $0.00001 par value; 20,000,000 shares authorized
11,464,213 and 11,356,014 shares issued and outstanding 115 114
Additional paid-in capital 13,251,171 10,180,265
Note receivable, officer [note 4] (27,895) (27,895)
Accumulated deficit (11,805,647) (8,764,013)
Accumulated other comprehensive income 299,445 14,441
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,717,192 1,402,912
- -----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,161,036 $ 1,683,745
===========================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements
F-3
<PAGE>
American Technology Corporation
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30, 1999 1998 1997
========================================================================================================================
<S> <C> <C> <C>
Revenues:
Product sales [note 10] $ 787,408 $ 194,758 $ 967,408
Contract and license 36,345 50,000 -
- ------------------------------------------------------------------------------------------------------------------------
Total revenues 823,753 244,758 967,408
- ------------------------------------------------------------------------------------------------------------------------
Cost of revenues 619,665 407,123 809,437
- ------------------------------------------------------------------------------------------------------------------------
Gross profit (loss) 204,088 (162,365) 157,971
- ------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 2,078,558 2,222,522 1,338,468
Research and development 1,099,848 991,238 566,288
Non-cash compensation expense [note 8] 131,000 438,000 278,100
- ------------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,309,406 3,651,760 2,182,856
- ------------------------------------------------------------------------------------------------------------------------
Loss from operations (3,105,318) (3,814,125) (2,024,885)
- ------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest income 64,781 131,967 27,653
Interest expense - non-cash [notes 5 and 7] - (926,555) (146,331)
Other (1,097) 15,000 (800)
- ------------------------------------------------------------------------------------------------------------------------
Total other income (expense) 63,684 (779,588) (119,478)
- ------------------------------------------------------------------------------------------------------------------------
Net loss $(3,041,634) $(4,593,713) $(2,144,363)
========================================================================================================================
Net loss available to common stockholders $(3,809,486) $(4,593,713) $(2,762,009)
========================================================================================================================
Net loss per share of common stock - basic and diluted $ (0.33) $ (0.42) $ (0.30)
========================================================================================================================
Average weighted number of common shares outstanding 11,408,264 10,889,654 9,268,128
========================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements. F-4
<PAGE>
American Technology Corporation
STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended September 30, 1999 1998 1997
=================================================================================================================
<S> <C> <C> <C>
Net Loss $ (3,041,634) $(4,593,713) $(2,144,363)
Unrealized holding gain (loss) on securities
available for sale 285,004 (14,645) (160,864)
-------------------------------------------------------
Comprehensive loss $ (2,756,630) $(4,608,358) $(2,305,227)
=======================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements F-5
<PAGE>
American Technology Corporation
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended September 30, 1999, 1998 and 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Series A Convertible Preferred Stock
------------ ------------------------------------
Additional
Paid-in
Shares Amount Capital Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1996 8,611,759 $ 86 $3,063,373 - -
Issuance of common stock:
Upon exercise of stock options [note 8] 592,500 6 343,644 - -
For compensation and services [note 8] 40,327 1 201,413 - -
Upon conversion of 6% convertible notes at
$3.50 per share - - - - -
and accrued interest [note 5] 181,230 2 634,308 - -
Cash-less exercise of 350,000 options 292,963 3 (3) - -
Upon exercise of warrants at $0.50 per
share [note 7] 40,000 20,000 - -
Value assigned to 50,000 warrants granted
with 6% convertible notes [note 5] - - 2,500 -
Value assigned to 90,000 warrants granted
for services [note 7] - - 33,300 - -
Value assigned to 97,500 options granted for
services [note 8] - - 244,800 - -
Non-cash interest on convertible notes [note 5] - - 122,700 - -
Issuance of preferred stock, net of offering
costs [note 7] - - - 350,000 3,321,153
Payment on notes receivable [note 4] - - - - -
Net loss for the year - - - - -
Other comprehensive income - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 9,758,779 98 4,666,035 350,000 3,321,153
==================================================================================================================================
Issuance of common stock:
Upon exercise of stock options [note 8] 158,800 2 213,716 - -
For compensation and services [note 8] 14,750 - 91,919 - -
Upon conversion of 6% convertible notes at
$3.50 per share - -
and accrued interest [note 5] 128,459 1 393,205 - -
Cash-less exercise of warrants [note 7] 106,029 1 919,999 - -
Upon conversion of Series A Preferred Stock 974,197 10 3,321,143 (350,000) (3,321,153)
[note 7]
Upon exercise of warrants from $0.50 - $7.50 215,000 2 136,248 - -
Value assigned to 75,000 warrants granted as
consulting services [note 7] - - 122,000 - -
Value assigned to 80,000 options granted - - 316,000 - -
for services [note 8]
Payment on notes receivable [note 4] - - - - -
Net loss for the year - - - - -
Other comprehensive income - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 11,356,014 114 10,180,265 - -
==================================================================================================================================
Issuance of common stock:
Upon exercise of stock options [note 8] 82,500 1 319,772 - -
For compensation and services [note 8] 25,699 - 140,137 - -
Issuance of 250,000 shares of Series B
preferred stock - - 2,479,997 - -
Value assigned to 30,000 options granted for
consulting services [note 7] - - 70,000 - -
Value assigned to 20,000 options granted
for services [note 8] - - 61,000 - -
Net loss for the year - - - - -
Other comprehensive income - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 11,464,213 $ 115 $13,251,171 - -
==================================================================================================================================
<CAPTION>
Series B Convertible Preferred Stock
------------------------------------
Accumulated
Other Total
Notes Accumulated Comprehensive Stockholders'
Shares Amount Receivable Deficit Income Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1996 - - - $(2,025,937) $189,950 $1,227,472
Issuance of common stock:
Upon exercise of stock options [note 8] - - (173,150) - - 170,500
For compensation and services [note 8] - - - - - 201,414
Upon conversion of 6% convertible notes at - - - - - -
$3.50 per share and accrued interest [note 5] - - - - - 634,310
Cash-less exercise of 350,000 options - - - - - -
Upon exercise of warrants at $0.50 per
share [note 7] - - - - - 20,000
Value assigned to 50,000 warrants granted - - - - - -
with 6% convertible notes [note 5] - - - - - 2,500
Value assigned to 90,000 warrants granted
for services [note 7] - - - - - 33,300
Value assigned to 97,500 options granted for
services [note 8] - - - - - 244,800
Non-cash interest on convertible notes [note 5] - - - - - 122,700
Issuance of preferred stock, net of offering
costs [note 7] - - - - - 3,321,153
Payment on notes receivable [note 4] - - 20,000 - - 20,000
Net loss for the year - - - (2,144,363) - (2,144,363)
Other comprehensive income - - - - (160,864) (160,864)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 - - (153,150) (4,170,300) 29,086 3,692,922
==================================================================================================================================
Issuance of common stock:
Upon exercise of stock options [note 8] - - - - - 213,718
For compensation and services [note 8] - - - - - 91,919
Upon conversion of 6% convertible notes at - -
$3.50 per share and accrued interest [note 5] - - - - - 393,206
Cash-less exercise of warrants [note 7] - - - - - 920,000
Upon conversion of Series A Preferred Stock
[note 7] - - - - - -
Upon exercise of warrants from $0.50 - $7.50 - - - - - 136,250
Value assigned to 75,000 warrants granted as
consulting services [note 7] - - - - - 122,000
Value assigned to 80,000 options granted
for services [note 8] - - - - - 316,000
Payment on notes receivable [note 4] - - 125,255 - - 125,255
Net loss for the year - - - (4,593,713) - (4,593,713)
Other comprehensive income - - - - (14,645) (14,645)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 - - (27,895) (8,764,013) 14,441 $1,402,912
==================================================================================================================================
Issuance of common stock:
Upon exercise of stock options [note 8] - - - - - 319,773
For compensation and services [note 8] - - - - - 140,137
Issuance of 250,000 shares of Series B
preferred stock 250,000 3 - - - 2,480,000
Value assigned to 30,000 options granted for
consulting services [note 7] - - - - - 70,000
Value assigned to 20,000 options granted
for services [note 8] - - - - - 61,000
Net loss for the year - - - (3,041,634) - (3,041,634)
Other comprehensive income - - - - 285,004 285,004
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 250,000 $3 $ (27,895) $(11,805,647) $299,445 $1,717,192
==================================================================================================================================
</TABLE>
See accompanying summary of accounting policies and to financial statements.
<PAGE>
American Technology Corporation
STATEMENTS OF CASH FLOWS
<TABLE>
Years Ended September 30, 1999 1998 1997
======================================================================================================================
<S> <C> <C> <C>
Increase (Decrease) in Cash
Operating Activities:
Net loss $(3,041,634) $(4,593,713) $(2,144,363)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 127,260 132,215 97,920
Warrants granted for services - 122,000 33,300
Warrants granted with convertible debt - - 2,500
Common stock issued for services and compensation 140,137 91,919 201,414
Common stock issued for interest - 18,206 9,310
Options granted for services 131,000 316,000 244,800
Inventory and loss accrual - 160,000 -
Bonus paid on exchange for payment - 125,255 -
Non-cash interest on cash-less exercise of warrants - 920,000 -
Non-cash interest expense on convertible notes - - 122,700
Non-cash accrued interest on long term debt - (11,651) 11,651
Changes in assets and
liabilities:
Trade accounts receivable (86,795) 235,437 (111,717)
Inventories (200,029) (57,477) 124,116
Prepaid expenses and other (146,111) (31,094) 31,530
Accounts payable 131,712 81,173 (227,319)
Accrued liabilities 31,299 27,355 31,633
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,913,161) (2,464,375) (1,572,525)
- ----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchase of equipment (69,458) (80,995) (176,766)
Patent costs paid (261,495) (108,479) (101,235)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (330,953) (189,474) (278,001)
- ----------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds from issuance of preferred stock, net 2,480,000 - 3,321,153
Proceeds from exercise of common stock warrants - 136,250 20,000
Proceeds from exercise of stock options 319,773 213,718 343,650
Proceeds loaned on notes receivable-officers for option exercise - - (173,150)
Principal payment received on notes receivable-officer - - 20,000
Proceeds from issuance of convertible debt - - 1,000,000
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,799,773 349,968 4,531,653
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (444,341) (2,303,881) 2,681,127
Cash, beginning of year 1,034,577 3,338,458 657,331
- ----------------------------------------------------------------------------------------------------------------------
Cash, end of year $590,236 $1,034,577 $3,338,458
======================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements F-7
<PAGE>
American Technology Corporation
Summary of Accounting Policies
===============================================================================
ORGANIZATION AND BUSINESS
American Technology Corporation (the "Company"), a Delaware corporation, is
engaged in design, development and commercialization of sound, acoustics and
other technologies and the sales and marketing of portable consumer products.
CONTINUED EXISTENCE AND MANAGEMENT'S PLAN
Other than cash of $590,236 at September 30, 1999, and the e.Digital 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 its sound and other products and
technologies. The timing and amounts of its expenditures and the extent of its
operating losses will depend on many factors, some of which are beyond the
Company's control. The Company anticipates that the commercialization of its
technologies may require increased operating costs, however the amounts are not
currently estimable by management.
Based on the above factors, including the current rate of expenditures,
anticipated additional expenditures and uncertainty as to future expenditures,
the Company does not have sufficient funds for the next twelve months and will
require funds from the sale or licensing of products or technology or from other
sources or will be required to scale back or curtail certain activities.
Management estimates the minimum additional funding required for the next twelve
months at approximately $2,000,000. Management has been successful in obtaining
equity financing in the past from existing shareholders and others based on the
strength and appeal of the Company's technologies Management is reviewing
financing proposals from prior investors and others and management is confident
that the required additional funding can be obtained. In addition to the sale of
equity securities, possible other sources for additional funding include the
sale or licensing by the Company of certain technologies. Margins from product
sales and revenues from licensing and other operations may also contribute
financial resources during the next twelve months. However any delays in funding
or the lack of sufficient funds could force management to curtail or scale back
operations and would therefore have an adverse effect on the Company's business.
There can be no assurance that any funds required during the next twelve months
or thereafter can be generated from operations or that such required funds will
be available from the aforementioned or other potential sources. The lack of
sufficient funds from operations or additional capital could force the Company
to curtail or scale back operations and would therefore have an adverse effect
on the Company's business.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and trade accounts receivable.
The Company's cash is placed in quality money market accounts with major
financial institutions. The investment policy limits the Company's exposure to
concentrations of credit risk. Such deposit accounts at times may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.
Concentration of credit risk with respect to the trade accounts receivable are
limited due to the wide variety of customers and markets which comprise the
Company's customer base, as well as their dispersion across many different
geographic areas. The Company routinely assesses the financial strength of its
customers and, as a consequence, believes that the trade accounts receivable
credit risk exposure is limited. Generally, the Company does not require
collateral or other security to support customer receivables.
F- 8
<PAGE>
American Technology Corporation
Summary of Accounting Policies
===============================================================================
The carrying amounts of financial instruments including cash, trade accounts
receivable, notes receivable-officers, accounts payable and accrued liabilities
approximated fair market value because of the immediate or short-term maturity
of these instruments.
INVESTMENT SECURITIES
Investment securities classified as available for sale are those securities that
the Company does not have the positive intent to hold to maturity or does not
intend to trade actively. These securities are reported at fair value with
unrealized gains and losses reported as a net amount (net of applicable deferred
income taxes) as a separate component of stockholders' equity.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
EQUIPMENT AND DEPRECIATION
Equipment is stated at cost. Depreciation is computed over the estimated useful
lives of three years using the straight-line method.
PATENTS
Patents are carried at cost and, when granted and are 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.
Amortization expense was $19,745 for fiscal 1999.
LEASES
Leases entered into are classified as either capital or operating leases. At
fiscal year end 1999 the Company had no capital lease obligations. All current
leases reported are classified as operating leases.
REVENUE RECOGNITION
Product sales are recognized in the periods that products are shipped. Licensing
revenues for one-time license fees are recognized upon achievement of
contractual milestones and the collection of the resulting receivable is deemed
probable. Contract revenue is recognized in the period the related services are
performed.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109. Temporary differences are differences between the
tax basis of assets and liabilities and their reported amounts in the financial
statements that will result in taxable or deductible amounts in future years. A
valuation allowance is recorded by the Company to the extent it is more likely
than not that a deferred tax asset will not be realized.
NET LOSS PER SHARE
Basic earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common stockholders, after deduction for cumulative
unpaid dividends, by the weighted average number of common shares outstanding
for the period. The weighted average number of common shares outstanding during
1999 was 11,408,264 [1998 - 10,889,654] [1997 - 9,268,128]. Diluted earnings
(loss) per share reflects the potential dilution of securities that could share
in the earnings of an entity. The Company's losses for the years presented cause
the inclusion of potential common stock instruments outstanding to be
antidilutive and, therefore, in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128"), the Company
is not required to present a diluted earnings (loss) per share. Stock options,
warrants and convertible preferred stock exercisable into 3,009,761 shares of
Common Stock were outstanding at September 30, 1999, stock options and
F- 9
<PAGE>
American Technology Corporation
Summary of Accounting Policies
===============================================================================
warrants exercisable into 1,693,100 shares of Common Stock were outstanding at
September 30, 1998 and stock options, warrants and convertible debt exercisable
or convertible into 2,408,000 shares of Comm Stock were outstanding at September
30, 1997. These securities were not included in the computation of diluted
earnings (loss) per share because of the losses but could potentially dilute
earnings (loss) per share in future periods.
Net loss to common stockholders was increased during the fiscal year ended
September 30, 1999 in computing net loss per share by imputed deemed dividends
based on the value of warrants issued in connection with the Series B Preferred
Stock (see note 7). The Company calculated the fair value of the warrants at
$595,000. The net loss available to common stockholders was also reduced by the
amortization of an additional $60,000 deemed dividends computed from the
discount provision included in the Series B Preferred Stock, which was amortized
to the earliest period at which the discount could be utilized (May 31, 1999). A
similar deemed dividend of $617,646 was recorded from a discount provision in
Series A stock in fiscal 1997. Such imputed dividends are not contractual
obligations of the Company to pay such imputed dividends.
The provisions of the Series B Preferred Stock also provide for an accretion in
the conversion value (similar to a dividend) of 6% or $0.60 per share per annum.
The accrued accretion at September 30, 1999 was $112,852, which also increase
the net loss available to common stockholders. Net loss available to common
stockholders is computed as follows:
<TABLE>
<CAPTION>
Years Ended September 30, 1999 1998 1997
========================================
<S> <C> <C> <C>
Net loss $(3,041,634) $(4,593,713) $(2,144,363)
Preferred stock dividends based on imputed
discount at issuance. (60,000) - (617,646)
Imputed deemed dividends on warrants issued
with Series B Preferred Stock (595,000) - -
Accretion on Series B Preferred Stock at stated rate (112,852) - -
----------- ----------- -----------
Net loss available to common stockholders $(3,809,486) $(4,593,713) $(2,762,009)
=========== =========== ===========
</TABLE>
STOCK OPTIONS
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for all stock options plans. Under APB
Opinion 25, compensation cost is recognized for stock options granted to
employees when the option price is less than the market price of the underlying
common stock on the date of grant.
SFAS Statement No. 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income as if compensation
cost for the Company's stock option plans had been determined in accordance with
the fair value based method prescribed in SFAS No. 123. To provide the required
pro forma information for employees, the Company estimates the fair value of
each stock option at the grant date by using the Black-Scholes option-pricing
model. Under SFAS No. 123, compensation cost is recognized for stock options
granted to nonemployees using the Black-Scholes Option-pricing model.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies
to record derivatives on the balance sheet as assets or liabilities, measured at
fair market value. Gains or losses resulting from changes in the values of those
derivatives are accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. The key criterion for hedge accounting is
that the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows.
F- 10
<PAGE>
American Technology Corporation
Summary of Accounting Policies
===============================================================================
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. The
Company does not expect the adoption of SFAS No. 133 to have a material effect
on the Company's financial statements.
F- 11
<PAGE>
American Technology Corporation
Notes to Financial Statements
===============================================================================
1. INVESTMENT SECURITIES
The Company's investment securities consist of 225,300 shares of e.Digital
Corporation common stock, an affiliated corporation through common ownership and
management.
<TABLE>
<CAPTION>
For the Years Ended September 30, 1999 1998
----------- ---------
<S> <C> <C>
Cost $ 203 $ 203
Gross Unrealized Gains 299,445 14,441
--------- ---------
Estimate Fair Value $ 299,648 $ 14,644
========= =========
2. INVENTORIES
Inventories consisted of the following at September 30,
1999 1998
--------- ---------
Finished goods $ 228,021 $ 28,258
Raw materials 79,300 7,987
Consigned finished goods - 43,200
Work-in-process - 7,847
-------- ---------
307,321 87,292
Reserve for obsolescence (20,000) -
--------- ---------
$ 287,321 $ 87,292
========= =========
3. EQUIPMENT
Equipment consisted of the following at September 30,
1999 1998
--------- ---------
Machinery and equipment $ 424,477 $ 413,278
Office furniture and equipment 149,668 91,409
Leasehold improvements 37,442 37,442
--------- ---------
611,587 542,129
Accumulated depreciation (478,540) (372,762)
--------- ---------
Net equipment $ 133,047 $ 169,367
========= =========
</TABLE>
Depreciation expense was $105,777, $108,049 and $74,000 for the years ended
September 30, 1999, 1998 and 1997, respectively.
4. RELATED PARTY TRANSACTIONS
Facility Lease
- --------------
The Company entered into a three-year lease agreement commencing on
July 11, 1997 and expiring on July 30, 2000. To meet the credit requirements of
the landlord, both the Company and an affiliated corporation, e.Digital
Corporation, entered into a joint lease agreement for approximately 13,000
square feet with aggregate monthly payments of $15,122 inclusive of utilities
and costs. The Company is occupying 7,500 square feet of the jointly leased
office space with its share of monthly payments being approximately $8,300. The
Company could become obligated for the entire lease should e.Digital default on
its share of payments thereon. Office rent expense recorded by the Company for
the years ended September 30, 1999, 1998 and 1997 was $96,500, $91,515 and
$32,000 respectively.
Royalties
- ---------
In connection with a 1992 agreement to purchase technology, the Company is
required to pay a stockholder/director of the Company a 1% royalty on all net
sales of certain radio equipment (as defined). Sales of these products were
discontinued in fiscal 1998. For the years ended September 30, 1998 and 1997,
total royalties paid by the Company on radio equipment sales were $973 and
$7,900, respectively.
F- 12
<PAGE>
American Technology Corporation
Notes to Financial Statements
===============================================================================
The Company is also obligated to pay the stockholder/director royalties of 2% on
gross revenues of the Company's sound reproduction and global positioning
satellite technologies. As of September 30, 1999, no amounts have been paid nor
are due under this agreement.
Notes Receivable-Officer
- ------------------------
At September 30, 1999 and 1998 an officer was obligated to the Company in the
amount of $27,895 from a cash loan made to exercise stock options. The note is
presented as a reduction from stockholders' equity in the accompanying financial
statements. The note is due on or before March 31, 2000.
5. LONG-TERM DEBT
During fiscal 1997, the Company raised $1,000,000 through the issuance of 6%
convertible subordinated promissory notes due March 1, 1999 (the "Convertible
Notes"). As the market price of the Company's Common Stock exceeded the
conversion price of the Convertible Notes at the date of issuance, the Company
recognized embedded non-cash interest expense of $122,700 upon the issuance of
the Convertible Notes in fiscal 1997. The Convertible Notes were issued with
detachable warrants which grant the holders the right to acquire up to 50,000
shares of the Company's Common Stock at a per share price of $5.00. The warrants
expire on March 1, 2000. The warrants were determined to have a value of $2,500,
which amount was recorded as additional paid-in capital.
During fiscal 1997, holders of $625,000 of the Convertible Notes converted their
notes, and accrued interest thereon, into 181,230 shares of the Company's Common
Stock. During fiscal 1998, the remaining balance of $375,000 and accrued
interest of $18,206 (including $11,651 accrued from September 30, 1997) was
converted into 128,459 Common Shares.
6. INCOME TAXES
Income taxes consisted of the following:
<TABLE>
<CAPTION>
Years ended September 30, 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred (benefit)
Federal $(1,025,000) $(1,302,000) $(597,000)
State (181,000) (230,000) (105,000)
----------- ----------- ---------
(1,206,000) (1,532,000) (702,000)
Change in valuation allowance 1,206,000 1,532,000 702,000
----------- ----------- ---------
$ - $ - $ -
=========== =========== =========
</TABLE>
A reconciliation of income taxes at the federal statutory rate of 34% to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
Years ended September 30, 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes (benefit) computed at the
federal statutory rate $(1,034,000) $(1,562,000) $(729,000)
Tax effect of change in valuation allowance 1,206,000 1,526,000 638,000
Nondeductible compensation and
interest expense (18,000) 288,000 168,000
State income taxes (benefit), net of
federal tax benefit (182,000) (276,000) (127,000)
Other 28,000 24,000 50,000
----------- ----------- ---------
$ - $ - $ -
=========== =========== =========
</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, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1999 1998
---- ----
<S> <C> <C>
</TABLE>
F- 13
<PAGE>
American Technology Corporation
Notes to Financial Statements
================================================================================
<TABLE>
<S> <C> <C>
Net operating loss carryforwards $ 4,173,000 $ 2,866,000
Equipment 8,000 22,000
Accruals and other 46,000 15,000
Allowances 3,000 7,000
----------- -----------
Gross deferred tax asset 4,230,000 2,910,000
Less valuation allowance (4,110,000) (2,904,000)
----------- -----------
120,000 6,000
----------- -----------
Deferred tax liabilities:
Unrealized gain on investment securities (120,000) (6,000)
----------- -----------
Net deferred tax asset (liability) $ - $ -
=========== ===========
</TABLE>
A valuation allowance has been recorded to offset the net deferred tax asset as
management has been unable to determine that it is more likely than not that the
deferred tax asset will be realized.
At September 30, 1999, the Company, for federal income tax purposes, has net
operating loss carryforwards of approximately $10,500,000 which expire through
2019 of which certain amounts are subject to limitations under the Internal
Revenue Code of 1986, as amended.
7. STOCKHOLDERS' EQUITY
Preferred Stock
- ---------------
The Company is authorized to issue 5,000,000 shares of preferred stock, $0.0001
par value, without any action by the stockholders. The board of directors has
the authority to divide any and all shares of preferred stock into series and to
fix and determine the relative rights and preferences of the preferred stock,
such as the designation of series and the number of shares constituting such
series, dividend rights, redemption and sinking fund provisions, liquidation and
dissolution preferences, conversion or exchange rights an voting rights, if any.
With respect to voting rights, if the preferred stock were permitted to vote in
the election of directors or on other matters, each such share would be entitled
to one vote, and such shares may vote with the shares of common stock or may
vote as a separate class. Issuance of preferred stock by the board of directors
could result in such shares having dividend and or liquidation preferences
senior to the rights of the holders of common stock and could dilute the voting
rights of the holders of common stock.
During December 1998 and January 1999, the Company issued 250,000 shares of
Series B Preferred Stock, par value $0.00001 ("Preferred Stock") for cash at
$10.00 per share for net proceeds of $2,480,000. The dollar amount of Preferred
Stock, increased by $0.60 per share accretion per annum and other adjustments,
is convertible one or more times into fully paid shares of Common Stock of the
Company at a conversion price which is the lower of (a) $5.00 per share or (b)
92% of the average of the five days closing bid market price prior to
conversion, but in no event less than $3.50 per share. The shares of Preferred
Stock may be called by the Company for conversion if the market price of the
Common Stock exceeds $12.00 per share for ten days and certain conditions are
met. The Preferred Stock is subject to automatic conversion on November 30,
2001.
In connection with the sale of Preferred Stock the Company issued warrants to
purchase 250,000 shares of Common Stock at $6.00 per share until November 30,
2001. At September 30, 1999 the Preferred Stock would have been convertible into
772,461 shares of Common Stock.
Warrants
- --------
During fiscal 1999 the Company granted a warrant to purchase 50,000 shares at
$10.00 per share, valued at $128,000 in connection with consulting services.
This amount was treated as a cost of the Preferred stock offering. During fiscal
1998 the Company granted warrants to purchase 75,000 shares at $16.00 per share
in connection with consulting services. These warrants were valued at $122,000.
During fiscal 1997 the Company granted warrants to purchase 90,000 shares at
$5.00 per share in connection with consulting services. The warrants were valued
at $33,300.
During fiscal 1998, the Company amended the terms of a warrant to purchase
100,000 shares of Common Stock previously granted to a director in connection
with a 1992 financing transaction. The amendment provided for a
F-14
<PAGE>
American Technology Corporation
Notes to Financial Statements
================================================================================
cashless exercise, which was completed in May 1998. The Company recorded non-
cash interest expense of $920,000 in connection with the cashless exercise.
At September 30, 1999, the Company had the following warrants outstanding
arising from the offerings and transactions, each exercisable into one Common
Share:
<TABLE>
<CAPTION>
Number Exercise Price Expiration Date
------- -------------- ---------------
<S> <C> <C> <C>
60,000 $ 5.00 February 5, 2000
47,500 $ 5.00 March 1, 2000
172,500 $ 7.50 August 1, 2000
25,000 $ 16.00 June 18, 2000
250,000 $ 6.00 November 30, 2001
50,000 $ 16.00 May 12, 2003
50,000 $ 10.00 January 5, 2004
-------
655,000
=======
</TABLE>
At September 30, 1998, the Company had the following warrants outstanding, each
exercisable into one Common Share:
<TABLE>
<CAPTION>
Number Exercise Price Expiration Date
------- -------------- ---------------
<S> <C> <C> <C>
60,000 $ 5.00 February 5, 2000
47,500 $ 5.00 March 1, 2000
172,500 $ 7.50 August 1, 2000
25,000 $ 16.00 June 18, 2000
50,000 $ 16.00 May 12, 2003
-------
355,000
=======
</TABLE>
8. BENEFIT PLANS
1997 Employee Stock Compensation Plan ("ESC")
- ---------------------------------------------
Effective March 10, 1997, the Company adopted the 1997 Employee Stock
Compensation Plan, expiring March 9, 2002, the plan was modified on March 5,
1999 reserving for issuance an aggregate of 150,000 shares of the Company's
Common Stock and extending the expiration date until 2002. The 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 1999, the
Company issued 25,699 shares of common stock under the Plan recording general
and administrative expense of $140,137 for awards valued at an estimated fair
market value ranging from $4.40 to $7.125per share.
During fiscal 1998, the Company issued 14,750 shares of Common Stock under the
plan recording general and administrative expense of $91,919 for awards valued
at an estimated fair market value ranging from $3.875 to $8.53 per share. During
fiscal 1997, the Company issued 40,327 shares of common stock under the Plan
recording general and administrative expense of $201,414 for awards valued at an
estimated fair market value ranging from $3.75 to $6.38 per share.
1997 Stock Option Plan
- -----------------------
The Company has a Stock Option Plan, expiring January 22, 2008, reserving for
issuance 500,000 shares of the Company's Common Stock. The Options issued under
the Plan shall, in the discretion of the Board, be either Incentive Stock
Options or Nonstatutory Stock Options. The Stock Option Plan provides for grants
to employees, directors or consultants, both at the discretion of the Board of
Directors. Options to purchase Common Stock of the Company at a price not less
than the fair market value of the shares on the date of grant. In the case of a
significant stockholder, the option price of shares will not be less than 110
percent of the fair market value of the share on the date of grant. Any options
granted under the Stock Option Plan must be exercised within ten years of the
date they were granted (five years in the case of a significant stockholder). As
of September 30, 1999, there were options outstanding covering 428,300 shares of
Common Stock under this Plan.
F-15
<PAGE>
American Technology Corporation
Notes to Financial Statements
================================================================================
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, 1999, there were options outstanding covering 479,000 shares of
Common Stock under this Plan.
1992 Non-Statutory Stock Option Plan ("NSO")
- --------------------------------------------
The Company has an NSO Plan, expiring March 2, 2002, originally reserving for
issuance 1,000,000 shares of the Company's Common Stock. The NSO Plan provides
for grants to either full or part-time employees, directors or consultants, at
the discretion of the Board of Directors, options to purchase Common Stock of
the Company at a price not less than the fair market value of the shares on the
date of grant. Any options granted under the NSO Plan must be exercised within
10 years of the date they were granted. As of September 30, 1999, there were
options outstanding covering 185,000 shares under this Plan.
Other Stock Options
- -------------------
During fiscal 1999 the Company granted an executive officer options to purchase
200,000 common shares exercisable at $10.00 per share. These options are only
exercisable contingent on the Company maintaining a trading price of its common
stock of $25.00 (as to 50% of the option) and $50.00 (for the balance) for a
minimum of 20 consecutive days and are exercisable until July 16, 2003.
During fiscal 1998 the Company granted to an executive officer options to
purchase up to 290,000 common shares vesting over a period of two years. A total
of 240,000 options are exercisable at $8.50 per share until July 15, 2003 and
50,000 options are exercisable at $16.00 per share until October 2, 2002.
Non-Cash Stock Option Compensation Expense
- ------------------------------------------
During fiscal 1999, 1998 and 1997, the Company recorded non-cash compensation
expense of $131,000, $316,000 and $244,800 respectively, under its stock option
plans to non-employees through the granting of 50,000 options, 80,000 options
and 97,500 options, respectively. Of the non-cash compensation expense recorded
in fiscal 1998, $136,000 pertained to the fourth quarter. Also during fiscal
1998, 292,963 common shares were issued in connection with the cashless exercise
of stock options relating to 350,000 shares.
Stock Option Pro Forma and Summary Information
- ----------------------------------------------
The Financial Accounting Standard Boards Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide pro
forma information regarding net loss and net loss per share as if compensation
costs for the Company's stock options plans and other stock awards had been
determined in accordance with the fair value based method prescribed in SFAS No.
123. The Company estimates the fair value of each stock award (those under the
stock option plans described above plus warrants for consulting services) (see
note 7) at the grant date by using the Black-Scholes option-pricing model with
the following weighted average assumptions used respectively; dividend yield of
zero percent for all years; expected volatility of 70 to 100 percent; risk-free
interest rates between 4.5 and 6 percent; and expected lives of 1 to 5 years.
Under the accounting provisions for SFAS No. 123, the Company's net loss
available to Common Shareholders and basic and diluted per Common Share would
have been increased by the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended September 30, 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Loss available to Common Shareholders
As reported $(3,809,486) $(4,593,713) $(2,762,009)
Pro forma (4,703,717) (4,906,273) (3,195,634)
Net loss per Common Share
As reported $ (.33) $ (.42) $ (.30)
</TABLE>
F-16
<PAGE>
American Technology Corporation
Notes to Financial Statements
================================================================================
<TABLE>
<S> <C> <C> <C>
Pro forma $(.41) $(.45) $(.34)
</TABLE>
During the initial phase-in period of SFAS No. 123, the effect on pro forma
results are not likely to be representative of the effects on pro forma results
in future years since options vest over several years and additional awards
could be made each year.
A summary of the status of the Company's stock option plans as of September 30,
1999, 1998 and 1997 and the changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
================ ==============
<S> <C> <C>
Fiscal 1997:
Outstanding October 1, 1996 1,586,000 $ 0.58
Granted 1,054,000 $ 5.66
Canceled/expired (25,000) $ 0.50
Exercised (942,500) $ 0.57
-----------
Outstanding September 30, 1997 1,672,500 $ 3.79
===========
Exercisable at September 30, 1997 1,016,500 $ 2.55
===========
Weighted average fair value of options granted during the year $ 1.51
======
Fiscal 1998:
Outstanding October 1, 1997 1,672,500 $ 3.79
Granted 567,600 $ 7.46
Canceled/expired (743,200) $ 5.81
Exercised (158,800) $ 1.35
-----------
Outstanding September 30, 1998 1,338,100 $ 4.51
===========
Exercisable at September 30, 1998 898,568 $ 2.84
===========
Weighted average fair value of options granted during the year $ 0.52
======
Fiscal 1999:
Outstanding October 1, 1998 1,338,100 $ 4.51
Granted 471,800 $ 7.06
Canceled/expired (145,100) $ 6.09
Exercised (82,500) $ 3.88
-----------
Outstanding September 30, 1999 1,582,300 $ 5.16
===========
Exercisable at September 30, 1999 975,666 $ 3.45
===========
Weighted average fair value of options granted during the year $ 3.93
======
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.50-$ 0.55 480,000 1.40 $ 0.52 480,000 $ 0.52
$3.59-$ 4.48 231,000 2.71 4.09 166,333 4.21
$4.98-$ 5.90 330,800 3.74 5.22 177,933 5.42
$ 7.81 40,500 1.57 7.81 33,900 7.81
$ 8.50 250,000 3.79 8.50 92,500 8.50
$10.00 200,000 3.79 10.00 - -
$16.00 50,000 3.01 16.00 25,000 16.00
- ----------------------------------------------------------------------------------------------
$0.50-$16.00 1,582,300 2.82 $ 5.16 975,666 $ 3.45
==============================================================================================
</TABLE>
F-17
<PAGE>
American Technology Corporation
Notes to Financial Statements
================================================================================
Employee Benefit - 401K Plan
- ----------------------------
On January 1, 1998, the Company established a 401(k) plan covering its
employees. The plan originated service effectively in June 1998. Matching
contributions are made on behalf of all participants at the discretion of the
Board of Directors. During the fiscal years ended September 30, 1999, the
Company made matching contributions of approximately $10,500.
9. COMMITMENTS AND CONTINGENCIES
Facility
- --------
The Company and e.Digital, an affiliated company, have a joint lease on office
space in San Diego, California (see note 4). The lease expires on July 31, 2000.
The total operating lease obligation under the joint lease for office space is
$326,227 of which the Company's share of minimum commitments is as follows:
Year ending:
2000 $83,109
=======
The Company could become obligated for the entire lease should e.Digital default
on its share of payments thereon.
Automobile Leases.
- -----------------
The Company has three automobile lease obligations with terms of 24 to 36
months. All leases will expire as of September 2001 and are reported as
operating leases within the financial statements. The obligations under these
leases are as follows:
Years ending:
2000 $16,648
2001 10,000
-------
$26,648
=======
Equipment Operating Lease
- -------------------------
The Company has a 36 month equipment lease obligation which is reported as an
operating lease within the financial statements. The lease expires in September
2000. The obligations under this lease is as follows:
Year ending:
2000 $12,570
=======
Employment Agreements
- ---------------------
The company has entered into four employment agreements with executive officers
and one key employee. These agreements are each for three-year terms expiring
from August, 2000 to September, 2001. The agreements may be automatically
renewed for one-year terms. The agreements provide for minimum annual salaries
ranging from $60,000 to $240,000, a total of $530,000, in the aggregate. Certain
of the agreements provide for up to twelve months severance for certain
terminations and payments for the term of the agreement (or in one case twelve
months, if longer) on certain changes in control.
10. MAJOR CUSTOMERS
For the year ended September 30, 1999, sales to two individual customers
accounted for 20% and 13% of total revenue. During the year ended September 30,
1998, sales to three individual customers accounted for 19%, 18% and 10% of
total revenues. During the year ended September 30, 1997, sales to three
individual customers accounted for 30%, 14% and 13% of total revenues.
11. SUPPLIER AGREEMENTS
F-18
<PAGE>
American Technology Corporation
Notes to Financial Statements
================================================================================
Finished consumer products are purchased from a variety of foreign and domestic
sources under contract or by purchase order. In fiscal 1999 and 1998, the
Company sourced from outside foreign manufacturers certain finished products
representing approximately 99% and 81%, respectively of its net revenues. The
Company has relationships with a number of high quality, low-cost foreign
manufacturers who provide the Company with a diverse line of consumer electronic
products. The Company believes this diversification is such that it is not
reliant on any one supplier.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended September 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-cash financing activities:
Convertible notes exchanged for Common Stock $ - $375,000 $625,000
Interest paid by issuance of Common Stock - 18,206 9,310
Cash paid for interest - - 170
Bonus paid in exchange for payment on officer note receivable - 125,255 -
</TABLE>
F-19
<PAGE>
American Technology Corporation
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
================================================================================
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Cost and At end of
Description Of period Expenses Deductions Period
- ------------------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended September 30, 1999 $16,893 $24,599 $33,492 $ 8,000
Year ended September 30, 1998 $ 7,842 $15,000 $ 5,845 $17,000
Year ended September 30, 1997 $10,000 - $ 2,158 $ 7,842
</TABLE>
F-20
<PAGE>
Exhibit 10.15
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into effective as of the 1st day of June, 1998,
between AMERICAN TECHNOLOGY CORPORATION, a Delaware publicly traded corporation
(the "Company"), and Robert Todrank ("Employee").
Employee, in consideration of the covenants and agreements hereinafter
contained, agrees as follows with respect to the employment of the Company of
Employee and Employees future business activities.
1. Employment: Term of Employment. The Company hereby employs Employee and
------------------------------
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth. Subject to the provisions for termination as hereinafter
provided, Employee's term of employment by the Company shall be from the date of
this agreement until September 30, 2001, and automatically renewed for one year
periods thereafter unless thirty (30) days written notice of termination is sent
prior to the annual renewal date. This Agreement will supersede all prior
written and oral agreements entered into by and between Company and Employee.
2. Services to be Rendered by Employee. Employee shall be subject to the
-----------------------------------
direction of the Company's Chief Executive Officer and his duties shall be those
generally vested in the office of Vice President of Licensing and Business
Development for the corporation and he shall have such other powers and duties
as may be reasonably prescribed by the Company's Chief Executive Officer, Board
of Directors, or a duly authorized committee thereof, and shall perform such
duties as from time to time may be decided upon by the Company's Chief Executive
Officer, Board of Directors, or a duly authorized committee thereof, including
but not limited to, speaking for and promoting the sale of the Company's product
lines as public spokesman both in print and television ads.
The Employee agrees that he will serve the Company faithfully and to the best of
his abilities, devoting substantially all his time, energy and skill to the
activities of the Company and the promotion of its interests. Employee shall not
serve as an officer or director or similar capacity with any other entity except
with the consent of the Company.
3. Compensation.
------------
(a) For the services to be rendered by Employee during his employment by the
Company, the Company shall pay Employee a Base Salary of One Hundred Ten
Thousand Dollars ($110,000) per annum during the term of this agreement,
prorated for any partial period and paid in conformity with the Company's normal
payroll period. Employee's salary shall be reviewed by the Company's Chief
Executive Officer from time to time in his discretion, and Employee will receive
such salary increases, if any, as the Chief Executive Officer in his sole
discretion determines.
(b) Employee shall be entitled to participate in any bonus pool or similar
program established by the Board of Directors.
(c) The Employee's place of employment shall be considered San Diego County,
California (or other mutually agreed upon location).
(d) Employee shall be entitled to participate in and receive benefits under the
Company's executive benefits plans as in effect from time to time, including,
medical insurance, sick leave, and vacation time, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and Company policies. Initial vacation time shall be at least three weeks per
annum.
(e) The Company shall pay or reimburse Employee for all expenses normal
reimbursed by the Company and reasonably incurred by him in furtherance of his
duties hereunder and authorized by the Company, including without limitation,
expenses for entertainment, traveling, meals, hotel accommodations and the like
upon submission by him of vouchers or an itemized list thereof as the Company;
may from time to time adopt and authorize, and as may be required in order to
permit such payments as proper deductions to the Company under the Internal
Revenue Code of 1986 and the rules and regulations adopted pursuant thereto now
or hereafter in effect.
(f) All amounts payable or which become payable under any provision of this
Agreement will be subject to any deductions authorized in writing by you and any
deductions and withholdings required by law.
4. Indemnification.
---------------
(a) If, after the date of the commencement of the Employment Period, the
Employee is made a party or is threatened to be made a party to any action, suit
or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was an officer of the Company
or is or was serving at the request of the Company as a director, officer,
1
<PAGE>
member, employee or agent of another corporation or partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether or not the basis of such Proceeding is an alleged act or failure
to act in an official capacity as a director, officer, member, employee or
agent, he shall be indemnified and held harmless by the Company to the fullest
extent authorized by Delaware law, as the same exists or may hereafter be
amended, against all expense, liability and loss (including, without limitation,
attorneys' fees, judgments, fines and amounts paid or to be paid in settlement)
reasonably incurred or suffered by the Employee in connection therewith,
including, without limitation, payment of expenses incurred in defending a
Proceeding prior to the final disposition of such Proceeding (subject to receipt
of an undertaking by the Employee to repay such amount if it shall ultimately be
determined that the Employee is not entitled to be indemnified by the Company
under Delaware law), and such indemnification shall continue as to the Employee
even if he has ceased to be an officer, member, employee or agent of the Company
or other enterprise and shall inure to the benefit of his heirs, executors and
administrators.
(b) The right of indemnification and the payment of expenses incurred in
defending a Proceeding in advance of its final disposition conferred in this
Section 4 shall not be exclusive of any other right that the Employee may have
or hereafter may acquire under any statute, provision of the Certificate of
Incorporation or Bylaws of the Company, agreement, vote of shareholders or
disinterested directors or otherwise.
5. Termination of Employment.
--------------------------
(a) The Company shall have the right at its option to terminate the employment
of Employee hereunder by giving written notice thereof to the Employee in the
event of any of the following:
(1) The Company may terminate this Agreement at any time with good
cause, as determined by the Board of Directors of the Company, or a
duly authorized committee thereof, acting in good faith and upon
reasonable grounds, whereupon all compensation to Executive shall
cease as of the effective date of termination. As used in this
paragraph, the term "good cause" shall mean (i) dishonesty by
Executive detrimental to the best interests of the Company, (ii)
continuing inattention to or neglect of the duties to be performed by
Employee, (iii) willful disloyalty of Employee to Company, (iv) the
death or disability of Employee, (v) conviction by a court of
competent jurisdiction of Employee in any fraud, or (vi) the
imparting of any material confidential information by Employee in
violation of this Agreement.
(2) If the Company gives Employee thirty days advance written notice
of termination of employment.
(3) If this Agreement is terminated by the Company pursuant to
Paragraph 5(a)(2) hereof, then Employee shall be entitled to
severance payments equal to six (6) months of his then monthly Base
Salary and any bonus on an as if perfected basis payable in one lump
sum within thirty (30) days after such effective termination of
Employee's employment by the Company irrespective of the remaining
term of this agreement.
(b) The Employee shall have the right at his sole option to terminate
employment hereunder at any time upon thirty (30) days written notice.
6. Soliciting Customers. The Employee agrees that he will not for a period of
--------------------
one (1) year immediately following the termination of his employment with the
Company, either directly or indirectly make known to any competing person, firm,
or corporation the names or addresses of any of the customers of the Company or
any other information pertaining to them that is not in the public domain.
7. Trade Secrets of the Company. The Employee prior to and during the term of
----------------------------
employment under this Agreement has had and will have access to and become
acquainted with various trade secrets, consisting of devices, secret inventions,
processes, and compilations of information, records, and specifications which
are owned by the Company, and which are regularly used or to be used in the
operation of the business of the Company. The Employee shall not disclose any of
the aforesaid trade secrets, directly or indirectly, or use them in any way,
either during the term of this agreement or for a period of 36 months
thereafter, except as required in the course of his employment. All files,
records, documents, drawings, specifications, equipment, and similar items
relating to the business of the Company, whether prepared by the Employee or
otherwise coming into his possession, shall remain the exclusive property of the
Company and shall not be removed under any circumstances from the premises of
the Company where the work is being carried on without prior written consent of
the Company or consistent with the Company's normal business practices.
8. Inventions and Patents.
----------------------
(a) Employee has provided the Company with a list of audio properties developed
by Employee prior to employment. The Company shall separately negotiate for
license(s) for any of these listed properties should the Company desire to use
them in any of its product programs. Other inventions shall be assumed to fall
under the provisions of this Section 8.
2
<PAGE>
(b) The Employee agrees that as to any inventions made by him during the term
of his employment, solely or jointly with others, which are made with the
equipment, supplies, facilities or trade secret information of the Company, or
which relate at the time of the conception or reduction to purchase of the
invention to the business of the Company or the Company's actual or demonstrably
anticipated research and development, or which result from any work performed by
the Employee for the Company, shall belong to the Company and the Employee
promises to assign such inventions to the Company. The Employee also agrees that
the Company shall have the right to keep such inventions as trade secrets, if
the Company chooses. The Employee agrees to assign to the Company the
Executive's rights in any other inventions where the Company is required to
grant those rights to the United States government or any agency thereof. In
order to permit the Company to claim rights to which it may be entitled, the
Employee agrees to disclose to the Company in confidence all inventions which
the Employee makes arising out of the Employee's employment and all patent
application filed by the Employee within one year after the termination of his
employment.
(c) The Employee shall assist the Company in obtaining patents on all
inventions, designs, improvements, and discoveries patentable by the Company in
the United States and in all foreign countries, and shall execute all documents
and do all things necessary to obtain letters patent, to vest the Company with
full and extensive title thereto, and to protect the same against infringement
by others.
9. Severability. Each paragraph and subparagraph of this Agreement shall be
------------
construed and considered separate and severable from the validity and
enforceability of any other provision contained in this Agreement.
10. Assignment. The rights of the Company (but not its obligations) under this
----------
Agreement may, without the consent of the Employee, be assigned by the Company
to any parent, subsidiary, or successor of the Company; provided that such
parent, subsidiary or successor acknowledges in writing that it is also bound by
the terms and obligations of this Agreement. Except as provided in the preceding
sentence, the Company may not assign all or any of its rights, duties or
obligations hereunder without prior written consent of Employee. The Employee
may not assign all or any of his rights, duties or obligations hereunder without
the prior written consent of the Company.
11. Notices. All notices, requests, demands and other communications shall be
-------
in writing and shall be defined to have been duly given if delivered or if
mailed by registered mail, postage prepaid:
(a) If to Employee, addressed to him at the following address as may be changed
in writing from time to time:
Robert Todrank
__________________
__________________
(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.
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
3
<PAGE>
other rights it may have, to obtain relief to restrain any breach hereof or
otherwise to specifically enforce any of the provisions hereof.
17. Waiver of Breach. The waiver by one party to this Agreement of a breach of
----------------
any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the said party.
18. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties hereto and may be modified or amended only by a written instrument
executed by parties hereto. Effective on the date hereof, any prior employment
agreements between the Company and the Employee shall terminate.
19. Attorney's Fees. In the event that either party must institute legal action
---------------
to compel the other to comply with the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees and costs.
20. Good Faith. Each of the parties hereto agrees that he or it shall act in
----------
good faith in all actions taken under this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
/s/ ELWOOD G. NORRIS July 8, 1998
- --------------------------------
American Technology Corporation
Elwood G. Norris, Director
/s/ ROBERT PUTNAM July 8, 1998
- --------------------------------
Robert Putnam, Vice President
/s/ ROBERT TODRANK July 8, 1998
- --------------------------------
Robert Todrank, Employee
4
<PAGE>
Exhibit 10.16
AMERICAN TECHNOLOGY CORPORATION
______________________________
Special Stock Option
________________
Granted Under the Approval of the Board of Directors of American Technology
Corporation
THIS SPECIAL STOCK OPTION, dated as of July 16, 1999 (the "Date of Grant"),
is granted by AMERICAN TECHNOLOGY CORPORATION, a Delaware corporation
("Company"), to Cornelius J. Brosnan (the "Optionee"), whose status with the
Company is described on the signature page hereof below his signature.
WHEREAS, the Optionee is now the President, CEO and Chairman 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. Pursuant to the Motion passed at the Board of Directors of
the Company dated July 16, 1999, the Company hereby grants to the Optionee an
option (the "Option") to purchase 100,000 shares of the Company's common stock,
$.00001 par value per share (the "Option Shares") at the price of $10.00 per
share (the "Purchase Price" or "Exercise Price") and exercisable only upon the
Company's publicly traded common shares achieving and maintaining $25.00 for a
minimum of twenty (20) consecutive trading days. This Option is granted
separately at the discretion of the Board of Directors and is not an option
pursuant to the 1992 or 1997 option plans. Both the Purchase Price and the
number of Option Shares purchasable may be adjusted pursuant to Paragraph 10
hereof.
2. Term. This Option is exercisable during the period beginning with
the Date of Grant and ending July 16, 2003, at 5:00 p.m. (Pacific Time), except
as provided in Paragraph 7 hereof.
3. Exercise of Option. During the Optionee's life, this Option may
only be exercised by him or her. 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 in cash, represented by bank or
cashier's check, certified check or money order.
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:
<PAGE>
"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 may, but shall in no event by obligated to, register any
securities covered hereby pursuant to the Act. 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 as
follows:
(i) Upon termination of the Optionee's directorship with the Company
for cause;
(ii) At the expiration of six (6) months from the date of the Optionee's
resignation or termination of the Optionee's directorship with the Company
without cause, for any reason other than death; provided, that if the Optionee
dies within such six-month period, subclause (iii) below shall apply; or
(iii) At the expiration of fifteen (15) months after the date of death of
the Optionee.
(b) This Option confers no right upon the Optionee with respect to the
continuation of his directorship (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.
<PAGE>
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 not
less than 45 days prior to such effective date, and (z) the Options or other
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.
<PAGE>
The failure of the Optionee or other holder of Option Shares to promptly
give such notice to the Company shall entitle the Company to cancel this Option
forthwith, without prior notice to the holder hereof.
11. 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 Drive 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 Special Stock Option
as of the day and year first above written.
AMERICAN TECHNOLOGY CORPORATION
By /s/ ELWOOD G. NORRIS
--------------------
Elwood G. Norris, Director
ATTEST:
By /s/ RENEE WARDEN
----------------
Renee Warden, Secretary
OPTIONEE NAME and STATUS;
Cornelius J. Brosnan, President, CEO and
Chairman
ORIGINAL to Optionee / COPY to Company
<PAGE>
Exhibit 10.17
AMERICAN TECHNOLOGY CORPORATION
_____________________________
Special Stock Option
________________
Granted Under the of the Board of Directors of American Technology Corporation
THIS SPECIAL STOCK OPTION, dated as of July 16, 1999 (the "Date of Grant"),
is granted by AMERICAN TECHNOLOGY CORPORATION, a Delaware corporation
("Company"), to Cornelius J. Brosnan (the "Optionee"), whose status with the
Company is described on the signature page hereof below his signature.
WHEREAS, the Optionee is now the President, CEO and Chairman 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. Pursuant to the Motion passed at the Board of Directors of the
Company dated July 16, 1999, the Company hereby grants to the Optionee an option
(the "Option") to purchase 100,000 shares of the Company's common stock, $.00001
par value per share (the "Option Shares") at the price of $10.00 per share (the
"Purchase Price" or "Exercise Price") and exercisable only upon the Company's
publicly traded common shares achieving and maintaining $50.00 for a minimum of
twenty (20) consecutive trading days. This Option is granted separately at the
discretion of the Board of Directors and is not an option pursuant to the 1992
or 1997 option plans. Both the Purchase Price and the number of Option Shares
purchasable may be adjusted pursuant to Paragraph 10 hereof.
2. Term. This Option is exercisable during the period beginning with the
Date of Grant and ending July 16, 2003, at 5:00 p.m. (Pacific Time), except as
provided in Paragraph 7 hereof.
3. Exercise of Option. During the Optionee's life, this Option may only
be exercised by him or her. 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 in cash, represented by bank or
cashier's check, certified check or money order.
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:
<PAGE>
"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 may, but shall in no event by obligated to, register any
securities covered hereby pursuant to the Act. 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 as
follows:
(i) Upon termination of the Optionee's directorship with the Company for
cause;
(ii) At the expiration of six (6) months from the date of the Optionee's
resignation or termination of the Optionee's directorship with the Company
without cause, for any reason other than death; provided, that if the Optionee
dies within such six-month period, subclause (iii) below shall apply; or
(iii) At the expiration of fifteen (15) months after the date of death of
the Optionee.
(b) This Option confers no right upon the Optionee with respect to the
continuation of his directorship (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.
<PAGE>
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 not
less than 45 days prior to such effective date, and (z) the Options or other
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.
<PAGE>
The failure of the Optionee or other holder of Option Shares to promptly
give such notice to the Company shall entitle the Company to cancel this Option
forthwith, without prior notice to the holder hereof.
11. 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 Drive 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 Special Stock Option
as of the day and year first above written.
AMERICAN TECHNOLOGY CORPORATION
By /s/ ELWOOD G. NORRIS
----------------------------
Elwood G. Norris, Director
ATTEST:
By /s/ RENEE WARDEN
------------------------
Renee Warden, Secretary
OPTIONEE NAME and STATUS;
Cornelius J. Brosnan, President, CEO and Chairman
ORIGINAL to Optionee / COPY to Company
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
American Technology Corporation
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (File No. 333-09265, File No. 333-09269, File No. 333-
23845 and File No. 333-59929) and Forms S-3 (File No. 333-27455, File No. 333-
36003, File No. 333-71351) of our report dated November 5, 1999 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, 1999.
/s/ BDO SEIDMAN, LLP
---------------------
BDO Seidman, LLP
Denver, Colorado
December 5, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 590,236
<SECURITIES> 299,649
<RECEIVABLES> 166,532
<ALLOWANCES> 8,000
<INVENTORY> 287,321
<CURRENT-ASSETS> 1,540,319
<PP&E> 611,587
<DEPRECIATION> 478,540
<TOTAL-ASSETS> 2,161,036
<CURRENT-LIABILITIES> 443,844
<BONDS> 0
0
3
<COMMON> 115
<OTHER-SE> 1,717,074
<TOTAL-LIABILITY-AND-EQUITY> 2,161,036
<SALES> 787,408
<TOTAL-REVENUES> 823,753
<CGS> 619,665
<TOTAL-COSTS> 619,665
<OTHER-EXPENSES> 3,309,406
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,041,634)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,041,634)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,041,634)
<EPS-BASIC> (.33)
<EPS-DILUTED> (.33)
</TABLE>
