-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lgt6G7m+6pi4ffUv9JSYz3t4MPWP3ZPPrULh+Ma2FXQ8onjMaD+bQr+yBtWi4lYk Zg2AL3XaZPEr5IfggNbHCA== 0000936392-97-001593.txt : 19971203 0000936392-97-001593.hdr.sgml : 19971203 ACCESSION NUMBER: 0000936392-97-001593 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971201 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN TECHNOLOGY CORP /DE/ CENTRAL INDEX KEY: 0000924383 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 870361799 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-24248 FILM NUMBER: 97730895 BUSINESS ADDRESS: STREET 1: 13114 EVENING CREEK DRIVE SOUTH CITY: SAN DIEGO STATE: CA ZIP: 92128 BUSINESS PHONE: 6196792114 10KSB 1 FORM 10-KSB 1 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED SEPTEMBER 30, 1997 Commission File No. 0-24248 AMERICAN TECHNOLOGY CORPORATION (Name of small business issuer in its charter) Delaware 87-0361799 - -------------------------------- ------------------------- (State or other jurisdiction of (I.R.S. Empl. Ident. No.) incorporation or organization) 13114 Evening Creek Drive South, San Diego, California 92128 (Address of principal executive offices) (Zip Code) (619) 679-2114 (Issuer's telephone number) SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: Common Stock, $.00001 par value ------------------------------- (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The Company's revenues for its most recent fiscal year were $967,408. The aggregate market value of the voting stock held by non-affiliates of the registrant on November 20, 1997 was approximately $35,180,000 based on an average of the closing bid and ask price of $5.22 as reported on the NASD's OTC Electronic Bulletin Board system. At November 20, 1997, 10,065,002 shares of common stock, par value $.00001 per share (the registrant's only class of voting stock), were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: None ================================================================================ 1 2
TABLE OF CONTENTS Page ---- PART I ITEM 1. Description of Business 2 ITEM 2. Description of Property 12 ITEM 3. Legal Proceedings 12 ITEM 4. Submission of Matters to a Vote of Security Holders 12 PART II ITEM 5. Market for Common Equity and Related 13 Stockholder Matters ITEM 6. Management's Discussion and Analysis or Plan of Operation 13 ITEM 7. Financial Statements 19 ITEM 8. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure 19 PART III ITEM 9. Directors, Executive Officers, Promoters and Control Persons; 19 Compliance With Section 16(a) of the Exchange Act ITEM 10. Executive Compensation 21 ITEM 11. Security Ownership of Certain Beneficial Owners and Management 23 ITEM 12. Certain Relationships and Related Transactions 23 ITEM 13. Exhibits, Lists and Reports on Form 8-K 24
FORWARD-LOOKING STATEMENTS IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21A OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE "SAFE HARBOR" PROVISIONS THEREOF. THEREFORE THE COMPANY IS INCLUDING THIS STATEMENT FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS. IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED TO CONSIDER THE SPECIFIC RISK FACTORS DESCRIBED BELOW AND NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE HEREOF. PART I ITEM 1. DESCRIPTION OF BUSINESS COMPANY DEVELOPMENT American Technology Corporation ( the "Company") was incorporated in the State of Utah on February 11, 1980 as Chasko, Inc. and on April 7, 1982 its name was changed to American Technology Corporation. On June 19, 1992 the Company redomiciled from the State of Utah to the State of Delaware. On July 14, 1992, the Company completed a 1-for-5 reverse stock split resulting in 7,291,228 common shares, par value $.00001, being issued and outstanding after the reverse split. The Company's shares trade in the over-the-counter market on the National Association of Securities Dealers OTC Bulletin Board system under the symbol "ATCO." From its inception in 1980 to 1984 the Company was primarily engaged in the development of a patented 2-speed long play cassette recorder ("X-TEN(R)"). On September 30, 1984, the Company acquired 100% of the outstanding shares of Norcom Electronics Corporation, which was engaged in development of patented ear radio and ear-microphone 2 3 technology. Both technologies feature small electronics for placement in or around the entrance to the ear canal to perform desired functions. From 1984 through 1987, the Company was engaged in various licensing and development activities with respect to the X-TEN, ear radio and ear-microphone technology. In March 1988 the Company assigned certain ear-microphone technology to Norris Communications, Inc. ("NCI") in return for 700,000 shares of NCI common stock and a 1% royalty on gross sales resulting from the exploitation of certain products using the ear-microphone technology ("EarPHONE"). The Company retained its ear radio technology. The ear-microphone technology was subsequently sold by NCI to JABRA Corporation ("JABRA") which is commercializing the EarPHONE for cellular phone, computer, multi-media and other customer uses. See "Certain Relationships and Related Transactions." From 1988 to early 1992, the Company was inactive due to inadequate financial resources. In early 1992 the Company was brought into good standing and restructured to take advantage of new financing opportunities designed to allow the Company to pursue development of its products and technologies. There were no changes to management resulting from this reactivation. Since the 1992 restructuring, Company operations have focused on developing its various technology assets. The Company's address is 13114 Evening Creek Drive South, San Diego, California, and its telephone number is 619-679-2114. Its Internet site is located at www.atcsd.com. BUSINESS OVERVIEW The Company is engaged in the development, manufacturing and marketing of consumer electronic products and acoustic technologies. The Company's ear radio technology was commercialized through the 1993 introduction of the FM ear radio and the 1995 introduction of the AM ear radio. During fiscal 1997 substantially all of the Company's revenues resulted from the manufacturing and marketing of its "FM Sounds" FM digital scanning ear radio. The Company intends to introduce new radio and related products and expand its ear radio distribution while developing new technology assets. The Company's HyperSonic(TM) Sound (HSS) reproduction technology has become its primary business focus, although there can be no assurance the Company can successfully exploit this new technology. HSS technology utilizes a new method of sound reproduction -- sound is generated in the air using ultrasonic frequencies, those above the normal range of hearing. A patents-pending process creates an ultrasonic wave that interacts in mid-air to produce wide spectrum audio. Since traditional loudspeaker system elements such as voice coils, magnets, cones/diaphragms, crossover networks, baffles and speaker enclosures are eliminated, management believes HSS technology offers higher quality sound with less distortion while using less power, space, and weight and at a lower cost. The sound produced by the HSS technology is also significantly more directional over greater distances with less volume loss than traditional sound reproduction methods thereby offering a number of application advantages to users. INDUSTRY BACKGROUND The human ear is sensitive to the rate at which sound vibrations occur or frequencies from about 20 Hertz (Hz) to 20,000 Hz (a Hertz is equal to one vibration per second). A wide variety of loudspeakers are produced today to recreate the range of hearing. These range from tweeters that attempt to re-create the top end of the audio spectrum, to mid-range speakers, and woofers to address the lower frequencies. Conventional loudspeakers are direct radiating - -- they are fundamentally a piston-like device designed to directly pump air molecules into motion to create audible sound waves. Better sound quality and low frequency (bass) reproduction is generally associated with larger and more expensive speakers. Since 1925, when C.W. Rice and E.W. Kellogg described basic, direct radiating speaker parameters, there have been few fundamental changes in speaker design or in the way electrical impulses are converted to sound. During this period, electronics (receivers, amplifiers, tuners and recording and playback equipment) have evolved from vacuum tubes to solid state digital circuits and recording technology has progressed from analog grooves in records to digital coding on compact discs that are read by a laser. Loudspeaker industry developments have focused primarily on improving individual elements such as magnets, coils, cones and enclosures. However, compared to the improvements in electronics, the Company believes loudspeakers are still relatively inefficient in converting electrical energy into acoustic energy and their design contributes to various forms of sound distortion. The loudspeaker market is an important segment of the electronics industry. Loudspeakers are used in televisions, radios, telephones, computers, automobiles, and a wide range of other consumer and industrial applications. From miniature speakers in hearing aids to large home theater, public address and concert sound systems, loudspeakers encompass a wide range in size, quality and cost. The manufacture and sale of loudspeakers is highly competitive and 3 4 includes both large international consumer electronic companies and specialty branded loudspeaker manufacturers. The Company believes the lack of fundamental innovation and the diversity and size of the loudspeaker market presents an opportunity to introduce new sound technology that will appeal to consumers and be cost-effective for manufacturers. HYPERSONIC SOUND STRATEGY The Company's objective is to become a leader in developing, marketing and licensing proprietary sound reproduction technologies and systems that address large and expanding domestic and international consumer electronics markets. The Company seeks to have its HSS technology become a significant alternative to conventional loudspeakers in target market segments. The Company believes that it is becoming increasingly difficult for manufacturers to differentiate their sound reproduction products and a novel method of reproduction with new features will find a receptive audience. The Company's marketing of the HSS technology continues to evolve as a result of market awareness, technical developments, changes in patent and protection strategies and reactions from prospective users of the technology. Rather than broadly licensing large market segments or industries, the Company is focusing its efforts on original equipment manufacturers ("OEMs") desiring to implement the HSS technology in specific products. The Company's strategy is to establish business relationships with leading participants in various segments of the electronics and sound reproduction markets. The Company believes this strategy will enable it to take advantage of the superior financial resources, technological capabilities, proprietary positions and market presence of these companies in establishing and maintaining HSS technology in sound reproduction. The Company also intends to implement a branding strategy to make HSS synonymous with innovative, high-quality sound reproduction. The Company believes that positioning itself as a licensor of the HSS technology and establishing technology collaboration arrangements with manufacturers will facilitate the rapid adoption of HSS technology. Key elements of the Company's strategy include: 1. Build on technical achievements to allow licensees to produce commercially viable products for consumers. The Company's new technology is in an early stage of development. The Company intends to rapidly convert its proof-of-concept demonstration into designs and materials that licensees can use to produce commercially viable sound reproduction systems to meet consumer demand across a variety of targeted market segments. 2. Expand patent coverage. The Company has filed multiple initial patent applications worldwide and expects to continue to file amendments, continuations and additional patents as development progresses. Management believes the scope and breadth of its patents will be an important factor in the exploitation of HSS technology. 3. Implement a segmented licensing approach. The Company has developed a segmented licensing approach to target individual fields of use for the HSS technology. Manufacturers of electronic components will be offered licenses to produce HSS-enabled electronic products and HSS emitters (specialized ultrasonic devices essentially taking the place of loudspeakers). The Company may sell circuit board level electronic components or an ASIC (Application Specific Integrated Circuit) containing necessary electronics to make electronic implementation simpler. The Company may also arrange for the production of and market customized ultrasonic materials to its specifications to be used in HSS emitters. 4. Identify and determine market segment needs. The Company has identified and is focusing its licensing efforts on four initial fields of use (a) computers, monitors (b) high end televisions, (c) home theater/professional audio, and (d) communications. The Company is working with manufacturers in each of these fields of use to identify market requirements and customize HSS technology. The Company believes that its HSS technology can become an important competitive feature for manufacturers and can also enable such manufacturers to achieve premium price or premium margins for their products. 5. Establish cross segment relationships to facilitate standards. The Company believes that successful implementation of HSS technology requires the cooperation of manufacturers of electronic components. The Company believes that developing standards for HSS-enabled electronics and ultrasonic HSS emitters will accelerate adoption of the technology across targeted fields of use. Therefore the Company is targeting long-term relationships with multiple entities to provide a competitive advantage in protecting the Company's market position. 6. Support licensees and develop a market position. The Company intends to support its licensees with technical support and an ongoing research and development effort. The Company intends to require branding of HSS devices to create and build consumer awareness. The Company's strategy is to develop strategic arrangements with manufacturers in the targeted fields of use with limited exclusivity to accelerate implementation and market introduction and to allow the selected manufacturers to 4 5 differentiate product offerings from competitors. The Company has not yet entered into any strategic arrangements and there can be no assurance the Company will be successful in implementing its strategy or exploiting its HSS technology. Although the Company anticipates generating a significant portion of its revenues from licensing, the Company may also sell HSS materials or components. The production and sale of HSS equipment may also accelerate market entry or meet specialized market needs. There can be no assurance that the Company can commercialize its HSS technology nor be successful in implementing the above strategies. See "Business Risks." HYPERSONIC SOUND TECHNOLOGY Background and Stage of Development The Company's HSS technology was invented by Elwood G. Norris, a director and Chief Technology Officer of the Company, who manages the Company's research and development and technical activities. Mr. Norris also invented the Company's ear radio, Global Positioning System ("GPS") and Engine Plasma Displacement ("EPD") technology for jet engine noise reduction. The Company acquired the basic concepts of HSS technology (previously called the Sonic Generator technology) from Mr. Norris in 1992. During fiscal 1996 and 1997, the Company devoted a significant portion of its research and development activities on HSS technology. In July 1996 the Company produced a laboratory proof-of-concept demonstration capable of producing sound in the air using ultrasonics. In October 1996 the Company produced a second generation portable demonstration system with improved electronics. The portable system consists of a standard CD player, an off-the-shelf amplifier modified by the Company, custom electronics and modified commercial ultrasonic emitters. In September 1997 the Company produced a portable stereo demonstration system and in October 1997, developed test equipment for evaluation by selected companies interested in collaborating on further development. During fiscal 1997 the Company's development efforts also focused on significantly expanding the pending patents portfolio on HSS technology and designing, developing and testing improved electronics and ultrasonic emitters. The Company believes that custom ultrasonic emitters will be required to produce a commercially viable system. The Company is continuing to improve its proprietary electronics and is working with multiple producers of ultrasonic devices to assist in developing custom emitters to the Company's specifications. The Company believes, but there can be no assurance, that it can have commercially acceptable designs and sources of materials for use by licensees during fiscal 1998. However, the development of the Company's HSS technology has taken longer than anticipated by the Company's management and could be subject to additional delays. There are inherent risks in new technology development, many beyond the control of management. See "Business Risks." In May 1997 the inventor of the HSS technology, Mr. Norris, was awarded the 1997 Discover Magazine Award for Technical Innovation in the Sound category for the Company's HSS technology. Winners in a total of eight categories were selected from over 4,000 entries. The annual awards are designed to recognize and promote new technological innovations and the winners are selected by an expert panel of judges. Winners were also featured in the July issue of Discovery magazine. In November 1997 HSS technology won a Popular Science 1997 "Best of What's New Award" from among thousands of new products. These awards and recognition have provided broad marketing exposure for the HSS technology to prospective users. HSS technology has also been featured in over 30 journal articles providing additional marketing exposure. The Company continues to devote significant resources in preparing and filing patent applications related to various aspects of the HSS technology. A total of eleven HSS technology patents have been filed and others are in various stages of preparation. Technology Description HSS technology is partially based on a phenomenon in music known as Tartini tones first noted by Giuseppe Tartini, an 18th century composer. When two sound tones are positioned relatively close together and are sufficient in volume, then two new tones appear, one is the sum of the original tones and one is the difference. In 1856, H. von Helmholtz, a German physiologist and physicist, published the results of his combination tone experiments proving the effect resulted from the non-linearity of air. He also developed descriptive mathematics which remain valid today. Although others have experimented with these principles in the past, the Company believes it has created novel and proprietary methods to efficiently use this concept to produce sufficient sound volume and quality capable of being commercially exploited. The Company's breakthroughs and its process are the subject of multiple pending patents. Mr. Norris, who has previous patents in the fields of ultrasonics and audio, applied aspects of the electrical concept of mixing multiple electrical signals to produce new audio by-products. HSS technology employs a method where 5 6 ultrasonic frequencies are created electronically using proprietary techniques to carry intelligence (e.g. music, voice) and these ultrasonic frequencies are then emitted into the air using an ultrasonic emitter. Since the audible sound is created in the air, sound does not appear on the surface of the ultrasonic emitter (a significant departure from a loudspeaker) but is actually created within the beam of ultrasonic energy being emitted. Accordingly, if the beam is directed towards a wall, the sound emanates from the surface and if the beam is directed to a person the sound emanates from the person. This directionality allows sound to be manipulated in space or diffused from a surface in a wide variety of ways to produce desired effects. The sound also does not dissipate over distance as it does with traditional speakers, providing greater volume at selected distant points with less energy. The Company's use of ultrasonic frequencies to carry intelligence is compatible with existing recording and transmission technology. The generation of the ultrasonic frequencies employed by HSS technology requires modification to existing electronic amplifiers (radios, televisions, telephones, etc.). However, since HSS technology requires less wattage (similar to a tweeter requiring less wattage than a sub-woofer) to reproduce sound, the Company believes electronic products that are HSS-enabled can be produced at the same or lower cost than current systems and in a smaller size. The Company has designed and is continuing to improve electronic specifications to be used to enable electronic devices to produce the ultrasonic output (as compared to audio output in a traditional system) necessary to drive HSS ultrasonic emitters. HSS technology uses ultrasonic emitters (transducers which convert electrical energy to high frequency acoustical energy). Certain crystals, and ceramics and other materials, known as piezoelectric elements, produce high frequency movement when voltage is supplied. These piezoelectric elements are used to emit ultrasonic energy in applications such as sonar, ultrasonic cleaning, industrial inspection and medical ultrasound. Such ultrasonic devices are incapable of producing frequencies in the audible range. However, the Company has developed the ability to use such devices (in lieu of loudspeakers) to emit a custom-generated ultrasonic wave with the proper difference frequency characteristics to produce audible sound in the air. The Company believes its ultrasonic emitters will be designed and configured in a variety of designs, shapes and sizes to produce desired effects in commercial applications. Ultrasonics are employed in a wide variety of medical applications where it is directly coupled to the body rather than air. The Company's technology uses relatively small amounts of ultrasonic sound energy which dissipates or is absorbed rapidly in the air. The Company employs frequencies above those that may be harmful to pets but within those used by medical devices directly coupling to the body to image fetuses and the brain. The Company believes that the frequencies and amount of energy employed in the HSS technology is harmless. The Company also believes the emission of such frequencies is not subject to governmental regulation. The Company believes its HSS technology, comprised of the combination of proprietary electronics and custom ultrasonic emitters, will offer the following advantages: - Coverage of the entire audible range (20 Hz to 20,000 Hz) with one small device no woofer, mid-range and tweeter combination and no crossover network to divide the signal amongst such devices - Sound quality that is not dependent on the size of the emitting face or speaker enclosure - Elimination of speaker enclosures and their cost and bulk - Reduction of the effect of room acoustics on sound quality - Small size and low weight as compared to conventional speakers - Improved phase coherency (frequency time alignment) - Reduced distortion - Lower power requirement and greater efficiency - Ability to manipulate or selectively position or diffuse the source of sound - Ability to deliver a beam of sound over greater distances - Elimination of magnets, their weight and adverse effects on video monitors - Elimination of feedback in professional applications There can be no assurance these advantages can be successfully implemented commercially. Target License Market Segments The Company has targeted four initial fields of use which include computers and monitors, high end televisions, home theater/professional audio systems and communications. As of the date of this report the Company has not finalized the details of its proposed licensing terms and conditions and has not entered into any license agreements on HSS technology. However, the Company has commenced discussions with manufacturers in each of the primary segments. The Company recently demonstrated the application of HSS technology in a personal computer for a prospective customer to demonstrate the advantages of directed sound, small size and high sound quality. Management is encouraged by the technical and marketing interest in its new sound technology and is pursuing its targeted implementation strategy. 6 7 The market for computer sound, primarily multimedia applications, is growing rapidly. According to market researcher The Yankee Group, 1996 multimedia equipped desktop personal computer worldwide shipments were 38.8 million units, with a total market value of $90 billion. There is also a growing demand for improved sound in notebook and other small computers with worldwide annual sales exceeding 70.86 million units in 1996 according to Dataquest. An increasing number of computer video monitors are incorporating sound. In 1996 over 65 million monitors were sold, according to Dataquest. In addition to OEM computer sound markets, there is a growing aftermarket for computer speakers. Major suppliers of computer sound equipment include OEM's such as Apple, IBM, Packard Bell, Compaq and others and manufacturers such as JBL, Sony, NEC, Mitsubishi, Phillips, Yamaha, Bose, Panasonic, Foster and others. The Company believes limitations in size, sound quality and cost are critical factors in the computer sound market. The Company expects HSS technology to offer size, cost and quality advantages to manufacturers and consumers in this large and growing market. High end televisions and home theater systems are growing segments of the consumer electronics market. Home theater audio systems include component and rack audio systems for the home as well as specifically targeted home theater systems. Professional audio systems include systems used by studios and other professionals in the creation or production of audio and video material. The Company intends to focus initially on manufacturers in the mid to high-end range of these segments. Home theater and large screen televisions are expected to experience continued growth from the introduction of the high-capacity DVD (digital versatile disc). Over 14 million televisions 19" and larger were sold in the U.S. in 1996 according to the Consumer Electronics Manufacturers Association (CEMA). In addition, almost 1 million projection televisions were sold in the same period. According to the Electronic Industries Association (EIA), households with the equipment to enjoy home theater in 1996 included approximately 15 million U.S. homes. EIA also estimates that U.S. factory sales of home theater and aftermarket loudspeakers exceeded $944 million in 1996. Manufacturers in these segments include major international consumer companies, such as Sony, AIWA, Phillips, Samsung, Mitsubishi, Toshiba, Sanyo, Sharp, JVC and others, and specialty audio component manufacturers such as Carver Corporation, Marantz, NAD and others. The market for professional audio systems is also growing. The domestic U.S. market for public address systems exceeded $447 million in 1995 according to EIA and the market for other professional equipment including sound modules, synthesizers, digital pianos, signal processing equipment and other products are experiencing growth. The Company believes its HSS technology will offer the home audio/video and professional markets improved full-spectrum sound source with less distortion and less room-acoustic interference. The ability to place and manipulate sound in a room without large multiple speakers is expected to be attractive to consumers. The lack of feedback is an important feature for professionals. The communications market for HSS technology includes all types of telephones, answering machines, speaker and conference phones and audio and video conferencing systems. The U.S. market for telephones and answering machines was worth $3.5 billion in 1996, according to the Polk Company. Leading manufacturers include AT&T (Lucent and the new Lucent/Phillips joint venture), Motorola, Ericsson, General Electric, Nokia, and Uniden. In addition, audio and video conferencing equipment sales exceeded $4.2 billion in the North America in 1996 according to the International Teleconferencing Association. Leading vendors in this industry include Picturetel, Sony, Intel and Polycom. Other HSS Market Opportunities While the Company's strategy is to focus on licensing to the above market segments, HSS technology is expected to have utility in diverse applications including military applications, portable consumer electronics, hearing aids, headphones, cinema/theater, public address and outdoor sound systems, use with noise cancellation systems, and many other applications. The Company also believes there is a significant opportunity for HSS-enabled devices designed to retrofit existing stereo equipment to provide theater-like sound. The Company may license, design, develop, manufacture and/or distribute products for these or other specialized applications. EAR RADIO TECHNOLOGY Product Description The Company's patented ear radio technology allows the placement of a fully operational radio device adapted in size and configuration for placement and retention at the entrance of the ear canal. FM and AM versions of the ear radio utilizing this technology have been developed and are manufactured for and marketed by the Company. The FM ear radio measures 1/2" by 1-1/2" by 1/4", utilizes approximately 40 transistors, features digital scanning touch-tuning and weighs less than 1/4th ounce. The AM ear radio measures 1-1/4" by 5/8" by 7 8 3/8" and weighs less than 1/4th ounce and features sound quality comparable to much larger radios. The Company produces standard and Japanese frequency FM radios and standard AM radios. The radios come in a variety of colors and are packaged for either retail or bulk shipment. The radios generally retail for $12.95 to $29.95 depending on the outlet and the accessories included. FM and AM ear radios accounted for substantially all of the Company's revenues during fiscal 1997 during which it sold approximately 107,000 ear radios to customers. Further applications of this technology have been identified, but not yet produced, including fixed-frequency AM, FM or TV band units for use in special station or program promotions, and fixed-frequency AM or FM units for use in specialized local broadcast environments for various events. The Company anticipates that it will be required to update its ear radio designs and packaging from time to time to meet market expectations for performance and packaging. The Company has developed an improved FM ear radio but management has not established a date for introduction. The Company is currently selling to customers from inventory and has not yet determined product plans for fiscal 1998. The current assembly contract has expired and the Company has not decided where or if to continue ear radio production. See "Assembly and Production." The Company has also designed and developed a mini-headphone radio (HeadGear) scheduled for introduction by mid-1998. Incorporating ear radio technology, the HeadGear is smaller than similar headphone radio products currently on the market. The intended retail price range is $29.95 and up. The Company has filed one patent application for this product. There can be no assurance this product can be introduced to market or that it will be successful. Management is also seeking compatible products and accessories developed by others for distribution. There can be no assurance the Company can obtain rights to manufacture and/or distribute any other products or accessories. The Company is the holder of patent number 4,539,708, granted September 3, 1985 and patent number 5,313,663, granted May 17, 1994 which relate to AM, FM, VHF and UHF frequency bands, as well as IR (Infrared) frequency bands. See "Intellectual Property Rights and Proprietary Information." Marketing Strategy The Company's existing FM and AM ear radios and products and accessories under development or acquired in the future are targeted for the portable audio products segment of the consumer electronics market. According to CEMA, the U.S. wholesale portable radio market in 1996 was approximately $42 million. The Company's marketing strategy is to wholesale its ear radios to a variety of organizations and companies already established to market and distribute the products to retailers and consumers. This strategy is designed to allow the Company to focus its efforts on manufacturing and new product development while limiting marketing and distributing personnel and associated costs. However, this strategy also limits the Company's ability to control and direct the marketing, distribution and end-pricing of its product. To date, the Company has focused on four primary market segments for ear radio marketing and distribution: - Retail outlets - The Company directly, and also through established manufacturer representatives, promotes its products to local, regional and national retail distributors such as electronics stores, drug stores, computer stores and other retailers. - Catalog distribution - The Company's personnel contact catalog companies directly and through third-party agents. To date the Company's radios have been illustrated and offered in a diverse range of catalogs. - Television - The radios have been displayed and sold by various television marketers. The Company's marketing plan includes pursuing additional television outlets for its products. - Premium/Incentive/Specialty - The Company targets corporate and other organizations to use the radios as premiums, incentives, prizes and for promotions. The radios are designed for logo placement and use in such promotions. The Company has attended premium/incentive trade shows as well as initiated direct contact with large users of prizes and premiums. Specialty applications would also include fixed frequency radios for use by a specific radio station or sports team or other program interested in featuring their activity or organization. The Company has two full-time marketing personnel assigned to ear radio marketing and sales activities. The Company had seventeen independent sale representatives in the U.S. and Canada at September 30, 1997. The Company also 8 9 employs international distributors from time to time. However due to foreign competition and a marketing focus on domestic sales, export sales in fiscal 1997 were only 2% of sales versus 27% in fiscal 1996. Assembly and Production The Company primarily uses subcontract assembly companies to produce ear radios from components and subassemblies purchased from others, some of which are manufactured to the Company's specifications. The Company tests, packages and ships the ear radios from its San Diego, California location but may subcontract some of these steps in the future. The Company performs limited assembly work from time to time. The Company performs its own engineering and quality control. The Company believes there are secondary suppliers of components and subassemblies available such that it is not reliant on one supplier, although delays could result should the Company be required to change suppliers of longer lead time components or subassemblies. Any significant delays in obtaining components from existing or secondary suppliers through supplier changes or from component shortages, which are common to the electronics industry, could have a material adverse impact on the Company's results of operations. In July 1995 the Company, through the services of its agent Mitsui U.S.A., Inc., entered into a subcontract manufacturing agreement with Zhuhai Huasheng Enterprise Group Co., Ltd. of mainland China to produce FM ear radios. This relationship resulted in added capacity and reduced costs. This agreement terminated in July 1997 and the Company is currently reviewing its future plans for ear radio product production at this or other assembly sites. The Company believes that there are a number of electronic product subcontract assembly companies located in North America and overseas that are qualified to produce the Company's electronic products should the Company change assembler or should a future assembler be unable or unwilling to produce, however any disruption of supply could cause additional costs and delays and could have a material adverse impact on the Company's results of operations. The Company produces both to meet orders and for inventory for future orders. Most orders have generally been filled within forty-five days, however any future large orders could exceed the Company's production and financial capacity and adversely affect the Company's operations. Because the Company's policy is to fill orders promptly, the Company does not maintain and does not expect in the future to maintain a significant backlog of sales on its ear radio products. PORTABLE GPS TECHNOLOGY, EPD TECHNOLOGY AND OTHER TECHNOLOGIES AND INVESTMENTS Portable GPS Technology In late 1994 the Company innovated a proprietary method of tracking persons and objects utilizing GPS technology. A substantial portion of the Company's 1995 research and development budget was expended in furthering this technology. The Company has designed a portable device as a simple solution to (1) finding another person or object or (2) finding a known location. It employs GPS technology but doesn't require complicated longitude/latitude readouts, mapping software or recording and storing of previous locations and movements as used in most portable GPS devices. The Company has produced a proof-of-concept demonstration system utilizing the GPS technology. The field of GPS technology involves a large number of companies with substantial resources devoting significant funds to research and development and launching many new products. It is a very competitive field with frequent introductions of new features and rapidly declining prices. With the nature of this intense competition in mind, the Company has taken extended steps in its attempts to protect this product concept, including the filing of two U.S. patent applications and reviewing the applications with a U.S. patent examiner specializing in GPS technology. Patent number 5,689,269 was granted November 18, 1997 and one patent is pending. There can be no assurance the pending patent will issue or that, if issued, that it or the issued patent will provide meaningful protection from competition. With the current emphasis on HSS technology, the Company has postponed further development on its GPS technology pending an evaluation of patent protection that may be available and further market evaluation due to significant competition and the rapidly changing nature of the GPS equipment market. The Company believes, but can make no assurance, the remaining pending patent will issue during the next fiscal year, however there can be no assurance thereof. The ultimate claim set allowed is expected to be a determining factor on future activity with respect to this technology. The Company believes that certain features of its pending patent, if allowed, may be licensable to the GPS industry. EPD Technology The Company has filed an initial U.S. patent application regarding a new method and system for reducing noise in jet engines, the EPD technology. This technology, invented by Mr. Norris, relates to canceling acoustic waves produced by a jet engine by stimulating a plasma within the engine to propagate an acoustic interference wave. Mr. Norris has previously performed rudimentary experiments on this technology, however the Company has not yet developed a 9 10 proof-of-concept device or demonstration. There can be no assurance that the Company's concepts will function as theorized or that any practical product or technology can ever result from the concepts. In addition, the Company has performed only limited competitive research and there can be no assurance that the concepts innovated by the Company are new or unique or that they are functionally better than existing and proposed methods for jet engine noise reduction. The Company's strategy is to develop a proof-of-concept demonstration of the EPD technology and seek a collaborative arrangement to further develop this technology. Management has not developed a timetable for this project nor identified personnel for further development. Although management believes there is a significant market for an improved system for jet engine noise reduction, there can be no assurance when or if the EPD technology can be exploited by the Company. Other Technologies The Company has other technology and product concepts in early stages of development. There can be no assurance that these concepts will develop into viable research projects nor that the Company will have the personnel and financial resources to develop additional technologies. Investment in Norris At September 30, 1997, the Company held 225,300 common shares (less than 1%) of Norris Communications Inc. (NCI), a San Diego-based OTC Bulletin Board-quoted company engaged in the development, manufacture and marketing of electronic products. These shares remain from the 700,000 shares received by the Company in 1988 from the sale to NCI of a newly formed subsidiary (now JABRA) that owned the Company's ear-microphone technology. See "Certain Relationships and Related Transactions." These shares had a market value of approximately $29,000 at September 30, 1997. By agreement dated October 31, 1997, the Company sold and canceled its 1% royalty interest on gross sales of JABRA's EarPHONE technology products incorporating a wireless receiver to JABRA for $15,000. There was no assurance of any future royalties. CUSTOMERS For the fiscal year ended September 30, 1997, three customers accounted for 57% of the Company's sales. Target Stores, Inc., CR McMullen Co., and Eddie Bauer accounted for approximately 30%, 14% and 13% of sales, respectively, with no other single customer accounting for more than 10% of sales. The Company expects that it will continue to rely on a number of large individual customers for future revenues and the loss of any customer could have a material adverse effect on the Company's financial condition and results of operations. COMPETITION The Company faces competition from a large number of international manufacturers of consumer electronic and audio equipment products. Consumer tastes and demand can change quickly. HyperSonic Sound Technology The Company has made substantial inquiry and search but is not aware of any previous or other sound reproduction system that has successfully employed the concepts similar to those developed by the Company. Although others have attempted to use the combination tone concept to produce sound, to the knowledge of the Company, none have been able to produce sufficient sound volume and quality to make a commercially viable system. Although most loudspeakers are of the direct radiating type, there have been many attempts to innovate new methods of sound reproduction to overcome limitations of traditional loudspeakers. For example direct radiating flat-panel loudspeakers overcome some of the size limitations, but they are generally limited by sound quality and frequency range. There can be no assurance that alternate technologies and systems have not been developed, or that such systems may currently be in development or will be developed by others in the future that would be directly competitive with the Company's HyperSonic Sound technology. The Company's method of sound reproduction will also compete with existing loudspeakers. In addition to the companies described above in "Target License Market Segments," many who currently provide loudspeakers with their consumer electronic products, the Company will also compete with branded loudspeaker manufacturers including Bose Corporation, JBL, Harman International (Infinity and Epicure), International Jensen (Acoustic Research and Advent), Polk Audio, Boston Acoustics, Klipsch, Yamaha and a host of others. Such competitors have substantially greater financial, technical and marketing resources than the Company and have existing proven technology and products, 10 11 marketing data, customer relationships and distribution channels. There can be no assurance that the Company's HSS technology, if implemented commercially, will be competitive in the entrenched loudspeaker market. The Company believes that its success will be dependent upon creating relationships with electronic equipment manufacturers by providing them the ability to differentiate their products. Specifically, the manufacturers could offer improved sound in a small light-weight unit at competitive prices with additional advantages such as the ability to spatially orient sound in novel ways. The Company believes it will compete on the uniqueness of its proprietary technology and designs, system features and price, ease of use, quality of marketing and ability to identify and meet consumer needs. There can be no assurance that based on these factors the Company can be competitive with existing or future products, technologies or services of its competitors. Ear Radio Products The Company's ear radio products compete directly with a number of miniature radios such as pocket and credit card-size radios. Most of the Company's competitors have greater financial, manufacturing and marketing resources and can command more retail and consumer exposure than that of the Company. Barriers to entry by new competitors are not significant and new competitors in consumer electronics are continually commencing operations. The technology of electronics and electronic components, features and capabilities is also rapidly changing, in many cases rapidly obsoleting existing products and technologies. The Company believes that its ear radio is a one-of-a-kind product featuring a radio entirely placed at the entrance to the ear canal. This feature, along with the quality of each radios' sound and the FM's digital touch tuning, are believed to be the most important competitive features important to customers. The Company believes that its patents provide it some protection and act as a barrier to entry into the U.S. from foreign competitors offering a similar radio device, however the Company recognizes patents are subject to loss, circumvention and other risks. See "Intellectual Property Rights and Proprietary Information." GOVERNMENT REGULATION The Company is subject to regulation by federal, state and local governmental authorities in connection with its assembly and production operations. The Company's electronic products are also subject to various regulations and are required to meet the specifications of agencies such as the Federal Communications Commission (the "FCC"). The Company believes it is in substantial compliance with all applicable regulations, and that it has all material governmental permits, licenses, qualifications and approvals required for its operation. The Company does not believe its ultrasonic emitters, which emit ultrasonic waves into the air rather than electromagnetic waves, are the subject of existing governmental regulation. However there can be no assurance that interpretations of existing regulations or imposition of new regulations could not have an adverse impact on the Company's proposed commercialization of HSS technology. The Company does not believe it is materially affected, nor does it expect to be materially affected, by the costs and effects of compliance with environmental laws. INTELLECTUAL PROPERTY RIGHTS AND PROPRIETARY INFORMATION The Company operates in an industry where innovations, investment in new ideas and protection of its resulting intellectual property rights are important to success. The Company relies on a variety of intellectual property protections for its products and technologies, including patent, copyright, trademark and trade secret laws, and contractual obligations, and pursues a policy of vigorously enforcing such rights. The Company currently holds two issued U.S. patents, #4,539,708 granted September 3, 1985 and #5,313,663 granted May 17, 1994, on the ear radio technology. The Company holds U.S. patent #5,689,269 granted November 18, 1997 and has one patent pending on its GPS technology. The Company has one patent pending on its EPD technology, one patent pending on the HeadGear product, and eleven patents pending on its HSS technology. The Company is currently preparing and intends to file additional HSS technology patent applications. The Company has an ongoing policy of filing patent applications to seek protection for novel features of its products and technologies. Prior to the filing and granting of patents, the Company's policy is to disclose key features to patent counsel and maintain these features as trade secrets prior to product introduction. There can be no assurance that any additional patents on the Company's products or technology will be granted. In addition to such factors as innovation, technological expertise and experienced personnel, the Company believes that a strong patent position will be important to compete effectively through licensing in the sound reproduction industry. The Company is investing significant management, legal and financial resources toward HSS technology patents. The electronics industry is characterized by frequent litigation regarding patent and other intellectual property rights. 11 12 Numerous patents in electronics and sound reproduction are held by others, including academic institutions and competitors. Although the Company is not aware of any existing patents that would inhibit its ability to license the HSS technology, there can be no assurance that others will not assert claims in the future. While sometimes licenses to third-party technology are available, there can be no assurance thereof or that such claims, with or without merit, would not have a material adverse effect on the Company. The validity of the Company's existing patents have not been adjudicated by any court. Competitors may bring legal action to challenge the validity of the Company's patents or may attempt to circumvent the protection provided by those patents. There can be no assurance that either of such activities by competitors would not be successful. The failure to obtain patent protection or the loss of patent protection on the Company's technology, or the circumvention of the Company's patents, when and if granted, by the Company's competitors could have a material adverse effect on the Company's ability to compete successfully in its business. The Company also files for tradename and trademark protection when appropriate. Marks for which the Company has registrations or applications to register in the U.S. or foreign countries include HyperSonic and HSS. There can be no assurance any degree of protection will be granted, or that if granted, that tradenames or trademarks can be successfully defended or protected. The Company's policy is to enter into nondisclosure agreements with each employee and consultant or third party to whom any of the Company's proprietary information is disclosed. These agreements prohibit the disclosure of confidential information to anyone outside the Company, both during and subsequent to employment or the duration of the working relationship. There can be no assurance, however, that these agreements will not be breached, that the Company will have adequate remedies for any breach or that the Company's trade secrets will not otherwise become known or be independently developed by competitors. RESEARCH AND DEVELOPMENT COSTS For the fiscal years ended September 30, 1997 and 1996, the Company spent $566,288 and $160,934, respectively, on research and development. Future levels of research and development expenditures will vary depending on the timing of further new product development and the availability of funds to carry on additional research and development on the Company's currently owned technologies or in other areas. EMPLOYEES At November 1, 1997 the Company in addition to its four executive officer employees, employed sixteen persons, including four part-time employees. Of such employees, one person was engaged in purchasing, five in engineering/quality control, one in production management, two in general/administrative and three in marketing and sales. The Company also employs or leases assembly personnel from time to time on an as needed basis and uses outside consultants for various services. The Company has experienced no work stoppages and is not a party to a collective bargaining agreement. The Company believes its relations with its employees are good. ITEM 2. DESCRIPTION OF PROPERTY. During most of fiscal 1997, the Company's research, assembly and shipping and office facilities were subleased under a $2,000 monthly sub-lease agreement which expired in January 1997 with an affiliated corporation NCI, and thereafter was month to month until July 1997. On July 11, 1997, the Company entered into a three year lease located at 13114 Evening Creek Drive South, San Diego, California. To meet the credit requirements of the landlord, both the Company and NCI entered into a joint lease agreement for approximately 12,925 square feet with aggregate monthly payments of $13,830 inclusive of utilities and costs. The Company is occupying approximately 7,500 square feet of the jointly leased office space with its share of monthly payments being approximately $8,000. The Company believes this facility is adequate to meet its needs for the next twelve months given management's current plans. However should the Company expand its operations, it may be required to obtain additional space or alternative space. The Company believes there is adequate availability of office space in the general vicinity to meet its future needs. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted during the fourth quarter of the fiscal year to a vote of security holders. 12 13 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. MARKET INFORMATION The Company's Common Stock is traded in the over-the-counter market and is quoted on the OTC Electronic Bulletin Board (symbol "ATCO") maintained by the National Association of Securities Dealers. The market for the Company's Common Stock has often been sporadic and limited. The following table sets forth the high and low bid quotations for the Common Stock for the fiscal years ended September 30, 1996 and 1997.
Bid Quotations High Low ---- --- Fiscal Year Ending September 30, 1996 First Quarter $0.46875 $0.25 Second Quarter $1.3125 $0.21875 Third Quarter $2.25 $0.875 Fourth Quarter $7.375 $5.6875 Fiscal Year Ending September 30, 1997 First Quarter $7.375 $3.375 Second Quarter $5.438 $3.375 Third Quarter $6.625 $3.50 Fourth Quarter $6.531 $5.00
The above quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions. The Company has made application to trade its shares of Common Stock on the National Association of Securities Dealers Automated Quotation System (NASDAQ). There is no assurance shares of the Company's Common Stock will commence trading on NASDAQ or that, if quoted thereon, the Company will continue to meet the minimum listing requirements. The Company had 1,237 holders of record of its Common Stock at November 20, 1997 with 10,065,002 shares issued and outstanding. The Company has never paid a cash dividend on its Common Stock and does not expect to pay one in the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES The following is a description of equity securities sold by the Company during the year ended September 30, 1997 that were not registered under the Securities Act: 1. The Company issued a Stock Purchase Warrant to Renwick Corporate Finance, Inc. ("Renwick") dated February 5, 1997 exercisable to purchase 90,000 shares of Common Stock at $5.00 per share until February 5, 2000. The Company expensed $33,300 as the value assigned to consulting services in connection with this Stock Purchase Warrant. The issuance was exempt by reason of Section 4(2) of the Securities Act of 1933, as amended (the "Act") in reliance on the private nature of the transaction, restrictions on transfer and based on representations of Renwick. 2. On March 25, 1997 the Company completed the private offering and sale for cash of an aggregate of $1,000,000 of unsecured 6% Convertible Subordinated Promissory Notes due March 1, 1999 ("Notes") to sixteen private investors (eleven accredited U.S. investors and five foreign investors). The securities were sold by the Company without an underwriter. The principal and interest amount of each Note is convertible on one or more occasions into shares of Common Stock, at a price which is the lower of (i) $3.50 per share or (ii) 85% of five days market price prior to conversion but not less than $2.50 per share or (iii) for any conversions on or after March 1, 1998 the average of the closing bid prices for the prior thirty days but in no event less than $1.00 per share. The Notes may be called by the Company for conversion if the market price exceeds $9.00 per share for ten consecutive days and certain conditions are met. Each purchaser was granted a warrant to purchase 50 common shares of the Company at $5.00 per share until March 1, 2000 ("Warrant") for each $1,000 of Notes purchased. The Warrants are exercisable, in the aggregate, into 50,000 shares. These securities were offered and sold without registration under the Act, in reliance upon the exemption provided by Regulation D thereunder and an appropriate legend was placed on the Notes and Warrants. The Company filed a registration statement, which became effective on 13 14 May 28, 1997, on shares of Common Stock issuable on conversion of the Notes and on exercise of the Warrants. Net proceeds from the sale of the Notes was approximately $950,000. 3. On August 25, 1997 the Company completed the private offering and sale for cash at $10.00 per share a total of 350,000 shares of Series A Convertible Preferred Stock, par value $.00001 ("Preferred Stock") to eight institutional and three accredited individual investors ("Preferred Shareholders") for an aggregate of $3,500,000. The securities were sold by the Company without an underwriter. The dollar amount of Preferred Stock, increased by $.60 per share of Preferred Stock per annum and subject to other adjustments, is convertible on one or more occasions into shares of Common Stock at a conversion price which is 85% of the average of the closing bid prices of the Company's Common Stock each day for the five trading days immediately preceding the date of conversion provided that in no event shall such amount to be multiplied by 85% be less than $3.00 per share or greater than $5.75 per share. The shares of Preferred Stock may be called by the Company for conversion if the common stock market price exceeds $14.00 per share for ten days and certain conditions are met. The Preferred Stock is subject to mandatory conversion after one year, subject to certain conditions. Each purchaser was granted a warrant to purchase 500 common shares of the Company at $7.50 per share until August 1, 2000 ("Warrant") for each 1,000 shares of Preferred Stock. The Warrants are exercisable, in the aggregate, into 175,000 shares. These securities were offered and sold without registration under the Act, in reliance upon the exemption provided by Regulation D thereunder and an appropriate legend was placed on the Preferred Stock and Warrants. The Company filed a registration statement, which became effective on September 30, 1997, on shares of Common Stock issuable on conversion of the Preferred Stock and the Warrants. Net proceeds from the sale of the Preferred Stock was approximately $3,321,000. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. OVERVIEW From 1988 to early 1992 the Company was inactive. In early 1992 the Company commenced its current business activities. Although the Company owns several technologies, initial efforts concentrated on developing and producing FM ear radios beginning in September 1993 and the AM ear radios beginning in July 1995. The Company is focusing its primary efforts on completing development and commercializing its HSS technology and expanding ear radio and related product distribution. Demand for the Company's ear radio products is subject to significant month to month variability resulting from the limited market penetration achieved to date by the Company. Initial sales have been concentrated with a few customers and there can be no assurance of future orders from these or new customers. The markets for the Company's products and future products and technologies are subject to rapidly changing customer tastes and a high level of competition. Demand for the Company's products is influenced by demographic trends in society, marketing and advertising expenditures, product positioning in retail outlets, technological developments, seasonal variations and general economic conditions. Because these factors can change rapidly, customer demand can also shift quickly. The Company may not be able to respond to changes in customer demand because of the time required to change or introduce products, production limitations and because of limited financial resources. For fiscal 1998 the Company is also evaluating plans for ear radio and related products and the choices made may impact future results. The Company's current FM radio off-shore production agreement has expired and the Company has not yet determined where, when or if it will produce additional FM radios for sale. The HSS technology has not been developed to the point of commercialization. There can be no assurance that a commercially viable system can be completed due to the inherent risks of new technology development, limitations on financing, competition, obsolescence, loss of key technical personnel and other factors beyond the Company's control. The Company has not generated any revenues from the HSS technology to date, and has no agreements or arrangements providing any assurance of revenues in the future. The Company's various development projects are high risk in nature. Unanticipated technical obstacles can arise at any time and result in lengthy and costly delays or result in determination that further development is unfeasible. There can be no assurance of timely completion of commercially viable HSS technology or that if available that it will perform on a cost-effective basis, or that if introduced, it will achieve market acceptance. The future of the Company is largely dependent upon the success of the HSS technology or the development of new technologies. There can be no assurance the Company can introduce any of its technologies or that if introduced they will achieve market acceptance sufficient to sustain the Company or achieve profitable operations. See also "Business Risks." 14 15 RESULTS OF OPERATIONS Net sales for the fiscal year ended September 30, 1997 (fiscal 1997) were $967,408, a 4% increase over sales of $933,643 for the prior fiscal year. Substantially all revenues for both years were from ear radio sales. Commencing in fiscal 1996, the Company encountered foreign-based competition for its FM ear radio which due to the Company's U.S. patent had a greater impact on foreign sales. The Company has taken and expects to continue to take actions to preclude the sale of infringing radios in the U.S. The Company also responded to increased competition by (1) contracting for off-shore assembly to reduce production costs and (2) reducing prices to make the ear radios attractive to large chain retailers. The improved sales results in fiscal 1997 include sales to several large chain retailers, which sales are highly seasonal. The foreign competition dramatically reduced foreign sales in fiscal 1997, which accounted for 27% of sales in fiscal 1996 and only 2% of sales in fiscal 1997. During fiscal 1996 management changed to off-shore assembly of the FM ear radio, resulting in reduced per unit costs, working capital requirements and increased capacity. However, reliance on off-shore assembly imposes certain risks, including delays, shortages and quality issues. The Company's assembly agreement off-shore has expired and the Company has not elected to renew the agreement. The Company is evaluating its ear radio and related consumer product offerings for fiscal 1998 with the goal of expanding revenues from additional products developed internally (such as HeadGear) and obtaining distribution rights to compatible products. In the meantime the Company is continuing to sell FM ear radios from inventory and believes, should it elect to do so, that it could obtain a domestic or off-shore assembler for the FM ear radio. The Company was successful in fiscal 1997 in adding new sales representatives and obtaining new ear radio accounts but at reduced unit prices. Although unit ear radio sales increased 19% to 107,000 units, dollar sales increased only 4% due to reduced average unit prices. The Company's sales are subject to significant month to month and quarter to quarter variability based on the timing of orders, new accounts, lost accounts and other factors. The Company's sales are affected by a variety of factors including seasonal requirements of customers. The Company's is also exposed due to its reliance on a limited number of customers. Cost of sales for the year ended September 30, 1997 were $809,437 resulting in a gross margin of $157,971 or 16%. This compares to a gross margin of 15% for the prior year. Fiscal 1997 margins reflect the impact of reduced manufacturing costs for the entire year from off-shore assembly. Gross margin percentage is highly dependent on sales prices, production volumes, costs and manufacturing overhead allocations. Past margins are not necessarily indicative of future margins given the uncertainty and timing of both existing product sales and new product offerings. Research and development costs for the year ended September 30, 1997 were $566,288 compared to $160,934 for the prior year. The $405,354 increase resulted primarily from an increase in HSS technology development activities and related costs. In the current fiscal year personnel costs increased by approximately $175,000, equipment and component costs by $55,000 and outside design and consulting increased by approximately $167,000 as compared to the prior year. Research and development costs vary quarter by quarter due to the timing of projects, the availability of funds for research and development and the timing and extent of use of outside consulting, design and development firms. The Company expects fiscal 1998 research and development costs to be at higher levels due to increased staffing and expanded use of outside design and consultants primarily associated with HSS technology development. The Company is seeking additional engineering and support personnel to further expand research and development on HSS and other technologies in future periods. Selling, general and administrative expenses increased from $555,950 for the year ended September 30, 1996 to $1,616,568 for the year ended September 30, 1997. The $1,060,618 increase included a $273,000 non-employee non-cash compensation expense related to the granting of stock options and warrants during fiscal 1997, a $41,000 increase in commissions primarily associated with large accounts, a $303,000 increase in personnel costs primarily associated with HSS technology marketing, a $93,000 increase in marketing travel and related costs, a $135,000 increase in costs associated with marketing and promoting the HSS technology, a $25,000 increase in office related costs primarily associated with the new lease of larger space and more personnel, and an $140,000 increase in professional and financing fees associated with preparing HSS technology licensing information and new financings. Management anticipates that selling, general and administrative costs will continue at higher levels in fiscal 1998 due to the recent executive additions and expanded HSS technology marketing personnel, travel and related operations and costs. As a result of the above factors, the Company experienced a loss from operations of $2,024,885 during the year ended September 30, 1997, compared to a loss from operations of $580,395 for the comparable year ended September 30, 1996. The increase in the operating losses resulted primarily from increases in research and development costs and selling, general and administrative costs associated with the HSS technology. The Company expects to incur continued operating losses until it is able to commercialize its HSS or other technologies and produce revenues sufficient to support operating costs. There can be no assurance the Company will be successful in such efforts. 15 16 During the year ended September 30, 1996, the Company recognized a gain of $55,019 from the sale of NCI shares. No sales were made in fiscal 1997. During the second fiscal 1997 quarter, the Company incurred $125,200 of non-cash interest expense consisting of $2,500 of value assigned to stock purchase warrants and $122,700 as embedded interest on convertible notes based on the difference between the conversion price and the market price at the issue date. A like amount was recorded as paid in capital. Through September 30, 1997 an additional $18,461 of non-cash interest was paid or payable in common shares related to the convertible notes. The Company reported a net loss of $2,144,363 for the year ended September 30, 1997, compared to a net loss of $560,448 for the year ended September 30, 1996. The Company has federal net loss carryforwards of approximately $3,600,000 for federal tax purposes expiring through 2012. The amount and timing of the utilization of the Company's net loss carryforwards may be limited under Section 382 of the Internal Revenue Code. A valuation allowance has been recorded to offset the related net deferred tax asset as management was unable to determine that it is more likely than not that the deferred tax asset will be realized. See Note 6 to the accomanying financial statements. The net loss available to common stockholders for the fiscal year ended September 30, 1997 was increased in computing loss per share of common stock by an imputed deemed dividend in the amount of $617,646 or $.07 per share. The imputed deemed dividend resulted from a discount provision included in the Series A Convertible Preferred Stock issued in August 1997. This imputed deemed dividend is not a contractual obligation on the part of the Company to pay such imputed dividend. Future operations are subject to significant variability as a result of product sales and margins, timing of new product offerings, the success and timing of new technology exploitation, decisions regarding future research and development and variability in other expenditures. LIQUIDITY AND CAPITAL RESOURCES Since the Company recommenced operations in January 1992, the Company has had significant negative cash flow from operating activities. The negative cash flow from operating activities was $1,572,425 for the fiscal year ended September 30, 1997 and $611,350 for the fiscal year ended September 30, 1996. During fiscal 1997, the net loss of $2,144,363 included non-cash expenses of $723,595 resulting in an adjusted net cash loss of $1,420,768. In addition to this amount of $1,420,768, cash was used in operating activities through an increase in customer accounts receivable of $111,717 and a $227,319 decrease in accounts payable. Operating cash was provided by a $31,630 reduction in prepaid expenses, a $124,116 reduction in inventories and a $31,633 increase in accrued liabilities. At September 30, 1997 the Company had approximately 115 days sales in accounts receivable as compared to 75 days at September 30, 1996. The unusually high level of receivables at September 30, 1997 was due to sales to Target and CR McMullen on terms demanded by the large retail chains that often require 90-120 day terms on sales. However, receivables can vary dramatically due to quarterly and seasonal variations in sales and timing of shipments to and receipts from large customers. For the year ended September 30, 1997, the Company used approximately $177,000 for the purchase of laboratory equipment and made a $101,000 investment in patents. The Company estimates a significant level of investments in patents in fiscal 1998 and requirements for additional equipment for developing HSS and other technologies. Dollar amounts of these patent investments and equipment additions are not currently estimable by management. At September 30, 1997, the Company had working capital of $3,719,807 and at September 30, 1996 had working capital of $1,047,787. Included in working capital is the unrealized holding gain in the shares held by the Company in NASDAQ quoted NCI. At September 30, 1997 and 1996, the Company owned 225,300 shares of NCI with a market value of $29,289 and $190,153, respectively. This investment is carried on the balance sheet as a current asset of the Company at market value pursuant to Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities" which was adopted by the Company effective September 30, 1994. Although the shares of NCI have experienced significant price and volume variability, these shares have provided a source of liquidity for the Company. Since the Company's reorganization in January 1992 and through June 30, 1997, the Company has financed its operations primarily through the sale of common equity, exercise of stock options, issuances of convertible notes and proceeds from the sale of shares of NCI. Included in the exercise of stock options in fiscal 1997 was a net of $153,250 financed by officer loans. These sources plus the recent sale of $3.3 million (net proceeds) of convertible preferred stock provided $4,531,553 of net cash from financing activities during fiscal 1997, significantly improving the Company's financial position. 16 17 Other than cash of $3.3 million at September 30, 1997 and the NCI shares, the Company has no other material unused sources of liquidity at this time. The Company expects to incur additional operating losses as a result of continued product sale operations and as a result of expenditures for research and development and marketing costs for HSS technology and other products and technologies. The timing and amounts of the Company's expenditures and the extent of operating losses will depend on many factors, some of which are beyond the Company's control. The Company anticipates that the commercialization of HSS technology will require increased personnel and operating costs. The Company believes it has sufficient financial resources for the next twelve months of operations. However this estimate is subject to significant variability and change due to management decisions regarding technologies, operations and the result of outside factors. The long-term success of the Company is dependent upon achieving a level of revenues adequate to support the Company's capital and operating requirements. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued a number of new pronouncements for future implementation as discussed in the footnotes to the Company's financial statements (see page F-8). As discussed in the notes to the financial statements, the implementation of these new pronouncements is not expected to have a material effect on the financial statements. BUSINESS RISKS This report contains a number of forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipates," "believes," "expects," "intends," "future" and similar expressions identify forward-looking statements. Readers are cautioned to consider the specific risk factors described below and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. The company undertakes no obligation to publicly revise these forward-looking statements, to reflect events or circumstances that may arise after the date hereof. History of Losses; Absence of Profitability; Variability of Results; and Reliance on Customers - The Company has an accumulated deficit of $4,170,300 with net losses of $2,144,363 for fiscal 1997 and $560,448 for fiscal 1996. The Company expects to incur additional operating losses in future quarters until and if it is able to generate operating revenues and margins sufficient to support expenditures. There is no assurance that the Company will be able to achieve or sustain significant periods of profitability in the future. The sales of the Company's products are subject to significant quarterly and seasonal variability. The Company has been and is expected to continue to be reliant on a limited number of customers, the loss of which would have an adverse effect on the Company's financial condition and results of operations. HSS Technology in Development; No Assurance of Completion; May Be Subject to Additional Delays -The HSS technology is in development and has not been developed to the point of commercialization. There can be no assurance that a commercially viable system can be completed due to the inherent risks of new technology development, limitations on financing, competition, obsolescence, loss of key technical personnel and other factors. The Company has not generated any revenues from the HSS technology to date, and has no agreements or arrangements providing any assurance of revenues in the future. The development of HSS technology has taken longer than anticipated by management and could be subject to additional delays. There can be no assurance of timely completion of commercially viable HSS technology or that if available that it will perform on a cost-effective basis, or that if introduced, that it will achieve market acceptance. The Company's various development projects are high risk in nature, where unanticipated technical obstacles can arise at any time and result in lengthy and costly delays or result in determination that further development is unfeasible. Future Dependent on Market Acceptance of the HSS Technology - The future of the Company is largely dependent upon the success of the HSS technology or the development of new technologies. There can be no assurance the Company can introduce any of its technologies or that if introduced they will achieve market acceptance sufficient to sustain the Company or achieve profitable operations. Significant Competition and Possible Obsolescence - Technological competition from other and longer established electronic and loudspeaker manufacturers is significant and expected to increase. Most of the companies with which the Company expects to compete have substantially greater capital resources, research and development staffs, marketing and distribution programs and facilities, and many of them have substantially greater experience in the production and marketing of products. In addition, one or more of the Company's competitors may succeed in developing technologies and products that are more effective than any of those being developed by the Company, rendering the Company's technology and products obsolete or noncompetitive. 17 18 New Technology Faces Many Barriers and Risks - The introduction of new technology, such as HSS, targeted for wide use often faces barriers to commercialization and many risks that cannot currently be identified. The HSS technology employs ultrasonics. Although ultrasonics are employed in a wide variety of medical and industrial applications, there can be no assurance that the Company will not face barriers to introduction due to the use of ultrasonics. The Company's technology uses relatively small amounts of ultrasonic energy which dissipates rapidly in air. The Company employs frequencies above those that may be harmful to pets but within those used by medical devices directly coupled to the body to image fetuses and the brain. Although the Company believes the frequencies and the amount of energy employed is harmless, and that the emission of such frequencies is not presently subject to government regulation, there can be no assurance that barriers to commercialization will not develop or that the use of such ultrasonics will not be subject to future regulation or interpretation of existing regulation. Dependence On Third Party Strategic Alliances and Business Relationships - The Company's strategy is to establish business relationships with leading participants in various segments of the electronics and sound reproduction markets. The Company believes this strategy will enable it to take advantage of the superior financial resources, technological capabilities, proprietary positions and market presence of these companies in establishing and maintaining HSS technology in sound reproduction. Although the Company's strategy is to establish closer relationships with selected companies through specific product collaborations, there can be no assurance that HSS technology can be developed to commercialization for such uses or that the Company can successfully collaborate to develop commercial products to exploit the HSS technology. The Company's success will depend on its ability to enter into additional strategic arrangements with new partners on commercially reasonable terms. Any future relationships may require the Company to share control over its development, manufacturing and marketing programs or to relinquish rights to certain versions of its technology. Patents and Proprietary Rights Subject to Uncertainty - The Company possesses two U.S. patents on ear radios which the Company relies on to protect its market position in the U.S. The Company has eleven patents pending on its HSS technology and the Company is considering additional patent applications. There can be no assurance that any patents held by the Company will not be challenged and invalidated, that patents will issue from any of the Company's pending applications or that any claims allowed from existing or pending patents will be of sufficient scope or strength. There can be no assurance the patents will be issued in all countries where the Company's products can be sold or licensed to provide meaningful protection or any commercial advantage to the Company. Competitors of the Company may also be able to design around the Company's patents. The electronics industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. There is currently no pending intellectual property litigation against the Company. There is no assurance, however, that the Company's technologies or products do not and will not infringe the patents or proprietary rights of third parties. Problems with patents or other rights could potentially increase the cost of the Company's products, or delay or preclude new product development and commercialization by the Company. If infringement claims against the Company are deemed valid, the Company may seek licenses which might not be available on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect the Company's future patent and/or technology license positions, or to defend against infringement claims. A successful challenge to the HSS technology could have a materially adverse effect on the Company and its business prospects. There can be no assurance that any application of the Company's technologies will not infringe upon the proprietary rights of others or that licenses required by the Company from others will be available on commercially reasonable terms, if at all. Ear Radio Assembly Dependent on Subcontractors; Possible Disruptions in Components - With respect to the assembly of the Company's FM ear radio, which accounts for substantially all of the Company's revenues, the Company is dependent on subcontract assemblers. The Company believes that there are a number of electronic product subcontract assembly companies located in North America and overseas that are qualified to produce the Company's ear radio. However, any disruption of supply could cause additional costs and delays and could have a material adverse impact on the Company's results of operations. The assembly of ear radios is dependent upon the availability of electronic components. The Company believes there are secondary suppliers of components and subassemblies such that it is not reliant on one supplier, although delays could result should the Company be required to change suppliers of longer lead time components or subassemblies. Any significant delays in obtaining components from existing or secondary suppliers through supplier changes or from component shortages, which are common to the electronics industry, could have a material adverse impact on the Company's results of operations. Performance Dependent on Key Personnel; Limited Key Person Life Insurance; Success Dependent on Additional Personnel - The Company's performance is substantially dependent on the performance of its executive officers and key technical employees. Given the Company's early stage of development, the Company is dependent on its ability to retain and motivate high quality personnel, especially its management and highly skilled technical personnel. Other than a $2 million policy on Elwood G. Norris, inventor of the Company's technologies, the Company does not maintain any 18 19 "key person" life insurance policies. The loss of the services of Mr. Norris could have a material adverse effect on the business, operating results or financial condition of the Company. The Company's future success and growth also depends on its continuing ability to identify, hire, train and retain other highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to attract, assimilate or retain other highly qualified technical and managerial personnel in the future. The inability to attract and retain the necessary technical and managerial personnel could have a material adverse effect upon the Company's business, operating results or financial condition. General Conflicts of Interest Due to Part-Time Management and Relationships - As more fully disclosed in "Item 9" below, certain of the Company's officers, including Mr. Norris, the inventor of the Company's technologies, devote only part-time services to the Company and have other employment and business interests to which they devote attention and will continue to do so, resulting in certain conflicts of interest. No Active Trading Market; Market Volatility - The Company's shares are traded on the OTC Bulletin Board, a screen-based trading system operated by the National Association of Securities Dealers, Inc. Securities traded on the OTC Bulletin Board are, for the most part, thinly traded and are subject to special regulations not imposed on securities listed or traded on the NASDAQ system or on a national securities exchange. The Company's shares, like that of the securities of other small, growth-oriented companies, have experienced in the past and are expected to experience in the future significant price and volume volatility thereby increasing the risk of ownership to investors. Historically, the Company's Common Stock has experienced low trading volume. There can be no assurance that the market price of the Common Stock will remain at its present level, and any future changes in market price cannot be predicted as to timing or extent. Past performance of the Common Stock does not guarantee and should not be construed to imply future performance. Factors such as announcements by the Company or its competitors concerning technological innovations, new commercial products or procedures, proposed government regulations and developments or disputes relating to patents or proprietary rights may have a significant effect on the market price of the Common Stock. Changes in the market price of the Common Stock may have no connection with the Company's actual financial results. ITEM 7. FINANCIAL STATEMENTS The financial statements required by this item begin on page F-1 (immediately following page 27 of this report) with the index to financial statements followed by the financial statements. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS The present directors, executive officers and significant employees of the Company, their ages, positions held in the Company and duration as director, are as follows:
NAME AGE POSITION AND OFFICES Dale Williams 58 Chairman of the Board of Directors, President and Chief Executive Officer Elwood G. Norris 59 Director and Chief Technology Officer Richard M. Wagner 52 Director and Secretary Joel A. Barker 52 Director Cornelius J. Brosnan 50 Director Robert Putnam 39 Vice President, Treasurer and Assistant Secretary James Croft 44 Vice President Engineering (1) (1) A significant employee of the Company.
The terms of all directors will expire at the next annual meeting of the Company's shareholders, or when their successors are elected and qualified. Directors are elected each year, and all directors serve one-year terms. Officers serve at the pleasure of the Board of Directors. There are no arrangements or understandings between the Company and any other person pursuant to which he was or is to be selected as a director, executive officer or nominee therefor. There 19 20 are no other persons whose activities are material or are expected to be material to the Company's affairs. The Company maintains a key person insurance policy on Mr. Norris in the amount of $2 million. BIOGRAPHICAL INFORMATION DALE WILLIAMS. Mr. Williams was appointed as Chairman, President and Chief Executive Officer effective September 1, 1997. In May 1997, Mr. Williams was engaged as a strategic planning and business development consultant for the HSS technology. Since March 1995, Mr. Williams, through his wholly-owned Spectrum Technology Inc., has been advising technology companies on business acquisition and market development strategies. From January 1990 to March 1995 he was founder and Chief Executive Officer of Beacon Light Products Inc., a private company manufacturing advanced electronic control products. He has held executive positions with technology companies including Intel, Monolithic Memories Inc. (Advanced Micro Devices) and Rockwell International. Mr. Williams has an B.S. in Electronics Engineering from California State University and an MBA from the University of Southern California. ELWOOD G. NORRIS. Mr. Norris has been a director of the Company since August 1980. He served as President from August 1980 to February 1994. He currently manages the Company's research and development activities as Chief Technology Officer. He has been a director and Chairman of NCI, a public company engaged in electronic product development, distribution and sales, since 1988. He has served as Chief Technology Officer to NCI since October 1995. From 1988 to October 1995 he served as NCI President and Chief Executive Officer and in January 1997 he was reappointed as Chief Executive Officer. Since August 1989, he has served as director of Patriot Scientific Corporation ("Patriot"), a public company engaged in the development of microprocessor technology, digital modem products and radar and antenna engineering. He also served as Chairman and Chief Executive Officer of Patriot until June 1994. From June 1995 until June 1996 when he was reappointed Chairman, Mr. Norris served as temporary President and Chief Executive Officer of Patriot. He is an electronics engineer and an inventor with over 20 U.S. patents, primarily in the fields of electrical and acoustical engineering. He is the inventor of the Company's ear radio, HyperSonic Sound, EPD technology and other technologies. Mr. Norris devotes only part-time services to the Company, approximating 15-30 hours per week. RICHARD M. WAGNER has served as a director since 1986 and was appointed Secretary in February 1994. Since 1980 he has been a self-employed real estate broker and agent. In 1986 he founded and has since operated The Mortgage Company and Scripps Escrow Co. which provide full-service real estate services. He received a Masters of Science degree from San Diego State University in 1974. JOEL A. BARKER. Mr. Barker was elected as a Director in March 1997. Since 1978 Mr. Barker has been President of Infinity Limited, Inc. and he has engaged as a futurist in speaking, consulting, publishing and video production popularizing the concept of paradigm shifts, change and vision. He is the author of the two successful books, Future Edge and Paradigms: The Business of Discovering the Future. He is the author and host of five futurist videos and is a frequent speaker and consultant to major world corporations and government agencies in North America, Europe and Asia. From 1975 to 1978 he was Director of the Futures Studies Department of the Science Museum of Minnesota. Mr. Barker obtained a B.S. in English Education from the University of Minnesota in 1966. CORNELIUS J. BROSNAN. Mr. Brosnan was appointed as a Director in October 1997. Since June 1997 he has been Vice President of Strategic Planning for Sprint PCS. From May 1995 to June 1997 he was Vice President, Product Planning Center for Samsung North America. From 1992 to May 1995 he held various executive positions at AT&T including serving as General Manager of Cordless Telephones, New Business Development Director for Consumer Products, Engineering Director for Interactive TV Services and the last position as Program Director for Broadband Networks. Mr. Brosnan received a B.A. in Political Science degree from Middlebury College in 1969. ROBERT PUTNAM. Mr. Putnam served as a director of the Company from 1984 until September 1997. He also served as Secretary/Treasurer until February 1994, then President and CEO through August 1997, and currently serves as Vice President, Treasurer and Assistant Secretary. Since 1988 he has served as Secretary of NCI and from 1995 as a Director of NCI. Since 1989 he has also served as Secretary/Treasurer and Director of Patriot. He received a B.A. degree in Mass Communication/Advertising from Brigham Young University in 1983. Mr. Putnam devotes approximately 20-25 hours per week to the Company. JAMES CROFT. Mr. Croft joined the Company in October 1997 as Vice President of Engineering for HSS technology. From October 1992 to October 1997 he was an executive with Carver Corp., a publicly traded high-end audio supplier. He was appointed Vice President of Marketing and Product Development for Carver Corp. in March 1993 and Vice President Research and Development in February 1995. From 1990 through October 1992, Mr. Croft was employed by Dahlquist, Inc., a loudspeaker manufacturer, the latest position being its Vice President of Research and Development. 20 21 Mr. Croft is a Vice President of Definitive Audio, Inc., a Seattle audio specialty retailer which he co-founded in 1975 and managed until 1985. CONFLICTS OF INTEREST Certain conflicts of interest now exist and will continue to exist between the Company and certain of its officers and directors due to the fact that they have other employment or business interests to which they devote some attention and they are expected to continue to do so. The Company has not established policies or procedures for the resolution of current or potential conflicts of interest between the Company and its management or management-affiliated entities. There can be no assurance that members of management will resolve all conflicts of interest in the Company's favor. The officers and directors are accountable to the Company as fiduciaries, which means that they are legally obligated to exercise good faith and integrity in handling the Company's affairs. Failure by them to conduct the Company's business in its best interests may result in liability to them. It is conceivable that the respective areas of interest of the Company, Patriot and NCI could overlap or conflict. The Company believes that although each of the three corporations are involved in the electronics industry, the respective areas of focus, products and technology directions of the three companies are sufficiently distinct such that no conflict in business lines or executive loyalties will result. Because of this unlikelihood, no steps have been taken to resolve possible conflicts, and any such conflicts, should they arise, will be addressed at the appropriate time. Mr. Norris and Mr. Putnam are officers and directors of multiple public companies as outlined above and Mr. Putnam is subordinate to Mr. Norris in these relationships. The Company has not provided a method of resolving any potential conflicts arising from these relationships and probably will not do so, partly due to inevitable extra expense and delay any such measures would occasion. Mr. Norris and Mr. Putnam are obligated to perform their duties in good faith and to act in the best interest of the Company and its shareholders, and any failure on their part to do so may constitute a breach of their fiduciary duties and expose them to damages and other liability under applicable law. While the directors and officers are excluded from liability for certain actions, their is no assurance that Mr. Norris or Mr. Putnam would be excluded from liability or indemnified if they breached their loyalty to the Company. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 (the "Act") requires the Company's officers, directors and persons who own more than 10% of a class of the Company's securities registered under Section 12(g) of the Act to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended September 30, 1997, the Company believes that all persons subject to the reporting requirements pursuant to Section 16(a) filed the required reports on a timely basis with the SEC. ITEM 10. EXECUTIVE COMPENSATION. There is shown below information concerning the compensation of the two individuals who acted as the Company's chief executive officer (each a "Named Executive Officer") for the fiscal year ended September 30, 1997. Compensation for the other four most highly compensated executive officers of the Company is not required nor presented as no such other executive officer's salary and bonus exceeded $100,000 during the fiscal year ended September 30, 1997.
SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation ------------------------------------ ----------------------- Name and Fiscal Other Annual Securities Underlying Principal Position Year Salary($) Bonus($) Compensation($) Options(#) - ------------------ ------ --------- --------- -------------- --------------------- Dale Williams, Chairman, 1997 $13,846 $43,750(3) $55,600(4) 862,000(6) President and CEO (1) Robert Putnam, Vice President 1997 $77,192 - $ 8,522(5) - Treasurer and Asst. Secretary (2) 1996 $73,109 - - 200,000 1995 $45,462 - - -
(1) Appointed Chairman, President and CEO on September 1, 1997. Served as a consultant from June 1997 through August 1997. (2) Service as President and CEO until September 1, 1997. (3) Represents consulting bonus paid by the issuance of 7,500 shares of Common Stock. (4) Represents consulting fees paid from June 1997 through August 1997. (5) Represents automobile lease paid by the Company. (6) Options on a total of 612,000 common shares subject to vesting. 21 22 Except for stock options, discussed below, no named person received any form of non-cash compensation from the Company in the fiscal year ended September 30, 1997, 1996 nor 1995 or currently receives any such compensation. OPTION GRANTS Shown below is further information on grants of stock options to the Named Executive Officers reflected in the Summary Compensation Table shown above. OPTION GRANTS FOR FISCAL YEAR ENDED SEPTEMBER 30, 1997
Percent of Total Number of Options Granted Exercise Expiration Name Options Granted to Employees in Fiscal Year Price Date ---- --------------- --------------------------- -------- ---------- Dale Williams 862,000(1) 82% $5.81 8/31/2002
(1) Options on a total of 250,000 common shares were vested and exercisable at issuance, the balance vesting monthly over 36 months at the rate of 17,000 shares per month, subject to partial acceleration for certain events including a major license agreement. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table provides information on unexercised options at September 30, 1997: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES Number of Unexercised Value of Unexercised Options Held At In-The-Money Options At Shares Acquired Value September 30, 1997 September 30, 1997(1) Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable ---- --------------- ----------- ----------- ------------- ----------- ------------- Dale Williams - - 250,000 612,000 - - Robert Putnam 150,000 (2) $676,875 200,000 - $988,000 -
(1) Based on the last sale price at the close of business on the last trading day of the fiscal year of $5.44 per share. (2) In connection with the exercise of these options, the Company made an interest bearing demand loan of $82,500 to Mr. Putnam. Mr. Putnam exercised the option by cash payment to the Company of $82,500. The Company does not have any stock appreciation rights plans in effect and has no long-term incentive plans, as those terms are defined in SEC regulations. During the fiscal year ended September 30, 1997, the Company did not adjust or amend the exercise price of stock options awarded to the Named Officers and the Company has no defined benefit or actuarial plans covering any person. COMPENSATION OF DIRECTORS No direct or indirect remuneration has been paid or is payable by the Company to the directors in their capacity as directors. It is anticipated that during the next twelve months that the Company will not pay any direct or indirect remuneration to any directors of the Company in their capacity as directors other than in the form of reimbursement of expenses of attending directors' or committee meetings. However, directors have received in the past, and may receive in the future, stock options. EMPLOYMENT CONTRACTS Mr. Putnam had no employment contract while he was President and CEO of the Company. Effective September 1, 1997 the Company entered into three year employment contract with Mr. Williams, Chairman, President and CEO. The agreement provides for a base salary of $20,000 per month, subject to future reviews. The agreement provides for a minimum performance bonus of 50% of base compensation in the first year, payable early if a significant license agreement is attained. Future bonuses are at the discretion of the Board of Directors. The Company may terminate the employment with or without cause (as defined), but termination without cause (other than disability or death) results in a severance payment equal to twelve months of the then monthly base salary and any bonus on an as if perfected basis payable in one lump sum. Likewise upon a change in control, as defined in the agreement, Mr. Williams may elect to terminate employment and obtain a payment equal to the remaining months of the agreement multiplied by the base salary and any bonus on an as if perfected basis payable in one lump sum. Mr. Williams has agreed not to disclose trade secrets during employment and for three years thereafter and has agreed to assign inventions to the Company (as defined) during employment to the Company. In connection with the employment agreement, the Company granted Mr. Williams options to purchase up to 862,000 common shares at $5.81 per share, with 250,000 shares vesting on the date of the grant and the balance over three years with certain amounts subject to acceleration for certain events. 22 23 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth, as of November 20, 1997, the stock ownership of each Named Executive Officer (see Item 10) and directors of the Company, of all executive officers and directors of the Company as a group, and of each person known by the Company to be a beneficial owner of 5% or more of its Common Stock. Except as otherwise noted, each person listed below is the sole beneficial owner of the shares and has sole investment and voting power as such shares. No person listed below has any option, warrant or other right to acquire additional securities of the Company, except as otherwise noted.
Name and Address Amount & Nature of Beneficial of Beneficial Title of Class Owner Ownership Percent of Class - -------------- ---------------- --------------- ---------------- Common Stock Elwood G. Norris 3,224,438(1) 30.9% par value 13114 Evening Creek Drive South $.00001 San Diego, California 92128 SAME Dale Williams 325,500(2) 3.1% 13114 Evening Creek Drive South San Diego, California 92128 SAME Joel A. Barker 19,000(3) * % 13114 Evening Creek Drive South San Diego, California 92128 SAME Cornelius J. Brosnan -0- * % 13114 Evening Creek Drive South San Diego, California 92128 SAME Richard M. Wagner 44,600 * % 13114 Evening Creek Drive South San Diego, California 92128 SAME Robert Putnam 620,000(4) 6.0% 13114 Evening Creek Drive South San Diego, California 92128 ALL DIRECTORS & EXECUTIVE OFFICERS 4,233,538(5) 38.6% AS A GROUP (6 PERSONS)
* Less than 1%. (1) Includes 280,000 Common Shares issuable upon the exercise of outstanding stock options and 100,000 Common Shares issuable upon the exercise of outstanding stock purchase warrants within 60 days of November 20, 1997. (2) Includes 318,000 Common Shares issuable upon the exercise of outstanding stock options within 60 days of November 20, 1997. (3) Includes 10,000 Common Shares issuable upon the exercise of outstanding stock options within 60 days of November 20, 1997. (4) Includes 200,000 Common Shares issuable upon the exercise of outstanding stock options within 60 days of November 20, 1997. (5) Includes 808,000 Common Shares issuable upon the exercise of outstanding stock options and 100,000 Common Shares issuable upon the exercise of outstanding stock purchase warrants within 60 days of November 20, 1997. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company is obligated to pay to Elwood G. Norris, a director, a 1% royalty on all sales of radio equipment based on the gross amount received by the Company less returns and allowances pursuant to a September 3, 1985 royalty agreement. Pursuant to an Addendum Agreement dated December 2, 1996, the Company is also obligated to pay Mr. Norris a 2% royalty on gross revenues received by the Company from the GPS and HSS technologies. Elwood Norris, a director of the Company, is also Chairman, CEO and Chief Technology Officer of NCI. He is the beneficial owner of 709,838 shares of NCI (representing approximately 1% of its issued and outstanding shares at October 31, 1997) and Robert Putnam (the Vice President, Treasurer and Asst. Secretary of the Company) is Secretary of NCI and the beneficial owner of 40,000 shares of NCI (representing less than 1% of its issued and outstanding shares). 23 24 Pursuant to an agreement dated March 23, 1988 between the Company and NCI, the Company sold NCI all of the issued and outstanding shares in its wholly-owned subsidiary Norcom Communications Corporation (now JABRA) in consideration of the Company's receipt of 700,000 common shares of NCI, subject to escrow and earn-out provisions which were subsequently fulfilled. At the time of the sale of JABRA to NCI, JABRA had a book value of $400. The Company still owns 225,300 of these common shares of NCI as of the date of this annual report. In 1993 NCI entered into agreements selling a portion of its ownership in JABRA to an investment group which has resulted in Norris no longer owning a majority interest in JABRA nor controlling its affairs. Although the Company was a signatory to certain sections of these agreements relating to the EarPHONE technology and royalties, the Company was not a beneficiary or material party to these transactions by NCI. The Company and Mr. Norris are each entitled to 1% royalties on certain gross invoice amounts received by JABRA on devices using the EarPHONE technology. The Company received its royalty right under agreements dated January 25, 1988 and March 22, 1988 by which the Company transferred all right, title and interest in and to the EarPHONE to JABRA. By letter agreement dated January 14, 1993 it was clarified that the Company's 1% royalty would be due only on gross sales of JABRA products incorporating a wireless receiver sold until the expiration of the last patent relating to the EarPHONE technology. JABRA has not introduced a wireless product and therefore there can be no assurance of future royalties. On October 31, 1997, the Company agreed to sell and cancel its 1% royalty interest to JABRA for $15,000, subject to receipt of funds by November 15, 1997. On June 4, 1996, the Company paid $50,788 to Elwood G. Norris reducing the principal balance of a 1991 note due and payable on October 1, 1996 to $100,000. In connection with the placement of $220,000 of convertible notes to other unrelated investors, the balance of the note to Mr. Norris was converted into a new note on terms comparable to the unrelated investors. Accordingly the Company executed a new unsecured 8% Convertible Subordinated Promissory Note due May 31, 1999 payable to Mr. Norris for $100,000. Pursuant to the conversion terms of the note, Mr. Norris converted the principal amount of the note into 100,000 shares of the Company's common stock at the conversion price of $1.00 per share on September 27, 1996. On the same terms as the other investors, Mr. Norris was also granted warrants to purchase up to 100,000 of the Company's common shares until May 31, 1998 at an exercise price of $1.00 per share. During the fiscal year ended September 30, 1997, the Company paid $15,000 to NCI for rent of its operating facility The Company also paid NCI for contract manufacturing services on ear radio production totaling $48,000 during fiscal 1997. The Company believes these services were performed on terms comparable to those from independent parties. On July 11, 1997, the Company entered into a three year lease. To meet the credit requirements of the landlord, both the Company and NCI entered into a joint lease agreement for approximately 12,925 square feet with aggregate monthly payments of $13,830 inclusive of utilities and costs. The Company is occupying approximately 7,500 square feet of the jointly leased office space with its share of monthly payments being approximately $8,000. Accordingly the Company could become obligated for the entire lease should NCI default on its share of payments thereon. In January 1997 the Company made unsecured cash demand loans with interest at 7% per annum to two officers aggregating $173,250 (Mr. Putnam as to $82,500 and Mr. Norris as to $90,750). The proceeds of the loans were used by the officers to exercise Company stock options. Each officer made a $10,000 principal payment plus interest during the year. Although the notes are payable on demand, the Board of Directors has advised the officers that they shall have until September 30, 1998 to repay the notes. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The following is a list and index of Exhibits required by Item 601 of Regulation S-B. Except for those exhibits indicated by an asterisk which are filed herewith, the remaining exhibits listed below are incorporated by reference to the exhibit (of the number indicated) previously filed by the Company as indicated. EXHIBIT INDEX 2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION 2.1 Share Exchange Agreement among the Company, Norcom Communications Corporation, and Norris Communications Corp., dated for reference March 23, 1988 filed as Exhibit 8.1 to the Company's Form 10-SB effective August 1, 1994 24 25 2.1.1 Amendment of Agreement among the Company, Norcom Communications Corporation, and Norris Communications Corp., dated for reference March 23, 1988 filed as Exhibit 8.1.1 to the Company's Form 10-SB effective August 1, 1994 2.2 Articles and Certificate of Merger of American Technology Corporation (Utah) into American Technology Corporation (Delaware) dated June 19, 1992 filed as Exhibit 8.2 to the Company's Form 10-SB effective August 1, 1994 2.2.1 Agreement and Plan of Merger of American Technology Corporation (Utah) and American Technology Corporation (Delaware) dated June 19, 1992 filed as Exhibit 8.2.1 to the Company's Form 10-SB effective August 1, 1994 3. ARTICLES AND BYLAWS 3.1 Certificate of Incorporation of American Technology Corporation (Delaware) dated March 1, 1992, filed as Exhibit 2.1 to the Company's Form 10-SB effective August 1, 1994 3.1.1 Amendment to Certificate of Incorporation of American Technology Corporation dated March 24, 1997 and filed with Delaware on April 22, 1997. Filed as Exhibit 3.1.1 to the Company's Form 10- QSB for March 31, 1997 3.1.2 Certificate of Designations of Series A Convertible Preferred Stock filed with Delaware on August 15, 1997. Filed as Exhibit 3.1.2 to the Company's Form 8-K dated August 29, 1997. 3.1.3 Corrected Certificate of Designations of Series A Convertible Preferred Stock dated and filed with Delaware on August 25, 1997. Filed as Exhibit 3.1.3 to the Company's Form 8-K dated August 29, 1997. 3.2 Bylaws of American Technology Corporation (Delaware) filed as Exhibit 23 to the Company's Form 10-SB effective August 1, 1994 4. INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS 4.1 Form of Stock Purchase Warrant dated February 29, 1996, exercisable to purchase 250,000 common shares at $0.50 per share until February 23, 1999, granted to investors filed as Exhibit 4.1 to the Company's Form 8-K dated March 12, 1996 4.2 Form of 8% Convertible Subordinated Promissory Note due May 31, 1999 aggregating $220,000 granted to investors filed as Exhibit 4.2 to the Company's Form 8-K dated June 12, 1996 4.3 Form of Stock Purchase Warrant dated as of May 31, 1996, exercisable to purchase 220,000 common shares at $1.00 per share until May 31, 1998, granted to investors filed as Exhibit 4.3 to the Company's Form 8-K dated June 12, 1996 4.4 8% Convertible Subordinated Promissory Note due May 31, 1999 payable to Elwood G. Norris for $100,000 filed as Exhibit 4.4 to the Company's Form 8-K dated June 12, 1996 4.5 Stock Purchase Warrant exercisable to purchase 100,000 common shares at $1.00 per share until May 31, 1998 granted to Elwood G. Norris filed as Exhibit 4.5 to the Company's Form 8-K dated June 12, 1996 4.6 Form of 6% Convertible Subordinated Promissory Note due July 31, 1998 aggregating $700,000 granted to six investors filed as Exhibit 4.6 to Form 8-K dated August 19, 1996 4.7 Form of 6% Convertible Subordinated Promissory Note due March 1, 1999 aggregating $1,000,000 granted to sixteen investors filed as Exhibit 4.7 to the Company's Form 8-K dated April 1, 1997 4.8 Form of Stock Purchase Warrant exercisable at $5.00 per share until March 1, 2000 granted to sixteen investors for an aggregate of 50,000 common shares filed as Exhibit 4.8 to the Company's Form 8-K dated April 1, 1997 4.9 Stock Purchase Warrant issued to Renwick Corporate Finance, Inc. dated as of February 5, 1997 exercisable to purchase 90,000 common shares at $5.00 per share until February 5, 2000 filed as Exhibit 4.9 to the Company's Form 10-QSB for March 31, 1997 25 26 4.10 Form of Stock Purchase Warrant exercisable at $7.50 per share until August 1,2000 granted to eleven investors for an aggregate of 175,000 common shares and filed as Exhibit 4.10 to the Company's Form 8-K dated August 29, 1997 4.11 Form of Registration Rights Agreement dated as of August 12, 1997 by and between the Company and Eleven Purchasers of Series A Convertible Preferred Stock filed as Exhibit 4.11 to the Company's Form S-3 dated May 20, 1997 4.12 Reference is made to Exhibits 3.1 through 3.2. 10. MATERIAL CONTRACTS 10.1 Technology Transfer Agreement among the Company, Norris Communications Corp., Elwood G. Norris and Norcom Electronics Corporation dated January 25, 1988 filed as Exhibit 6.1 to the Company's Form 10-SB effective August 1, 1994 10.1.1 Assignment Agreement among the Company, Norcom Electronics Corporation, Norcom Communications Corporation and Elwood G. Norris dated March 22, 1988 filed as Exhibit 6.1.1 to the Company's Form 10-SB effective August 1, 1994 10.2 Royalty Agreement between the Company and Elwood G. Norris dated September 3, 1985 filed as Exhibit 6.2 to the Company's Form 10-SB effective August 1, 1994 10.3 Assignment of Technology Agreement between the Company and Elwood G. Norris dated March 2, 1992 filed as Exhibit 6.3 to the Company's Form 10-SB effective August 1, 1994 10.3.1 Addendum Agreement to Assignment of Technology Agreement between the Company and Elwood G. Norris dated December 2, 1996 10.4 Property Reimbursement Agreement between the Company and Elwood G. Norris dated March 2, 1992 filed as Exhibit 6.4 to the Company's Form 10-SB effective August 1, 1994 10.5 Promissory Note between the Company and Elwood G. Norris dated September 30, 1991 filed as Exhibit 6.5 to the Company's Form 10-SB effective August 1, 1994 10.6 Bonus and Stock Agreement between the Company and Robert Putnam dated March 2, 1992 filed as Exhibit 6.6 to the Company's Form 10-SB effective August 1, 1994 10.7 Agreement and Plan of Reorganization by and among Norris Communications Corp., Norcom Communications Corporation and JABRA Corporation also executed in part by American Technology Corporation dated January 15, 1993 filed as Exhibit 6.7 to the Company's Form 10-SB effective August 1, 1994 10.7.1 Amendment No. 1 dated May 28, 1993 to Agreement and Plan of Reorganization by and among Norris Communications Corp., Norcom Communications Corporation and JABRA Corporation also executed in part by American Technology Corporation filed as Exhibit 6.7.1 to the Company's Form 10-SB effective August 1, 1994 10.7.2 Letter Agreement between the Company, Elwood Norris and Norcom Communications Corporation dated January 14, 1993 filed as Exhibit 6.7.2 to the Company's Form 10-SB effective August 1, 1994 10.8 1992 Incentive Stock Option Plan adopted by the Board of Directors on March 2, 1992 and approved by the shareholders on June 19, 1992 filed as Exhibit 6.8 to the Company's Form 10-SB effective August 1, 1994 10.8.1 Standard form of Incentive Stock Option Plan Agreement filed as Exhibit 6.8.1 to the Company's Form 10-SB effective August 1, 1994 10.9 1992 Non-Statutory Stock Option Plan adopted by the Board of Directors on March 2, 1992 and approved by the shareholders on June 19, 1992 filed as Exhibit 6.9 to the Company's Form 10-SB effective August 1, 1994 26 27 10.9.1 Standard form of Non-Statutory Stock Option Plan Agreement filed as Exhibit 6.9.1 to the Company's Form 10-SB effective August 1, 1994 10.10 Manufacturing Contract between the Company and Zhuhai Huasheng Enterprise Group Co., Ltd. dated July 20, 1995 filed as Exhibit 10.10 to the Company's Form 10-KSB for September 30, 1995 10.11 Demand Promissory Note for $82,500 due from Robert Putnam dated January 17, 1997 filed as Exhibit 10.11 to the Company's Form 10-QSB for March 31, 1997 10.12 Demand Promissory Note for $90,750 due from Elwood G. Norris dated January 21, 1997 filed as Exhibit 10.12 to the Company's Form 10-QSB for March 31, 1997 10.13 Sublease Agreement between Global Associates, Ltd. and Norris Communications, Inc. and the Company dated July 11, 1997 filed as Exhibit 10.13 to the Company's Form 10-QSB for June 30, 1997 10.14 1997 Employee Stock Compensation Plan of the Company dated March 10, 1997 filed as Exhibit 10.11 to the Company's Form S-8 dated March 24, 1997 *10.15 Employment Agreement dated as of September 1, 1997 between the Company and Dale Williams *10.15.1 Stock Option Agreement dated September 1, 1997 between the Company and Dale Williams *10.16 Employment Agreement dated as of September 1, 1997 between the Company and Elwood G. Norris *10.17 Employment Agreement dated as of September 1, 1997 between the Company and Robert Putnam 23. CONSENTS OF EXPERTS AND COUNSEL *23.1 Consent of BDO Seidman, LLP 27. FINANCIAL DATA SCHEDULE *27.1 Financial Data Schedule - ---------- (b) Reports on Form 8-K -The Company filed one report on Form 8-K (amended by a Form 8-K/A) during the last fiscal quarter of the year ended September 30, 1997. The report dated August 29, 1997 reported an Item 5 event related to the placement of $3,500,000 of Convertible Preferred Stock. This filing was amended by a Form 8-K/A dated September 18, 1997. 27 28 AMERICAN TECHNOLOGY CORPORATION INDEX TO FINANCIAL STATEMENTS Report of Independent Certified Public Accountants F-2 Balance Sheet as of September 30, 1997 F-3 Statements of Operations for the Years Ended September 30, 1997 and 1996 F-4 Statements of Stockholders' Equity for the Years Ended September 30, 1997 and 1996 F-5 Statements of Cash Flows for the Years Ended September 30, 1997 and 1996 F-6 Summary of Accounting Policies F-7 - F-9 Notes to Financial Statements F-10 - F-17
F-1 29 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors American Technology Corporation San Diego, California We have audited the accompanying balance sheet of American Technology Corporation as of September 30, 1997 and the related statements of operations, stockholders' equity and cash flows for each of the two years in the period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Technology Corporation as of September 30, 1997, and the results of its operations and its cash flows for each of the two years in the period then ended in conformity with generally accepted accounting principles. /s/ BDO SEIDMAN, LLP BDO Seidman, LLP Denver, Colorado November 5, 1997 F-2 30 AMERICAN TECHNOLOGY CORPORATION BALANCE SHEET
September 30, 1997 - ---------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash $ 3,338,458 Investment securities available for sale (Note 1) 29,289 Trade accounts receivable (Note 8), less allowance of $7,800 for doubtful accounts 307,174 Inventories (Note 2) 189,815 Prepaid expenses and other 27,376 - ---------------------------------------------------------------------------------------------- Total current assets 3,892,112 EQUIPMENT, NET (Note 3) 196,422 OTHER ASSETS: Patents 137,440 Other 25,904 - ---------------------------------------------------------------------------------------------- Total other assets 163,344 - ---------------------------------------------------------------------------------------------- $ 4,251,878 ============================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable (Note 4) $ 120,869 Accrued liabilities 51,436 - ---------------------------------------------------------------------------------------------- Total current liabilities 172,305 LONG-TERM LIABILITIES 6% Convertible notes and accrued interest (Note 5) 386,651 - ---------------------------------------------------------------------------------------------- Total liabilities 558,956 COMMITMENTS AND CONTINGENCY (Notes 4 and 9) STOCKHOLDERS' EQUITY (Note 7): Preferred stock, $.00001 par value, authorized 5,000,000 shares: Series A Convertible preferred stock, 350,000 shares designated, issued and outstanding (liquidation preference of $10 per share) 3,321,153 Common stock, $.00001 par value; 20,000,000 shares authorized: issued and outstanding, 9,758,779 98 Additional paid-in capital 4,666,035 Notes receivable (Note 4) (153,150) Accumulated deficit (4,170,300) Net unrealized gain on securities available for sale 29,086 - ---------------------------------------------------------------------------------------------- Total stockholders' equity 3,692,922 - ---------------------------------------------------------------------------------------------- $ 4,251,878 ==============================================================================================
See accompanying summary of accounting policies and notes to financial statements. F-3 31 AMERICAN TECHNOLOGY CORPORATION STATEMENTS OF OPERATIONS
Years Ended September 30, 1997 1996 - -------------------------------------------------------------------------------- NET SALES (Note 8) $ 967,408 $ 933,643 Cost of goods sold (Note 4) 809,437 797,154 - -------------------------------------------------------------------------------- Gross profit 157,971 136,489 - -------------------------------------------------------------------------------- OPERATING EXPENSES: Selling, general and administrative 1,616,568 555,950 Research and development 566,288 160,934 - -------------------------------------------------------------------------------- Total operating expenses 2,182,856 716,884 - -------------------------------------------------------------------------------- Loss from operations (2,024,885) (580,395) OTHER INCOME (EXPENSE): Gain on sale of investment securities (Note 1) -- 55,019 Interest expense (146,331) (42,046) Other 26,853 6,974 - -------------------------------------------------------------------------------- Total other income (expense) (119,478) 19,947 - -------------------------------------------------------------------------------- NET LOSS $(2,144,363) $ (560,448) ================================================================================ NET LOSS AVAILABLE TO COMMON STOCKHOLDERS (NOTE 11) $(2,762,009) $ (560,448) ================================================================================ NET LOSS PER SHARE OF COMMON STOCK $ (.30) $ (.08) ================================================================================ AVERAGE WEIGHTED NUMBER OF COMMON SHARES OUTSTANDING 9,268,128 7,464,588 ================================================================================
See accompanying summary of accounting policies and notes to financial statements. F-4 32 AMERICAN TECHNOLOGY CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 1997 and 1996 - -------------------------------------------------------------------------------------------------------------------- Common Stock Series A Convertible Additional Preferred Stock Paid-in Notes Shares Amount Capital Shares Amount Receivable - -------------------------------------------------------------------------------------------------------------------- BALANCE, OCTOBER 1, 1995 7,291,228 $ 73 $ 1,567,805 -- -- -- Issuances of common stock: Private placement at $.50 per unit, consisting of one share and one warrant (Note 7) 250,000 2 124,998 -- -- -- Upon exercise of stock options 171,667 2 87,082 -- -- -- Upon conversion of 8% convertible notes at $1.00 per share 320,000 3 319,997 -- -- -- Upon conversion of 6% convertible notes at $2.00 per share 350,000 4 699,996 -- -- -- Upon exercise of warrants at $1.00 per share 220,000 2 219,998 -- -- -- For interest on convertible notes 8,864 -- 11,797 -- -- -- Value assigned to private placement warrants -- -- 12,500 -- -- -- Value assigned to warrants granted with 8% convertible notes -- -- 19,200 -- -- -- Net loss for the year -- -- -- -- -- -- Net unrealized loss on securities available for sale -- -- -- -- -- -- - -------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1996 8,611,759 86 3,063,373 -- -- -- Issuances of common stock: Upon exercise of stock options (Note 4) 592,500 6 343,644 -- -- (173,150) For compensation and services 40,327 1 201,413 -- -- -- Upon conversion of 6% convertible notes at $3.50 per share (Note 5) 178,571 2 624,998 -- -- -- For accrued interest on 6% convertible notes (Note 5) 2,659 -- 9,310 -- -- -- Cash-less exercise of options 292,963 3 (3) -- -- -- Upon exercise of warrants at $0.50 per share (Note 7) 40,000 -- 20,000 -- -- -- Value assigned to 50,000 warrants granted with 6% convertible notes (Note 5) -- -- 2,500 -- -- -- Value assigned to 90,000 warrants granted as consulting services (Note 7) -- -- 33,300 -- -- -- Value assigned to 97,500 options granted for services -- -- 244,800 -- -- -- Non-cash interest on convertible notes (Note 7) -- -- 122,700 -- -- -- Issuance of preferred stock, net of offering costs (Note 7) 350,000 3,321,153 -- Payment on notes receivable (Note 4) -- -- -- -- -- 20,000 Net loss for the year -- -- -- -- -- -- Net unrealized loss on securities available for sale -- -- -- -- -- -- - -------------------------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1997 9,758,779 $ 98 $ 4,666,035 350,000 $ 3,321,153 $ (153,150) ====================================================================================================================
- --------------------------------------------------------------------------------- Net Unrealized Gain on Securities Total Accumulated Available Stockholders' Deficit For Sale Equity - --------------------------------------------------------------------------------- BALANCE, OCTOBER 1, 1995 $(1,465,489) $ 481,016 $ 583,405 Issuances of common stock: Private placement at $.50 per unit, consisting of one share and one warrant (Note 7) -- -- 125,000 Upon exercise of stock options -- -- 87,084 Upon conversion of 8% convertible notes at $1.00 per share -- -- 320,000 Upon conversion of 6% convertible notes at $2.00 per share -- -- 700,000 Upon exercise of warrants at $1.00 per share -- -- 220,000 For interest on convertible notes -- -- 11,797 Value assigned to private placement warrants -- -- 12,500 Value assigned to warrants granted with 8% convertible notes -- -- 19,200 Net loss for the year (560,448) -- (560,448) Net unrealized loss on securities available for sale -- (291,066) (291,066) - --------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1996 (2,025,937) 189,950 1,227,472 Issuances of common stock: Upon exercise of stock options (Note 4) -- -- 170,500 For compensation and services -- -- 201,414 Upon conversion of 6% convertible notes at $3.50 per share (Note 5) -- -- 625,000 For accrued interest on 6% convertible notes (Note 5) -- -- 9,310 Cash-less exercise of options -- -- -- Upon exercise of warrants at $0.50 per share (Note 7) -- -- 20,000 Value assigned to 50,000 warrants granted with 6% convertible notes (Note 5) -- -- 2,500 Value assigned to 90,000 warrants granted as consulting services (Note 7) -- -- 33,300 Value assigned to 97,500 options granted for services -- -- 244,800 Non-cash interest on convertible notes (Note 7) -- -- 122,700 Issuance of preferred stock, net of offering costs (Note 7) -- -- 3,321,153 Payment on notes receivable (Note 4) -- -- 20,000 Net loss for the year (2,144,363) -- (2,144,363) Net unrealized loss on securities available for sale -- (160,864) (160,864) - --------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1997 $(4,170,300) $ 29,086 $ 3,692,922 =================================================================================
See accompanying summary of accounting policies and notes to financial statements. F-5 33 AMERICAN TECHNOLOGY CORPORATION STATEMENTS OF CASH FLOWS
Years Ended September 30, 1997 1996 - ------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net loss $(2,144,363) $ (560,448) Adjustments to reconcile net loss to cash used in operating activities: Gain on sale of investment securities -- (55,019) Gain on sale of equipment -- (5,323) Depreciation and amortization 97,920 74,493 Common stock issued for interest 9,310 11,797 Common stock issued for services 201,414 -- Warrants granted for services 33,300 -- Warrants granted with convertible notes 2,500 19,200 Options granted for services 244,800 -- Non-cash interest expense on convertible notes 134,351 -- Changes in operating assets and liabilities: Prepaid expenses and other 31,630 (49,544) Trade accounts receivable (111,717) (82,165) Inventories 124,116 (28,555) Accounts payable (227,319) 78,466 Accrued liabilities 31,633 (14,252) - ------------------------------------------------------------------------------------------ Net cash used in operating activities (1,572,425) (611,350) - ------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Purchase of equipment (176,766) (42,715) Proceeds from sale of equipment -- 6,198 Patent costs paid (101,235) (36,205) - ------------------------------------------------------------------------------------------ Net cash used in investing activities (278,001) (72,722) - ------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Proceeds from issuance of preferred stock, net 3,321,153 -- Proceeds from exercise of common stock warrants 20,000 220,000 Proceeds from exercise of stock options 343,650 87,084 Proceeds loaned on notes receivable - officers for option exercise (173,250) -- Principal payments received on notes receivable - officers 20,000 -- Proceeds from issuance of convertible notes 1,000,000 920,000 Payment on line of credit -- (25,000) Principal payment on note payable stockholder -- (44,584) Proceeds from issuance of common stock -- 125,000 - ------------------------------------------------------------------------------------------ Net cash provided by financing activities 4,531,553 1,282,500 - ------------------------------------------------------------------------------------------ Increase in cash 2,681,127 598,428 CASH, BEGINNING OF YEAR 657,331 58,903 - ------------------------------------------------------------------------------------------ CASH, END OF YEAR $ 3,338,458 $ 657,331 ==========================================================================================
See accompanying summary of accounting policies and notes to financial statements. F-6 34 AMERICAN TECHNOLOGY CORPORATION SUMMARY OF ACCOUNTING POLICIES ORGANIZATION American Technology Corporation (the "Company"), a AND Delaware corporation, is engaged in the development, BUSINESS manufacture and marketing of consumer electronic products and acoustic technologies. USE OF The preparation of financial statements in conformity ESTIMATES with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FINANCIAL INSTRUMENTS The Company's financial instruments that are exposed to AND CONCENTRATIONS OF concentrations of credit risk consist primarily of cash CREDIT RISK and trade accounts receivable. The Company's cash is placed in quality money market accounts with major financial institutions. The investment policy limits the Company's exposure to concentrations of credit risk. Such deposit accounts at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. Concentrations of credit risk with respect to the trade accounts receivable are limited due to the wide variety of customers and markets which comprise the Company's customer base, as well as their dispersion across many different geographic areas. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that the trade accounts receivable credit risk exposure is limited. Generally, the Company does not require collateral or other security to support customer receivables. The carrying amounts of financial instruments including cash, trade accounts receivable, notes receivable-officers, accounts payable and accrued liabilities approximated fair market value because of the immediate or short-term maturity of these instruments. The difference between the carrying amount of the Company's convertible notes and their fair market value is not considered significant. INVESTMENT Investment securities classified as available for sale SECURITIES are those securities that the Company does not have the positive intent to hold to maturity or does not intend to trade actively. These securities are reported at fair value with unrealized gains and losses reported as a net amount (net of applicable income taxes) as a separate component of stockholders' equity. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. EQUIPMENT AND Equipment is stated at cost. Depreciation is computed DEPRECIATION over the estimated useful lives of three years using the straight line method. PATENTS Patents are carried at cost and, when granted, will be amortized over their estimated useful lives. The carrying value of patents is periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from individual intangible assets is less than its carrying value. REVENUE Sales are recorded in the periods that products are RECOGNITION shipped. F-7 35 AMERICAN TECHNOLOGY CORPORATION SUMMARY OF ACCOUNTING POLICIES RESEARCH AND Research and development costs are expensed as incurred. DEVELOPMENT COSTS INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards ("SFAS") No. 109. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. NET LOSS Net loss per common share is based on the weighted PER SHARE average number of shares outstanding during each period presented. Options and warrants to purchase stock and debt convertible into common shares are included as common stock equivalents, when dilutive. Net loss available to common stockholders was reduced in computing net loss per share by an imputed deemed dividend from a discount provision included in the Series A Preferred Stock (see Note 7). The deemed dividend is amortized to the earliest period at which the preferred stock became convertible. Since the Series A Stock was convertible at issuance, the entire imputed conversion discount of $617,646 is recognized as a deemed dividend for the fiscal year ended September 30, 1997. This imputed dividend is not a contractual obligation on the part of the Company to pay such imputed dividend. Loss per share available to common stockholders is calculated as follows:
1997 1996 ---- ---- Net loss $(2,144,363) $ (560,448) Series A preferred stock dividends based on imputed discount at issuance (617,646) -- ----------- ----------- Net loss available to common stockholders $(2,762,009) $ (560,448) =========== =========== Net loss per share of common stock $ (.30) $ (.08) =========== =========== Average weighted number of common shares outstanding 9,268,128 7,464,588 =========== ===========
STOCK OPTIONS The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for all stock option plans. Under APB Opinion 25, compensation cost is recognized for stock options granted to employees when the option price is less than the market price of the underlying common stock on the date of grant. SFAS Statement No. 123, "Accounting for Stock-Based Compensation," requires the Company to provide pro forma information regarding net income as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in SFAS No. 123. To provide the required pro forma information, the Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model. STATEMENTS OF For purposes of the statement of cash flows, the Company CASH FLOWS considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. F-8 36 AMERICAN TECHNOLOGY CORPORATION SUMMARY OF ACCOUNTING POLICIES RECENT ACCOUNTING The Financial Accounting Standards Board has issued PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" and Statement of Financial Accounting Standards No. 129 "Disclosures of Information About an Entity's Capital Structure." SFAS No. 128 provides a different method of calculating earnings per share than is currently used in accordance with Accounting Principles Board Opinion No. 15, "Earnings Per Share." SFAS No. 128 provides for the calculation of "Basic" and "Dilutive" earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. SFAS No. 129 establishes standards for disclosing information about an entity's capital structure. SFAS No. 128 and SFAS No. 129 are effective for financial statements issued for periods ending after December 15, 1997. Their implementation is not expected to have a material effect on the financial statements. The Financial Accounting Standards Board has also issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that displays with the same prominence as other financial statements. SFAS No. 131 supersedes SFAS No. 14 "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes standards on the way that public companies report financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosure regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. SFAS No. 130 and No. 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Because of the recent issuance of these standards, management has been unable to fully evaluate the impact, if any, the standards may have on the future financial statement disclosures. Results of operations and financial position, however, will be unaffected by implementation of these standards. F-9 37 AMERICAN TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS 1. INVESTMENT The Company's investment in securities consists of SECURITIES 225,300 shares of Norris Communications Inc. common stock, an affiliated corporation. At September 30, 1997 the Company's market value of available for sale securities consisted of:
Gross Estimated Unrealized Fair Cost Gains Value ------ ---------- --------- Common Stock $ 203 $ 29,086 $ 29,289
The Company realized gains of $55,019 on the sale of investment securities for the year ended September 30, 1996. 2. INVENTORIES At September 30, 1997 inventories consisted of the following: Finished goods $ 9,912 Work-in-process 125,980 Raw materials 53,923 -------- $189,815 ========
3. EQUIPMENT Equipment consisted of the following at September 30, 1997: Machinery and equipment $367,460 Office furniture and equipment 63,837 Leasehold improvements 29,838 -------- 461,135 Less accumulated depreciation 264,713 -------- Net equipment $196,422 ========
Depreciation expense was approximately $74,000 and $52,000 for the years ended September 30, 1997 and 1996. 4. RELATED PARTY Facility Lease TRANSACTIONS Through July 1997, the Company's research, assembly and shipping and office facilities were subleased under a $2,000 monthly sub-lease agreement with an affiliated corporation Norris Communications, Inc. ("NCI"). On July 11, 1997, the Company entered into a three year lease. To meet the credit requirements of the landlord, both the Company and NCI entered into a joint lease agreement for approximately 12,925 square feet with aggregate monthly payments of $13,830 inclusive of utilities and costs. The Company is occupying approximately 7,500 square feet of the jointly leased office space with its share of monthly payments being approximately $8,000. Accordingly the Company could become obligated for the entire lease should NCI default on its share of payments thereon. Total rent expense under operating lease agreements was approximately $32,000 and $39,000 for the years ended September 30, 1997 and 1996. Outside Manufacturing Services NCI has provided certain outside manufacturing services to the Company. For the years ended September 30, 1997 and 1996 total services provided amounted to approximately $48,000 and $49,000. At September 30, 1997 approximately $1,600 is due to NCI for such services and is included in accounts payable in the accompanying balance sheet. F-10 38 AMERICAN TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS Royalties In connection with a 1992 agreement to purchase technology, the Company is required to pay a stockholder/director of the Company a 1% royalty on all net sales of radio equipment (as defined). For the years ended September 30, 1997 and 1996, total royalties paid by the Company on radio sales were approximately $7,900 and $9,000. The Company is also obligated to pay the stockholder/director royalties of 2% on gross revenues of the Company's sound reproduction and global positioning satellite technologies. As of September 30, 1997 no amounts have been paid nor are due under this agreement. Notes Receivable-Officers In January 1997 the Company made unsecured cash demand loans to two officers aggregating $173,250 in connection with the exercise of stock options. Notes receivable-officers, represents the balance of principal and accrued interest at 7% per annum on these demand notes. Each officer made a $10,000 principal plus interest payment during the year. Such notes are presented as a reduction from stockholders' equity in the accompanying financial statements. 5. CONVERTIBLE NOTES During fiscal 1997, the Company raised $1,000,000 through the issuance of 6% convertible subordinated promissory notes (the "Convertible Notes"). The Convertible Notes are unsecured and are due on March 1, 1999. Interest on the Convertible Notes is payable in cash upon maturity or in common stock upon conversion. Principal and interest due under the Convertible Notes may be converted, at the option of the holder, into shares of the Company's common stock at a price which is the lower of (i) $3.50 per share or (ii) 85% of the ten day average closing bid price prior to conversion but not less than $2.50 per share or (iii) for conversions on or after March 1, 1998, the average closing bid price for the prior thirty days but in no event less than $1.00 per share. The Convertible Notes may be called by the Company for conversion if the market price exceeds $9.00 per share for ten days and other conditions have been met. As the market price of the Company's common stock exceeded the conversion price of the Convertible Notes at the date of issuance, the Company recognized embedded interest expense of $122,700 upon issuance of the Convertible Notes. The Convertible Notes were issued with detachable warrants which grant the holders the right to acquire up to 50,000 shares of the Company's common stock at a per share price of $5.00. The warrants expire on March 1, 2000. The warrants were determined to have a value of $2,500, which amount was recorded as additional paid-in capital. During 1997, holders of $625,000 of the Convertible Notes converted their notes, and accrued interest thereon, into 181,230 shares of the Company's common stock. At September 30, 1997, the remaining $375,000 of Convertible Notes, and accrued interest thereon of $11,651 would have been convertible into approximately 110,500 shares of the Company's common stock. Subsequent to September 30, 1997, an additional $25,872 of Convertible Notes, and accrued interest thereon, was converted into 7,392 shares of common stock reducing the principal amount to $350,000. F-11 39 AMERICAN TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS 6. INCOME TAXES Income taxes consisted of the following:
Year Ended September 30, 1997 1996 ------------------------------------------------------------ Current - State $ - $ - Deferred (benefit): Federal (597,000) (287,000) State (105,000) (51,000) --------- --------- (702,000) (338,000) Change in valuation allowance 702,000 338,000 --------- --------- $ - $ - ========= =========
A reconciliation of income taxes at the federal statutory rate of 34% to the effective tax rate is as follows:
1997 1996 ---- ---- Income taxes (benefit) computed at the federal statutory rate $ (729,000) $ (191,000) Tax effect of change in valuation allowance 638,000 240,000 Nondeductible compensation and interest expense 168,000 - State income taxes (benefit), net of federal tax benefit (127,000) (33,000) Other 50,000 (16,000) ---------- ----------- $ - $ - ========== ===========
The types of temporary differences between the tax basis of assets and liabilities and their approximate tax effects that give rise to a significant portion of the net deferred tax asset (liability) at September 30, 1997 are as follows: DEFERRED TAX ASSETS: Tax loss carryforwards $1,352,000 Tax credit carryforward 23,000 Accruals and other 12,000 Allowances 3,000 ---------- Gross deferred tax asset 1,390,000 Less valuation allowance (1,372,000) ---------- 18,000 ---------- DEFERRED TAX LIABILITIES: Unrealized gain on investment securities (12,000) Equipment (6,000) ---------- (18,000) ---------- Net deferred tax asset (liability) $ - ==========
A valuation allowance has been recorded to offset the net deferred tax asset as management has been unable to determine that it is more likely than not that the deferred tax asset will be realized. At September 30, 1997, the Company for federal income tax purposes has net operating loss carryforwards of approximately $3,600,000 which expire through 2012 of which certain amounts are subject to limitations under the Internal Revenue Code of 1986, as amended. F-12 40 AMERICAN TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS 7. STOCKHOLDERS' Fiscal 1996 Private Offerings EQUITY During fiscal 1996 the Company completed a private offering of 250,000 units, consisting of one share of the Company's common stock and one warrant to purchase one share of common stock at $0.50 per share through February 23, 1999. During fiscal 1997 a total of 40,000 of these warrants were exercised for proceeds of $20,000. During fiscal 1996 the Company completed two subordinated convertible note offerings. Eight percent convertible notes due May 31, 1999 were sold for cash of $220,000 and an additional $100,000 was issued to a director and stockholder to refinance the $100,000 balance remaining on such stockholder note with a due date of October 1, 1996. An aggregate of 320,000 warrants expiring May 31, 1998 were granted to the note holders each exercisable into one common share at an exercise price of $1.00 per share. All $320,000 of the 8% convertible notes plus accrued interest were converted to common stock prior to the end of the fiscal year and 220,000 of the warrants were exercised prior to September 30, 1996. The second note offering consisted of 6% subordinated convertible notes due July 31, 1998 sold for cash of $700,000. The 6% convertible notes were convertible into common stock at a price ranging from $0.80 per share to $2.00 per share. Prior to September 30, 1996 all of these notes and accrued interest were converted to common stock at $2.00 per share. Preferred Stock The Company is authorized to issue 5,000,000 shares of preferred stock, $.00001 par value, without any action by the stockholders. The board of directors has the authority to divide any and all shares of preferred stock into series and to fix and determine the relative rights and preferences of the preferred stock, such as the designation of series and the number of shares constituting such series, dividend rights, redemption and sinking fund provisions, liquidation and dissolution preferences, conversion or exchange rights and voting rights, if any. With respect to voting rights, if the preferred stock were permitted to vote in the election of directors or on other matters, each such share would be entitled to one vote, and such shares may vote with the shares of Common Stock or may vote as a separate class. Issuance of preferred stock by the board of directors could result in such shares having dividend and/or liquidation preferences senior to the rights of the holders of Common Stock and could dilute the voting rights of the holders of Common Stock. The Company has designated 350,000 shares of its preferred stock as Series A Convertible Preferred Stock ("Series A Stock") all of which were issued at September 30, 1997. The Series A Stock was sold at $10.00 per share in a private offering for gross proceeds of $3,500,000 and net proceeds, after $178,847 of offering costs, of $3,321,153. The Series A Stock is non-voting except in certain matters affecting the Preferred Stockholders. The holders of Series A Stock shall be entitled to dividends, when, as, and if declared by the Board of Directors. The Preferred Stock has a liquidation preference of $10.00 per preferred share plus $0.60 per share per annum from issuance and certain other adjustments. There is no further participation after the liquidation preference is paid. There are no mandatory or optional redemption rights. In a merger or consolidation, the Preferred Stock shall retain the same economic benefits as the Preferred Stock just prior to such transaction. As long as the Company is in compliance in all material respects with its obligations to the Preferred Stockholders and the underlying common shares are registered, all the Preferred Stock not already converted shall be converted to Common Stock in accordance with the conversion terms on August 25, 1998. F-13 41 AMERICAN TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS Each share of Series A Stock is convertible (minimum conversions of 10,000 Series A shares or the balance held by each holder) into that number of Common Shares determined by dividing $10.00, plus an amount accruing at $0.60 per annum, by 85% of the average of the closing bid prices of the Company's Common Stock each day for the five trading days immediately preceding the date of conversion provided that in no event shall such amount to be multiplied by 85% be less than $3.00 per share or greater than $5.75 per share. The Company may force conversion of the Series A Stock if the closing bid price of the Common Stock equals or exceeds $14.00 per share for ten consecutive trading days and certain other conditions are met. The Company granted the holders of Series A Stock warrants to purchase an aggregate of 175,000 Common Shares at $7.50 per share until August 1, 2000. At September 30, 1997 the 350,000 shares of Series A Stock would have been convertible into approximately 777,000 common shares. Subsequent to September 30, 1997 a total of 110,000 shares of Series A Stock (original issue value of $1,100,000) were converted into 245,189 shares of common stock. Warrants In addition to the warrants described above, during fiscal 1997 the Company granted warrants to purchase 90,000 shares at $5.00 per share in connection with consulting services. These warrants were valued at $33,300. At September 30, 1997 the Company had the following warrants outstanding arising from the above offerings and transactions, each exercisable into one common share:
Number Exercise Price Expiration Date ------- -------------- --------------- 210,000 $0.50 February 23, 1999 100,000 $1.00 May 31, 1998 50,000 $5.00 March 1, 2000 175,000 $7.50 August 1, 2000 90,000 $5.00 February 5, 2000 ------- 625,000 =======
1997 Employee Stock Compensation Plan ("ESC") Effective March 10, 1997, the Company adopted the ESC Plan, expiring March 9, 2000, reserving for issuance 100,000 shares of the Company's Common Stock. The ESC Plan provides for compensation awards of the Company's common stock to non-executive employees (as defined), at the discretion of the ESC Plan committee. During fiscal 1997, the Company issued 40,327 shares of common stock under the Plan recording non-cash compensation expense of $201,414 for awards valued at an estimated fair market value ranging from $3.75 to $6.38 per share. 1992 Incentive Stock Option Plan ("ISO") The Company has an ISO Plan, expiring March 2, 2002, originally reserving for issuance 1,000,000 shares of the Company's common stock. The ISO Plan provides for grants to either full or part time employees, at the discretion of the Board of Directors, options to purchase common stock of the Company at a price not less than the fair market value of the shares on the date of grant. In the case of a significant stockholder, the option price of shares will not be less than 110 percent of the fair market value of the share on the date of grant. Any options granted under the ISO Plan must be exercised within ten years of the date they were granted (five years in the case of a significant stockholder). As of September 30, 1997, there were options outstanding covering 477,000 shares of Common Stock under this plan. F-14 42 AMERICAN TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS 1992 Non-Statutory Stock Option Plan ("NSO") The Company has an NSO Plan, expiring March 2, 2002, originally reserving for issuance 1,000,000 shares of the Company's common stock. The NSO Plan provides for grants to either full or part time employees, at the discretion of the Board of Directors, options to purchase common stock of the Company at a price not less than the fair market value of the shares on the date of grant. Any options granted under the NSO Plan must be exercised within ten years of the date they were granted. As of September 30, 1997, there were options outstanding covering 333,500 shares under this plan. During fiscal 1997, the Company granted 97,500 options under this plan to non-employees recording non-cash compensation expense of $244,800. Also during fiscal 1997, 292,963 common shares were issued in connection with the cashless exercise of stock options under this plan relating to 350,000 shares. Other Stock Options During fiscal 1997 the Company granted to an executive officer options on up to 862,000 Common Shares vesting over a period of three years, subject to acceleration. These options are exercisable at $5.81 per share until August 31, 2002. Stock Option Pro Forma and Summary Information FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide pro forma information regarding net loss and net loss per share as if compensation costs for the Company's stock option plans and other stock awards had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The Company estimates the fair value of each stock award (those under the stock option plans described above plus the 90,000 warrants for consulting services) at the grant date by using the Black-Scholes option-pricing model with the following weighted average assumptions used respectively; dividend yield of zero percent for all years; expected volatility of 45 percent: risk-free interest rates of 5.7 to 6.5 percent; and expected lives of 2 to 5 years. Under the accounting provisions for SFAS No. 123, the Company's net loss per common share would have been increased by the pro forma amounts indicated below:
Fiscal 1997 Fiscal 1996 ----------- ----------- Net loss As reported $(2,144,363) $(560,448) Pro forma (2,578,188) (680,773) Net loss per common share As reported $(.30) $(.08) Pro forma $(.34) $(.09)
During the initial phase-in period of SFAS No. 123, the effect on pro forma results are not likely to be representative of the effects on pro forma results in future years since options vest over several years and additional awards could be made each year. A summary of the status of the Company's stock option plans as of September 30, 1997 and 1996 and changes during the years ended on those dates is presented below: F-15 43 AMERICAN TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS
Weighted Average Shares Exercise Price FISCAL 1996: Outstanding October 1, 1995 1,249,000 $0.54 Granted 653,500 $0.62 Canceled/expired (144,833) $0.50 Exercised (171,667) $0.51 --------- Outstanding September 30, 1996 1,586,000 $0.58 ========= Exercisable at September 30, 1996 1,586,000 $0.58 ========= Weighted average fair value of options granted during the year $0.37 ===== FISCAL 1997: Outstanding October 1, 1996 1,586,000 $0.58 Granted 1,054,000 $5.66 Canceled/expired (25,000) $0.50 Exercised (942,500) $0.57 --------- Outstanding September 30, 1997 1,672,500 $3.79 ========= Exercisable at September 30, 1997 1,016,500 $2.55 ========= Weighted average fair value of options granted during the year $1.51 =====
The following table summarizes information about stock options outstanding at September 30, 1997:
Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 9/30/97 Life Price at 9/30/97 Price $0.50-$0.55 580,000 3.40 $0.52 580,000 $0.52 $1.59-$2.25 38,500 0.81 1.95 38,500 1.95 $4.00-$4.48 107,000 2.06 4.26 63,000 4.31 $5.06-$5.90 947,000 4.89 5.81 335,000 5.82 ------------------------------------------------------------------------- $0.50-$5.90 1,672,500 4.10 $3.79 1,016,500 $2.55 ===========================================================================
8.CUSTOMERS, The Company's financial instruments that are exposed to FINANCIAL concentrations of credit risk consist primarily of cash INSTRUMENTS, and trade accounts receivable. CONCENTRATIONS OF CREDIT RISK The Company's cash equivalents are in demand deposit AND EXPORT accounts placed with major financial institutions. The SALES investment policy limits the Company's exposure to concentrations of credit risk. Such deposit accounts at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. The carrying amounts of financial instruments including cash, accounts receivable, accounts payable and accrued liabilities approximated fair value because of the immediate or short-term maturity of these instruments. During the year ended September 30, 1997, sales to three individual customers accounted for 30%, 14% and 13% of total net sales. During the year ended September 30, 1996, sales to two individual customers accounted for 14% and 11% of total net sales. F-16 44 AMERICAN TECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS The Company markets its ear-radio to four major segments of customers, including retail outlets, catalog distribution, television and premium/specialty markets. At September 30, 1997 total trade accounts receivable included approximately $245,153 due from retail outlets for which extended credit terms were granted. Export sales were approximately 2% and 27% of sales for the years ended September 30, 1997 and 1996. A summary of the Company's sales by geographical areas is as follows:
1997 1996 Foreign sales: Europe $ -- $147,300 Asia 4,000 34,300 Australia -- 31,300 South America 3,500 24,700 Other 8,200 11,500 -------- -------- Total foreign sales 15,700 249,100 Domestic sales 951,708 684,543 -------- -------- $967,408 $933,643 ======== ========
The Company has no foreign assets. 9. SUBCONTRACTOR The Company is dependent on a foreign subcontractor for AND SUPPLIER the assembly of its FM ear-radio which accounted for AGREEMENTS substantially all of the Company's revenues during the year ended September 30, 1997. The Company believes that there are a number of electronic product subcontract assembly companies located in North America and overseas that are qualified to produce the Company's FM ear-radio should the existing supplier be unable or unwilling to do so, however any disruption of supply could cause additional costs and delays and could have an adverse impact on the Company's operations. The assembly of ear-radios is dependent upon the availability of electronic components. The Company believes there are secondary suppliers of components and subassemblies such that it is not reliant on one supplier, although delays could result should the Company be required to change suppliers of longer lead time components or subassemblies. Any significant delays in obtaining components from existing or secondary suppliers through supplier changes or from component shortages, which are common to the electronics industry, could have an adverse impact on the Company's operations.
10. SUPPLEMENTAL 1997 1996 DISCLOSURE OF ---- ---- CASH FLOW Non-cash financing activities: INFORMATION Convertible notes exchanged for common stock $ 625,000 $1,020,000 Convertible note issued to refinance stockholder note -- 100,000 Investment securities exchanged for reduction in accounts payable -- 55,050 Interest paid by issuance of common stock 16,310 30,997 Value of warrants assigned to financing costs (other assets) -- 12,500 Cash paid for interest 170 11,049
F-17 45 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN TECHNOLOGY CORPORATION December 1, 1997 By:/s/ DALE WILLIAMS ---------------------------------- Dale Williams Chairman, President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: December 1, 1997 By /s/ DALE WILLIAMS ------------------------------------------------- Dale Williams, Chairman, President and Chief Executive Officer and Director (Principal Executive Officer) Date: December 1, 1997 By /s/ ROBERT PUTNAM ------------------------------------------------- Robert Putnam, Vice President, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer) Date: December 1, 1997 By /s/ RICHARD M. WAGNER ------------------------------------------------- Richard M. Wagner Secretary and Director Date: December 1, 1997 By /s/ ELWOOD G. NORRIS ------------------------------------------------- Elwood G. Norris Chief Technology Officer and Director Date: December 1, 1997 By ------------------------------------------------- Joel A. Barker Director Date: December 1, 1997 By /s/ CORNELIUS J. BROSNAN ------------------------------------------------- Cornelius J. Brosnan Director
EX-10.15 2 EXHIBIT 10.15 1 Exhibit 10.15.1 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into effective as of the 1st day of September, 1997, between AMERICAN TECHNOLOGY CORPORATION, a Delaware publicly traded corporation (the "Company"), and Dale Williams ("Employee"). Employee, in consideration of the covenants and agreements hereinafter contained, agrees as follows with respect to the employment of the Company of Employee and Employees future business activities. 1. Employment: Term of Employment. The Company hereby employs Employee and Employee hereby accepts such employment upon the terms and conditions hereinafter set forth. Subject to the provisions for termination as hereinafter provided, Employee's term of employment by the Company shall be from the date of this agreement until August 31, 2000, and said employment shall continue after such date until either party shall deliver written notice to the other party hereto to the effect that the employment hereunder shall terminate thirty (30) days from the giving of such notice. This Agreement will supersede all prior written and oral agreements entered into by and between Company and Employee. 2. Services to be Rendered by Employee. Employee shall be subject to the direction of the Board of Directors, or a duly authorized committee thereof and his duties shall be those generally vested in the office of Chairman, President and Chief Executive Officer for the corporation and he shall have such other powers and duties as may be reasonably prescribed by the Board of Directors, or a duly authorized committee thereof, and shall perform such duties as from time to time may be decided upon by the Board of Directors, or a duly authorized committee thereof, of the Company, including but not limited to, speaking for and promoting the sale of the Company's product lines as public spokesman both in print and television ads. The Employee agrees that he will serve the Company faithfully and to the best of his abilities, devoting substantially all his time, energy and skill to the activities of the Company and the promotion of its interests. Employee shall not serve as an officer or director or similar capacity with any other entity except with the consent of the Board of Directors. 3. Compensation. (a) For the services to be rendered by Employee during his employment by the Company, the Company shall pay Employee a Base Salary of twenty thousand dollars ($20,000) per month during the term of this agreement, prorated for any partial month and paid in conformity with the Company's normal payroll period. Employee's salary shall be reviewed by the Board of Directors from time to time in its discretion, and Employee will receive such salary increases, if any, as the Board of Directors in its sole discretion determines. (b) In addition to the Base Salary during the first year of the term of employment, the Employee will receive an Annual Bonus equal to, or greater than, 50% of Employee's Base Salary. The amount of which shall be based upon the Employee's achievement of specific quantitative and non-quantitative objectives related to the fiscal year business plan established by the Company's Board of Directors prior to the annual period in question, and approved by the Board based upon milestones, to be paid within 60 days of employment anniversary. Company agrees to a first year Annual Bonus of $120,000 as a minimum to be paid early, upon the achievement of a significant licensing agreement. Additional bonuses and future year bonuses shall be at the discretion of the Board of Directors. (c) The Employee's place of employment shall be considered San Diego County, California (or other mutually agreed upon location) and it is contemplated that the Employee will relocate to San Diego County or vicinity within a reasonable period during the Employment Period. Until the Employee's residence is relocated or for a period of one year, the Company shall pay reasonable commuting expenses from time to time to Boise, Idaho from San Diego and shall pay reasonable lodging expenses while in San Diego for such term. The Company shall also pay Employee a maximum of $25,000 of moving and relocation expenses to San Diego plus any gross up for taxes for any non-deductible expenses. (d) Employee shall be entitled to participate in and receive benefits under the Company's executive benefits plans as in effect from time to time, including auto, medical insurance, sick leave, and vacation time, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and Company policies. Employee shall be reimbursed for his current medical insurance coverage until the Company has a medical program in which the Employee is eligible to participate. 1 2 (e) The Company shall pay or reimburse Employee for all expenses normal reimbursed by the Company and reasonably incurred by him in furtherance of his duties hereunder and authorized by the Company, including without limitation, expenses for entertainment, traveling, meals, hotel accommodations and the like upon submission by him of vouchers or an itemized list thereof as the Board of Directors; may from time to time adopt and authorize, and as may be required in order to permit such payments as proper deductions to the Company under the Internal Revenue Code of 1986 and the rules and regulations adopted pursuant thereto now or hereafter in effect. (f) All amounts payable or which become payable under any provision of this Agreement will be subject to any deductions authorized in writing by you and any deductions and withholdings required by law. 4. Indemnification. (a) If, after the date of the commencement of the Employment Period, the Employee is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation or partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is an alleged act or failure to act in an official capacity as a director, officer, member, employee or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Delaware law, as the same exists or may hereafter be amended, against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Employee in connection therewith, including, without limitation, payment of expenses incurred in defending a Proceeding prior to the final disposition of such Proceeding (subject to receipt of an undertaking by the Employee to repay such amount if it shall ultimately be determined that the Employee is not entitled to be indemnified by the Company under Delaware law), and such indemnification shall continue as to the Employee even if he has ceased to be a director, officer, member, employee or agent of the Company or other enterprise and shall inure to the benefit of his heirs, executors and administrators. (b) The right of indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 4 shall not be exclusive of any other right that the Employee may have or hereafter may acquire under any statute, provision of the Certificate of Incorporation or Bylaws of the Company, agreement, vote of shareholders or disinterested directors or otherwise. 5. Termination of Employment. (a) The Company shall have the right at its option to terminate the employment of Employee hereunder by giving written notice thereof to the Employee in the event of any of the following: (1) If the Board of Directors of the Company, or a duly authorized committee thereof, acting in good faith and upon reasonable grounds, determines that the Employee should be terminated for Cause. For purposes of this Agreement, "Cause" means, in each case as determined in good faith by the Board, Employee's (i) personal dishonesty, willful misconduct, or breach of fiduciary duty involving personal profit, and/or (ii) conviction of any felony law, and/or (iii) a determination or request by an appropriate regulatory authority that Employee be removed or disqualified from acting as an officer of the Company, and/or (iv) willful breach of a material provision of this Agreement after written notice, in reasonable detail as the alleged breach, has been given to you by the Board and you have had a reasonable opportunity to cure such breach. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Employee (i) a copy of a resolution, duly adopted by the Board (excluding the Employee) at a meeting of the Board called and held for the purpose (after reasonable notice to the Employee of the meeting of the Board at which the motion is to be considered, which notice shall specify in reasonably detailed terms the facts and circumstances constituting Cause, and after the Employee, together with his counsel, having been afforded at such meeting an opportunity to be heard before the Board), finding that the Employee was guilty of conduct constituting Cause; (ii) a certificate of the Secretary or an Assistant Secretary of the Company stating that such resolution was in fact duly adopted by the Board (excluding the Employee); and (iii) a Notice of Termination in the form specified in the following sentence. A Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and set forth in reasonable detail the facts and circumstances of the Employee's employment under the provision so indicated and the actual termination effective date. (2) If the Company gives Employee thirty days advance written notice of termination of employment. 2 3 (3) If the Employee dies during the term of employment, the Employee's employment hereunder and Employee's compensation and other rights under this Agreement and as an employee of the Company (except as to compensation rights accrued prior thereto and except as expressly provided in the next succeeding sentence) shall terminate thirty (30 ) days following the date of death. In such event, the Company shall pay to the Employee's designated executor or administrator of the Employee's estate, all compensations and benefits accrued which would otherwise be payable to the Employee through the thirtieth (30) day following the date of death. (4) If the Employee is unable for any reason to carry out or to perform the duties required of him hereunder and does not resume his duties prior to the termination date specified in the Company's written notice of termination; provided, however, if the Employee shall fail to carry out or to perform the duties required of him because of mental or physical disability for a six consecutive month period during the term hereof and following such period he is unable to perform his duties hereunder because of mental or physical disability, as determined by the Board of Directors of the Company, or a duly authorized committee thereof, acting in good faith and upon reasonable grounds, he shall be entitled to receive his then Base Salary he would otherwise be entitled to hereunder during the term of this Agreement pursuant to Paragraph 3 hereof for a period of not longer than twelve (12) months after the termination of his employment pursuant to this Paragraph 5(a) (4). (5) If this Agreement is terminated by the Company pursuant to Paragraph 5(a)(2) hereof, then Employee shall be entitled to severance payments equal to twelve (12) months of his then monthly Base Salary and any bonus on an as if perfected basis payable in one lump sum within thirty (30) days after such effective termination of Employee's employment by the Company irrespective of the remaining term of this agreement. (b) The Employee shall have the right at his sole option to terminate employment hereunder under the following conditions: (1) at any time upon thirty (30) days written notice. (2) upon written notice by Employee to the Company within thirty (30) days of and indicating that a change in control of the Company ("Corporate Transaction") has occurred and therefore Employee elects to terminate as provided herein. A Corporate Transaction of the Company shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided that, without limitation, such a change in control or other qualifying event shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; or (ii) the Company sells, transfers or otherwise disposes of all or substantially all of the assets of the Company; or (iii) a merger or acquisition in which the Company is not the surviving entity (except for a merger into a wholly-owned subsidiary, and except for a transaction the sole purpose of which is to change domicile. (3) if termination by the Employee is pursuant to 5 (b) (1) then no severance or termination payments shall be payable. If termination is noticed pursuant to 5 (b) (2) hereof then Employee shall be entitled to a payment equal to the remaining months of this Agreement multiplied by the Base Salary and any bonus on an as if perfected basis payable in one lump sum within sixty (60) days. In addition, the Employee shall be entitled to recover legal fees and costs incurred by Employee should the Company not make timely payment prescribed by this section and should the Employee prevail in any action filed thereabout. 6. Soliciting Customers. The Employee agrees that he will not for a period of one (1) year immediately following the termination of his employment with the Company, either directly or indirectly make known to any competing person, firm, or corporation the names or addresses of any of the customers of the Company or any other information pertaining to them that is not in the public domain. 7. Trade Secrets of the Company. The Employee prior to and during the term of employment under this Agreement has had and will have access to and become acquainted with various trade secrets, consisting of devices, secret inventions, processes, and compilations of information, records, and specifications which are owned by the Company, and which are regularly used or to be used in the operation of the business of the Company. The Employee shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the term of this agreement or for a period of 36 months 3 4 thereafter, except as required in the course of his employment. All files, records, documents, drawings, specifications, equipment, and similar items relating to the business of the Company, whether prepared by the Employee or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be removed under any circumstances from the premises of the Company where the work is being carried on without prior written consent of the Company or consistent with the Company's normal business practices. 8. Inventions and Patents. (a) The Employee agrees that as to any inventions made by him during the term of his employment, solely or jointly with others, which are made with the equipment, supplies, facilities or trade secret information of the Company, or which relate at the time of the conception or reduction to purchase of the invention to the business of the Company or the Company's actual or demonstrably anticipated research and development, or which result from any work performed by the Employee for the Company, shall belong to the Company and the Employee promises to assign such inventions to the Company. The Employee also agrees that the Company shall have the right to keep such inventions as trade secrets, if the Company chooses. The Employee agrees to assign to the Company the Employee's rights in any other inventions where the Company is required to grant those rights to the United States government or any agency thereof. In order to permit the Company to claim rights to which it may be entitled, the Employee agrees to disclose to the Company in confidence all inventions which the Employee makes arising out of the Employee's employment and all patent application filed by the Employee within one year after the termination of his employment. (b) The Employee shall assist the Company in obtaining patents on all inventions, designs, improvements, and discoveries patentable by the Company in the United States and in all foreign countries, and shall execute all documents and do all things necessary to obtain letters patent, to vest the Company with full and extensive title thereto, and to protect the same against infringement by others. Any assistance after termination shall be at the Company's expense. 9. Stock Options. (a) The Employee has been granted stock options on 862,000 shares, subject to vesting, in connection with this employment agreement. The Board of Directors may reset the option price on these options one time during the first year if a decline in the market price is, in the Board of Directors opinion, primarily the result of a general decline due to market correction or conditions. The Company agrees that if it should cause the registration of any stock options of any senior officers that it will include the option shares of the Employee with any registration statement, subject to qualification, at no cost to Employee. Subject to Board of Director approval, the Company may file a registration statement on Form S-8, if so registrable on such form, covering the shares issuable on option exercise. (b) Subject to the provisions of Section 9(b) hereof, immediately prior to the closing of a transaction as described in Section 5(b)(2) ("Corporate Transaction"), the exerciseability of each option granted to you to purchase shares of Common Stock that is outstanding immediately prior to the closing of such Corporate Transaction, will be automatically accelerated so that each such option will, immediately prior to the closing date for the Corporate Transaction, become fully exerciseable with respect to the total number of shares issuable upon exercise thereof and may be exercised prior to the closing of such Corporate Transaction for all or any portion of such shares. 10. Severability. Each paragraph and subparagraph of this Agreement shall be construed and considered separate and severable from the validity and enforceability of any other provision contained in this Agreement. 11. Assignment. The rights of the Company (but not its obligations) under this Agreement may, without the consent of the Employee, be assigned by the Company to any parent, subsidiary, or successor of the Company; provided that such parent, subsidiary or successor acknowledges in writing that it is also bound by the terms and obligations of this Agreement. Except as provided in the preceding sentence, the Company may not assign all or any of its rights, duties or obligations hereunder without prior written consent of Employee. The Employee may not assign all or any of his rights, duties or obligations hereunder without the prior written consent of the Company. 4 5 12. Notices. All notices, requests, demands and other communications shall be in writing and shall be defined to have been duly given if delivered or if mailed by registered mail, postage prepaid: (a) If to Employee, addressed to him at the following address as may be changed in writing from time to time: Dale Williams 5800 Sterling Drive Boise, Idaho 83703 (b) If to the Company, addressed to: American Technology Corporation 13114 Evening Creek Dr. South San Diego, California 92128 or to such other address as any party hereto may request by notice given as aforesaid to the other parties hereto. 13. Title and Headings. Titles and headings to paragraphs hereof are for purposes of references only and shall in no way limit, define or otherwise affect the provisions hereof. 14. Governing Law. This Agreement is being executed and delivered and is intended to be performed in the State of California, and shall be governed by and construed in accordance with the laws of the State of California. 15. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall not be necessary in making proof of this Agreement to produce or account for more than one original counterpart. 16. Cumulative Rights. Each and all of the various rights, powers and remedies of the Company and Employee in this Agreement shall be considered as cumulative, with and in addition to any other rights, powers or remedies of the Company or the Employee and no one of them as exclusive of the others or as exclusive of any other rights, powers and remedies allowed by law. The exercise or partial exercise of any right, power or remedy shall neither constitute the election thereof nor the waiver of any other right, power or remedy. Sections 4, 6, 7 and 8 hereof shall continue in full force and effect notwithstanding the Employee's termination of employment and the termination of this Agreement. 17. Remedies. The Employee and the Company both acknowledge that each may have no adequate remedy at law if either violates any of the terms contained in Sections 6, 7 and 8. In such event, either party shall have the right, in addition to any other rights it may have, to obtain relief to restrain any breach hereof or otherwise to specifically enforce any of the provisions hereof. 18. Waiver of Breach. The waiver by one party to this Agreement of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the said party . 19. Entire Agreement. This Agreement contains the entire agreement of the parties hereto and may be modified or amended only by a written instrument executed by parties hereto. Effective on the date hereof, any prior employment agreements between the Company and the Employee shall terminate. 20. Attorney's Fees. In the event that either party must institute legal action to compel the other to comply with the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and costs. 21. Good Faith. Each of the parties hereto agrees that he or it shall act in good faith in all actions taken under this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first above written. /s/ Richard M. Wagner August 28, 1997 - ----------------------------- Richard M. Wagner, Secretary /s/ Dale Williams August 28, 1997 - ------------------------------ Dale Williams, Employee EX-10.15.1 3 EXHIBIT 10.15.1 1 Exhibit 10.15.1.1 AMERICAN TECHNOLOGY CORPORATION ------------------------------ STOCK OPTION AGREEMENT ---------------- GRANTED UNDER THE APPROVAL OF THE BOARD OF DIRECTORS OF AMERICAN TECHNOLOGY CORPORATION THIS STOCK OPTION AGREEMENT, dated as of September 1, 1997 (the "Date of Grant"), is granted by AMERICAN TECHNOLOGY CORPORATION, a Delaware corporation ("Company"), to Dale Williams (the "Optionee"), whose status with the Company is described on the signature page hereof below his signature. WHEREAS, the Optionee is now an officer of the Company and the Company desires to have the Optionee remain in its service and desires to encourage stock ownership by the Optionee and to increase the Optionee's proprietary interest in the Company's success; and as an inducement thereto has determined to grant to the Optionee the option herein provided for, to the end that the Optionee may thereby be assisted in obtaining an interest, or an increased interest, as the case may be, in the stock ownership of the Company; NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. GRANT AND VESTING. (a) Pursuant to the Unanimous Consent of Directors of the Company dated August 26, 1997, the Company hereby grants to the Optionee an option (the "Option") to purchase up to 862,000 shares of the Company's common stock, $.00001 par value per share (the "Option Shares") at the price of $5.81 per share (the "Purchase Price" or "Exercise Price") representing the closing bid price on August 29, 1997. (b) This option shall vest and become exercisable with respect to 250,000 option shares on this grant date and the balance of 612,000 option shares vesting and becoming exercisable at the rate of 17,000 option shares on each full month anniversary of employment thereafter with all shares vesting and become exercisable on August 31, 2000. (c) Additionally 306,000 option shares (deducted from the farthest out months vesting) shall vest and become exercisable upon the achievement of a significant licensing agreement during Optionee's employment, as determined by the Board of Directors in its sole discretion. (d) Subject to the provisions hereof, immediately prior to the closing of a transaction as described in Section 5(b)(2) of the Optionee's Employment Agreement dated September 1, 1997 ("Corporate Transaction"), the exerciseability of each option granted to purchase shares of Common Stock that is outstanding immediately prior to the closing of such Corporate Transaction, will be automatically accelerated so that each such option will, immediately prior to the closing date for the Corporate Transaction, become fully exerciseable with respect to the total number of shares issuable upon exercise thereof and may be exercised prior to the closing of such Corporate Transaction for all or any portion of such shares. (e) This Option is granted separately at the discretion of the Board of Directors and is not an option pursuant to the 1992 option plans. Both the Purchase Price and the number of Option Shares purchasable may be adjusted pursuant to Paragraph 9 hereof. 2. TERM. This Option is exercisable during the period beginning with the Date of Grant and ending August 31, 2002, at 5:00 p.m. (Pacific Time), except as provided in Paragraph 7 hereof. 3. EXERCISE OF OPTION. During the Optionee's life, this Option may only be exercised by him or her in whole or in part. This Option may only be exercised by presentation at the principal offices of the Company in San Diego, California of written notice to the Company's Secretary advising the Company of the Optionee's election to purchase Option Shares, specifying the number of Option Shares being purchased, accompanied by payment. No Option Shares shall be issued until full payment is made therefor. Payment shall be made either (i) in cash, represented by bank or cashier's check, certified check or money order; or (ii) by advising the Company, at the time the Option is exercised, to withhold from exercise under the Option the appropriate number of Option Shares, the aggregate market value (closing bid price) of which on the date of exercise of the Option is equal to the aggregate cash purchase price of the 2 Option Shares being exercised and purchased under the Option, and such withholding shall constitute full payment for the non-withheld Option Shares issued upon exercise, or (iii) at the discretion of the Board of Directors, by delivery of the Optionee's personal recourse note with interest and terms acceptable to the Board of Directors. 4. ISSUANCE OF OPTION SHARES; RESTRICTIVE LEGEND. (a) Upon proper exercise of this Option, the Company shall mail or deliver to the Optionee, as promptly as practicable, a stock certificate or certificates representing the Option Shares purchased, subject to clause (b) below. The Company shall not be required to sell or issue any shares under the Option if the issuance of such shares shall constitute a violation of any applicable law or regulation or of any requirements of any national securities exchange upon which the Company's common stock may be listed. (b) Upon any exercise of this Option, if a registration statement under the Securities Act of 1933 (the "Act") is not in effect with respect to the Option Shares, then the Company shall not be required to issue any Option Shares unless the Company has received evidence reasonably satisfactory to it to the effect that the Optionee is acquiring such shares for investment and not with a view to the distribution thereof. Any reasonable determination in this connection by the Company shall be final, binding and conclusive. (c) Unless and until removed as provided below, each certificate evidencing unregistered Option Shares shall bear a legend in substantially the following form: "The shares of stock represented by this certificate have not been registered under the Securities Act of 1933 or under the securities laws of any state and may not be sold or transferred except upon such registration or upon receipt by this Corporation of an opinion or counsel satisfactory to this Corporation, in form and substance satisfactory to this Corporation, that registration is not required for such sale or transfer. " The Company shall issue a new certificate which does not contain such legend if (i) the shares represented by such certificate are sold pursuant to a registration statement (including a current prospectus) which has become effective under the Act, or (ii) the staff of the Securities and Exchange Commission shall have issued a "no action" letter, reasonably satisfactory to the Company's counsel, to the effect that such shares may be freely sold and thereafter traded publicly without registration under the Act, or (iii) the Company's counsel, or other counsel acceptable to the Company, shall have rendered an opinion satisfactory to the Company to the effect that such shares may be freely sold and thereafter publicly traded without registration under the Act. The Company agrees that if it should cause the registration of any stock options of any senior officers that it will include the option shares of the Optionee with any registration statement, as long as the shares qualify to be so registered, at no cost to Optionee. The Company shall not be obligated to take any other affirmative action in order to cause the exercise of the Option or the issuance of any Option Shares to comply with any law or regulation of any governmental authority. 5. TRANSFER OF OPTION SHARES. Option Shares issued upon exercise of this Option which have not been registered under the Act shall be transferable by a holder thereof only upon compliance with the conditions in this Paragraph. Before making any transfer of Option Shares, the holder of the shares shall give written notice to the Company of the holder's intention to make the transfer, describing the manner and circumstances of the transfer. If in the opinion of the Company's counsel, or of other counsel acceptable to the Company, the proposed transfer may be effected without registration under the Act, the Company shall so notify the holder and the holder shall be entitled to transfer such shares as described in the holder's notice to the Company. If such counsel opines that the transfer may not be made without registration under the Act, then the Company shall so notify the holder, in which event the holder shall not be entitled to transfer the shares until (i) the Company notifies the holder that it is permissible to proceed with the transfer, or (ii) registration of the shares under the Act has become effective. The Company may issue "stop transfer" instructions to its transfer agent with respect to any or all of the Option Shares as it deems necessary to prevent any violation of the Act. 6. TRANSFER OR ENCUMBRANCE OF THIS OPTION PROHIBITED. This Option may not be transferred or assigned in any manner by the Optionee, except by will or trust upon the Optionee's death or by operation of law under the laws of descent and distribution. The same restriction on transfer or assignment shall apply to any heirs, devisees, beneficiaries or other persons acquiring this Option or an interest herein under such an instrument or by operation of law. Further, this Option may not be pledged, hypothecated or otherwise encumbered, by operation of law or otherwise, nor shall it be subject to execution, attachment or similar process. 7. TERMINATION OF SERVICE, DEATH, OR DISABILITY. (a) Except as may be otherwise expressly provided in this Agreement, this Option shall terminate and any vested options at such termination shall no longer be exercisable as follows: 2 3 (i) Upon termination of the Optionee's employment with the Company for cause; (ii) At the expiration of twelve (12) months from the date of the Optionee's resignation; (iii) At the expiration of twelve (12) months from the date of Optionee's termination of the Optionee's employment with the Company without cause, for any reason other than death; provided, that if the Optionee dies within such twelve-month period, subclause (iv) below shall also apply; or (iv) At the expiration of twelve (12) months after the date of death of the Optionee. (b) "Employment with the Company" shall include employment with any parent or subsidiary of the Company, and this Option shall not be affected by the Optionee's transfer of employment among the Company and any parent or subsidiary thereof. An Optionee's employment with the Company shall not be deemed interrupted or terminated by a bona fide leave of absence (such as sabbatical leave or employment by the Government) duly approved, military leave or sick leave. This Option shall not be affected in the event the Optionee suffers a significant diminution in his duties or any significant reduction in his overall compensation. After the death of the Optionee, his executors, administrators or personal representatives, or any person or persons to whom the Option may be transferred by will, trust or by the laws of descent and distribution, shall have the right, at any time prior to termination hereof, to exercise this Option pursuant to its terms. (c) This Option confers no right upon the Optionee with respect to the continuation of his employment (or his position as an officer, director or other provider of services) with the Company or any parent or subsidiary of the Company, and shall not interfere with the right of the Company, or any parent or subsidiary Company, to terminate such relationship(s) at any time in accordance with law and any agreements then in force. 8. NO RIGHTS AS STOCKHOLDER. The Optionee shall have no rights as a stockholder with respect to Option Shares until the date of issuance of a stock certificate for such shares. No adjustment for dividends, or otherwise, except as provided in Paragraph 9, shall be made if the record date therefor is prior to the date of exercise of such Option. 9. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of this Option shall not limit or affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Option Shares or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. However, (a) If, prior to the Company's delivery of all the Option Shares subject to this Option, the Company shall effect a subdivision (split) or combination (reverse split) of shares or other capital readjustment, the payment of a common stock dividend, or other increase or reduction of the number of shares of common stock outstanding, without receiving compensation therefor in money, services or property, then (i) in the event of an increase in the number of such shares outstanding, the Purchase Price shall be proportionately reduced and the number of Option Shares then still purchasable shall be proportionately increased; and (ii) in the event of a reduction in the number of such shares outstanding, the Purchase Price payable per share shall be proportionately increased and the number of Option Shares then still purchasable shall be proportionately reduced. (b) If while this Option remains outstanding the Company is reorganized, merged, consolidated or party to a plan of share exchange with another corporation, or if the Company sells or otherwise disposes of all or substantially all its property or assets to another corporation, then subject to the provisions of clause (ii) below, (i) after the effective date of such reorganization, merger, consolidation, exchange or sale, as the case may be, the Optionee shall be entitled, upon exercise of this Option, to receive, in lieu of the Option Shares, the number and class of shares of such stock, other securities, cash and other property or rights as the holders of shares of the Company's common stock received pursuant to the terms of the reorganization, merger, consolidation, exchange or sale and to which he would have been entitled if, immediately prior to such reorganization, merger, consolidation, exchange or sale, he had been the holder of record of a number of shares of common stock equal to the number of Option Shares as to which this Option shall be so exercised; and (ii) this Option may be canceled by the Board of Directors of the Company as of the effective date of any such reorganization, merger, consolidation, exchange or sale; provided that (x) such reorganization, merger, consolidation, exchange or sale results in a change in control of the Company rather than a mere change of form or domicile of the Company, (y) written notice of such cancellation is given to the Optionee or other holder of this Option 3 4 not less than 45 days prior to such effective date, and (z) the holder shall have the right to exercise the Option in full during such 45-day period preceding the effective date of such reorganization, merger, consolidation, exchange or sale. (c) In case the Company shall determine to offer to the holders of its common stock rights to subscribe pro rata for any new or additional shares of common stock, or any securities convertible into common stock, then the Optionee shall be entitled to participate in such pro rata offering in the same manner and to the same extent as if this Option had been exercised at the Purchase Price then in effect and the number of Option Shares then purchasable upon exercise hereof had been issued to the Optionee pursuant to the terms hereof. (d) Except as herein before expressly provided, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the Purchase Price or the number of Option Shares then subject to this Option. 10. NOTIFICATION TO COMPANY OF CERTAIN SALES. The Optionee or other holder of Option Shares who sells any of such shares shall notify the Company of such fact in writing within 30 days after the date of sale, if: (a) At the time the Option Shares were sold, less than ONE year had elapsed since the date the Option Shares were purchased by the Optionee, and less than TWO years had elapsed since the Date of Grant of this Option; or (b) the Optionee was not an employee of the Company (or of a parent or subsidiary thereof) at all times during the period beginning on the Date of Grant of this Option and ending on the date three (3) months prior to the date this Option was exercised to purchase the Option Shares sold. 11. PAYMENT OF WITHHOLDING TAXES. The exercise of any Option is subject to the condition that if at any time the Company shall determine, in its discretion, that the satisfaction of withholding tax or other withholding liabilities under any federal, state or local law is necessary or desirable as a condition of, or in connection with, such exercise or a later lapsing of time or restrictions on or disposition of the shares of Common Stock received upon such exercise, then in such event, the exercise of the Option shall not be effective unless such withholding shall have been effected or obtained in a manner acceptable to the Company. 12. NOTICES, ETC. Any notice hereunder by the Optionee shall be given to the Company in writing, and such notice and any payment by the Optionee hereunder shall be deemed duly given or made only upon receipt thereof at the Company's office at 13114 Evening Creek Dr. South, San Diego, California 92128, or at such other address as the Company may designate by notice to the Optionee. Any notice or other communication to the Optionee hereunder shall be in writing and shall be deemed duly given or made if mailed or delivered to the Optionee at the last address as the Optionee may have on file with the Company's Secretary. This Option shall be governed under and construed in accordance with the laws of the State of California. This address shall be binding on the Company and the Optionee and all successors, assigns, heirs, devisees and personal representatives thereof. NOTE: This option must match the Control copy maintained by the Company, in all particulars. IN WITNESS WHEREOF, the parties hereto have executed this Stock Option Agreement as of the day and year first above written. AMERICAN TECHNOLOGY CORPORATION By /s/ Robert Putnam ---------------------------------- ROBERT PUTNAM, PRESIDENT ATTEST: By /s/ Richard Wagner -------------------------------- RICHARD WAGNER, SECRETARY OPTIONEE NAME AND STATUS; DALE WILLIAMS, EMPLOYEE ORIGINAL to Optionee / COPY to Company 4 EX-10.16 4 EXHIBIT 10.16 1 Exhibit 10.16 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into effective as of the 1st day of September, 1997, between AMERICAN TECHNOLOGY CORPORATION, a Delaware publicly traded corporation (the "Company"), and Elwood G. Norris ("Employee"). Employee, in consideration of the covenants and agreements hereinafter contained, agrees as follows with respect to the employment of the Company of Employee and Employees future business activities. 1. Employment: Term of Employment. The Company hereby employs Employee and Employee hereby accepts such employment upon the terms and conditions hereinafter set forth. Subject to the provisions for termination as hereinafter provided, Employee's term of employment by the Company shall be from the date of this agreement until August 31, 2000, and said employment shall continue after such date until either party shall deliver written notice to the other party hereto to the effect that the employment hereunder shall terminate thirty (30) days from the giving of such notice. This Agreement will supersede all prior written and oral agreements entered into by and between Company and Employee. 2. Services to be Rendered by Employee. Employee shall be subject to the direction of the Board of Directors, or a duly authorized committee thereof and his duties shall be those generally vested in the office of Chief Technology Officer for the corporation and he shall have such other powers and duties as may be reasonably prescribed by the Board of Directors, or a duly authorized committee thereof, and shall perform such duties as from time to time may be decided upon by the Board of Directors, or a duly authorized committee thereof, of the Company, including but not limited to, speaking for and promoting the sale of the Company's product lines as public spokesman both in print and television ads. Employee shall devote a sufficient amount of his productive time, energy and ability during the term of this Agreement to the proper and efficient conduct of the Company's business during the term of this Agreement however the Employee shall be only required to devote part time and attention to the Company's business expected to range from approximately 15-30 hours per week unless otherwise agreed by the parties. Employee shall at all times faithfully, industriously, and to the best of his ability, experience and talent, perform the duties that may be reasonably required to the reasonable satisfaction of the Board of Directors. As is the present case, Employee may from time to time work for other persons or entities in any capacity, including but not limited to an officer, director, employee or consultant, and conduct other business activities so long as such work or activities do not adversely and directly impact on his duties and obligations to the Company as has been reasonably performed in the past. The Company acknowledges that Employee is an officer and director of Norris Communications, Inc. and Patriot Scientific Corporation and has duties thereto. 3. Compensation. (a) For the services to be rendered by Employee during his employment by the Company, the Company shall pay Employee a Base Salary of eight thousand dollars ($8,000) per month during the term of this agreement, prorated for any partial month and paid in conformity with the Company's normal payroll period. Employee's salary shall be reviewed by the Board of Directors from time to time in its discretion, and Employee will receive such salary increases, if any, as the Board of Directors in its sole discretion determines. (b) Employee shall be entitled to participate in any bonus pool, stock option plan or similar program established by the Board of Directors. (c) The Employee's place of employment shall be considered San Diego County, California (or other mutually agreed upon location). (d) Employee shall be entitled to participate in and receive benefits under the Company's executive benefits plans as in effect from time to time, including auto, medical insurance, sick leave, and vacation time, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and Company policies. (e) The Company shall pay or reimburse Employee for all expenses normal reimbursed by the Company and reasonably incurred by him in furtherance of his duties hereunder and authorized by the Company, including without limitation, expenses for entertainment, traveling, meals, hotel accommodations and the like upon submission by him of vouchers or an itemized list thereof as the Board of Directors; may from time to time adopt and authorize, and as may be required in order to permit 1 2 such payments as proper deductions to the Company under the Internal Revenue Code of 1986 and the rules and regulations adopted pursuant thereto now or hereafter in effect. (f) All amounts payable or which become payable under any provision of this Agreement will be subject to any deductions authorized in writing by you and any deductions and withholdings required by law. 4. Indemnification. (a) If, after the date of the commencement of the Employment Period, the Employee is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation or partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is an alleged act or failure to act in an official capacity as a director, officer, member, employee or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Delaware law, as the same exists or may hereafter be amended, against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Employee in connection therewith, including, without limitation, payment of expenses incurred in defending a Proceeding prior to the final disposition of such Proceeding (subject to receipt of an undertaking by the Employee to repay such amount if it shall ultimately be determined that the Employee is not entitled to be indemnified by the Company under Delaware law), and such indemnification shall continue as to the Executive even if he has ceased to be a director, officer, member, employee or agent of the Company or other enterprise and shall inure to the benefit of his heirs, executors and administrators. (b) The right of indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 4 shall not be exclusive of any other right that the Employee may have or hereafter may acquire under any statute, provision of the Certificate of Incorporation or Bylaws of the Company, agreement, vote of shareholders or disinterested directors or otherwise. 5. Termination of Employment. (a) The Company shall have the right at its option to terminate the employment of Employee hereunder by giving written notice thereof to the Employee in the event of any of the following: (1) If the Board of Directors of the Company, or a duly authorized committee thereof, acting in good faith and upon reasonable grounds, determines that the Employee should be terminated for Cause. For purposes of this Agreement, "Cause" means, in each case as determined in good faith by the Board, Employee's (i) personal dishonesty, willful misconduct, or breach of fiduciary duty involving personal profit, and/or (ii) conviction of any felony law, and/or (iii) a determination or request by an appropriate regulatory authority that Employee be removed or disqualified from acting as an officer of the Company, and/or (iv) willful breach of a material provision of this Agreement after written notice, in reasonable detail as the alleged breach, has been given to you by the Board and you have had a reasonable opportunity to cure such breach. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Employee (i) a copy of a resolution, duly adopted by the Board (excluding the Employee) at a meeting of the Board called and held for the purpose (after reasonable notice to the Employee of the meeting of the Board at which the motion is to be considered, which notice shall specify in reasonably detailed terms the facts and circumstances constituting Cause, and after the Employee, together with his counsel, having been afforded at such meeting an opportunity to be heard before the Board), finding that the Employee was guilty of conduct constituting Cause; (ii) a certificate of the Secretary or an Assistant Secretary of the Company stating that such resolution was in fact duly adopted by the Board (excluding the Employee); and (iii) a Notice of Termination in the form specified in the following sentence. A Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and set forth in reasonable detail the facts and circumstances of the Employee's employment under the provision so indicated and the actual termination effective date. (2) If the Company gives Employee thirty days advance written notice of termination of employment. (3) If the Employee dies during the term of employment, the Employee's employment hereunder and Employee's compensation and other rights under this Agreement and as an employee of the Company (except as to compensation rights accrued prior thereto and except as expressly provided in the next succeeding sentence) shall terminate thirty (30) days following the date of death. In such event, the Company shall pay to the Employee's designated executor 2 3 or administrator of the Employee's estate, all compensations and benefits accrued which would otherwise be payable to the Employee through the thirtieth (30) day following the date of death. (4) If the Employee is unable for any reason to carry out or to perform the duties required of him hereunder and does not resume his duties prior to the termination date specified in the Company's written notice of termination; provided, however, if the Employee shall fail to carry out or to perform the duties required of him because of mental or physical disability for a six consecutive month period during the term hereof and following such period he is unable to perform his duties hereunder because of mental or physical disability, as determined by the Board of Directors of the Company, or a duly authorized committee thereof, acting in good faith and upon reasonable grounds, he shall be entitled to receive his then Base Salary he would otherwise be entitled to hereunder during the term of this Agreement pursuant to Paragraph 3 hereof for a period of not longer than twelve (12) months after the termination of his employment pursuant to this Paragraph 5(a) (4). (5) If this Agreement is terminated by the Company pursuant to Paragraph 5(a)(2) hereof, then Employee shall be entitled to severance payments equal to twelve (12) months of his then monthly Base Salary and any bonus on an as if perfected basis payable in one lump sum within thirty (30) days after such effective termination of Employee's employment by the Company irrespective of the remaining term of this agreement. Any vested stock options shall also be exercisable in accordance with their terms for the duration of the original option agreement term irrespective of any contrary provisions in the option agreement. (b) The Employee shall have the right at his sole option to terminate employment hereunder under the following conditions: (1) at any time upon thirty (30) days written notice. (2) upon written notice by Employee to the Company within thirty (30) days of and indicating that a change in control of the Company ("Corporate Transaction") has occurred and therefore Employee elects to terminate as provided herein. A Corporate Transaction of the Company shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided that, without limitation, such a change in control or other qualifying event shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; or (ii) the Company sells, transfers or otherwise disposes of all or substantially all of the assets of the Company; or (iii) a merger or acquisition in which the Company is not the surviving entity (except for a merger into a wholly-owned subsidiary, and except for a transaction the sole purpose of which is to change domicile. (3) if termination by the Employee is pursuant to 5 (b) (1) then no severance or termination payments shall be payable. If termination is noticed pursuant to 5 (b) (2) hereof then Employee shall be entitled to a payment equal to the remaining months of this Agreement multiplied by the Base Salary and any bonus on an as if perfected basis payable in one lump sum within sixty (60) days. In addition, the Employee shall be entitled to recover legal fees and costs incurred by Employee should the Company not make timely payment prescribed by this section and should the Employee prevail in any action filed thereabout. 6. Soliciting Customers. The Employee agrees that he will not for a period of one (1) year immediately following the termination of his employment with the Company, either directly or indirectly make known to any competing person, firm, or corporation the names or addresses of any of the customers of the Company or any other information pertaining to them that is not in the public domain. 7. Trade Secrets of the Company. The Employee prior to and during the term of employment under this Agreement has had and will have access to and become acquainted with various trade secrets, consisting of devices, secret inventions, processes, and compilations of information, records, and specifications which are owned by the Company, and which are regularly used or to be used in the operation of the business of the Company. The Employee shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the term of this agreement or for a period of 36 months thereafter, except as required in the course of his employment. All files, records, documents, drawings, specifications, equipment, and similar items relating to the business of the Company, whether prepared by the Employee or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be removed under any 3 4 circumstances from the premises of the Company where the work is being carried on without prior written consent of the Company or consistent with the Company's normal business practices. 8. Inventions and Patents. The Employee agrees that as to any inventions made by him during the term of his employment, solely or jointly with others, which are made using trade secret information of the Company or which relate at the time of the conception or reduction-to-practice of an invention to the business of the Company (which shall be limited to sound reproduction, sound attenuation, global positioning and miniature radio technologies as currently practiced by the Company) or the Company's actual or demonstrably anticipated research or development as promulgated by the Board of Directors prior to any invention thereof, or which result from any work performed by the Employee directly for the Company at the Board of Directors direction, shall belong to the Company and the Employee promises to assign such inventions to the Company. The Employee also agrees that the Company shall have the right to keep such inventions as trade secrets, if the Company chooses. The Employee agrees to assign to the Company the Employee's rights in any such inventions where the Company is required to grant those rights to the United States government or any agency thereof. The Employee shall assist the Company in obtaining such patents on all inventions described above, and designs, improvements, and discoveries deemed patentable by the Company in the United States and in all foreign countries, and shall execute all documents and do all things necessary to obtain letters patent, to vest the Company with full and extensive title thereto, and to protect the same against infringement by others. In exchange for assignment of any new patents to the Company, the Company and Employee shall negotiate a royalty agreeement comparable to rates on prior assignments made to the Company by Employee. Employee has been an inventor for more than 30 years for his own account and for a variety of entities and is responsible for developments for various entities. Nothing in this Agreement is intended to restrict Employees outside activities as an inventor other than as prescribed in this section. Accordingly, unless an invention made by Employee relates to sound reproduction, sound attenuation, global positioning and/or miniature radio technologies as currently practiced by the Company, the presumption shall be that any such invention is not owned by the Company without the written consent of Employee and the burden of proving the invention is owned by the Company shall be that of the Company. 9. Severability. Each paragraph and subparagraph of this Agreement shall be construed and considered separate and severable from the validity and enforceability of any other provision contained in this Agreement. 10. Assignment. The rights of the Company (but not its obligations) under this Agreement may, without the consent of the Employee, be assigned by the Company to any parent, subsidiary, or successor of the Company; provided that such parent, subsidiary or successor acknowledges in writing that it is also bound by the terms and obligations of this Agreement. Except as provided in the preceding sentence, the Company may not assign all or any of its rights, duties or obligations hereunder without prior written consent of Employee. The Employee may not assign all or any of his rights, duties or obligations hereunder without the prior written consent of the Company. 11. Notices. All notices, requests, demands and other communications shall be in writing and shall be defined to have been duly given if delivered or if mailed by registered mail, postage prepaid: (a) If to Employee, addressed to him at the following address as may be changed in writing from time to time: Elwood G. Norris 13824 San Sebastian Way Poway, California 92064 (b) If to the Company, addressed to: American Technology Corporation 13114 Evening Creek Dr. South San Diego, California 92128 or to such other address as any party hereto may request by notice given as aforesaid to the other parties hereto. 12, Title and Headings. Titles and headings to paragraphs hereof are for purposes of references only and shall in no way limit, define or otherwise affect the provisions hereof. 13. Governing Law. This Agreement is being executed and delivered and is intended to be performed in the State of California, and shall be governed by and construed in accordance with the laws of the State of California. 4 5 14. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall not be necessary in making proof of this Agreement to produce or account for more than one original counterpart. 15. Cumulative Rights. Each and all of the various rights, powers and remedies of the Company and Employee in this Agreement shall be considered as cumulative, with and in addition to any other rights, powers or remedies of the Company or the Employee and no one of them as exclusive of the others or as exclusive of any other rights, powers and remedies allowed by law. The exercise or partial exercise of any right, power or remedy shall neither constitute the election thereof nor the waiver of any other right, power or remedy. Sections 4, 6, 7 and 8 hereof shall continue in full force and effect notwithstanding the Employee's termination of employment and the termination of this Agreement. 16. Remedies. The Employee and the Company both acknowledge that each may have no adequate remedy at law if either violates any of the terms contained in Sections 6, 7 and 8. In such event, either party shall have the right, in addition to any other rights it may have, to obtain relief to restrain any breach hereof or otherwise to specifically enforce any of the provisions hereof. 17. Waiver of Breach. The waiver by one party to this Agreement of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the said party . 18. Entire Agreement. This Agreement contains the entire agreement of the parties hereto and may be modified or amended only by a written instrument executed by parties hereto. Effective on the date hereof, any prior employment agreements between the Company and the Employee shall terminate. 19. Attorney's Fees. In the event that either party must institute legal action to compel the other to comply with the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and costs. 20. Good Faith. Each of the parties hereto agrees that he or it shall act in good faith in all actions taken under this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. /s/ Richard M. Wagner August 28, 1997 - ----------------------------- American Technology Corporation Richard M. Wagner, Secretary /s/ Elwood G. Norris August 28, 1997 - ----------------------------- Elwood G. Norris, Employee 5 EX-10.17 5 EXHIBIT 10.17 1 Exhibit 10.17 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into effective as of the 1st day of September, 1997, between AMERICAN TECHNOLOGY CORPORATION, a Delaware publicly traded corporation (the "Company"), and Robert Putnam ("Employee"). Employee, in consideration of the covenants and agreements hereinafter contained, agrees as follows with respect to the employment of the Company of Employee and Employees future business activities. 1. Employment: Term of Employment. The Company hereby employs Employee and Employee hereby accepts such employment upon the terms and conditions hereinafter set forth. Subject to the provisions for termination as hereinafter provided, Employee's term of employment by the Company shall be from the date of this agreement until August 31, 2000, and said employment shall continue after such date until either party shall deliver written notice to the other party hereto to the effect that the employment hereunder shall terminate thirty (30) days from the giving of such notice. This Agreement will supersede all prior written and oral agreements entered into by and between Company and Employee. 2. Services to be Rendered by Employee. Employee shall be subject to the direction of the Board of Directors, or a duly authorized committee thereof and his duties shall be those generally vested in the office of Vice President and Secretary/Treasurer for the corporation and he shall have such other powers and duties as may be reasonably prescribed by the Board of Directors, or a duly authorized committee thereof, and shall perform such duties as from time to time may be decided upon by the Board of Directors, or a duly authorized committee thereof, of the Company. Employee shall devote a sufficient amount of his productive time, energy and ability during the term of this Agreement to the proper and efficient conduct of the Company's business during the term of this Agreement however the Employee shall be only required to devote part time and attention to the Company's business expected to range from approximately 20-25 hours per week unless otherwise agreed by the parties. Employee shall at all times faithfully, industriously, and to the best of his ability, experience and talent, perform the duties that may be reasonably required to the reasonable satisfaction of the Board of Directors. As is the present case, Employee may from time to time work for other persons or entities in any capacity, including but not limited to an officer, director, employee or consultant, and conduct other business activities so long as such work or activities do not adversely and directly impact on his duties and obligations to the Company as has been reasonably performed in the past. The Company acknowledges that Employee is an officer and director of Norris Communications, Inc. and Patriot Scientific Corporation and has duties thereto. 3. Compensation. (a) For the services to be rendered by Employee during his employment by the Company, the Company shall pay Employee a Base Salary of three thousand five hundred dollars ($3,500) per month during the term of this agreement, prorated for any partial month and paid in conformity with the Company's normal payroll period. Employee's salary shall be reviewed by the Board of Directors from time to time in its discretion, and Employee will receive such salary increases, if any, as the Board of Directors in its sole discretion determines. (b) Employee shall be entitled to participate in any bonus pool or similar program established by the Board of Directors. (c) The Employee's place of employment shall be considered San Diego County, California (or other mutually agreed upon location). (d) Employee shall be entitled to participate in and receive benefits under the Company's executive benefits plans as in effect from time to time, including auto, medical insurance, sick leave, and vacation time, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and Company policies. (e) The Company shall pay or reimburse Employee for all expenses normal reimbursed by the Company and reasonably incurred by him in furtherance of his duties hereunder and authorized by the Company, including without limitation, expenses for entertainment, traveling, meals, hotel accommodations and the like upon submission by him of vouchers or an itemized list thereof as the Board of Directors; may from time to time adopt and authorize, and as may be required in order to permit such payments as proper deductions to the Company under the Internal Revenue Code of 1986 and the rules and regulations adopted pursuant thereto now or hereafter in effect. 1 2 (f) All amounts payable or which become payable under any provision of this Agreement will be subject to any deductions authorized in writing by you and any deductions and withholdings required by law. 4. Indemnification. (a) If, after the date of the commencement of the Employment Period, the Employee is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation or partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is an alleged act or failure to act in an official capacity as a director, officer, member, employee or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Delaware law, as the same exists or may hereafter be amended, against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Employee in connection therewith, including, without limitation, payment of expenses incurred in defending a Proceeding prior to the final disposition of such Proceeding (subject to receipt of an undertaking by the Employee to repay such amount if it shall ultimately be determined that the Employee is not entitled to be indemnified by the Company under Delaware law), and such indemnification shall continue as to the Employee even if he has ceased to be a director, officer, member, employee or agent of the Company or other enterprise and shall inure to the benefit of his heirs, executors and administrators. (b) The right of indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 4 shall not be exclusive of any other right that the Employee may have or hereafter may acquire under any statute, provision of the Certificate of Incorporation or Bylaws of the Company, agreement, vote of shareholders or disinterested directors or otherwise. 5. Termination of Employment. (a) The Company shall have the right at its option to terminate the employment of Employee hereunder by giving written notice thereof to the Employee in the event of any of the following: (1) If the Board of Directors of the Company, or a duly authorized committee thereof, acting in good faith and upon reasonable grounds, determines that the Employee should be terminated for Cause. For purposes of this Agreement, "Cause" means, in each case as determined in good faith by the Board, Employee's (i) personal dishonesty, willful misconduct, or breach of fiduciary duty involving personal profit, and/or (ii) conviction of any felony law, and/or (iii) a determination or request by an appropriate regulatory authority that Employee be removed or disqualified from acting as an officer of the Company, and/or (iv) willful breach of a material provision of this Agreement after written notice, in reasonable detail as the alleged breach, has been given to you by the Board and you have had a reasonable opportunity to cure such breach. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Employee (i) a copy of a resolution, duly adopted by the Board (excluding the Employee) at a meeting of the Board called and held for the purpose (after reasonable notice to the Employee of the meeting of the Board at which the motion is to be considered, which notice shall specify in reasonably detailed terms the facts and circumstances constituting Cause, and after the Employee, together with his counsel, having been afforded at such meeting an opportunity to be heard before the Board), finding that the Employee was guilty of conduct constituting Cause; (ii) a certificate of the Secretary or an Assistant Secretary of the Company stating that such resolution was in fact duly adopted by the Board (excluding the Employee); and (iii) a Notice of Termination in the form specified in the following sentence. A Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and set forth in reasonable detail the facts and circumstances of the Employee's employment under the provision so indicated and the actual termination effective date. (2) If the Company gives Employee thirty days advance written notice of termination of employment. (3) If the Employee dies during the term of employment, the Employee's employment hereunder and Employee's compensation and other rights under this Agreement and as an employee of the Company (except as to compensation rights accrued prior thereto and except as expressly provided in the next succeeding sentence) shall terminate thirty (30) days following the date of death. In such event, the Company shall pay to the Employee's designated executor or administrator of the Employee's estate, all compensations and benefits accrued which would otherwise be payable to the Employee through the thirtieth (30) day following the date of death. 2 3 (4) If the Employee is unable for any reason to carry out or to perform the duties required of him hereunder and does not resume his duties prior to the termination date specified in the Company's written notice of termination; provided, however, if the Employee shall fail to carry out or to perform the duties required of him because of mental or physical disability for a six consecutive month period during the term hereof and following such period he is unable to perform his duties hereunder because of mental or physical disability, as determined by the Board of Directors of the Company, or a duly authorized committee thereof, acting in good faith and upon reasonable grounds,he shall be entitled to receive his then Base Salary he would otherwise be entitled to hereunder during the term of this Agreement pursuant to Paragraph 3 hereof for a period of not longer than twelve (12) months after the termination of his employment pursuant to this Paragraph 5(a) (4). (5) If this Agreement is terminated by the Company pursuant to Paragraph 5(a)(2) hereof, then Employee shall be entitled to severance payments equal to twelve (12) months of his then monthly Base Salary and any bonus on an as if perfected basis payable in one lump sum within thirty (30) days after such effective termination of Employee's employment by the Company irrespective of the remaining term of this agreement. Any vested stock options shall also be exercisable in accordance with their terms for the duration of the original option agreement term irrespective of any contrary provisions in the option agreement. (b) The Employee shall have the right at his sole option to terminate employment hereunder under the following conditions: (1) at any time upon thirty (30) days written notice. (2) upon written notice by Employee to the Company within thirty (30) days of and indicating that a change in control of the Company ("Corporate Transaction") has occurred and therefore Employee elects to terminate as provided herein. A Corporate Transaction of the Company shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided that, without limitation, such a change in control or other qualifying event shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; or (ii) the Company sells, transfers or otherwise disposes of all or substantially all of the assets of the Company; or (iii) a merger or acquisition in which the Company is not the surviving entity (except for a merger into a wholly-owned subsidiary, and except for a transaction the sole purpose of which is to change domicile. (3) if termination by the Employee is pursuant to 5 (b) (1) then no severance or termination payments shall be payable. If termination is noticed pursuant to 5 (b) (2) hereof then Employee shall be entitled to a payment equal to the remaining months of this Agreement multiplied by the Base Salary and any bonus on an as if perfected basis payable in one lump sum within sixty (60) days. In addition, the Employee shall be entitled to recover legal fees and costs incurred by Employee should the Company not make timely payment prescribed by this section and should the Employee prevail in any action filed thereabout. 6. Soliciting Customers. The Employee agrees that he will not for a period of one (1) year immediately following the termination of his employment with the Company, either directly or indirectly make known to any competing person, firm, or corporation the names or addresses of any of the customers of the Company or any other information pertaining to them that is not in the public domain. 7. Trade Secrets of the Company. The Employee prior to and during the term of employment under this Agreement has had and will have access to and become acquainted with various trade secrets, consisting of devices, secret inventions, processes, and compilations of information, records, and specifications which are owned by the Company, and which are regularly used or to be used in the operation of the business of the Company. The Employee shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the term of this agreement or for a period of 36 months thereafter, except as required in the course of his employment. All files, records, documents, drawings, specifications, equipment, and similar items relating to the business of the Company, whether prepared by the Employee or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be removed under any circumstances from the premises of the Company where the work is being carried on without prior written consent of the Company or consistent with the Company's normal business practices. 3 4 8. Inventions and Patents. (a) The Employee agrees that as to any inventions made by him during the term of his employment, solely or jointly with others, which are made with the equipment, supplies, facilities or trade secret information of the Company, or which relate at the time of the conception or reduction to purchase of the invention to the business of the Company or the Company's actual or demonstrably anticipated research and development, or which result from any work performed by the Employee for the Company, shall belong to the Company and the Employee promises to assign such inventions to the Company. The Employee also agrees that the Company shall have the right to keep such inventions as trade secrets, if the Company chooses. The Employee agrees to assign to the Company the Executive's rights in any other inventions where the Company is required to grant those rights to the United States government or any agency thereof. In order to permit the Company to claim rights to which it may be entitled, the Employee agrees to disclose to the Company in confidence all inventions which the Employee makes arising out of the Employee's employment and all patent application filed by the Employee within one year after the termination of his employment. (b) The Employee shall assist the Company in obtaining patents on all inventions, designs, improvements, and discoveries patentable by the Company in the United States and in all foreign countries, and shall execute all documents and do all things necessary to obtain letters patent, to vest the Company with full and extensive title thereto, and to protect the same against infringement by others. 9. Severability. Each paragraph and subparagraph of this Agreement shall be construed and considered separate and severable from the validity and enforceability of any other provision contained in this Agreement. 10. Assignment. The rights of the Company (but not its obligations) under this Agreement may, without the consent of the Employee, be assigned by the Company to any parent, subsidiary, or successor of the Company; provided that such parent, subsidiary or successor acknowledges in writing that it is also bound by the terms and obligations of this Agreement. Except as provided in the preceding sentence, the Company may not assign all or any of its rights, duties or obligations hereunder without prior written consent of Employee. The Employee may not assign all or any of his rights, duties or obligations hereunder without the prior written consent of the Company. 11. Notices. All notices, requests, demands and other communications shall be in writing and shall be defined to have been duly given if delivered or if mailed by registered mail, postage prepaid: (a) If to Employee, addressed to him at the following address as may be changed in writing from time to time: Robert Putnam 14238 Bounty Way Poway, California 92064 (b) If to the Company, addressed to: American Technology Corporation 13114 Evening Creek Dr. South San Diego, California 92128 or to such other address as any party hereto may request by notice given as aforesaid to the other parties hereto. 12. Title and Headings. Titles and headings to paragraphs hereof are for purposes of references only and shall in no way limit, define or otherwise affect the provisions hereof. 13. Governing Law. This Agreement is being executed and delivered and is intended to be performed in the State of California, and shall be governed by and construed in accordance with the laws of the State of California. 14. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall not be necessary in making proof of this Agreement to produce or account for more than one original counterpart. 15. Cumulative Rights. Each and all of the various rights, powers and remedies of the Company and Employee in this Agreement shall be considered as cumulative, with and in addition to any other rights, powers or remedies of the Company or the Employee and no one of them as exclusive of the others or as exclusive of any other rights, powers and remedies allowed by law. The exercise or partial exercise of any right, power or remedy shall neither constitute the election thereof nor the waiver of any other right, power or remedy. Sections 4, 6, 7 and 8 hereof shall continue in full force and effect notwithstanding the Employee's termination of employment and the termination of this Agreement. 4 5 16. Remedies. The Employee and the Company both acknowledge that each may have no adequate remedy at law if either violates any of the terms contained in Sections 6, 7 and 8. In such event, either party shall have the right, in addition to any other rights it may have, to obtain relief to restrain any breach hereof or otherwise to specifically enforce any of the provisions hereof. 17. Waiver of Breach. The waiver by one party to this Agreement of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the said party . 18. Entire Agreement. This Agreement contains the entire agreement of the parties hereto and may be modified or amended only by a written instrument executed by parties hereto. Effective on the date hereof, any prior employment agreements between the Company and the Employee shall terminate. 19. Attorney's Fees. In the event that either party must institute legal action to compel the other to comply with the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and costs. 20. Good Faith. Each of the parties hereto agrees that he or it shall act in good faith in all actions taken under this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. /s/ Richard M. Wagner August 28, 1997 - ----------------------------- American Technology Corporation Richard M. Wagner, Secretary /s/ Robert Putnam August 28, 1997 - ----------------------------- Robert Putnam, Employee EX-23.1 6 EXHIBIT 23.1 1 Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors American Technology Corporation We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (File No. 333-09265, File No. 333-09269 and File No. 333-23845 and Forms S-3 (File No. 333-27455 and File No. 333-36003) of our report dated November 5, 1997, relating to the financial statements of American Technology Corporation appearing in the Company's Annual Report on Form 10-KSB for the year ended September 30, 1997. /s/ BDO SEIDMAN, LLP BDO Seidman, LLP Denver, Colorado December 1, 1997 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) AUDITED STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 3,338,458 29,289 315,016 7,800 189,815 3,892,112 461,135 264,713 4,251,878 172,305 0 0 3,321,153 98 371,671 4,251,878 967,408 967,408 809,437 809,437 2,182,856 0 146,331 (2,144,363) 0 (2,144,363) 0 0 0 (2,144,363) (.30) (.30)
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