-----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, RnjCtfyhaFtmOYRJz5/qf7Wbg8oMMuwljYRINSUepzuw+COIFn8EESqXi7CFobWt Ak7Z8sFKt8ul0H0ewMPLzw== 0001072993-99-000383.txt : 19991229 0001072993-99-000383.hdr.sgml : 19991229 ACCESSION NUMBER: 0001072993-99-000383 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN TECHNOLOGY CORP /DE/ CENTRAL INDEX KEY: 0000924383 STANDARD INDUSTRIAL CLASSIFICATION: HOUSEHOLD AUDIO & VIDEO EQUIPMENT [3651] IRS NUMBER: 870361799 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24248 FILM NUMBER: 99781737 BUSINESS ADDRESS: STREET 1: 13114 EVENING CREEK DRIVE SOUTH CITY: SAN DIEGO STATE: CA ZIP: 92128 BUSINESS PHONE: 6196792114 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1999 Commission File Number 0-24248 ------- AMERICAN TECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 87-0361799 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 13114 Evening Creek Drive South, San Diego, California 92128 ------------------------------------------------------ ----- (Address of principal executive offices) (Zip Code) (858) 679-2114 -------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.00001 par value ------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding in 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of December 27, 1999, the aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant was approximately $68.7 million. The number of shares of Common Stock, $.00001 par value, outstanding on December 27, 1999, was 11,549,489. DOCUMENTS INCORPORATED BY REFERENCE 1 Information required by Part III is incorporated by reference to portions of the Registrant's Proxy Statement for the Year 2000 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the 1999 fiscal year. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- PART I ITEM 1. Business 3 ITEM 2. Properties 13 ITEM 3. Legal Proceedings 13 ITEM 4. Submission of Matters to a Vote of Security Holders 13 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 13 ITEM 6. Selected Financial Data 14 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 21 ITEM 8. Financial Statements and Supplementary Data 21 ITEM 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure 21 PART III ITEM 10. Directors and Executive Officers of the Registrant 21 ITEM 11. Executive Compensation 22 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 22 ITEM 13. Certain Relationships and Related Transactions 22 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
FORWARD-LOOKING STATEMENTS IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21A OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE "SAFE HARBOR" PROVISIONS THEREOF. THEREFORE THE COMPANY IS INCLUDING THIS STATEMENT FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR ANTICIPATED RESULTS. IN THIS REPORT, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE," "PLANS," "STRATEGY," AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED TO CONSIDER THE SPECIFIC RISK FACTORS DESCRIBED BELOW AND NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE FORWARD- LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE HEREOF. 2 PART I Item 1. Business American Technology Corporation develops, markets and licenses proprietary sound reproduction and other technologies. Our primary business focus is on two proprietary sound reproduction technologies: . SFT(TM), Stratified Field(TM) Technology . HSS(TM), HyperSonic(TM) Technology We also market a line of portable consumer products under our own label and are developing other new technologies. We operated in one business segment, electronic products. Stratified Field is an advanced speaker technology that shares certain characteristics of electrostatic speakers. Electrostatic speakers employ a thin plastic film to radiate sound and are known for very high sound quality and low distortion. Our Stratified Field technology is a non-magnetic thin panel speaker design that we believe has performance advantages over traditional speakers and other thin panel speakers. Our Hypersonic Sound technology is a new method of sound reproduction. Sound is generated in an air column using ultrasonic frequencies, those above the normal range of hearing. Our proprietary electronic process generates an ultrasonic beam to interact in mid-air producing wide spectrum audio along the beam. The sound beam has a very high degree of directionality and maintains sound volume over longer distances than traditional methods of sound reproduction. We believe HyperSonic Sound has unique features useful in new sound applications as well as in certain traditional speaker applications. Our objective is to be a leader in developing, marketing and licensing innovative sound reproduction technologies that address large and expanding domestic and international consumer and commercial electronics markets. We seek to have our sound technologies become important alternatives to conventional loudspeakers in target market segments. We believe it is becoming increasingly difficult for manufacturers to differentiate their sound reproduction products to offer consumers new choices. We also believe the rapid emergence of flat panel computer and television monitors and the growing computer multimedia market provide new and growing opportunities for our products. We own other technologies in various stages of development: . Our Magnified Force Woofer ("MFW") offers improved woofer performance. . Our Global Positioning System ("GPS") technology provides a method to improve searching and tracking features for objects or persons. . Our Engine Plasma Displacement ("EPD") technology provides a method for jet engine noise reduction. We also label, under the American Technology brand, portable consumer products, primarily sourced from foreign manufacturers. We currently market and distribute approximately ten portable consumer products with retail prices ranging from $3.50 to $51.99. All but two products are consumer electronic products. The marketing of portable consumer products provided substantially all revenues during fiscal 1999, 1998 and 1997. However the majority of marketing and development costs during fiscal 1999 were incurred towards our sound technologies. American Technology was incorporated in the State of Utah on February 11, 1980 as Chasko, Inc. and on April 7, 1982 our name was changed to American Technology Corporation. From inception to 1988, we were engaged in electronic product development. From 1988 to early 1992, we were inactive due to inadequate financial resources. In early 1992 our company was brought into good standing and restructured. There were no changes to management resulting from this re- activation. On June 19, 1992 we reincorporated in the State of Delaware. Since the 1992 restructuring, our operations have focused on developing various technology assets. Our shares trade on NASDAQ under the symbol "ATCO." Our address is 13114 Evening Creek Drive South, San Diego, California, and our telephone number is 858-679-2114. Our Internet site is located at www.atcsd.com. Sound Reproduction Industry Overview The human ear is sensitive to the rate at which sound vibrations occur or frequencies from about 20 Hertz (Hz) to 20,000 Hz (a Hertz is equal to one vibration per second). A wide variety of loudspeakers are produced today to recreate 3 the range of hearing. These range from tweeters that attempt to re-create the top end of the audio spectrum, to mid-range speakers and woofers to address the lower frequencies. Conventional loudspeakers generally are direct radiating - --they are fundamentally a piston-like device designed to directly pump air molecules into motion to create audible sound waves. Better sound quality and low frequency (bass) reproduction is generally associated with larger and more expensive speakers. Since 1925, when C.W. Rice and E.W. Kellogg described basic, direct radiating speaker parameters, there have been, until recently, few fundamental changes in speaker design or in the way electrical impulses are converted to sound. Electronics (receivers, amplifiers, tuners and recording and playback equipment) have evolved from vacuum tubes to solid state digital circuits and recording technology has progressed from analog grooves in records to digital coding on compact discs that are read by a laser. Loudspeaker industry developments have focused primarily on improving individual elements such as magnets, coils, cones and enclosures. However, compared to the improvements in electronics, we believe loudspeakers are still relatively inefficient in converting electrical energy into acoustic energy and their design contributes to various forms of sound distortion. Loudspeakers are used in televisions, radios, telephones, computers, automobiles, and a wide range of other consumer and industrial applications. From miniature speakers in hearing aids to large home theater, public address and concert sound systems, loudspeakers encompass a wide range in size, quality and cost. The manufacture and sale of loudspeakers is highly competitive and includes both large international consumer electronic companies and specialty branded loudspeaker manufacturers. We believe the lack of fundamental innovation and the diversity and size of the loudspeaker market presents an opportunity to introduce new sound technology that will appeal to consumers and be cost- effective for manufacturers. The rapid emergence of flat panel computer and television monitors and the growing multimedia computer market provides opportunities for thin flat panel speaker designs. In its infancy, the market for computer flat panel monitors is expected to grow from $1 billion in 1998 factory sales to $19 billion in 2002 according to Stanford Resources, Inc. Recently several companies have introduced flat panel speaker designs (see "Competition") to benefit from this trend and for other applications such as wall-mounted picture speakers. We believe the introduction of these new products has increased market awareness for new speaker designs and the benefits of thin panel speakers. Our Sound Solutions Our primary development and marketing focus is on our Stratified Field and HyperSonic Sound technologies. Stratified Field Technology - --------------------------- Stratified Field Technology, or SFT, is a thin, non-magnetic loudspeaker design providing high quality performance for a variety of applications. The term Stratified Field relates to the multiple layers of materials employed in the design. We have developed a number of distinct Stratified Field designs employing plastic film as the direct radiating element. During fiscal 1999 we focused on bringing our best performing design to market by developing manufacturing techniques to allow technology transfer. We believe this design offers advantages over existing electrostatic, planar magnetic and magnetic actuated panel designs generally associated with flat speakers (see "Technologies" below). Our patent-pending Stratified Field speaker competes with other flat panel and conventional speakers. We believe we have a competitive cost of construction, as compared to our quality of sound reproduction. Our speaker can be manufactured flat or can be shaped in curves. Our other Stratified Field designs can be shaped in cylinders and spheres. This flexibility provides unique product design opportunities for consumer product manufacturers. Our design eliminates the costs and the constraints of the normal "box" associated with loudspeakers. The following attributes of our speakers compare well on a competitive basis to conventional and other flat panel loudspeaker designs: Performance Attributes ---------------------- . Consistent radiation movement over the entire surface resulting in low distortion, smooth frequency response and low coloration of sound . Smooth, flat frequency response across the effective sound range . Low bass response compared to comparable size flat panels . Accurate imaging and high sound quality . Low mechanical vibration . Loss-less load (no heat is produced regardless of sound pressure level) 4 . No constraint on the ratio of height to width. Ability to curve and shape the speakers to produce new product designs. Physical Attributes ------------------- . Thin physical format - as thin as 5 mm over the entire surface with no protruding actuator drive mechanism . Non-magnetic design employs no magnetic fields . Low moving mass producing minimal vibration . No requirement for a speaker box or enclosure . Radiating surface can be curved, shaped or cylindrical . Low overall weight Manufacturing Benefits ---------------------- . Simple manufacturing process with robust design for manufacturability . High fidelity to cost ratio . Variable dimensions to meet custom application requirements . Multiple product mounting options . Low component and manufacturing costs The above properties offer advantages for products such as flat panel video displays, laptop computers, home audio and theater systems, installed sound reinforcement, professional monitors, high-fidelity speakers, automotive systems and other applications requiring physically flat or thin (in the case of curved) panels but with high-quality audio performance. HyperSonic Sound Technology - --------------------------- Our HyperSonic Sound technology utilizes a new method of sound reproduction -- sound is generated in the air using ultrasonic frequencies, those above the normal range of hearing. A patent-pending electronic process creates and modulates (shapes) an ultrasonic wave that interacts in mid-air to produce wide spectrum audio. Since traditional loudspeaker system elements such as voice coils, magnets, cones/diaphragms, crossover networks, baffles and speaker enclosures are eliminated, we believe HyperSonic Sound offers quality sound while using little space. The sound produced by this technology is significantly more directional over greater distances with less volume loss than traditional sound reproduction methods thereby offering a number of application advantages to users. Our HyperSonic Sound technology, comprised of the combination of proprietary electronics and proprietary custom ultrasonic emitters (specialized ultrasonic devices essentially taking the place of the radiating element of a loudspeaker) offers a number of advantages: . The ability to create a beam of sound to place sound where you want it . Elimination of the need for a speaker enclosure . Reduction of the effect of room acoustics on sound quality . Improved phase coherency (frequency time alignment) . Ability to manipulate or selectively position or diffuse the source of sound . Ability to deliver a beam of sound over long distances . Elimination of magnets, their weight and adverse effects . Elimination of feedback in professional applications We believe our sound technologies offer important competitive advantages for original equipment manufacturers ("OEMs") and new features important to consumers. However, there can be no assurance our sound technology advantages can be successfully implemented commercially or will achieve market acceptance. Our Strategy The marketing of our sound technologies continues to evolve as a result of market awareness, technical developments, changes in patent and protection strategies and reactions from prospective users of our technologies. We are focusing our efforts on OEMs desiring to implement our technology in specific products or applications. Our strategy is to establish business relationships with leading participants in selected segments of the electronics and sound reproduction markets. We believe this strategy will enable us to take advantage of the superior financial resources, technological 5 capabilities, proprietary positions, branding, distribution and market presence of OEMs in establishing and maintaining our technologies. We also are implementing a branding strategy aimed to make Stratified Field and HyperSonic Sound (SFT and HSS) synonymous with innovative, high-quality sound reproduction. We believe we can facilitate the rapid adoption of our technologies through licensing and technology collaboration arrangements with contract and OEM manufacturers. Key elements of our strategy include: 1. Build on technical achievements allowing licensees to produce commercially viable products for consumers. We are converting our prototypes into designs and materials that licensees can use to meet consumer demand across a variety of targeted market segments. We expect to continue to improve our designs to benefit licensees. 2. Expand patent coverage. We have filed multiple patent applications worldwide and expect to continue to file amendments, continuations and additional patents as development progresses. The scope and breadth of our patents will be an important factor in the exploitation of our technologies. 3. Implement a segmented and flexible licensing approach. We have identified a segmented licensing approach targeted at individual fields of use. This approach includes developing one or more manufacturing partners to supply product to those OEMs not wishing to produce the core elements of our technologies. Contract manufacturers will be offered licenses to produce speakers for our OEMs. We may also sell key components or materials to make implementation simpler. 4. Identify and determine market segment needs. We have identified and are focusing our Stratified Field marketing and licensing efforts on four initial fields of use (a) computer multimedia (b) high-end televisions, (c) consumer home audio, and (d) professional audio. We are working with OEMs in each of these fields of use to identify market requirements for the technology. We believe our technology can become an important competitive feature for OEMs and can also help OEMs achieve premium price or premium margins for their products. We have initially focused HyperSonic Sound marketing efforts towards military and governmental applications to further develop and fund the technology. With recent success in designing new emitters, we believe our HyperSonic Sound technology may also have applications in the four segments above as well as in communications and other markets. 5. Support licensees and develop a market position. We intend to support our licensees and manufacturers with technical support and on ongoing research and development effort. We intend to require branding of our devices to create and build consumer awareness. Our strategy is to develop strategic arrangements with manufacturers in targeted fields of use with limited exclusivity to accelerate implementation and market introduction and to allow selected manufacturers to differentiate product offerings from competitors. Although we anticipate generating a significant portion of our revenues from licensing and royalties or arrangements with contract manufacturers, we may also directly produce and sell materials or components used in the production of our speakers. There can be no assurance that we can be successful in implementing our strategies or commercializing our technologies. Our Technologies Background - ---------- We acquired the basic concepts of HyperSonic Sound technology from Elwood G. Norris, a director and Chief Technology Officer, in 1992. During fiscal 1996 and 1997, we devoted a significant portion of our research and development activities to HyperSonic sound technology proving new concepts. In July 1996, we produced a laboratory proof-of-concept demonstration capable of producing sound in the air using ultrasonics. In October 1996, we produced a second-generation portable demonstration system with improved electronics. In September 1997, we produced a portable stereo demonstration system. During fiscal 1998 we focused research and development on our Stratified Field technology. During fiscal 1999 we innovated new modulation electronics to reduce distortion and focused development and testing of our own ultrasonic emitter design that we believe can be commercialized. We also significantly expanded our portfolio of patent applications. In November 1999 we announced an initial patent on our new HyperSonic Sound emitter. 6 In late 1997 we invented basic Stratified Field concepts and demonstrated the technology in January 1999. During fiscal 1999 we evolved several designs and significantly expanded our patent portfolio. Recently we have completed sample speakers and finalized the manufacturing processes. Stratified Field offers high quality sound quality compared to its cost and size. We believe Stratified Field has advantages for OEMs for consumer applications and have commenced marketing the technology to prospective customers. Stratified Field Technology - --------------------------- Several designs of direct radiating speakers are currently associated with thinner or flat products. These include electrostatic speakers, planar magnetic speakers and magnetic actuated panel speakers. An electrostatic loudspeaker generally employs a diaphragm (generally a thin plastic film) which is tensioned between two conductive planes. A charge is applied to the diaphragm and charges are alternated between the two conductive planes to move the diaphragm thus moving air to create audible tones. Based on the size of the device and the speed of the movement of the diaphragm, various sound pressure levels and frequencies are produced. Generally electrostatic speakers are: . low in distortion, high in sound quality . quite large in order to produce low frequencies . difficult to manufacture due to high tolerances, resulting in high cost A planar magnetic loudspeaker combines some aspects of traditional direct radiating speakers and electrostatic designs. In the traditional planar design, conducting wires are imbedded in the large plastic film or sheet, and magnets are employed to create a magnetic field around the sheet to radiate sound similar to an electrostatic speaker. Planar speakers are also generally expensive and difficult to produce. A new flat panel design employs a magnetic actuator or exciter to excite a rigid panel to radiate sound. This method has recently been introduced in multi-media and home audio systems. Stratified Field is both a departure from and a significant improvement on electrostatic designs. While employing plastic film as the primary radiating sound element, our designs are distinct from traditional electrostatic, planar magnetic or magnetic actuator speaker designs. New materials and methods are employed to overcome some of the limitations of electrostatic, planar magnetic and magnetic actuator speaker designs. We expect Stratified Field to compete with conventional loudspeakers due to high sound quality, competitive economics and ease of manufacture in a variety of thin sizes and shapes. We have filed multiple patent applications on our Stratified Field technology. We have produced prototypes of our designs in various sizes to demonstrate commercial applications. We are finalizing specifications, manufacturing methods and technology transfer documentation. We believe Stratified Field is commercially viable technology and we are marketing this technology to prospective OEM licensees. HyperSonic Sound Technology - --------------------------- HyperSonic Sound is partially based on a phenomenon in music known as Tartini tones, which were first noted by Giuseppe Tartini, an 18th century composer. When two sound tones are positioned relatively close together and are sufficient in volume, then two new tones appear, one is the sum of the original tones and one is the difference. In 1856, H. von Helmholtz, a German physiologist and physicist, published the results of his combination tone experiments proving the effect resulted from the non-linearity of air. Although others have experimented with these principles in the past (the general field of experimentation being described as parametric speakers), we believe we have created novel and proprietary methods to efficiently use these concepts to produce sufficient sound volume and quality capable of being commercially exploited. Our HyperSonic Sound technology and processes are the subject of three issued patents and multiple pending patents. HyperSonic Sound employs a method where ultrasonic frequencies are created electronically using proprietary techniques to carry intelligence (e.g. music, voice), and these ultrasonic frequencies are then emitted into the air using an ultrasonic emitter. Since the audible sound is created in the air, sound does not appear on the surface of the ultrasonic emitter (a significant departure from a loudspeaker) but is actually created within and throughout the beam of ultrasonic energy being emitted. Accordingly, if the beam is directed towards a wall, the sound emanates from the surface of the wall, and if the beam is directed to a person, the sound emanates at the person. This directionality allows sound to be manipulated in space or diffused from a surface in a wide variety of ways to produce desired effects. The 7 sound also does not dissipate at the same rate over distance as it does with traditional speakers. This unique feature provides greater volume at selected distant points with less energy. Our technology uses ultrasonic emitters (transducers which convert electrical energy to high frequency acoustical energy). Such ultrasonic devices are not designed to produce frequencies in the audible range. However, we have developed the ability to use such devices (in lieu of loudspeakers) to emit a custom- generated ultrasonic wave with the proper difference frequency characteristics to produce audible sound in the air. And we have developed new proprietary emitter designs specific to our application. We have recently innovated a new ultrasonic emitter design that can be configured in a variety of shapes and sizes that produces the desired effects for commercial applications. We have also innovated new electronic circuits minimizing distortion and improving efficiency. We believe these recent innovations provide the foundation for commercialization of HyperSonic Sound. Other Sound Technologies - ------------------------ During fiscal 1999 we improved a new woofer design previously invented by our Vice President of Engineering, James Croft. During the year we developed initial prototypes and filed for patent protection on our Magnified Force Woofer ("MFW") technology. This technology uses a proprietary electro-acoustical system to magnify the force of the woofer transducer to provide greater acoustical output for a given power input and a given size. We believe that if this technology can be commercialized it offers improved performance/cost for many types of woofer applications including miniature multimedia, high output car stereo, home theater and professional sound systems. We are currently developing and testing new prototypes of our design. There is no assurance we can produce commercial technology. In June 1998 we acquired certain rights to a patented method of producing powerful ultrasonic frequencies which we are targeting primarily for government and military applications. Portable GPS Technology - ----------------------- In late 1994, we innovated a proprietary method of tracking persons and objects utilizing Global Positioning System (GPS) technology. We developed a GPS design as a simple solution to (1) finding another person or object or (2) finding a known location. The system employs GPS technology but doesn't require complicated longitude/latitude readouts, mapping software or recording and storing of previous locations and movements as used in most portable GPS devices. We produced a proof-of-concept demonstration system utilizing GPS technology. We own two U.S. patents on our GPS designs. There can be no assurance the patents will provide meaningful protection of our GPS technology or that such patents will be commercially exploitable. We have postponed further development on our GPS technology due to the significant competition and rapidly changing nature of the GPS equipment market. We believe that certain features of our GPS technology may be licensable to the GPS industry; however, no resources are being devoted to developing or marketing this technology. EPD Technology - -------------- We have been awarded one U.S. patent regarding our Engine Plasma Displacement (EPD) technology, a new method and system for reducing noise in jet engines. This technology, invented by Mr. Norris, relates to canceling acoustic waves produced by a jet engine. Mr. Norris has previously performed rudimentary experiments on this technology; however, we have not yet developed a proof-of- concept device. There can be no assurance that our concepts will function as theorized or that any practical product or technology will result from the concepts. In addition, we have performed only limited competitive research and there can be no assurance that the concepts innovated by us are functionally better than existing and proposed methods for jet engine noise reduction. Our strategy is to develop a proof-of-concept demonstration and seek a collaborative arrangement to further develop this technology. Management has not developed a timetable for this project, nor has it identified personnel for further development. Although management believes there is a significant market for an improved system for jet engine noise reduction, there can be no assurance when or if the EPD technology can be exploited. Markets and Licensing Stratified Field Markets - ------------------------ We have targeted four initial fields of use, which include consumer home audio, computer multimedia, high-end televisions, and professional audio systems. 8 We believe the market for computer sound, primarily multimedia applications, is growing rapidly. We also believe there is a growing demand for improved sound in notebook and other small computers and a growing aftermarket for computer speakers. While estimates of this growth differ widely among sources, this market segment offers opportunity to our Stratified Field technology. Flat panel computer monitors are expected to be an increasingly important category growing from less than 1 million units and $1 billion in worldwide factory sales projected for 1998 to over $19 billion in 2002 according to Stanford Resources, Inc. We believe limitations in size, sound quality and cost are critical factors in the computer sound market. We are targeting our non- magnetic, flat and thin designs to offer size, cost and quality advantages to OEMs and consumers in this rapidly growing market. We believe Stratified Field has important attributes for the emerging flat panel monitor market to provide high quality sound in a thin format. High-end televisions and home theater systems are growing segments of the consumer electronics market. Home theater audio systems include component and rack audio systems for the home as well as specifically targeted home theater systems. We intend to focus initially on manufacturers in the mid to high-end range of these segments. Home theater and large screen televisions are expected to experience continued growth from the introduction of the high-capacity DVD (digital versatile disc). According to CEMA, U.S. factory sales of televisions 25" and higher were $4.3 billion in 1997. Home theater speakers and speaker packages had U.S. factory sales of $246 million in the first half of 1998 according to CEMA. We believe the market for professional audio systems are also growing. Professional audio systems include systems used by studios and other professionals in the creation or production of audio and video material. The market for professional equipment includes stage speakers, sound modules, synthesizers, digital pianos and signal processing equipment among others. Cinemas, jukebox systems and karaoke systems are also demanding increasingly high quality sound reproduction. Our Stratified Field technology offers the home audio/video and professional markets improved full-spectrum sound source with less distortion. If our Magnified Force Woofer technology can be commercialized it would be targeted for similar customers. HyperSonic Sound Markets - ------------------------ We have focused HyperSonic Sound marketing efforts primarily towards military and governmental customers. With the recent development of new emitters, we believe our technology may have applications in consumer and commercial markets including military applications, professional audio, public address, headphones, cinema/theater, and outdoor sound systems. Licensing and Contracts - ----------------------- We seek to execute our licensing strategy through our marketing and executive personnel and through a business development and representation agreement with Teksel Co., Ltd. in Japan. In June 1998, we executed our first license agreement on Stratified Field technology with Authentic of Japan. We received an initial $50,000 non- refundable payment. This agreement is exclusive in a narrow market segment and for a limited customer set. Because the implementation schedule, specified in the license agreement, has been subject to significant delays, we are working with Authentic to modify the agreement to reflect changes in scope, royalties and other terms. There can be no assurance this relationships will produce any future revenues. In August 1998, we obtained an initial military contract for $20,000 from the U.S. Army Space and Missile Command to evaluate an application of the HSS technology. The project was completed in January 1999. In May 1999, the Company obtained a contract from the University of Mississippi ("NCPA") for $46,322 to provide NCPA with three to six HSS(TM) sound sources for testing. As of September 30, 1999 the project has generated approximately $15,500 in service revenues. The project was completed on November 29, 1999. In September 1999, we obtained a $44,773 contract from General Dynamics to develop a HyperSonic Sound Engineering Model. The project is expected to be completed in January 2000. We are seeking additional governmental and military contracts related to this technology. In addition to seeking OEMs to sell Stratified Field speakers, we are seeking to develop supply agreements with contract manufacturers capable of supplying our speakers to OEM customer specifications and produce HyperSonic 9 Sound electronics and emitters. Existing product designs may be retrofitted for Stratified Field speakers. Stratified Field offers benefits in new OEM product designs. Many OEMs source speaker products from outside vendors rather than manufacture such components. Accordingly, our strategy is to develop a supply arrangement for these OEM customers that do not wish to manufacture. We believe there are a large number of contract manufacturers with facilities and capabilities to manufacture Stratified Field speakers and assemble HyperSonic Sound electronics and emitters. We have obtained oral indications of interest from two prospective manufacturers but have no agreements related to such manufacture. Our HyperSonic Sound technology has not previously been commercialized due to delays in developing acceptable emitters. We previously entered into a number of non-binding working agreements with prospects to explore the technology. These agreements became inactive due to our delays in commercializing the technology. Although we believe we have innovated a commercially viable emitter design, there can be no assurance that commercially viable HyperSonic Sound systems can be completed due to the inherent risks of new technology development, refinement, limitations on financing, competition, obsolescence, loss of key technical personnel, customer acceptance and other factors beyond our control. Consumer Product Sales To date substantially all of our revenues have been derived from portable consumer products. We currently offer a total of ten sourced portable consumer products (including miniature FM, AM and solar radios) targeted for niche markets at retail prices ranging from $3.50 to $51.99. Sourcing is from three manufacturers on both an exclusive and nonexclusive basis and for different market territories on a product by product basis. Our market focus is in North America. We inventory finished goods and also offer direct factory shipment to certain customers. One of our products is a patented mini-headphone radio design (HeadPhone) introduced in January 1999. Our HeadPhone is smaller than similar headphone radio products currently on the market and offers additional features. The retail price range is $39.99 and up. A foreign contract manufacturer manufactures this product for us. Our management continually seeks additional products and accessories developed by others for distribution. There can be no assurance we can obtain rights to manufacture and/or distribute any future products. Selling and Marketing One sales and marketing officer and senior executive personnel direct our sound technology marketing. We have employed one agent, Teksel Co., Ltd. in Japan. Our marketing activities are directed at promoting our technologies through industry press, at industry trade shows and related marketing activities. Our sound technology sales activities are targeted at specific prospective OEMs. Our marketing activities have resulted in a number of awards and press articles. In May 1997, the inventor of the HSS technology, Mr. Norris, was awarded the 1997 Discover Magazine Award for Technical Innovation in the sound category for our HyperSonic sound technology. Winners in a total of eight categories were selected from over 4,000 entries. The annual awards are designed to recognize and promote new technological innovations, and an expert panel of judges selected the winners. Winners were also featured in the July issue of Discovery magazine. In November 1997, HSS technology won a Popular Science 1997 "Best of What's New Award" from among thousands of new products. These awards and recognition have provided marketing exposure for the HSS technology. HSS technology has also been featured in over 30 journal articles providing additional marketing exposure. We have two full-time marketing personnel assigned to consumer electronic product marketing and sales activities. We had 39 independent representative agencies in the U.S. and Canada at November 30, 1999. We focus most of our consumer electronic product marketing on traditional retail outlets and catalog distributors. We employ cooperative marketing and advertising arrangements with our product customers from time to time. Customers For the fiscal year ended September 30, 1999, sales to two customers accounted for 33% of product sales with Oshman's Sporting Goods and Big 5accounting for approximately 20% and 13% of sales, respectively, with no other single customer accounting for more than 10% of product sales. 10 We expect that we will continue to rely on a number of large individual customers for future revenues and the loss of any customer could have a material adverse effect on our financial condition, results of operations and cash flows. Competition Our technologies and products compete with those of other companies. Many of our present and potential future competitors have, or may have, substantially greater resources to devote to further technological and new product developments. We believe we will compete primarily on the originality of our concepts, the uniqueness and quality of our technology and designs, the ease and cost of manufacturing and implementing our technologies, the ability to meet OEMs' needs to differentiate their products, the strength of our intellectual property and the strength of future licensee and contract supply arrangements. There can be no assurance that based on these factors we can be competitive with existing or future products, technologies or services of our competitors. We are not aware of any other sound reproduction system that has successfully employed HyperSonic Sound technology concepts similar and to the degree developed by us. Although others have attempted to use the combination tone concept to produce sound, to our knowledge, none have progressed to our stage of development nor been able to produce sufficient sound volume and quality to make a commercially viable system. We also believe our Stratified Field designs are novel with distinct market appealing attributes compared to existing and competing flat panel speaker designs. One of the distinguishing features of our Stratified Field designs is their thin, flat panel form factor. Our designs may also be easily and economically shaped to create curves or other shapes. Other companies that are focusing marketing efforts in the flat panel market segment include, but are not limited to (i) high-end electrostatic flat panel manufacturers such as Martin Logan and others, (ii) NXT Plc and their licensees employing the NXT flat panel technology which uses a magnetic actuator to produce vibrations over a rigid panel, (iii) NCT Group, Inc. and their Gekko line of flat panel speakers using a comparable actuated panel, and (iv) Sonigistix's Monsoon multimedia speaker using a planar magnetic design. There are continuing attempts by a large number of competitors to innovate new methods of sound reproduction to overcome limitations of traditional loudspeakers. There can be no assurance that alternate technologies and systems have not been developed, or that such systems may currently be in development, or will be developed by others in the future, that would be directly competitive with our sound technology. Our sound reproduction methods will also compete with traditional loudspeakers. Many international manufacturers provide loudspeakers such as Sony, AIWA, Phillips, Samsung, Mitsubishi, Toshiba, Sanyo, Sharp, JVC and others. There are also specialty audio component manufacturers such as Marantz, NAD and others. We will also compete with branded loudspeaker manufacturers including Bose Corporation, JBL, Harman International (Infinity and Epicure), International Jensen (Acoustic Research and Advent), Polk Audio, Boston Acoustics, Klipsch, Yamaha and a host of others. Such competitors have substantially greater financial, technical and marketing resources and have proven technology and products, marketing data, customer relationships and distribution channels. There can be no assurance that our SFT and HSS technology, if implemented commercially, will be competitive in the entrenched loudspeaker market with these or other customers. We believe our success will be dependent upon creating relationships with OEMs by providing them the ability to differentiate their products with our sound technology attributes. The consumer product and consumer electronic marketplaces are extremely competitive with a large number of suppliers. Most of our competitors have greater financial, manufacturing and marketing resources and can command more retail and consumer exposure. Barriers to entry by new competitors are not significant and new competitors in consumer products and consumer electronics are continually commencing operations. The technology of electronics and electronic components, features and capabilities is also rapidly changing, in many cases rapidly obsoleting existing products and technologies. We seek to market unique products to large market segments. With respect to our consumer product sales, which accounts for substantially all of our revenues, we are dependent on contract suppliers for finished goods. We source products developed by others from a variety of suppliers. The loss of a supply of a high selling product could have a material adverse effect on our operations. Disruption of supply could cause additional costs and delays and could also have an adverse impact on our operations. The manufacture of 11 consumer electronic products is dependent upon the availability of electronic components. We believe there are secondary suppliers of components and subassemblies such that the products we distribute are not reliant on one supplier, although delays could result should there be a change in suppliers of longer lead-time components or subassemblies. Any significant delays in obtaining components from existing or secondary suppliers through supplier changes or from component shortages, which are common to the electronics industry, could have a material adverse effect on our financial condition and results of operations. Government Regulation Certain of our electronic products are subject to various regulations and are required to meet the specifications of agencies such as the Federal Communications Commission (the "FCC"). We believe we are in substantial compliance with all applicable regulations, and that we have all material governmental permits, licenses, qualifications and approvals required for our operation. We do not believe our HyperSonic Sound technology ultrasonic emitters, which emit ultrasonic waves into the air rather than electromagnetic waves, are out of compliance with existing governmental regulations. However there can be no assurance that interpretations of existing regulations or imposition of new regulations could not have an adverse impact on the commercialization of our technologies. We do not believe we are materially affected, nor do we expect to be materially affected, by the costs and effects of compliance with environmental laws. Intellectual Property Rights and Proprietary Information We operate in an industry where innovations, investment in new ideas and protection of resulting intellectual property rights are important to success. We rely on a variety of intellectual property protections for our products and technologies, including patent, copyright, trademark and trade secret laws, and contractual obligations, and pursue a policy of vigorously enforcing such rights. We own four U.S. patents and twenty U.S. patents (and additional foreign applications) pending on our sound technologies. We are preparing and intend to file other sound technology patent applications. We own two U.S. patents on consumer products and two U.S. patents on our GPS technology. We have one patent pending on our EPD technology. We have purchased one patent on transducer technology primarily targeted for government applications. We have an ongoing policy of filing patent applications to seek protection for novel features of our products and technologies. Prior to the filing and granting of patents, our policy is to disclose key features to patent counsel and maintain these features as trade secrets prior to product introduction. There can be no assurance that any additional patents on our products or technology will be granted. In addition to such factors as innovation, technological expertise and experienced personnel, we believe that a strong patent position will be important to compete effectively through licensing in the sound reproduction industry. We are investing significant management, legal and financial resources toward our technology patents. The electronics industry is characterized by frequent litigation regarding patent and other intellectual property rights. Others, including academic institutions and competitors, hold numerous patents in electronics and sound reproduction. Although we are not aware of any existing patents that would inhibit our ability to license our sound technology; there can be no assurance that others will not assert claims in the future. There can be no assurance that such claims, with or without merit, would not have a material adverse effect on our financial condition or results of operations. The validity of our existing patents has not been adjudicated by any court. Competitors may bring legal action to challenge the validity of our existing or future patents or may attempt to circumvent the protection provided by such patents. There can be no assurance that either of such activities by competitors would not be successful. The failure to obtain patent protection or the loss of patent protection on our technologies or the circumvention of our patents, by competitors could have a material adverse effect on our ability to compete successfully. We generally take advantage of the Patent Convention Treaty procedures for patent protection in foreign countries. This procedure is more cost efficient, but results in a delay in the application and issuance of foreign patents; however, any resulting foreign patents, if and when issued, enjoy the same priority date as U.S. counterparts. 12 We also file for tradename and trademark protection when appropriate. We are the owner of federally registered trademarks on HYPERSONIC(R), HYPERCOUSTIC(R) and HSS(R). Trademark applications have been filed for STRATIFIED FIELD TECHNOLOGY, SFT and PICOSONIC. There can be no assurance any degree of protection will be granted, or that if granted, that tradenames or trademarks could be successfully maintained, defended or protected. Our policy is to enter into nondisclosure agreements with each employee and consultant or third party to whom any of our proprietary information is disclosed. These agreements prohibit the disclosure of confidential information to others, both during and subsequent to employment or the duration of the working relationship. There can be no assurance, however, that these agreements will not be breached, that we will have adequate remedies for any breach or that our trade secrets will not otherwise become known or be independently developed by competitors. Research and Development The sound reproduction market is subject to rapid changes in technology and designs with frequent improvements and new product introductions. We believe our future success will depend on our ability to enhance and improve existing technologies and to introduce new technologies on a competitive basis. Accordingly, we have in the past, and are expected in the future, to engage in significant research and development activities. There can be no assurance, however, that we will be able to commercialize our current or future technologies. For the fiscal years ended September 30, 1999, 1998 and 1997 we invested $1,099,848, $991,238 and $566,288 respectively, on research and development. Future levels of research and development expenditures will vary depending on the timing of further new product development and the availability of funds to carry on additional research and development on currently owned technologies or in other areas. Employees At December 27, 1999, in addition to our three executive officer employees, we employed 18 full-time persons. Of such employees, eight are in research, development and technology transfer, one in shipping and distribution, five in general and administrative and four in marketing, sales and licensing. We also lease technical personnel from time to time on an as needed basis and use outside consultants for various services. We have not experienced any work stoppages and are not a party to a collective bargaining agreement. Item 2. Properties. On July 11, 1997, we entered into a three-year lease for property located at 13114 Evening Creek Drive South, San Diego, California. To meet the credit requirements of the landlord, both American Technology and e.Digital Corporation, an affiliated company, entered into a joint lease agreement for approximately 12,925 square feet with aggregate monthly payments of $15,122 inclusive of utilities and costs. We occupy approximately 7,500 square feet of the jointly leased office space with our share of monthly payments approximate $8,300. We believe this facility is adequate to meet our needs for the next twelve months given current plans. However should we expand our operations, we may be required to obtain additional space or alternative space. We believe there is adequate availability of office space in the general vicinity to meet our future needs. Item 3. Legal Proceedings. We are not a party to any material legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. Market Information 13 Our shares of common stock is traded and quoted on NASDAQ SmallCap Market under the symbol "ATCO". Prior to July 1999 our shares were quoted on the OTC Electronic Bulletin Board. The market for our common stock has often been sporadic and limited. The following table sets forth the high and low bid quotations for our common stock for the fiscal years ended September 30, 1998 and 1999: Bid Quotations High Low -------------- -------- Fiscal Year Ending September 30, 1998 First Quarter $ 6.125 $3.46875 Second Quarter $4.65625 $ 3.375 Third Quarter $11.6875 $ 4.75 Fourth Quarter $ 9.8125 $ 4.375 Fiscal Year Ending September 30, 1999 First Quarter $ 4.375 $ 4.1875 Second Quarter $ 7.25 $ 4.9688 Third Quarter $ 6.1875 $ 5.0625 Fourth Quarter $ 7.625 $ 6.75 The above quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions. We had 1,152 holders of record of our common stock at December 13, 1999 with 11,518,302 shares issued and outstanding. We have never paid a cash dividend on our common stock and do not expect to pay any in the foreseeable future. Item 6. Selected Financial Data The following is a summary of selected financial data of American Technology Corporation as of and for the five most recent fiscal periods ended. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Financial Statements and the Notes thereto appearing elsewhere in this document.
For the fiscal years ended September 30, 1999 1998 1997 1996 1995 ------------ ------------ ------------ ----------- ----------- Statement of Operations: Net revenues $ 823,753 $ 244,758 $ 967,408 $ 933,643 $1,801,562 Gross profit (loss) 204,088 (162,365) 157,971 136,489 431,187 Net loss (3,041,634) (4,593,713) (2,144,363) (560,448) (368,201) Net loss available to common stockholders $(3,809,486) $(4,593,713) $(2,762,009) $ (560,448) $ (368,201) Net loss per share- basic and diluted $ (0.33) $ (0.42) $ (0.30) $ (0.08) $ (0.05) Weighted average number of shares-basic and diluted 11,408,264 10,889,654 9,268,128 7,464,588 7,291,228 As of September 30, 1999 1998 1997 1996 1995 ------------ ------------ ------------ ----------- ----------- Balance Sheet: Working capital $ 976,475 $ 985,888 $ 3,719,807 $1,047,787 $ 564,356 Total assets 2,161,036 1,683,745 4,251,878 1,595,462 1,121,815 Long-term obligations - - 386,651 - 144,584 Total stockholders' equity 1,597,192 1,402,912 3,692,922 1,227,472 583,405
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 14 Overview We are focused on completing the development and commercializing our proprietary Stratified Field Technology and HyperSonic Sound technologies. Our Stratified Field technology features a thin form factor, in a variety of shapes and sizes, producing high fidelity, low distortion sound reproduction. Our HyperSonic Sound technology employs a laser-like beam to project sound to any listening environment. Our strategy is to commercialize these technologies through OEMs by entering into licensing or contract supply agreements. There can be no assurance we will be successful in commercially exploiting our sound technologies. Other than an early license on our Stratified Field technology with Authentic in Japan, we have only recently completed development of our latest designs which we believe will meet OEM requirements and can be readily transferred to production. We have also only recently obtained our first contract on HyperSonic Sound technology and are commencing marketing of this technology. There can be no assurance that commercially viable systems can be produced by customer in the future due to the inherent risks of new technology development and transfer, limitations on financing, competition, obsolescence, loss of key technical personnel and other factors beyond our control. We have not generated any significant revenues from our sound technologies to date. Our various development projects are high risk in nature. Unanticipated technical obstacles can arise at any time and result in lengthy and costly delays or result in determination that further development is unfeasible. There can be no assurance of timely completion of commercially viable sound products by customers or that, if available, such products will perform on a cost- effective basis, or that, they will achieve market acceptance. Our future is largely dependent upon the success of our sound technologies, other technologies or the development of new technologies. We invest significant funds in research and development and on patent applications related to our proprietary technologies. There can be no assurance our technologies will achieve market acceptance sufficient to sustain operations or achieve future profits. See "Business Risks" below. To date substantially all of our revenues have been derived from the sale of portable consumer products. We have sourced a total of ten products (including FM and solar radios) targeted for niche markets at retail prices ranging from $3.50 to $51.99. Sourcing is on both an exclusive and nonexclusive basis and for different market territories on a product by product basis. Our market focus is in North America. We inventory finished goods as well as provide direct factory shipment to certain customers. There can be no assurance that our line of products can be marketed successfully. Demand for our portable consumer products is subject to significant month to month variability resulting from seasonal demand fluctuations and the limited number of customers and market penetration achieved by us to date. Further, sales have been concentrated with a few customers. We are also reliant on outside manufacturers to supply our products and there can be no assurance of future supply. The markets for our products and future products and technologies are subject to rapidly changing customer tastes and a high level of competition. Demographic trends in society, marketing and advertising expenditures, and product positioning in retail outlets, technological developments, seasonal variations and general economic conditions influence demand for our products. Because these factors can change rapidly, customer demand can also shift quickly. We may not be able to respond to changes in customer demand because of the time required to change or introduce products, production limitations and because of our limited financial resources. Results of Operations (Fiscal Years ended September 30, 1999, 1998 and 1997) Total revenues for the fiscal year ended September 30, 1999 ("fiscal 1999") were $823,753, a 235% increase from revenues of $244,758 for fiscal 1998. Revenues for fiscal 1997 were $967,408. Substantially all revenues for the three fiscal years were from consumer product sales. The increase in product sales during fiscal 1999 reflects new product sales of the solar powered radio's and the continuous sales growth of the small FM sounds radio to new customers. The decrease of $772,650 or 80% from fiscal 1997 to fiscal 1998 reflected the phasing out and termination of an older ear radio line of consumer products. Fiscal 1999 product sales consisted of a new line of sourced products manufactured by others only recently introduced by us. There can be no assurance that the new product line can be successfully marketed in any significant volume or for any term. Consumer product sales are subject to significant month to month and quarter to quarter variability based on the timing of orders, new accounts, lost accounts and other factors. Our sales are further affected by a variety of factors including seasonal requirements of customers. 15 Contract and license revenues were $36,345 in fiscal 1999 compared to $50,000 for fiscal 1998. Fiscal 1999 contract and license revenues consisted of amounts earned on development contracts for customers. Fiscal 1998 revenues were received from one customer as a non-refundable initial license payment. There were no comparable revenues in fiscal 1997. There can be no assurance when or if we will realize any future payments under this or any other license agreement. Our policy is to recognize one-time license fees upon achievement of contractual milestones and the collection of the resulting receivable is deemed probable. Contract fees are recorded as services are performed. Cost of sales for the fiscal year ended September 30, 1999 were $619,665 resulting in a gross profit of $204,088 or 25%. This compares to a gross loss of $162,365 for fiscal 1998 and a gross margin of $157,971 for fiscal 1997. The fiscal 1999 gross profit is the result of the new product line. The prior year's gross loss resulted from the phasing out of our previous ear radio product line and included special closeout pricing to reduce inventory levels. Fiscal 1997 reflected gross margins from products sold prior to phasing out the line. Gross profit percentage is highly dependent on sales prices, volumes, purchasing costs and overhead allocations. Overall gross margins will also be impacted by future contract and licensing revenues, if any. Selling, general and administrative expenses reflect a decrease from fiscal year 1998 from $2,222,522 to $2,078,558 for fiscal 1999. They totaled $1,338,468 for fiscal 1997. The $143,964 decrease in fiscal 1999 from fiscal 1998 resulted primarily from a reduction in legal expenditures of $47,394 and a reduction in travel expenditures and related costs of $77,280. The $884,054 increase from fiscal 1997 to fiscal 1998 resulted primarily from the hiring of senior executive personnel to develop marketing for our sound technologies. We may expend additional resources on marketing our sound technologies in the future quarters, which may increase selling, general and administrative expenses in future periods. In fiscal 1999 we recorded in selling, general and administrative is $137,137 of services paid through the issuance of 25,018 shares of common stock. Research and development costs for the year ended September 30, 1999 were $1,099,848 compared to $991,238 for the prior year. Research and development costs were $566,288 for fiscal 1997. The $108,610 increase in fiscal 1999 resulted primarily from an increase in sound technology development activities and related personnel and component costs. The $424,950 increase in fiscal 1998 over fiscal 1997 resulted from a substantial increase in sound technology development and included increases in personnel costs as well as component and equipment costs. Research and development costs vary quarter by quarter due to the timing of projects, the availability of funds for research and development and the timing and extent of use of outside consulting, design and development firms. We expect fiscal 2000 research and development costs to remain at comparable levels to fiscal 1999 or at higher levels should we increase staffing or expand the use of outside design and consultants. We recorded non-cash compensation expense of $131,000 for the year ended September 30, 1999 compared to $438,000 for fiscal 1998 and $278,100 in fiscal 1997. Non-cash compensation expense for the fiscal 1999 included the $70,000 value attributable to stock options granted to consultants on 30,000 shares of common stock. Fiscal 1998's total of $438,000 included $122,000 for warrants issued for services and $316,000 for the value of options granted for services. Fiscal 1997's total of $278,100 included $33,300 for warrants issued for services and $244,800 for the value of options granted. As a result of the above factors, we experienced a loss from operations of $3,105,318 during the year ended September 30, 1999, compared to a loss from operations of $3,814,125 for the year ended September 30, 1998 and a loss from operations of $2,024,885 for the year ended September 30, 1997. The net loss for the year ended September 30, 1999 was $3,041,634 a decrease from the $4,593,713 reported for the prior year which was an increase from the $2,144,363 reported for fiscal 1997. We expect to incur continued operating losses until we are able to commercialize our technologies and produce revenues sufficient to support operating costs. There can be no assurance we will be successful in such efforts. During fiscal 1998, we incurred $926,555 of non-cash interest expense including $920,000 computed on the cashless exercise of previously issued warrants. In fiscal 1997 we incurred $146,331 of non-cash interest. Net non-operating income aggregated $63,684 for fiscal 1999 as compared to $779,588 in operating expense for fiscal 1998 and $119,478 of operating expense in fiscal 1997. We incurred a net loss of $3,041,634 for fiscal 1999, compared to a net loss of $4,593,713 for fiscal 1998 and a net loss of $2,144,363 in fiscal 1997. We have federal net loss carryforwards of approximately $10,500,000 for federal tax 16 purposes expiring through 2019. The amount and timing of the utilization of our net loss carryforwards may be limited under Section 382 of the Internal Revenue Code. A valuation allowance has been recorded to offset the related net deferred tax asset as management is unable to determine that it is more likely than not that the deferred tax asset will be realized. The net loss available to common stockholders for fiscal 1999 was increased in computing loss per share of common stock by an imputed deemed dividend on warrants issued with Series B Preferred Stock in the amount of $595,000, accretion on the stock at the stated rate of $112,852 and a $60,000 imputed deemed dividend from a discount provision or $0.06 per share in the aggregate. The imputed deemed dividend is not a contractual obligations to pay such imputed dividends in cash or otherwise. There were no comparable adjustments in fiscal 1998. A $617,646 adjustment in fiscal 1997 resulted from Series A preferred stock. Future operations are subject to significant variability as a result of licensing activities, product sales and margins, timing of new product offerings, the success and timing of new technology exploitation, decisions regarding future research and development and variability in other expenditures. Liquidity and Capital Resources Since we recommenced operations in January 1992, we have had significant negative cash flow from operating activities. Our negative cash flow from operating activities was $2,913,161 for the fiscal year ended September 30, 1999, $2,464,375 and for the fiscal year ended September 30, 1998 and $1,572,525 for fiscal year 1997. During fiscal 1999, the net loss of $3,041,634 included non-cash expenses of $398,397 resulting in an adjusted net cash loss of $2,643,237. In addition to this adjusted net cash loss, cash was used in operating activities through an $86,795 increase in accounts receivable, a $200,029 increase in inventories and a $146,111 increase in prepaid expenses and other. Operating cash in fiscal 1999 was provided by a $131,712 increase in accounts payable and a $31,299 increase in accrued liabilities. At September 30, 1999 we had approximately 83 days product sales in accounts receivable as compared to 130 days at September 30, 1998. The decrease is due primarily to the larger sales volume and better terms with customers in the current year. Large retail chains often require 90-120 day terms on sales. Our receivables can vary dramatically due to overall sales volumes and due to quarterly and seasonal variations in sales and timing of shipments to and receipts from large customers. For the year ended September 30, 1999, we used approximately $69,457 for the purchase of laboratory equipment and made a $261,495 investment in patents. We anticipate a continued investment in patents in fiscal 2000. Dollar amounts to be invested on these patents are not currently estimable by management. At September 30, 1999, ATC had working capital of $976,475. Included in working capital is the unrealized holding gain in the shares we hold in e.Digital Corporation. At September 30, 1999 we owned 225,300 shares of e.Digital with a market value of $299,649. This investment is carried on the balance sheet as a current asset at market value as an available for sale security We have financed our operations primarily through the sale of common equity, exercise of stock options, issuance's of convertible notes, proceeds from the sale of shares of e.Digital and margins from consumer product sales. Other than cash of $590,236 at September 30, 1999, and the e.Digital shares, we have no other material unused sources of liquidity at this time. We expect to incur additional operating losses as a result of continued product sale operations and as a result of expenditures for research and development and marketing costs for our sound and other products and technologies. The timing and amounts of these expenditures and the extent of our operating losses will depend on many factors, some of which are beyond our control. We anticipate that the commercialization of our technologies may require increased operating costs, however the amounts are not currently estimable by management. Based on the above factors, including the current rate of expenditures, anticipated additional expenditures and uncertainty as to future expenditures, we do not presently have sufficient funds for the next twelve months and will require funds from the sale or licensing of products or technology or from other sources or will be required to scale back or curtail certain activities. Management estimates the minimum additional funding required for the next twelve months at approximately $2,000,000. We have been successful in obtaining equity financing in the past from existing shareholders and others based on the strength and appeal of our technologies. Management is reviewing financing 17 proposals from prior investors and others and management is confident that the required additional funding can be obtained. In addition to the sale of equity securities, possible other sources for additional funding include the sale or licensing of certain of our technologies. Margins from product sales and revenues from licensing and other operations may also contribute financial resources during the next twelve months. However any delays in funding or the lack of sufficient funds could force management to curtail or scale back operations and would therefore have an adverse effect on our business. New Accounting Pronouncements The Financial Accounting Standards Board has issued a new pronouncement for future implementation as discussed in our financial statements (see page F-10). As discussed in the notes to the financial statements, the implementation of these new pronouncements is not expected to have a material effect on our financial statements. Year 2000 Readiness Disclosure We are aware of the issues associated with the programming code in existing computer systems as the Year 2000 approaches. The "Year 2000" problem is concerned with whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Year 2000 problem is pervasive and complex as the computer operation of virtually every company will be affected in some way which could lead to business disruptions in the U.S. and internationally. We have identified the following areas, which could be impacted by the Year 2000 issue. They are: our products; internally used systems and software; products or services provided by key third parties; and the inability of licensees and prospective licensees or customers to process business transactions relating to licensing revenue and product sales. During the first calendar quarter ended March 31, 1999 we completed an initial review of our internal systems. The review consisted of an evaluation of significant internal hardware systems and major software application programs, which are primarily, packaged third party "off-the-shelf" software programs. As a result of this review we identified certain systems which required further review and upgrades to be Year 2000 ready. These upgrades have been completed. We have also installed a new business software application which we believe is in full compliance with respect to Year 2000 issues. Our licensable technology and consumer products do not have any material Year 2000 problems. We continue to assess the compliance of our major customers, suppliers and vendors. Management believes that third-party relationships upon which we rely represent the greatest risk with respect to the Year 2000 issue, because we cannot guarantee that third parties will be able to adequately assess and address their Year 2000 compliance issues in a timely manner. As a consequence, we can give no assurances that issues related to Year 2000 will not have a material adverse effect on future results of operations or financial condition. During the month of June 1999, we implemented our Year 2000 plan. In July 1999, we hired a full-time Information Systems director to address all Year 2000 issues. We capitalized $19,188 for new business software and we expense maintenance and modification costs as incurred. Should we not be completely successful in mitigating internal and external Year 2000 risks, the likely worst case scenario could be a system failure causing disruptions of operations, including, among other things, a temporary inability to process transactions, develop or distribute products, send invoices or engage in similar normal business activities at our offices or with our vendors and suppliers. We have no current plans to arrange for alternative sources of supply or to stockpile inventory in preparation for the Year 2000. We do not have any other contingency plans with respect to potential Year 2000 failures of our suppliers or customers and at the present time, after evaluation, do not intend to develop one. If these failures would occur, depending upon their duration and severity, they could have a material adverse effect on our business, results of operations and financial condition. The information set forth above under this caption "Year 2000 Readiness Disclosure" relates to our efforts to address the Year 2000 concerns regarding our (a) operations, (b) products and technologies licensed or sold to third parties and (c) major suppliers and customers. Such statements are intended as Year 2000 Statements and Year 2000 Readiness Disclosures and are subject to the "Year 2000 Information Readiness Act." Business Risks 18 This report contains a number of forward-looking statements which reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below and elsewhere in this Annual Report on Form 10- K, that could cause actual results to differ materially from historical results or those anticipated. In this report, the words "anticipates," "believes," "expects," "intends," "future" and similar expressions identify forward-looking statements. Readers are cautioned to consider the specific risk factors described below and not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements, to reflect events or circumstances that may arise after the date hereof. Our Business May Suffer If We Are Not Profitable In The Future - We have - -------------------------------------------------------------- incurred significant operating losses and anticipate continued losses in fiscal 2000. At September 30, 1999 we had an accumulated deficit of $11,805,647. There is no assurance that we will be able to achieve or sustain significant periods of profitability in the future. We may require additional capital in the future to continue our operations. The failure to achieve profitable operations or in the alternative to obtain sufficient capital would have an adverse effect on our financial condition and results of operations. If Our Technology Products Are Not Accepted By The Market, Our Business May - -------------------------------------------------------------------------- Suffer - Our sound technologies continue to be developed, there can be no - ------ assurance that our commercialization efforts will be successful. Our development and commercialization efforts face the inherent risks associated with technology development, limitations on financing, competition, obsolescence, and loss of key technical personnel and other factors. We have not generated significant revenues from our sound technologies to date. The failure to commercialize our technologies and generate revenues sufficient to meet operating costs would have a significant adverse effect on our financial condition and results of operations. Delays in or Lack of Success in Commercializing Our Technologies Could Impair - ----------------------------------------------------------------------------- Our Operations - The development of our sound technologies has taken longer than - -------------- we anticipated. Although we are introducing our technology to customers, commercialization could be subject to additional delays. There can be no assurance that prospective customers will adopt our technologies or if adopted that they will timely introduce end-user products. The introduction of new technology is high risk in nature, where unanticipated technical or market obstacles can arise at any time and result in lengthy and costly delays or result in determination that further commercialization efforts are unfeasible. Should we fail to successfully develop and exploit our technologies our financial condition and results of operations and business prospects would be adversely effected. Our future is largely dependent upon the success of our sound technologies or the development of new technologies. There can be no assurance we can successfully commercialize any of our technologies or that if introduced they will achieve market acceptance sufficient to sustain or achieve profitable operations. Competition and Technological Changes May Adversely Affect Our Business - - ----------------------------------------------------------------------- Technological competition from other and longer established electronic and loudspeaker manufacturers is significant and expected to increase. Most of the companies with which we expect to compete have substantially greater capital resources, research and development staffs, marketing and distribution programs and facilities, and many of them have substantially greater experience in the production and marketing of products. In addition, one or more of our competitors may have developed or may succeed in developing technologies and products that are more effective than any of our, rendering our technology and products obsolete or noncompetitive. There can be no assurance we will remain viable or competitive in the face of competition and technological change. If We Are Unable To Develop Our New Technologies, Our Business May Suffer - The - ------------------------------------------------------------------------- introduction of new technology, such as sound technologies, often faces barriers to commercialization and many risks that cannot currently be identified. Our HyperSonic sound technology employs ultrasonics. Although ultrasonics are employed in a wide variety of medical and industrial applications, there can be no assurance we will not face barriers to introduction due to the use of ultrasonics. Our technology uses relatively small amounts of ultrasonic energy which dissipates rapidly in air. We also employ frequencies above those that may be harmful to pets. Although we believe the frequencies and the amount of energy employed is harmless, there can be no assurance that barriers to commercialization will not develop or that the use of such ultrasonics will not be subject to future regulation or interpretation of existing regulation. 19 If We Are Unable To Develop Relationships With Strategic Partners, Our Business - ------------------------------------------------------------------------------- May Suffer - We cannot guarantee that we will be able to successfully - ---------- collaborate to develop commercial products to exploit our technologies. Our success will depend on our ability to enter into strategic arrangements with new partners on commercially reasonable terms. Our failure to enter into such strategic arrangements with third parties could have a material adverse effect on our financial condition, results of operations, cash flows and business prospects. Any future relationships may require us to share control over development, manufacturing and marketing programs or to relinquish rights to certain versions of our technology. If We Are Unable To Protect Our Intellectual Property, Our Business May Suffer - - ------------------------------------------------------------------------------ We have both issued and pending patents on our sound reproduction technologies and we are considering additional patent applications. There can be no assurance that any patents held by us will not be challenged and invalidated, that patents will issue from any of our pending applications or that any claims allowed from existing or pending patents will be of sufficient scope or strength. There can be no assurance our patents will be issued in all countries where our products can be sold or licensed to provide us meaningful protection or any commercial advantage. Our competitors may also be able to design around our patents. The failure to protect our patents could impair our competitive position and have a material adverse effect on our business. If We Are Unable To Obtain Supply Of Our Electronic Components, Our Business May - -------------------------------------------------------------------------------- Suffer - With respect to our consumer electronic product sales, which has - ------ accounted for substantially all of our revenues, we are dependent on contract suppliers for finished goods. We source products developed by others from a variety of suppliers but generally each product is sole sourced. The loss of a supply of a product could have an adverse effect on operations. Any significant delays in obtaining components from existing or secondary suppliers through supplier changes or from component shortages, which are common to the electronics industry, could have a material adverse effect on our financial condition and results of operations. If We Are Unable To Retain Our Key Personnel Or Are Unable To Attract - ---------------------------------------------------------------------- Additional Personnel, Our Business May Suffer - Our performance is substantially - --------------------------------------------- dependent on the performance of our executive officers and key technical employees. We are dependent on our ability to retain and motivate high quality personnel, especially highly skilled technical personnel. Our future success and growth also depends on our continuing ability to identify, hire, train and retain other highly qualified technical, managerial and sales personnel. Competition for such personnel is intense, there can be no assurance that we will be able to attract, assimilate or retain other highly qualified technical, managerial or sales personnel in the future. The inability to attract and retain the necessary 20 technical, managerial or sales personnel in the future. The inability to attract and retain the necessary technical, managerial or sales personnel could have a material adverse effect upon our business, operating results or financial condition. Our Stock Price Is Volatile And May Continue To Be Volatile In The Future - Our - ------------------------------------------------------------------------- shares of common stock trade on NASDAQ SmallCap Market. Our shares, like that of the securities of other small, growth-oriented companies, have experienced in the past and are expected to experience in the future significant price and volume volatility thereby increasing the risk of ownership to investors. Historically, our shares have experienced low trading volume and high volatility. There can be no assurance that the market price will remain at present levels, and any future changes in market price cannot be predicted as to timing or extent. Past performance of does not guarantee and should not be construed to imply future performance. We expect the volatility to continue in the future due to a variety of factors, including: Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market Risk represents the risk of loss that may impact the financial position, results of operations or cash flows of American Technology due to adverse changes in market prices, including interest rate risk and other relevant market rate or price risks. We do not use derivative financial instruments in our investment portfolio. We are exposed to some market risk through interest rates, related to our investment of current cash and cash equivalents of approximately $0.6 million. The risk is not considered material and we manage such risk by continuing to evaluate the best investment rates available for short-term high quality investments. We have no activities in long-term indebtedness and our other investments are insignificant. At the present time we do not have any significant foreign sales or foreign currency transactions. Item 8. Financial Statements and Supplementary Data The financial statements required by this item begin on page F-1 (immediately following page 25 of this report) with the index to financial statements followed by the financial statements. All financial statement schedules have been omitted because the information is not applicable or is not material or because the information required is included in the financial statements or the notes thereto. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant 21 Information relating to the directors of American Technology Corporation is incorporated herein by reference from the "ELECTION OF DIRECTORS -- Information As To Nominees" and the "ELECTION OF DIRECTORS -- Executive Officers" contained in the American Technology Proxy Statement for our 2000 Annual Meeting of Stockholders (the "2000 Proxy Statement"), which 2000 Proxy Statement is to be filed within 120 days of the end of the fiscal year covered by this Report pursuant to General Instruction G(3) of Form 10-K. Item 11. Executive Compensation. Information relating to executive compensation is incorporated herein by reference from the "ELECTION OF DIRECTORS -- Executive Compensation And Related Matters" section of the 2000 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information relating to the security ownership of certain beneficial owners and management is incorporated herein by reference from the "ELECTION OF DIRECTORS-- Beneficial Ownership Of Company Securities" section of the 2000 Proxy Statement. Item 13. Certain Relationships and Related Transactions. Information relating to related transactions is incorporated herein by reference from the "ELECTION OF DIRECTORS -- Executive Compensation And Related Matters" and "ELECTION OF DIRECTORS -- Related Transactions" sections of the 2000 Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Exhibits - The following is a list and index of Exhibits required by Item -------- 601 of Regulation S-K. Except for those exhibits indicated by an asterisk which are filed herewith, the remaining exhibits listed below are incorporated by reference to the exhibit (of the number indicated) previously filed by us as indicated. Exhibit Index 3. Articles and Bylaws 3.1 Certificate of Incorporation of American Technology Corporation (Delaware) dated March 1, 1992, filed as Exhibit 2.1 to ATC's Form 10-SB effective August 1, 1994 3.1.1 Amendment to Certificate of Incorporation of American Technology Corporation dated March 24, 1997 and filed with Delaware on April 22, 1997. Filed as Exhibit 3.1.1 to ATC's Form 10-QSB for March 31, 1997 3.1.2 Certificate of Designations of Series A Convertible Preferred Stock filed with Delaware on August 15, 1997. Filed as Exhibit 3.1.2 to ATC's Form 8-K dated August 29, 1997. 3.1.3 Corrected Certificate of Designations of Series A Convertible Preferred Stock dated and filed with Delaware on August 25, 1997. Filed as Exhibit 3.1.3 to ATC's Form 8-K dated August 29, 1997. 3.1.4 Corrected Certificate of Designations of Series B Convertible Preferred Stock filed with Delaware on December 23, 1998. Filed as Exhibit 3.1.4 to ATC's Form 10-KSB dated December 29, 1998. 3.2 Bylaws of American Technology Corporation (Delaware) filed as Exhibit 2.3 to ATC's Form 10-SB effective August 1, 1994 4. Instruments Defining the Rights of Holders 4.1 Form of Stock Purchase Warrant exercisable at $5.00 per share until March 1, 2000 granted to sixteen investors for an aggregate of 50,000 common shares filed as Exhibit 4.8 to ATC's Form 8-K dated April 1, 1997 22 4.2 Stock Purchase Warrant issued to Renwick Corporate Finance, Inc. dated as of February 5, 1997 exercisable to purchase 90,000 common shares at $5.00 per share until February 5, 2000 filed as Exhibit 4.9 to ATC's Form 10-QSB for March 31, 1997 4.3 Form of Stock Purchase Warrant exercisable at $7.50 per share until August 1, 2000 granted to eleven investors for an aggregate of 175,000 common shares and filed as Exhibit 4.10 to ATC's Form 8-K dated August 29, 1997 4.4 Stock Purchase Warrant dated June 18, 1998 exercisable at $16.00 per share until June 18, 2000 between ATC and to L.H. Friend, Weinress, Frankson & Presson, Inc. for an aggregate of 25,000 common shares. Filed as Exhibit 4.4 to ATC's Form 10-KSB dated December 29, 1998. 4.5 Stock Purchase Warrant dated May 12, 1998 exercisable at $16.00 per share until May 12, 2003 between ATC and Jonathan A. Berg for an aggregate of 50,000 common shares. Filed as Exhibit 4.5 to ATC's Form 10-KSB dated December 29, 1998. 4.6 Form of Series B Preferred Stock and Warrant Purchase Agreement executed with nine investors and dated December 24, 1998. Filed as Exhibit 4.6 to ATC's Form 10-KSB dated December 29, 1998. 4.7 Form of Warrant to Purchase Common Stock granted to nine investors for an aggregate of 172,750 shares of Common Stock dated December 24, 1998. Filed as Exhibit 4.7 to ATC's Form 10-KSB dated December 29, 1998. 4.8 Reference is made to Exhibits 3.1 through 3.2. 10. Material Contracts 10.1 Royalty Agreement between ATC and Elwood G. Norris dated September 3, 1985 filed as Exhibit 6.2 to ATC's Form 10-SB effective August 1, 1994 10.2 Assignment of Technology Agreement between ATC and Elwood G. Norris dated March 2, 1992 filed as Exhibit 6.3 to ATC's Form 10- SB effective August 1, 1994 10.2.1 Addendum Agreement to Assignment of Technology Agreement between ATC and Elwood G. Norris dated December 2, 1996 filed as Exhibit 10.3.1 to ATC's Form 10-KSB for September 30, 1996 10.3 1992 Incentive Stock Option Plan adopted by the Board of Directors on March 2, 1992 and approved by the shareholders on June 19, 1992 filed as Exhibit 6.8 to ATC's Form 10-SB effective August 1, 1994 10.3.1 Standard form of Incentive Stock Option Plan Agreement filed as Exhibit 6.8.1 to ATC's Form 10-SB effective August 1, 1994 10.4 1992 Non-Statutory Stock Option Plan adopted by the Board of Directors on March 2, 1992 and approved by the shareholders on June 19, 1992 filed as Exhibit 6.9 to ATC's Form 10-SB effective August 1, 1994 10.4.1 Standard form of Non-Statutory Stock Option Plan Agreement filed as Exhibit 6.9.1 to ATC's Form 10-SB effective August 1, 1994 10.5 Demand Promissory Note for $82,500 due from Robert Putnam dated January 17, 1997 filed as Exhibit 10.11 to ATC's Form 10-QSB for March 31, 1997 10.6 Sublease Agreement between Global Associates, Ltd. and Norris Communications, Inc. and the Company dated July 11, 1997 filed as Exhibit 10.13 to ATC's Form 10-QSB for June 30, 1997 23 10.7 1997 Employee Stock Compensation Plan of ATC dated March 10, 1997 filed as Exhibit 10.11 to ATC's Form S-8 dated March 24, 1997 10.8 Stock Option Agreement dated September 1, 1997 between ATC and Dale Williams filed as Exhibit 10.15.1 to ATC's Form 10-KSB for September 30, 1997 10.8.1 Separation Agreement and General Release between Dale Williams and ATC executed on June 19, 1998 filed as Exhibit 10.15.2 to ATC's Form 8-K dated June 29, 1998 10.8.2 Amendment to Stock Option Agreement between Dale Williams and ATC dated as of June 12, 1998 filed as Exhibit 10.15.3 to ATC's Form 8-K dated June 29, 1998 10.9 Employment Agreement dated as of September 1, 1997 between ATC and Elwood G. Norris filed as Exhibit 10.16 to ATC's Form 10-KSB for September 30, 1997 10.10 Employment Agreement dated as of September 1, 1997 between ATC and Robert Putnam filed as Exhibit 10.17 to ATC's Form 10-KSB for September 30, 1997 10.11 Agreement dated as of June 1, 1998, between ATC and Authentic, Ltd. (Portions of this Exhibit have been omitted, based on a request for confidential treatment, and have been filed with the Securities and Exchange Commission pursuant to rule 406) as filed as Exhibit 10.18 to ATC's 10-QSB dated August 10, 1998 10.12 1997 Stock Option Plan as adopted on January 23, 1998 filed as Exhibit 10.1 to ATC's Form S-8 dated July 27, 1998 10.13 Employment Agreement dated July 17, 1998 between ATC and Cornelius J. Brosnan. Filed as Exhibit 10.13 to ATC's Form 10-KSB dated December 29, 1998. 10.13.1 Special Stock Option Agreement dated October 2, 1997 between ATC and Cornelius J. Brosnan filed as Exhibit 10.2 to ATC's Form S-8 dated July 27, 1998 10.13.2 Stock Option Agreement dated July 15, 1998 between ATC and Cornelius J. Brosnan. Filed as Exhibit 10.13.2 to ATC's Form 10- KSB dated December 29, 1998. 10.14 Employment Agreement dated July 8, 1998 between ATC and James Croft. Filed as Exhibit 10.14 to ATC's Form 10-KSB dated December 29, 1998. *10.15 Employment Agreement dated July 8, 1998 between ATC and Robert Todrank. *10.16 Special Option Agreement dated July 16, 1999 between ATC and Cornelius J. Brosnan covering 100,000 shares exercisable at $10.00 per share subject to a stock price of $25.00. *10.17 Special Option Agreement dated July 16, 1999 between ATC and Cornelius J. Brosnan covering 100,000 shares exercisable at $10.00 per share subject to a stock price of $50.00. 23. Consents of Experts and Counsel *23.1 Consent of BDO Seidman, LLP 27. Financial Data Schedule *27.1 Financial Data Schedule _____________________________________ (b) Reports on Form 8-K - None ------------------- 24 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN TECHNOLOGY CORPORATION December 28, 1999 By: /s/ CORNELIUS J.BROSNAN -------------------------- Cornelius J. Brosnan Chairman, President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: December 28, 1999 By /s/ CORNELIUS J. BROSNAN ----------------------------------- Cornelius J. Brosnan, Chairman, President and Chief Executive Officer and Director (Principal Executive Officer) Date: December 28, 1999 By /s/ RENEE WARDEN ----------------------------------- Renee Warden, Chief Accounting Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) Date: December 28, 1999 By /s/ ELWOOD G. NORRIS ----------------------------------- Elwood G. Norris Chief Technology Officer and Director Date: December 28, 1999 By /s/ RICHARD M. WAGNER ----------------------------------- Richard M. Wagner Director Date: December 28, 1999 By /s/ O'CONNELL J. BENJAMIN ----------------------------------- O'Connell J. Benjamin Director Date: December 28, 1999 By /s/ DAVID J. CARTER ----------------------------------- David J. Carter Director
25 American Technology Corporation Index to Financial Statements ================================================================================ Report of Independent Certified Public Accountants F-2 Balance Sheets as of September 30, 1999 and 1998 F-3 Statements of Operations for the Years Ended September 30, 1999, 1998 and 1997 F-4 Statements of Comprehensive Income for the Years Ended September 30, 1999, 1998 and 1997 F-5 Statements of Stockholders' Equity for the Years Ended September 30, 1999, 1998 and 1997 F-6 Statements of Cash Flows for the Years Ended September 30, 1999, 1998 and 1997 F-7 Summary of Accounting Policies F-8 - F-10 Notes to Financial Statements F-11 - F-18 Schedule II - Valuation and Qualifying Accounts F-19
F- 1 Report of Independent Certified Public Accountants =============================================================================== To the Stockholders and Board of Directors American Technology Corporation San Diego, California We have audited the accompanying balance sheets of American Technology Corporation as of September 30, 1999 and 1998 and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period then ended. We have also audited the schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Technology Corporation as of September 30, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period then ended in conformity with generally accepted accounting principles. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO SEIDMAN, LLP -------------------- BDO Seidman, LLP Denver, Colorado November 5, 1999 F- 2 American Technology Corporation
BALANCE SHEETS September 30, 1999 1998 =========================================================================================================== ASSETS Current Assets: Cash $ 590,236 $ 1,034,577 Investment securities available for sale [note 1] 299,648 14,644 Trade accounts receivable, less allowance of $8,000 and $17,000 for doubtful accounts 158,533 71,738 Inventories [note 2] 287,321 87,292 Prepaid expenses and other 204,581 58,470 - ----------------------------------------------------------------------------------------------------------- Total current assets 1,540,319 1,266,721 - ----------------------------------------------------------------------------------------------------------- Equipment, net [note 3] 133,047 169,367 Patents, net 487,670 245,919 Other - 1,738 - ----------------------------------------------------------------------------------------------------------- Total assets $ 2,161,036 $ 1,683,745 =========================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 333,754 $ 202,042 Accrued liabilities: Payroll and related 94,695 75,241 Other 15,395 3,550 - ----------------------------------------------------------------------------------------------------------- Total current liabilities 443,844 280,833 - ----------------------------------------------------------------------------------------------------------- Commitments and contingencies [notes 4, 8 and 9] Stockholders' equity [notes 7 and 8]: Series B Preferred stock, $0.00001 par value; 5,000,000 shares authorized: 250,000 shares issued and outstanding in 1999 [note 7] 3 - Common stock, $0.00001 par value; 20,000,000 shares authorized 11,464,213 and 11,356,014 shares issued and outstanding 115 114 Additional paid-in capital 13,251,171 10,180,265 Note receivable, officer [note 4] (27,895) (27,895) Accumulated deficit (11,805,647) (8,764,013) Accumulated other comprehensive income 299,445 14,441 - ----------------------------------------------------------------------------------------------------------- Total stockholders' equity 1,717,192 1,402,912 - ----------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 2,161,036 $ 1,683,745 ===========================================================================================================
See accompanying summary of accounting policies and notes to financial statements F-3 American Technology Corporation STATEMENTS OF OPERATIONS
Years Ended September 30, 1999 1998 1997 ======================================================================================================================== Revenues: Product sales [note 10] $ 787,408 $ 194,758 $ 967,408 Contract and license 36,345 50,000 - - ------------------------------------------------------------------------------------------------------------------------ Total revenues 823,753 244,758 967,408 - ------------------------------------------------------------------------------------------------------------------------ Cost of revenues 619,665 407,123 809,437 - ------------------------------------------------------------------------------------------------------------------------ Gross profit (loss) 204,088 (162,365) 157,971 - ------------------------------------------------------------------------------------------------------------------------ Operating expenses: Selling, general and administrative 2,078,558 2,222,522 1,338,468 Research and development 1,099,848 991,238 566,288 Non-cash compensation expense [note 8] 131,000 438,000 278,100 - ------------------------------------------------------------------------------------------------------------------------ Total operating expenses 3,309,406 3,651,760 2,182,856 - ------------------------------------------------------------------------------------------------------------------------ Loss from operations (3,105,318) (3,814,125) (2,024,885) - ------------------------------------------------------------------------------------------------------------------------ Other income (expense): Interest income 64,781 131,967 27,653 Interest expense - non-cash [notes 5 and 7] - (926,555) (146,331) Other (1,097) 15,000 (800) - ------------------------------------------------------------------------------------------------------------------------ Total other income (expense) 63,684 (779,588) (119,478) - ------------------------------------------------------------------------------------------------------------------------ Net loss $(3,041,634) $(4,593,713) $(2,144,363) ======================================================================================================================== Net loss available to common stockholders $(3,809,486) $(4,593,713) $(2,762,009) ======================================================================================================================== Net loss per share of common stock - basic and diluted $ (0.33) $ (0.42) $ (0.30) ======================================================================================================================== Average weighted number of common shares outstanding 11,408,264 10,889,654 9,268,128 ========================================================================================================================
See accompanying summary of accounting policies and notes to financial statements. F-4 American Technology Corporation STATEMENTS OF COMPREHENSIVE INCOME
Years Ended September 30, 1999 1998 1997 ================================================================================================================= Net Loss $ (3,041,634) $(4,593,713) $(2,144,363) Unrealized holding gain (loss) on securities available for sale 285,004 (14,645) (160,864) ------------------------------------------------------- Comprehensive loss $ (2,756,630) $(4,608,358) $(2,305,227) =======================================================
See accompanying summary of accounting policies and notes to financial statements F-5 American Technology Corporation Statements of Stockholders' Equity
Years Ended September 30, 1999, 1998 and 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock Series A Convertible Preferred Stock ------------ ------------------------------------ Additional Paid-in Shares Amount Capital Shares Amount - ---------------------------------------------------------------------------------------------------------------------------------- Balance, October 1, 1996 8,611,759 $ 86 $3,063,373 - - Issuance of common stock: Upon exercise of stock options [note 8] 592,500 6 343,644 - - For compensation and services [note 8] 40,327 1 201,413 - - Upon conversion of 6% convertible notes at $3.50 per share - - - - - and accrued interest [note 5] 181,230 2 634,308 - - Cash-less exercise of 350,000 options 292,963 3 (3) - - Upon exercise of warrants at $0.50 per share [note 7] 40,000 20,000 - - Value assigned to 50,000 warrants granted with 6% convertible notes [note 5] - - 2,500 - Value assigned to 90,000 warrants granted for services [note 7] - - 33,300 - - Value assigned to 97,500 options granted for services [note 8] - - 244,800 - - Non-cash interest on convertible notes [note 5] - - 122,700 - - Issuance of preferred stock, net of offering costs [note 7] - - - 350,000 3,321,153 Payment on notes receivable [note 4] - - - - - Net loss for the year - - - - - Other comprehensive income - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1997 9,758,779 98 4,666,035 350,000 3,321,153 ================================================================================================================================== Issuance of common stock: Upon exercise of stock options [note 8] 158,800 2 213,716 - - For compensation and services [note 8] 14,750 - 91,919 - - Upon conversion of 6% convertible notes at $3.50 per share - - and accrued interest [note 5] 128,459 1 393,205 - - Cash-less exercise of warrants [note 7] 106,029 1 919,999 - - Upon conversion of Series A Preferred Stock 974,197 10 3,321,143 (350,000) (3,321,153) [note 7] Upon exercise of warrants from $0.50 - $7.50 215,000 2 136,248 - - Value assigned to 75,000 warrants granted as consulting services [note 7] - - 122,000 - - Value assigned to 80,000 options granted - - 316,000 - - for services [note 8] Payment on notes receivable [note 4] - - - - - Net loss for the year - - - - - Other comprehensive income - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1998 11,356,014 114 10,180,265 - - ================================================================================================================================== Issuance of common stock: Upon exercise of stock options [note 8] 82,500 1 319,772 - - For compensation and services [note 8] 25,699 - 140,137 - - Issuance of 250,000 shares of Series B preferred stock - - 2,479,997 - - Value assigned to 30,000 options granted for consulting services [note 7] - - 70,000 - - Value assigned to 20,000 options granted for services [note 8] - - 61,000 - - Net loss for the year - - - - - Other comprehensive income - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1999 11,464,213 $ 115 $13,251,171 - - ================================================================================================================================== Series B Convertible Preferred Stock ------------------------------------ Accumulated Other Total Notes Accumulated Comprehensive Stockholders' Shares Amount Receivable Deficit Income Equity - ---------------------------------------------------------------------------------------------------------------------------------- Balance, October 1, 1996 - - - $(2,025,937) $189,950 $1,227,472 Issuance of common stock: Upon exercise of stock options [note 8] - - (173,150) - - 170,500 For compensation and services [note 8] - - - - - 201,414 Upon conversion of 6% convertible notes at - - - - - - $3.50 per share and accrued interest [note 5] - - - - - 634,310 Cash-less exercise of 350,000 options - - - - - - Upon exercise of warrants at $0.50 per share [note 7] - - - - - 20,000 Value assigned to 50,000 warrants granted - - - - - - with 6% convertible notes [note 5] - - - - - 2,500 Value assigned to 90,000 warrants granted for services [note 7] - - - - - 33,300 Value assigned to 97,500 options granted for services [note 8] - - - - - 244,800 Non-cash interest on convertible notes [note 5] - - - - - 122,700 Issuance of preferred stock, net of offering costs [note 7] - - - - - 3,321,153 Payment on notes receivable [note 4] - - 20,000 - - 20,000 Net loss for the year - - - (2,144,363) - (2,144,363) Other comprehensive income - - - - (160,864) (160,864) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1997 - - (153,150) (4,170,300) 29,086 3,692,922 ================================================================================================================================== Issuance of common stock: Upon exercise of stock options [note 8] - - - - - 213,718 For compensation and services [note 8] - - - - - 91,919 Upon conversion of 6% convertible notes at - - $3.50 per share and accrued interest [note 5] - - - - - 393,206 Cash-less exercise of warrants [note 7] - - - - - 920,000 Upon conversion of Series A Preferred Stock [note 7] - - - - - - Upon exercise of warrants from $0.50 - $7.50 - - - - - 136,250 Value assigned to 75,000 warrants granted as consulting services [note 7] - - - - - 122,000 Value assigned to 80,000 options granted for services [note 8] - - - - - 316,000 Payment on notes receivable [note 4] - - 125,255 - - 125,255 Net loss for the year - - - (4,593,713) - (4,593,713) Other comprehensive income - - - - (14,645) (14,645) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1998 - - (27,895) (8,764,013) 14,441 $1,402,912 ================================================================================================================================== Issuance of common stock: Upon exercise of stock options [note 8] - - - - - 319,773 For compensation and services [note 8] - - - - - 140,137 Issuance of 250,000 shares of Series B preferred stock 250,000 3 - - - 2,480,000 Value assigned to 30,000 options granted for consulting services [note 7] - - - - - 70,000 Value assigned to 20,000 options granted for services [note 8] - - - - - 61,000 Net loss for the year - - - (3,041,634) - (3,041,634) Other comprehensive income - - - - 285,004 285,004 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1999 250,000 $3 $ (27,895) $(11,805,647) $299,445 $1,717,192 ==================================================================================================================================
See accompanying summary of accounting policies and to financial statements. American Technology Corporation STATEMENTS OF CASH FLOWS Years Ended September 30, 1999 1998 1997 ====================================================================================================================== Increase (Decrease) in Cash Operating Activities: Net loss $(3,041,634) $(4,593,713) $(2,144,363) Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization 127,260 132,215 97,920 Warrants granted for services - 122,000 33,300 Warrants granted with convertible debt - - 2,500 Common stock issued for services and compensation 140,137 91,919 201,414 Common stock issued for interest - 18,206 9,310 Options granted for services 131,000 316,000 244,800 Inventory and loss accrual - 160,000 - Bonus paid on exchange for payment - 125,255 - Non-cash interest on cash-less exercise of warrants - 920,000 - Non-cash interest expense on convertible notes - - 122,700 Non-cash accrued interest on long term debt - (11,651) 11,651 Changes in assets and liabilities: Trade accounts receivable (86,795) 235,437 (111,717) Inventories (200,029) (57,477) 124,116 Prepaid expenses and other (146,111) (31,094) 31,530 Accounts payable 131,712 81,173 (227,319) Accrued liabilities 31,299 27,355 31,633 - ---------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (2,913,161) (2,464,375) (1,572,525) - ---------------------------------------------------------------------------------------------------------------------- Investing Activities: Purchase of equipment (69,458) (80,995) (176,766) Patent costs paid (261,495) (108,479) (101,235) - ---------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (330,953) (189,474) (278,001) - ---------------------------------------------------------------------------------------------------------------------- Financing Activities: Proceeds from issuance of preferred stock, net 2,480,000 - 3,321,153 Proceeds from exercise of common stock warrants - 136,250 20,000 Proceeds from exercise of stock options 319,773 213,718 343,650 Proceeds loaned on notes receivable-officers for option exercise - - (173,150) Principal payment received on notes receivable-officer - - 20,000 Proceeds from issuance of convertible debt - - 1,000,000 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 2,799,773 349,968 4,531,653 - ---------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (444,341) (2,303,881) 2,681,127 Cash, beginning of year 1,034,577 3,338,458 657,331 - ---------------------------------------------------------------------------------------------------------------------- Cash, end of year $590,236 $1,034,577 $3,338,458 ======================================================================================================================
See accompanying summary of accounting policies and notes to financial statements F-7 American Technology Corporation Summary of Accounting Policies =============================================================================== ORGANIZATION AND BUSINESS American Technology Corporation (the "Company"), a Delaware corporation, is engaged in design, development and commercialization of sound, acoustics and other technologies and the sales and marketing of portable consumer products. CONTINUED EXISTENCE AND MANAGEMENT'S PLAN Other than cash of $590,236 at September 30, 1999, and the e.Digital shares, the Company has no other material unused sources of liquidity at this time. The Company expects to incur additional operating losses as a result of continued product sale operations and as a result of expenditures for research and development and marketing costs for its sound and other products and technologies. The timing and amounts of its expenditures and the extent of its operating losses will depend on many factors, some of which are beyond the Company's control. The Company anticipates that the commercialization of its technologies may require increased operating costs, however the amounts are not currently estimable by management. Based on the above factors, including the current rate of expenditures, anticipated additional expenditures and uncertainty as to future expenditures, the Company does not have sufficient funds for the next twelve months and will require funds from the sale or licensing of products or technology or from other sources or will be required to scale back or curtail certain activities. Management estimates the minimum additional funding required for the next twelve months at approximately $2,000,000. Management has been successful in obtaining equity financing in the past from existing shareholders and others based on the strength and appeal of the Company's technologies Management is reviewing financing proposals from prior investors and others and management is confident that the required additional funding can be obtained. In addition to the sale of equity securities, possible other sources for additional funding include the sale or licensing by the Company of certain technologies. Margins from product sales and revenues from licensing and other operations may also contribute financial resources during the next twelve months. However any delays in funding or the lack of sufficient funds could force management to curtail or scale back operations and would therefore have an adverse effect on the Company's business. There can be no assurance that any funds required during the next twelve months or thereafter can be generated from operations or that such required funds will be available from the aforementioned or other potential sources. The lack of sufficient funds from operations or additional capital could force the Company to curtail or scale back operations and would therefore have an adverse effect on the Company's business. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable. The Company's cash is placed in quality money market accounts with major financial institutions. The investment policy limits the Company's exposure to concentrations of credit risk. Such deposit accounts at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. Concentration of credit risk with respect to the trade accounts receivable are limited due to the wide variety of customers and markets which comprise the Company's customer base, as well as their dispersion across many different geographic areas. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that the trade accounts receivable credit risk exposure is limited. Generally, the Company does not require collateral or other security to support customer receivables. F- 8 American Technology Corporation Summary of Accounting Policies =============================================================================== The carrying amounts of financial instruments including cash, trade accounts receivable, notes receivable-officers, accounts payable and accrued liabilities approximated fair market value because of the immediate or short-term maturity of these instruments. INVESTMENT SECURITIES Investment securities classified as available for sale are those securities that the Company does not have the positive intent to hold to maturity or does not intend to trade actively. These securities are reported at fair value with unrealized gains and losses reported as a net amount (net of applicable deferred income taxes) as a separate component of stockholders' equity. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. EQUIPMENT AND DEPRECIATION Equipment is stated at cost. Depreciation is computed over the estimated useful lives of three years using the straight-line method. PATENTS Patents are carried at cost and, when granted and are amortized over their estimated useful lives. The carrying value of patents is periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from individual intangible assets is less than its carrying value. Amortization expense was $19,745 for fiscal 1999. LEASES Leases entered into are classified as either capital or operating leases. At fiscal year end 1999 the Company had no capital lease obligations. All current leases reported are classified as operating leases. REVENUE RECOGNITION Product sales are recognized in the periods that products are shipped. Licensing revenues for one-time license fees are recognized upon achievement of contractual milestones and the collection of the resulting receivable is deemed probable. Contract revenue is recognized in the period the related services are performed. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards ("SFAS") No. 109. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. A valuation allowance is recorded by the Company to the extent it is more likely than not that a deferred tax asset will not be realized. NET LOSS PER SHARE Basic earnings (loss) per share includes no dilution and is computed by dividing income (loss) available to common stockholders, after deduction for cumulative unpaid dividends, by the weighted average number of common shares outstanding for the period. The weighted average number of common shares outstanding during 1999 was 11,408,264 [1998 - 10,889,654] [1997 - 9,268,128]. Diluted earnings (loss) per share reflects the potential dilution of securities that could share in the earnings of an entity. The Company's losses for the years presented cause the inclusion of potential common stock instruments outstanding to be antidilutive and, therefore, in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128"), the Company is not required to present a diluted earnings (loss) per share. Stock options, warrants and convertible preferred stock exercisable into 3,009,761 shares of Common Stock were outstanding at September 30, 1999, stock options and F- 9 American Technology Corporation Summary of Accounting Policies =============================================================================== warrants exercisable into 1,693,100 shares of Common Stock were outstanding at September 30, 1998 and stock options, warrants and convertible debt exercisable or convertible into 2,408,000 shares of Comm Stock were outstanding at September 30, 1997. These securities were not included in the computation of diluted earnings (loss) per share because of the losses but could potentially dilute earnings (loss) per share in future periods. Net loss to common stockholders was increased during the fiscal year ended September 30, 1999 in computing net loss per share by imputed deemed dividends based on the value of warrants issued in connection with the Series B Preferred Stock (see note 7). The Company calculated the fair value of the warrants at $595,000. The net loss available to common stockholders was also reduced by the amortization of an additional $60,000 deemed dividends computed from the discount provision included in the Series B Preferred Stock, which was amortized to the earliest period at which the discount could be utilized (May 31, 1999). A similar deemed dividend of $617,646 was recorded from a discount provision in Series A stock in fiscal 1997. Such imputed dividends are not contractual obligations of the Company to pay such imputed dividends. The provisions of the Series B Preferred Stock also provide for an accretion in the conversion value (similar to a dividend) of 6% or $0.60 per share per annum. The accrued accretion at September 30, 1999 was $112,852, which also increase the net loss available to common stockholders. Net loss available to common stockholders is computed as follows:
Years Ended September 30, 1999 1998 1997 ======================================== Net loss $(3,041,634) $(4,593,713) $(2,144,363) Preferred stock dividends based on imputed discount at issuance. (60,000) - (617,646) Imputed deemed dividends on warrants issued with Series B Preferred Stock (595,000) - - Accretion on Series B Preferred Stock at stated rate (112,852) - - ----------- ----------- ----------- Net loss available to common stockholders $(3,809,486) $(4,593,713) $(2,762,009) =========== =========== ===========
STOCK OPTIONS The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for all stock options plans. Under APB Opinion 25, compensation cost is recognized for stock options granted to employees when the option price is less than the market price of the underlying common stock on the date of grant. SFAS Statement No. 123, "Accounting for Stock-Based Compensation," requires the Company to provide pro forma information regarding net income as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in SFAS No. 123. To provide the required pro forma information for employees, the Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model. Under SFAS No. 123, compensation cost is recognized for stock options granted to nonemployees using the Black-Scholes Option-pricing model. STATEMENT OF CASH FLOWS For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair market value. Gains or losses resulting from changes in the values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. F- 10 American Technology Corporation Summary of Accounting Policies =============================================================================== SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. The Company does not expect the adoption of SFAS No. 133 to have a material effect on the Company's financial statements. F- 11 American Technology Corporation Notes to Financial Statements =============================================================================== 1. INVESTMENT SECURITIES The Company's investment securities consist of 225,300 shares of e.Digital Corporation common stock, an affiliated corporation through common ownership and management.
For the Years Ended September 30, 1999 1998 ----------- --------- Cost $ 203 $ 203 Gross Unrealized Gains 299,445 14,441 --------- --------- Estimate Fair Value $ 299,648 $ 14,644 ========= ========= 2. INVENTORIES Inventories consisted of the following at September 30, 1999 1998 --------- --------- Finished goods $ 228,021 $ 28,258 Raw materials 79,300 7,987 Consigned finished goods - 43,200 Work-in-process - 7,847 -------- --------- 307,321 87,292 Reserve for obsolescence (20,000) - --------- --------- $ 287,321 $ 87,292 ========= ========= 3. EQUIPMENT Equipment consisted of the following at September 30, 1999 1998 --------- --------- Machinery and equipment $ 424,477 $ 413,278 Office furniture and equipment 149,668 91,409 Leasehold improvements 37,442 37,442 --------- --------- 611,587 542,129 Accumulated depreciation (478,540) (372,762) --------- --------- Net equipment $ 133,047 $ 169,367 ========= =========
Depreciation expense was $105,777, $108,049 and $74,000 for the years ended September 30, 1999, 1998 and 1997, respectively. 4. RELATED PARTY TRANSACTIONS Facility Lease - -------------- The Company entered into a three-year lease agreement commencing on July 11, 1997 and expiring on July 30, 2000. To meet the credit requirements of the landlord, both the Company and an affiliated corporation, e.Digital Corporation, entered into a joint lease agreement for approximately 13,000 square feet with aggregate monthly payments of $15,122 inclusive of utilities and costs. The Company is occupying 7,500 square feet of the jointly leased office space with its share of monthly payments being approximately $8,300. The Company could become obligated for the entire lease should e.Digital default on its share of payments thereon. Office rent expense recorded by the Company for the years ended September 30, 1999, 1998 and 1997 was $96,500, $91,515 and $32,000 respectively. Royalties - --------- In connection with a 1992 agreement to purchase technology, the Company is required to pay a stockholder/director of the Company a 1% royalty on all net sales of certain radio equipment (as defined). Sales of these products were discontinued in fiscal 1998. For the years ended September 30, 1998 and 1997, total royalties paid by the Company on radio equipment sales were $973 and $7,900, respectively. F- 12 American Technology Corporation Notes to Financial Statements =============================================================================== The Company is also obligated to pay the stockholder/director royalties of 2% on gross revenues of the Company's sound reproduction and global positioning satellite technologies. As of September 30, 1999, no amounts have been paid nor are due under this agreement. Notes Receivable-Officer - ------------------------ At September 30, 1999 and 1998 an officer was obligated to the Company in the amount of $27,895 from a cash loan made to exercise stock options. The note is presented as a reduction from stockholders' equity in the accompanying financial statements. The note is due on or before March 31, 2000. 5. LONG-TERM DEBT During fiscal 1997, the Company raised $1,000,000 through the issuance of 6% convertible subordinated promissory notes due March 1, 1999 (the "Convertible Notes"). As the market price of the Company's Common Stock exceeded the conversion price of the Convertible Notes at the date of issuance, the Company recognized embedded non-cash interest expense of $122,700 upon the issuance of the Convertible Notes in fiscal 1997. The Convertible Notes were issued with detachable warrants which grant the holders the right to acquire up to 50,000 shares of the Company's Common Stock at a per share price of $5.00. The warrants expire on March 1, 2000. The warrants were determined to have a value of $2,500, which amount was recorded as additional paid-in capital. During fiscal 1997, holders of $625,000 of the Convertible Notes converted their notes, and accrued interest thereon, into 181,230 shares of the Company's Common Stock. During fiscal 1998, the remaining balance of $375,000 and accrued interest of $18,206 (including $11,651 accrued from September 30, 1997) was converted into 128,459 Common Shares. 6. INCOME TAXES Income taxes consisted of the following:
Years ended September 30, 1999 1998 1997 ----------- ----------- ----------- Deferred (benefit) Federal $(1,025,000) $(1,302,000) $(597,000) State (181,000) (230,000) (105,000) ----------- ----------- --------- (1,206,000) (1,532,000) (702,000) Change in valuation allowance 1,206,000 1,532,000 702,000 ----------- ----------- --------- $ - $ - $ - =========== =========== =========
A reconciliation of income taxes at the federal statutory rate of 34% to the effective tax rate is as follows:
Years ended September 30, 1999 1998 1997 ----------- ----------- ----------- Income taxes (benefit) computed at the federal statutory rate $(1,034,000) $(1,562,000) $(729,000) Tax effect of change in valuation allowance 1,206,000 1,526,000 638,000 Nondeductible compensation and interest expense (18,000) 288,000 168,000 State income taxes (benefit), net of federal tax benefit (182,000) (276,000) (127,000) Other 28,000 24,000 50,000 ----------- ----------- --------- $ - $ - $ - =========== =========== =========
The types of temporary differences between the tax basis of assets and liabilities and their approximate tax effects that give rise to a significant portion of the net deferred tax asset (liability) at September 30, 1999 and 1998 are as follows:
Deferred tax assets: 1999 1998 ---- ----
F- 13 American Technology Corporation Notes to Financial Statements ================================================================================ Net operating loss carryforwards $ 4,173,000 $ 2,866,000 Equipment 8,000 22,000 Accruals and other 46,000 15,000 Allowances 3,000 7,000 ----------- ----------- Gross deferred tax asset 4,230,000 2,910,000 Less valuation allowance (4,110,000) (2,904,000) ----------- ----------- 120,000 6,000 ----------- ----------- Deferred tax liabilities: Unrealized gain on investment securities (120,000) (6,000) ----------- ----------- Net deferred tax asset (liability) $ - $ - =========== ===========
A valuation allowance has been recorded to offset the net deferred tax asset as management has been unable to determine that it is more likely than not that the deferred tax asset will be realized. At September 30, 1999, the Company, for federal income tax purposes, has net operating loss carryforwards of approximately $10,500,000 which expire through 2019 of which certain amounts are subject to limitations under the Internal Revenue Code of 1986, as amended. 7. STOCKHOLDERS' EQUITY Preferred Stock - --------------- The Company is authorized to issue 5,000,000 shares of preferred stock, $0.0001 par value, without any action by the stockholders. The board of directors has the authority to divide any and all shares of preferred stock into series and to fix and determine the relative rights and preferences of the preferred stock, such as the designation of series and the number of shares constituting such series, dividend rights, redemption and sinking fund provisions, liquidation and dissolution preferences, conversion or exchange rights an voting rights, if any. With respect to voting rights, if the preferred stock were permitted to vote in the election of directors or on other matters, each such share would be entitled to one vote, and such shares may vote with the shares of common stock or may vote as a separate class. Issuance of preferred stock by the board of directors could result in such shares having dividend and or liquidation preferences senior to the rights of the holders of common stock and could dilute the voting rights of the holders of common stock. During December 1998 and January 1999, the Company issued 250,000 shares of Series B Preferred Stock, par value $0.00001 ("Preferred Stock") for cash at $10.00 per share for net proceeds of $2,480,000. The dollar amount of Preferred Stock, increased by $0.60 per share accretion per annum and other adjustments, is convertible one or more times into fully paid shares of Common Stock of the Company at a conversion price which is the lower of (a) $5.00 per share or (b) 92% of the average of the five days closing bid market price prior to conversion, but in no event less than $3.50 per share. The shares of Preferred Stock may be called by the Company for conversion if the market price of the Common Stock exceeds $12.00 per share for ten days and certain conditions are met. The Preferred Stock is subject to automatic conversion on November 30, 2001. In connection with the sale of Preferred Stock the Company issued warrants to purchase 250,000 shares of Common Stock at $6.00 per share until November 30, 2001. At September 30, 1999 the Preferred Stock would have been convertible into 772,461 shares of Common Stock. Warrants - -------- During fiscal 1999 the Company granted a warrant to purchase 50,000 shares at $10.00 per share, valued at $128,000 in connection with consulting services. This amount was treated as a cost of the Preferred stock offering. During fiscal 1998 the Company granted warrants to purchase 75,000 shares at $16.00 per share in connection with consulting services. These warrants were valued at $122,000. During fiscal 1997 the Company granted warrants to purchase 90,000 shares at $5.00 per share in connection with consulting services. The warrants were valued at $33,300. During fiscal 1998, the Company amended the terms of a warrant to purchase 100,000 shares of Common Stock previously granted to a director in connection with a 1992 financing transaction. The amendment provided for a F-14 American Technology Corporation Notes to Financial Statements ================================================================================ cashless exercise, which was completed in May 1998. The Company recorded non- cash interest expense of $920,000 in connection with the cashless exercise. At September 30, 1999, the Company had the following warrants outstanding arising from the offerings and transactions, each exercisable into one Common Share:
Number Exercise Price Expiration Date ------- -------------- --------------- 60,000 $ 5.00 February 5, 2000 47,500 $ 5.00 March 1, 2000 172,500 $ 7.50 August 1, 2000 25,000 $ 16.00 June 18, 2000 250,000 $ 6.00 November 30, 2001 50,000 $ 16.00 May 12, 2003 50,000 $ 10.00 January 5, 2004 ------- 655,000 =======
At September 30, 1998, the Company had the following warrants outstanding, each exercisable into one Common Share:
Number Exercise Price Expiration Date ------- -------------- --------------- 60,000 $ 5.00 February 5, 2000 47,500 $ 5.00 March 1, 2000 172,500 $ 7.50 August 1, 2000 25,000 $ 16.00 June 18, 2000 50,000 $ 16.00 May 12, 2003 ------- 355,000 =======
8. BENEFIT PLANS 1997 Employee Stock Compensation Plan ("ESC") - --------------------------------------------- Effective March 10, 1997, the Company adopted the 1997 Employee Stock Compensation Plan, expiring March 9, 2002, the plan was modified on March 5, 1999 reserving for issuance an aggregate of 150,000 shares of the Company's Common Stock and extending the expiration date until 2002. The Plan provides for compensation awards of the Company's common stock to non-executive employees (as defined), at the discretion of the ESC Plan committee. During fiscal 1999, the Company issued 25,699 shares of common stock under the Plan recording general and administrative expense of $140,137 for awards valued at an estimated fair market value ranging from $4.40 to $7.125per share. During fiscal 1998, the Company issued 14,750 shares of Common Stock under the plan recording general and administrative expense of $91,919 for awards valued at an estimated fair market value ranging from $3.875 to $8.53 per share. During fiscal 1997, the Company issued 40,327 shares of common stock under the Plan recording general and administrative expense of $201,414 for awards valued at an estimated fair market value ranging from $3.75 to $6.38 per share. 1997 Stock Option Plan - ----------------------- The Company has a Stock Option Plan, expiring January 22, 2008, reserving for issuance 500,000 shares of the Company's Common Stock. The Options issued under the Plan shall, in the discretion of the Board, be either Incentive Stock Options or Nonstatutory Stock Options. The Stock Option Plan provides for grants to employees, directors or consultants, both at the discretion of the Board of Directors. Options to purchase Common Stock of the Company at a price not less than the fair market value of the shares on the date of grant. In the case of a significant stockholder, the option price of shares will not be less than 110 percent of the fair market value of the share on the date of grant. Any options granted under the Stock Option Plan must be exercised within ten years of the date they were granted (five years in the case of a significant stockholder). As of September 30, 1999, there were options outstanding covering 428,300 shares of Common Stock under this Plan. F-15 American Technology Corporation Notes to Financial Statements ================================================================================ 1992 Incentive Stock Option Plan ("ISO") - ---------------------------------------- The Company has an ISO Plan, expiring March 2, 2002, originally reserving for issuance 1,000,000 shares of the Company's Common Stock. The ISO Plan provides for grants to either full or part time employees, at the discretion of the Board of Directors, options to purchase Common Stock of the Company at a price not less than the fair market value of the shares on the date of grant. In the case of a significant stockholder, the option price of shares will not be less than 110 percent of the fair market value of the share on the date of grant. Any options granted under the ISO Plan must be exercised within ten years of the date they were granted (five years in the case of a significant stockholder). As of September 30, 1999, there were options outstanding covering 479,000 shares of Common Stock under this Plan. 1992 Non-Statutory Stock Option Plan ("NSO") - -------------------------------------------- The Company has an NSO Plan, expiring March 2, 2002, originally reserving for issuance 1,000,000 shares of the Company's Common Stock. The NSO Plan provides for grants to either full or part-time employees, directors or consultants, at the discretion of the Board of Directors, options to purchase Common Stock of the Company at a price not less than the fair market value of the shares on the date of grant. Any options granted under the NSO Plan must be exercised within 10 years of the date they were granted. As of September 30, 1999, there were options outstanding covering 185,000 shares under this Plan. Other Stock Options - ------------------- During fiscal 1999 the Company granted an executive officer options to purchase 200,000 common shares exercisable at $10.00 per share. These options are only exercisable contingent on the Company maintaining a trading price of its common stock of $25.00 (as to 50% of the option) and $50.00 (for the balance) for a minimum of 20 consecutive days and are exercisable until July 16, 2003. During fiscal 1998 the Company granted to an executive officer options to purchase up to 290,000 common shares vesting over a period of two years. A total of 240,000 options are exercisable at $8.50 per share until July 15, 2003 and 50,000 options are exercisable at $16.00 per share until October 2, 2002. Non-Cash Stock Option Compensation Expense - ------------------------------------------ During fiscal 1999, 1998 and 1997, the Company recorded non-cash compensation expense of $131,000, $316,000 and $244,800 respectively, under its stock option plans to non-employees through the granting of 50,000 options, 80,000 options and 97,500 options, respectively. Of the non-cash compensation expense recorded in fiscal 1998, $136,000 pertained to the fourth quarter. Also during fiscal 1998, 292,963 common shares were issued in connection with the cashless exercise of stock options relating to 350,000 shares. Stock Option Pro Forma and Summary Information - ---------------------------------------------- The Financial Accounting Standard Boards Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide pro forma information regarding net loss and net loss per share as if compensation costs for the Company's stock options plans and other stock awards had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The Company estimates the fair value of each stock award (those under the stock option plans described above plus warrants for consulting services) (see note 7) at the grant date by using the Black-Scholes option-pricing model with the following weighted average assumptions used respectively; dividend yield of zero percent for all years; expected volatility of 70 to 100 percent; risk-free interest rates between 4.5 and 6 percent; and expected lives of 1 to 5 years. Under the accounting provisions for SFAS No. 123, the Company's net loss available to Common Shareholders and basic and diluted per Common Share would have been increased by the pro forma amounts indicated below:
Years ended September 30, 1999 1998 1997 - ------------------------------------------------------------------------------- Net Loss available to Common Shareholders As reported $(3,809,486) $(4,593,713) $(2,762,009) Pro forma (4,703,717) (4,906,273) (3,195,634) Net loss per Common Share As reported $ (.33) $ (.42) $ (.30)
F-16 American Technology Corporation Notes to Financial Statements ================================================================================ Pro forma $(.41) $(.45) $(.34)
During the initial phase-in period of SFAS No. 123, the effect on pro forma results are not likely to be representative of the effects on pro forma results in future years since options vest over several years and additional awards could be made each year. A summary of the status of the Company's stock option plans as of September 30, 1999, 1998 and 1997 and the changes during the years ended on those dates is presented below:
Weighted Average Shares Exercise Price ================ ============== Fiscal 1997: Outstanding October 1, 1996 1,586,000 $ 0.58 Granted 1,054,000 $ 5.66 Canceled/expired (25,000) $ 0.50 Exercised (942,500) $ 0.57 ----------- Outstanding September 30, 1997 1,672,500 $ 3.79 =========== Exercisable at September 30, 1997 1,016,500 $ 2.55 =========== Weighted average fair value of options granted during the year $ 1.51 ====== Fiscal 1998: Outstanding October 1, 1997 1,672,500 $ 3.79 Granted 567,600 $ 7.46 Canceled/expired (743,200) $ 5.81 Exercised (158,800) $ 1.35 ----------- Outstanding September 30, 1998 1,338,100 $ 4.51 =========== Exercisable at September 30, 1998 898,568 $ 2.84 =========== Weighted average fair value of options granted during the year $ 0.52 ====== Fiscal 1999: Outstanding October 1, 1998 1,338,100 $ 4.51 Granted 471,800 $ 7.06 Canceled/expired (145,100) $ 6.09 Exercised (82,500) $ 3.88 ----------- Outstanding September 30, 1999 1,582,300 $ 5.16 =========== Exercisable at September 30, 1999 975,666 $ 3.45 =========== Weighted average fair value of options granted during the year $ 3.93 ======
The following table summarizes information about stock options outstanding at September 30, 1999:
Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - ---------------------------------------------------------------------------------------------- $0.50-$ 0.55 480,000 1.40 $ 0.52 480,000 $ 0.52 $3.59-$ 4.48 231,000 2.71 4.09 166,333 4.21 $4.98-$ 5.90 330,800 3.74 5.22 177,933 5.42 $ 7.81 40,500 1.57 7.81 33,900 7.81 $ 8.50 250,000 3.79 8.50 92,500 8.50 $10.00 200,000 3.79 10.00 - - $16.00 50,000 3.01 16.00 25,000 16.00 - ---------------------------------------------------------------------------------------------- $0.50-$16.00 1,582,300 2.82 $ 5.16 975,666 $ 3.45 ==============================================================================================
F-17 American Technology Corporation Notes to Financial Statements ================================================================================ Employee Benefit - 401K Plan - ---------------------------- On January 1, 1998, the Company established a 401(k) plan covering its employees. The plan originated service effectively in June 1998. Matching contributions are made on behalf of all participants at the discretion of the Board of Directors. During the fiscal years ended September 30, 1999, the Company made matching contributions of approximately $10,500. 9. COMMITMENTS AND CONTINGENCIES Facility - -------- The Company and e.Digital, an affiliated company, have a joint lease on office space in San Diego, California (see note 4). The lease expires on July 31, 2000. The total operating lease obligation under the joint lease for office space is $326,227 of which the Company's share of minimum commitments is as follows: Year ending: 2000 $83,109 ======= The Company could become obligated for the entire lease should e.Digital default on its share of payments thereon. Automobile Leases. - ----------------- The Company has three automobile lease obligations with terms of 24 to 36 months. All leases will expire as of September 2001 and are reported as operating leases within the financial statements. The obligations under these leases are as follows: Years ending: 2000 $16,648 2001 10,000 ------- $26,648 ======= Equipment Operating Lease - ------------------------- The Company has a 36 month equipment lease obligation which is reported as an operating lease within the financial statements. The lease expires in September 2000. The obligations under this lease is as follows: Year ending: 2000 $12,570 ======= Employment Agreements - --------------------- The company has entered into four employment agreements with executive officers and one key employee. These agreements are each for three-year terms expiring from August, 2000 to September, 2001. The agreements may be automatically renewed for one-year terms. The agreements provide for minimum annual salaries ranging from $60,000 to $240,000, a total of $530,000, in the aggregate. Certain of the agreements provide for up to twelve months severance for certain terminations and payments for the term of the agreement (or in one case twelve months, if longer) on certain changes in control. 10. MAJOR CUSTOMERS For the year ended September 30, 1999, sales to two individual customers accounted for 20% and 13% of total revenue. During the year ended September 30, 1998, sales to three individual customers accounted for 19%, 18% and 10% of total revenues. During the year ended September 30, 1997, sales to three individual customers accounted for 30%, 14% and 13% of total revenues. 11. SUPPLIER AGREEMENTS F-18 American Technology Corporation Notes to Financial Statements ================================================================================ Finished consumer products are purchased from a variety of foreign and domestic sources under contract or by purchase order. In fiscal 1999 and 1998, the Company sourced from outside foreign manufacturers certain finished products representing approximately 99% and 81%, respectively of its net revenues. The Company has relationships with a number of high quality, low-cost foreign manufacturers who provide the Company with a diverse line of consumer electronic products. The Company believes this diversification is such that it is not reliant on any one supplier. 12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Years ended September 30, 1999 1998 1997 - ----------------------------------------------------------------------------------------------- Non-cash financing activities: Convertible notes exchanged for Common Stock $ - $375,000 $625,000 Interest paid by issuance of Common Stock - 18,206 9,310 Cash paid for interest - - 170 Bonus paid in exchange for payment on officer note receivable - 125,255 -
F-19 American Technology Corporation SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ================================================================================ ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Charged to Balance Beginning Cost and At end of Description Of period Expenses Deductions Period - ------------------------------- ---------- ---------- ---------- --------- Year ended September 30, 1999 $16,893 $24,599 $33,492 $ 8,000 Year ended September 30, 1998 $ 7,842 $15,000 $ 5,845 $17,000 Year ended September 30, 1997 $10,000 - $ 2,158 $ 7,842
F-20 EX-10.15 2 EMPLOYMENT AGREEMENT Exhibit 10.15 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into effective as of the 1st day of June, 1998, between AMERICAN TECHNOLOGY CORPORATION, a Delaware publicly traded corporation (the "Company"), and Robert Todrank ("Employee"). Employee, in consideration of the covenants and agreements hereinafter contained, agrees as follows with respect to the employment of the Company of Employee and Employees future business activities. 1. Employment: Term of Employment. The Company hereby employs Employee and ------------------------------ Employee hereby accepts such employment upon the terms and conditions hereinafter set forth. Subject to the provisions for termination as hereinafter provided, Employee's term of employment by the Company shall be from the date of this agreement until September 30, 2001, and automatically renewed for one year periods thereafter unless thirty (30) days written notice of termination is sent prior to the annual renewal date. This Agreement will supersede all prior written and oral agreements entered into by and between Company and Employee. 2. Services to be Rendered by Employee. Employee shall be subject to the ----------------------------------- direction of the Company's Chief Executive Officer and his duties shall be those generally vested in the office of Vice President of Licensing and Business Development for the corporation and he shall have such other powers and duties as may be reasonably prescribed by the Company's Chief Executive Officer, Board of Directors, or a duly authorized committee thereof, and shall perform such duties as from time to time may be decided upon by the Company's Chief Executive Officer, Board of Directors, or a duly authorized committee thereof, including but not limited to, speaking for and promoting the sale of the Company's product lines as public spokesman both in print and television ads. The Employee agrees that he will serve the Company faithfully and to the best of his abilities, devoting substantially all his time, energy and skill to the activities of the Company and the promotion of its interests. Employee shall not serve as an officer or director or similar capacity with any other entity except with the consent of the Company. 3. Compensation. ------------ (a) For the services to be rendered by Employee during his employment by the Company, the Company shall pay Employee a Base Salary of One Hundred Ten Thousand Dollars ($110,000) per annum during the term of this agreement, prorated for any partial period and paid in conformity with the Company's normal payroll period. Employee's salary shall be reviewed by the Company's Chief Executive Officer from time to time in his discretion, and Employee will receive such salary increases, if any, as the Chief Executive Officer in his sole discretion determines. (b) Employee shall be entitled to participate in any bonus pool or similar program established by the Board of Directors. (c) The Employee's place of employment shall be considered San Diego County, California (or other mutually agreed upon location). (d) Employee shall be entitled to participate in and receive benefits under the Company's executive benefits plans as in effect from time to time, including, medical insurance, sick leave, and vacation time, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and Company policies. Initial vacation time shall be at least three weeks per annum. (e) The Company shall pay or reimburse Employee for all expenses normal reimbursed by the Company and reasonably incurred by him in furtherance of his duties hereunder and authorized by the Company, including without limitation, expenses for entertainment, traveling, meals, hotel accommodations and the like upon submission by him of vouchers or an itemized list thereof as the Company; may from time to time adopt and authorize, and as may be required in order to permit such payments as proper deductions to the Company under the Internal Revenue Code of 1986 and the rules and regulations adopted pursuant thereto now or hereafter in effect. (f) All amounts payable or which become payable under any provision of this Agreement will be subject to any deductions authorized in writing by you and any deductions and withholdings required by law. 4. Indemnification. --------------- (a) If, after the date of the commencement of the Employment Period, the Employee is made a party or is threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was an officer of the Company or is or was serving at the request of the Company as a director, officer, 1 member, employee or agent of another corporation or partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is an alleged act or failure to act in an official capacity as a director, officer, member, employee or agent, he shall be indemnified and held harmless by the Company to the fullest extent authorized by Delaware law, as the same exists or may hereafter be amended, against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Employee in connection therewith, including, without limitation, payment of expenses incurred in defending a Proceeding prior to the final disposition of such Proceeding (subject to receipt of an undertaking by the Employee to repay such amount if it shall ultimately be determined that the Employee is not entitled to be indemnified by the Company under Delaware law), and such indemnification shall continue as to the Employee even if he has ceased to be an officer, member, employee or agent of the Company or other enterprise and shall inure to the benefit of his heirs, executors and administrators. (b) The right of indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 4 shall not be exclusive of any other right that the Employee may have or hereafter may acquire under any statute, provision of the Certificate of Incorporation or Bylaws of the Company, agreement, vote of shareholders or disinterested directors or otherwise. 5. Termination of Employment. -------------------------- (a) The Company shall have the right at its option to terminate the employment of Employee hereunder by giving written notice thereof to the Employee in the event of any of the following: (1) The Company may terminate this Agreement at any time with good cause, as determined by the Board of Directors of the Company, or a duly authorized committee thereof, acting in good faith and upon reasonable grounds, whereupon all compensation to Executive shall cease as of the effective date of termination. As used in this paragraph, the term "good cause" shall mean (i) dishonesty by Executive detrimental to the best interests of the Company, (ii) continuing inattention to or neglect of the duties to be performed by Employee, (iii) willful disloyalty of Employee to Company, (iv) the death or disability of Employee, (v) conviction by a court of competent jurisdiction of Employee in any fraud, or (vi) the imparting of any material confidential information by Employee in violation of this Agreement. (2) If the Company gives Employee thirty days advance written notice of termination of employment. (3) If this Agreement is terminated by the Company pursuant to Paragraph 5(a)(2) hereof, then Employee shall be entitled to severance payments equal to six (6) months of his then monthly Base Salary and any bonus on an as if perfected basis payable in one lump sum within thirty (30) days after such effective termination of Employee's employment by the Company irrespective of the remaining term of this agreement. (b) The Employee shall have the right at his sole option to terminate employment hereunder at any time upon thirty (30) days written notice. 6. Soliciting Customers. The Employee agrees that he will not for a period of -------------------- one (1) year immediately following the termination of his employment with the Company, either directly or indirectly make known to any competing person, firm, or corporation the names or addresses of any of the customers of the Company or any other information pertaining to them that is not in the public domain. 7. Trade Secrets of the Company. The Employee prior to and during the term of ---------------------------- employment under this Agreement has had and will have access to and become acquainted with various trade secrets, consisting of devices, secret inventions, processes, and compilations of information, records, and specifications which are owned by the Company, and which are regularly used or to be used in the operation of the business of the Company. The Employee shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the term of this agreement or for a period of 36 months thereafter, except as required in the course of his employment. All files, records, documents, drawings, specifications, equipment, and similar items relating to the business of the Company, whether prepared by the Employee or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be removed under any circumstances from the premises of the Company where the work is being carried on without prior written consent of the Company or consistent with the Company's normal business practices. 8. Inventions and Patents. ---------------------- (a) Employee has provided the Company with a list of audio properties developed by Employee prior to employment. The Company shall separately negotiate for license(s) for any of these listed properties should the Company desire to use them in any of its product programs. Other inventions shall be assumed to fall under the provisions of this Section 8. 2 (b) The Employee agrees that as to any inventions made by him during the term of his employment, solely or jointly with others, which are made with the equipment, supplies, facilities or trade secret information of the Company, or which relate at the time of the conception or reduction to purchase of the invention to the business of the Company or the Company's actual or demonstrably anticipated research and development, or which result from any work performed by the Employee for the Company, shall belong to the Company and the Employee promises to assign such inventions to the Company. The Employee also agrees that the Company shall have the right to keep such inventions as trade secrets, if the Company chooses. The Employee agrees to assign to the Company the Executive's rights in any other inventions where the Company is required to grant those rights to the United States government or any agency thereof. In order to permit the Company to claim rights to which it may be entitled, the Employee agrees to disclose to the Company in confidence all inventions which the Employee makes arising out of the Employee's employment and all patent application filed by the Employee within one year after the termination of his employment. (c) The Employee shall assist the Company in obtaining patents on all inventions, designs, improvements, and discoveries patentable by the Company in the United States and in all foreign countries, and shall execute all documents and do all things necessary to obtain letters patent, to vest the Company with full and extensive title thereto, and to protect the same against infringement by others. 9. Severability. Each paragraph and subparagraph of this Agreement shall be ------------ construed and considered separate and severable from the validity and enforceability of any other provision contained in this Agreement. 10. Assignment. The rights of the Company (but not its obligations) under this ---------- Agreement may, without the consent of the Employee, be assigned by the Company to any parent, subsidiary, or successor of the Company; provided that such parent, subsidiary or successor acknowledges in writing that it is also bound by the terms and obligations of this Agreement. Except as provided in the preceding sentence, the Company may not assign all or any of its rights, duties or obligations hereunder without prior written consent of Employee. The Employee may not assign all or any of his rights, duties or obligations hereunder without the prior written consent of the Company. 11. Notices. All notices, requests, demands and other communications shall be ------- in writing and shall be defined to have been duly given if delivered or if mailed by registered mail, postage prepaid: (a) If to Employee, addressed to him at the following address as may be changed in writing from time to time: Robert Todrank __________________ __________________ (b) If to the Company, addressed to: American Technology Corporation 13114 Evening Creek Dr. South San Diego, California 92128 or to such other address as any party hereto may request by notice given as aforesaid to the other parties hereto. 12. Title and Headings. Titles and headings to paragraphs hereof are for ------------------ purposes of references only and shall in no way limit, define or otherwise affect the provisions hereof. 13. Governing Law. This Agreement is being executed and delivered and is ------------- intended to be performed in the State of California, and shall be governed by and construed in accordance with the laws of the State of California. 14. Counterparts. This Agreement may be executed simultaneously in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall not be necessary in making proof of this Agreement to produce or account for more than one original counterpart. 15. Cumulative Rights. Each and all of the various rights, powers and remedies ----------------- of the Company and Employee in this Agreement shall be considered as cumulative, with and in addition to any other rights, powers or remedies of the Company or the Employee and no one of them as exclusive of the others or as exclusive of any other rights, powers and remedies allowed by law. The exercise or partial exercise of any right, power or remedy shall neither constitute the election thereof nor the waiver of any other right, power or remedy. Sections 4, 6, 7 and 8 hereof shall continue in full force and effect notwithstanding the Employee's termination of employment and the termination of this Agreement. 16. Remedies. The Employee and the Company both acknowledge that each may have -------- no adequate remedy at law if either violates any of the terms contained in Sections 6, 7 and 8. In such event, either party shall have the right, in addition to any 3 other rights it may have, to obtain relief to restrain any breach hereof or otherwise to specifically enforce any of the provisions hereof. 17. Waiver of Breach. The waiver by one party to this Agreement of a breach of ---------------- any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the said party. 18. Entire Agreement. This Agreement contains the entire agreement of the ---------------- parties hereto and may be modified or amended only by a written instrument executed by parties hereto. Effective on the date hereof, any prior employment agreements between the Company and the Employee shall terminate. 19. Attorney's Fees. In the event that either party must institute legal action --------------- to compel the other to comply with the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and costs. 20. Good Faith. Each of the parties hereto agrees that he or it shall act in ---------- good faith in all actions taken under this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. /s/ ELWOOD G. NORRIS July 8, 1998 - -------------------------------- American Technology Corporation Elwood G. Norris, Director /s/ ROBERT PUTNAM July 8, 1998 - -------------------------------- Robert Putnam, Vice President /s/ ROBERT TODRANK July 8, 1998 - -------------------------------- Robert Todrank, Employee 4 EX-10.16 3 SPECIAL STOCK OPTION Exhibit 10.16 AMERICAN TECHNOLOGY CORPORATION ______________________________ Special Stock Option ________________ Granted Under the Approval of the Board of Directors of American Technology Corporation THIS SPECIAL STOCK OPTION, dated as of July 16, 1999 (the "Date of Grant"), is granted by AMERICAN TECHNOLOGY CORPORATION, a Delaware corporation ("Company"), to Cornelius J. Brosnan (the "Optionee"), whose status with the Company is described on the signature page hereof below his signature. WHEREAS, the Optionee is now the President, CEO and Chairman of the Company and the Company desires to have the Optionee remain in its service and desires to encourage stock ownership by the Optionee and to increase the Optionee's proprietary interest in the Company's success; and as an inducement thereto has determined to grant to the Optionee the option herein provided for, to the end that the Optionee may thereby be assisted in obtaining an interest, or an increased interest, as the case may be, in the stock ownership of the Company; NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. Grant. Pursuant to the Motion passed at the Board of Directors of the Company dated July 16, 1999, the Company hereby grants to the Optionee an option (the "Option") to purchase 100,000 shares of the Company's common stock, $.00001 par value per share (the "Option Shares") at the price of $10.00 per share (the "Purchase Price" or "Exercise Price") and exercisable only upon the Company's publicly traded common shares achieving and maintaining $25.00 for a minimum of twenty (20) consecutive trading days. This Option is granted separately at the discretion of the Board of Directors and is not an option pursuant to the 1992 or 1997 option plans. Both the Purchase Price and the number of Option Shares purchasable may be adjusted pursuant to Paragraph 10 hereof. 2. Term. This Option is exercisable during the period beginning with the Date of Grant and ending July 16, 2003, at 5:00 p.m. (Pacific Time), except as provided in Paragraph 7 hereof. 3. Exercise of Option. During the Optionee's life, this Option may only be exercised by him or her. This Option may only be exercised by presentation at the principal offices of the Company in San Diego, California of written notice to the Company's Secretary advising the Company of the Optionee's election to purchase Option Shares, specifying the number of Option Shares being purchased, accompanied by payment. No Option Shares shall be issued until full payment is made therefor. Payment shall be made in cash, represented by bank or cashier's check, certified check or money order. 4. Issuance of Option Shares; Restrictive Legend. (a) Upon proper exercise of this Option, the Company shall mail or deliver to the Optionee, as promptly as practicable, a stock certificate or certificates representing the Option Shares purchased, subject to clause (b) below. The Company shall not be required to sell or issue any shares under the Option if the issuance of such shares shall constitute a violation of any applicable law or regulation or of any requirements of any national securities exchange upon which the Company's common stock may be listed. (b) Upon any exercise of this Option, if a registration statement under the Securities Act of 1933 (the "Act") is not in effect with respect to the Option Shares, then the Company shall not be required to issue any Option Shares unless the Company has received evidence reasonably satisfactory to it to the effect that the Optionee is acquiring such shares for investment and not with a view to the distribution thereof. Any reasonable determination in this connection by the Company shall be final, binding and conclusive. (c) Unless and until removed as provided below, each certificate evidencing unregistered Option Shares shall bear a legend in substantially the following form: "The shares of stock represented by this certificate have not been registered under the Securities Act of 1933 or under the securities laws of any state and may not be sold or transferred except upon such registration or upon receipt by this Corporation of an opinion or counsel satisfactory to this Corporation, in form and substance satisfactory to this Corporation, that registration is not required for such sale or transfer." The Company shall issue a new certificate which does not contain such legend if (i) the shares represented by such certificate are sold pursuant to a registration statement (including a current prospectus) which has become effective under the Act, or (ii) the staff of the Securities and Exchange Commission shall have issued a "no action" letter, reasonably satisfactory to the Company's counsel, to the effect that such shares may be freely sold and thereafter traded publicly without registration under the Act, or (iii) the Company's counsel, or other counsel acceptable to the Company, shall have rendered an opinion satisfactory to the Company to the effect that such shares may be freely sold and thereafter publicly traded without registration under the Act. The Company may, but shall in no event by obligated to, register any securities covered hereby pursuant to the Act. The Company shall not be obligated to take any other affirmative action in order to cause the exercise of the Option or the issuance of any Option Shares to comply with any law or regulation of any governmental authority. 5. Transfer of Option Shares. Option Shares issued upon exercise of this Option which have not been registered under the Act shall be transferable by a holder thereof only upon compliance with the conditions in this Paragraph. Before making any transfer of Option Shares, the holder of the shares shall give written notice to the Company of the holder's intention to make the transfer, describing the manner and circumstances of the transfer. If in the opinion of the Company's counsel, or of other counsel acceptable to the Company, the proposed transfer may be effected without registration under the Act, the Company shall so notify the holder and the holder shall be entitled to transfer such shares as described in the holder's notice to the Company. If such counsel opines that the transfer may not be made without registration under the Act, then the Company shall so notify the holder, in which event the holder shall not be entitled to transfer the shares until (i) the Company notifies the holder that it is permissible to proceed with the transfer, or (ii) registration of the shares under the Act has become effective. The Company may issue "stop transfer" instructions to its transfer agent with respect to any or all of the Option Shares as it deems necessary to prevent any violation of the Act. 6. Transfer or Encumbrance of this Option Prohibited. This Option may not be transferred or assigned in any manner by the Optionee, except by will or trust upon the Optionee's death or by operation of law under the laws of descent and distribution. The same restriction on transfer or assignment shall apply to any heirs, devisees, beneficiaries or other persons acquiring this Option or an interest herein under such an instrument or by operation of law. Further, this Option may not be pledged, hypothecated or otherwise encumbered, by operation of law or otherwise, nor shall it be subject to execution, attachment or similar process. 7. Termination of Service, Death, or Disability. (a) Except as may be otherwise expressly provided in this Agreement, this Option shall terminate as follows: (i) Upon termination of the Optionee's directorship with the Company for cause; (ii) At the expiration of six (6) months from the date of the Optionee's resignation or termination of the Optionee's directorship with the Company without cause, for any reason other than death; provided, that if the Optionee dies within such six-month period, subclause (iii) below shall apply; or (iii) At the expiration of fifteen (15) months after the date of death of the Optionee. (b) This Option confers no right upon the Optionee with respect to the continuation of his directorship (or his position as an officer, director or other provider of services) with the Company or any parent or subsidiary of the Company, and shall not interfere with the right of the Company, or any parent or subsidiary Company, to terminate such relationship(s) at any time in accordance with law and any agreements then in force. 8. No Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to Option Shares until the date of issuance of a stock certificate for such shares. No adjustment for dividends, or otherwise, except as provided in Paragraph 9, shall be made if the record date therefor is prior to the date of exercise of such Option. 9. Changes in the Company's Capital Structure. The existence of this Option shall not limit or affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Option Shares or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. However, (a) If, prior to the Company's delivery of all the Option Shares subject to this Option, the Company shall effect a subdivision (split) or combination (reverse split) of shares or other capital readjustment, the payment of a common stock dividend, or other increase or reduction of the number of shares of common stock outstanding, without receiving compensation therefor in money, services or property, then (i) in the event of an increase in the number of such shares outstanding, the Purchase Price shall be proportionately reduced and the number of Option Shares then still purchasable shall be proportionately increased; and (ii) in the event of a reduction in the number of such shares outstanding, the Purchase Price payable per share shall be proportionately increased and the number of Option Shares then still purchasable shall be proportionately reduced. (b) If while this Option remains outstanding the Company is reorganized, merged, consolidated or party to a plan of share exchange with another corporation, or if the Company sells or otherwise disposes of all or substantially all its property or assets to another corporation, then subject to the provisions of clause (ii) below, (i) after the effective date of such reorganization, merger, consolidation, exchange or sale, as the case may be, the Optionee shall be entitled, upon exercise of this Option, to receive, in lieu of the Option Shares, the number and class of shares of such stock, other securities, cash and other property or rights as the holders of shares of the Company's common stock received pursuant to the terms of the reorganization, merger, consolidation, exchange or sale and to which he would have been entitled if, immediately prior to such reorganization, merger, consolidation, exchange or sale, he had been the holder of record of a number of shares of common stock equal to the number of Option Shares as to which this Option shall be so exercised; and (ii) this Option may be canceled by the Board of Directors of the Company as of the effective date of any such reorganization, merger, consolidation, exchange or sale; provided that (x) such reorganization, merger, consolidation, exchange or sale results in a change in control of the Company rather than a mere change of form or domicile of the Company, (y) written notice of such cancellation is given to the Optionee or other holder of this Option not less than 45 days prior to such effective date, and (z) the Options or other holder shall have the right to exercise the Option in full during such 45-day period preceding the effective date of such reorganization, merger, consolidation, exchange or sale. (c) In case the Company shall determine to offer to the holders of its common stock rights to subscribe pro rata for any new or additional shares of common stock, or any securities convertible into common stock, then the Optionee shall be entitled to participate in such pro rata offering in the same manner and to the same extent as if this Option had been exercised at the Purchase Price then in effect and the number of Option Shares then purchasable upon exercise hereof had been issued to the Optionee pursuant to the terms hereof. (d) Except as herein before expressly provided, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the Purchase Price or the number of Option Shares then subject to this Option. 10. Notification to Company of Certain Sales. The Optionee or other holder of Option Shares who sells any of such shares shall notify the Company of such fact in writing within 30 days after the date of sale, if: (a) At the time the Option Shares were sold, less than ONE year had elapsed since the date the Option Shares were purchased by the Optionee, and less than TWO years had elapsed since the Date of Grant of this Option; or (b) the Optionee was not an employee of the Company (or of a parent or subsidiary thereof) at all times during the period beginning on the Date of Grant of this Option and ending on the date three (3) months prior to the date this Option was exercised to purchase the Option Shares sold. The failure of the Optionee or other holder of Option Shares to promptly give such notice to the Company shall entitle the Company to cancel this Option forthwith, without prior notice to the holder hereof. 11. Notices, etc. Any notice hereunder by the Optionee shall be given to the Company in writing, and such notice and any payment by the Optionee hereunder shall be deemed duly given or made only upon receipt thereof at the Company's office at 13114 Evening Creek Drive South, San Diego, California 92128, or at such other address as the Company may designate by notice to the Optionee. Any notice or other communication to the Optionee hereunder shall be in writing and shall be deemed duly given or made if mailed or delivered to the Optionee at the last address as the Optionee may have on file with the Company's Secretary. This Option shall be governed under and construed in accordance with the laws of the State of California. This address shall be binding on the Company and the Optionee and all successors, assigns, heirs, devisees and personal representatives thereof. NOTE: This option must match the Control copy maintained by the Company, in all particulars. IN WITNESS WHEREOF, the parties hereto have executed this Special Stock Option as of the day and year first above written. AMERICAN TECHNOLOGY CORPORATION By /s/ ELWOOD G. NORRIS -------------------- Elwood G. Norris, Director ATTEST: By /s/ RENEE WARDEN ---------------- Renee Warden, Secretary OPTIONEE NAME and STATUS; Cornelius J. Brosnan, President, CEO and Chairman ORIGINAL to Optionee / COPY to Company EX-10.17 4 SPECIAL STOCK OPTION Exhibit 10.17 AMERICAN TECHNOLOGY CORPORATION _____________________________ Special Stock Option ________________ Granted Under the of the Board of Directors of American Technology Corporation THIS SPECIAL STOCK OPTION, dated as of July 16, 1999 (the "Date of Grant"), is granted by AMERICAN TECHNOLOGY CORPORATION, a Delaware corporation ("Company"), to Cornelius J. Brosnan (the "Optionee"), whose status with the Company is described on the signature page hereof below his signature. WHEREAS, the Optionee is now the President, CEO and Chairman of the Company and the Company desires to have the Optionee remain in its service and desires to encourage stock ownership by the Optionee and to increase the Optionee's proprietary interest in the Company's success; and as an inducement thereto has determined to grant to the Optionee the option herein provided for, to the end that the Optionee may thereby be assisted in obtaining an interest, or an increased interest, as the case may be, in the stock ownership of the Company; NOW, THEREFORE, in consideration of the covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. Grant. Pursuant to the Motion passed at the Board of Directors of the Company dated July 16, 1999, the Company hereby grants to the Optionee an option (the "Option") to purchase 100,000 shares of the Company's common stock, $.00001 par value per share (the "Option Shares") at the price of $10.00 per share (the "Purchase Price" or "Exercise Price") and exercisable only upon the Company's publicly traded common shares achieving and maintaining $50.00 for a minimum of twenty (20) consecutive trading days. This Option is granted separately at the discretion of the Board of Directors and is not an option pursuant to the 1992 or 1997 option plans. Both the Purchase Price and the number of Option Shares purchasable may be adjusted pursuant to Paragraph 10 hereof. 2. Term. This Option is exercisable during the period beginning with the Date of Grant and ending July 16, 2003, at 5:00 p.m. (Pacific Time), except as provided in Paragraph 7 hereof. 3. Exercise of Option. During the Optionee's life, this Option may only be exercised by him or her. This Option may only be exercised by presentation at the principal offices of the Company in San Diego, California of written notice to the Company's Secretary advising the Company of the Optionee's election to purchase Option Shares, specifying the number of Option Shares being purchased, accompanied by payment. No Option Shares shall be issued until full payment is made therefor. Payment shall be made in cash, represented by bank or cashier's check, certified check or money order. 4. Issuance of Option Shares; Restrictive Legend. (a) Upon proper exercise of this Option, the Company shall mail or deliver to the Optionee, as promptly as practicable, a stock certificate or certificates representing the Option Shares purchased, subject to clause (b) below. The Company shall not be required to sell or issue any shares under the Option if the issuance of such shares shall constitute a violation of any applicable law or regulation or of any requirements of any national securities exchange upon which the Company's common stock may be listed. (b) Upon any exercise of this Option, if a registration statement under the Securities Act of 1933 (the "Act") is not in effect with respect to the Option Shares, then the Company shall not be required to issue any Option Shares unless the Company has received evidence reasonably satisfactory to it to the effect that the Optionee is acquiring such shares for investment and not with a view to the distribution thereof. Any reasonable determination in this connection by the Company shall be final, binding and conclusive. (c) Unless and until removed as provided below, each certificate evidencing unregistered Option Shares shall bear a legend in substantially the following form: "The shares of stock represented by this certificate have not been registered under the Securities Act of 1933 or under the securities laws of any state and may not be sold or transferred except upon such registration or upon receipt by this Corporation of an opinion or counsel satisfactory to this Corporation, in form and substance satisfactory to this Corporation, that registration is not required for such sale or transfer. " The Company shall issue a new certificate which does not contain such legend if (i) the shares represented by such certificate are sold pursuant to a registration statement (including a current prospectus) which has become effective under the Act, or (ii) the staff of the Securities and Exchange Commission shall have issued a "no action" letter, reasonably satisfactory to the Company's counsel, to the effect that such shares may be freely sold and thereafter traded publicly without registration under the Act, or (iii) the Company's counsel, or other counsel acceptable to the Company, shall have rendered an opinion satisfactory to the Company to the effect that such shares may be freely sold and thereafter publicly traded without registration under the Act. The Company may, but shall in no event by obligated to, register any securities covered hereby pursuant to the Act. The Company shall not be obligated to take any other affirmative action in order to cause the exercise of the Option or the issuance of any Option Shares to comply with any law or regulation of any governmental authority. 5. Transfer of Option Shares. Option Shares issued upon exercise of this Option which have not been registered under the Act shall be transferable by a holder thereof only upon compliance with the conditions in this Paragraph. Before making any transfer of Option Shares, the holder of the shares shall give written notice to the Company of the holder's intention to make the transfer, describing the manner and circumstances of the transfer. If in the opinion of the Company's counsel, or of other counsel acceptable to the Company, the proposed transfer may be effected without registration under the Act, the Company shall so notify the holder and the holder shall be entitled to transfer such shares as described in the holder's notice to the Company. If such counsel opines that the transfer may not be made without registration under the Act, then the Company shall so notify the holder, in which event the holder shall not be entitled to transfer the shares until (i) the Company notifies the holder that it is permissible to proceed with the transfer, or (ii) registration of the shares under the Act has become effective. The Company may issue "stop transfer" instructions to its transfer agent with respect to any or all of the Option Shares as it deems necessary to prevent any violation of the Act. 6. Transfer or Encumbrance of this Option Prohibited. This Option may not be transferred or assigned in any manner by the Optionee, except by will or trust upon the Optionee's death or by operation of law under the laws of descent and distribution. The same restriction on transfer or assignment shall apply to any heirs, devisees, beneficiaries or other persons acquiring this Option or an interest herein under such an instrument or by operation of law. Further, this Option may not be pledged, hypothecated or otherwise encumbered, by operation of law or otherwise, nor shall it be subject to execution, attachment or similar process. 7. Termination of Service, Death, or Disability. (a) Except as may be otherwise expressly provided in this Agreement, this Option shall terminate as follows: (i) Upon termination of the Optionee's directorship with the Company for cause; (ii) At the expiration of six (6) months from the date of the Optionee's resignation or termination of the Optionee's directorship with the Company without cause, for any reason other than death; provided, that if the Optionee dies within such six-month period, subclause (iii) below shall apply; or (iii) At the expiration of fifteen (15) months after the date of death of the Optionee. (b) This Option confers no right upon the Optionee with respect to the continuation of his directorship (or his position as an officer, director or other provider of services) with the Company or any parent or subsidiary of the Company, and shall not interfere with the right of the Company, or any parent or subsidiary Company, to terminate such relationship(s) at any time in accordance with law and any agreements then in force. 8. No Rights as Stockholder. The Optionee shall have no rights as a stockholder with respect to Option Shares until the date of issuance of a stock certificate for such shares. No adjustment for dividends, or otherwise, except as provided in Paragraph 9, shall be made if the record date therefor is prior to the date of exercise of such Option. 9. Changes in the Company's Capital Structure. The existence of this Option shall not limit or affect in any way the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Option Shares or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. However, (a) If, prior to the Company's delivery of all the Option Shares subject to this Option, the Company shall effect a subdivision (split) or combination (reverse split) of shares or other capital readjustment, the payment of a common stock dividend, or other increase or reduction of the number of shares of common stock outstanding, without receiving compensation therefor in money, services or property, then (i) in the event of an increase in the number of such shares outstanding, the Purchase Price shall be proportionately reduced and the number of Option Shares then still purchasable shall be proportionately increased; and (ii) in the event of a reduction in the number of such shares outstanding, the Purchase Price payable per share shall be proportionately increased and the number of Option Shares then still purchasable shall be proportionately reduced. (b) If while this Option remains outstanding the Company is reorganized, merged, consolidated or party to a plan of share exchange with another corporation, or if the Company sells or otherwise disposes of all or substantially all its property or assets to another corporation, then subject to the provisions of clause (ii) below, (i) after the effective date of such reorganization, merger, consolidation, exchange or sale, as the case may be, the Optionee shall be entitled, upon exercise of this Option, to receive, in lieu of the Option Shares, the number and class of shares of such stock, other securities, cash and other property or rights as the holders of shares of the Company's common stock received pursuant to the terms of the reorganization, merger, consolidation, exchange or sale and to which he would have been entitled if, immediately prior to such reorganization, merger, consolidation, exchange or sale, he had been the holder of record of a number of shares of common stock equal to the number of Option Shares as to which this Option shall be so exercised; and (ii) this Option may be canceled by the Board of Directors of the Company as of the effective date of any such reorganization, merger, consolidation, exchange or sale; provided that (x) such reorganization, merger, consolidation, exchange or sale results in a change in control of the Company rather than a mere change of form or domicile of the Company, (y) written notice of such cancellation is given to the Optionee or other holder of this Option not less than 45 days prior to such effective date, and (z) the Options or other holder shall have the right to exercise the Option in full during such 45-day period preceding the effective date of such reorganization, merger, consolidation, exchange or sale. (c) In case the Company shall determine to offer to the holders of its common stock rights to subscribe pro rata for any new or additional shares of common stock, or any securities convertible into common stock, then the Optionee shall be entitled to participate in such pro rata offering in the same manner and to the same extent as if this Option had been exercised at the Purchase Price then in effect and the number of Option Shares then purchasable upon exercise hereof had been issued to the Optionee pursuant to the terms hereof. (d) Except as herein before expressly provided, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the Purchase Price or the number of Option Shares then subject to this Option. 10. Notification to Company of Certain Sales. The Optionee or other holder of Option Shares who sells any of such shares shall notify the Company of such fact in writing within 30 days after the date of sale, if: (a) At the time the Option Shares were sold, less than ONE year had elapsed since the date the Option Shares were purchased by the Optionee, and less than TWO years had elapsed since the Date of Grant of this Option; or (b) the Optionee was not an employee of the Company (or of a parent or subsidiary thereof) at all times during the period beginning on the Date of Grant of this Option and ending on the date three (3) months prior to the date this Option was exercised to purchase the Option Shares sold. The failure of the Optionee or other holder of Option Shares to promptly give such notice to the Company shall entitle the Company to cancel this Option forthwith, without prior notice to the holder hereof. 11. Notices, etc. Any notice hereunder by the Optionee shall be given to the Company in writing, and such notice and any payment by the Optionee hereunder shall be deemed duly given or made only upon receipt thereof at the Company's office at 13114 Evening Creek Drive South, San Diego, California 92128, or at such other address as the Company may designate by notice to the Optionee. Any notice or other communication to the Optionee hereunder shall be in writing and shall be deemed duly given or made if mailed or delivered to the Optionee at the last address as the Optionee may have on file with the Company's Secretary. This Option shall be governed under and construed in accordance with the laws of the State of California. This address shall be binding on the Company and the Optionee and all successors, assigns, heirs, devisees and personal representatives thereof. NOTE: This option must match the Control copy maintained by the Company, in all particulars. IN WITNESS WHEREOF, the parties hereto have executed this Special Stock Option as of the day and year first above written. AMERICAN TECHNOLOGY CORPORATION By /s/ ELWOOD G. NORRIS ---------------------------- Elwood G. Norris, Director ATTEST: By /s/ RENEE WARDEN ------------------------ Renee Warden, Secretary OPTIONEE NAME and STATUS; Cornelius J. Brosnan, President, CEO and Chairman ORIGINAL to Optionee / COPY to Company EX-23.1 5 CONSENT OF BDO Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors American Technology Corporation We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (File No. 333-09265, File No. 333-09269, File No. 333- 23845 and File No. 333-59929) and Forms S-3 (File No. 333-27455, File No. 333- 36003, File No. 333-71351) of our report dated November 5, 1999 relating to the financial statements of American Technology Corporation appearing in the Company's Annual Report on Form 10-KSB for the year ended September 30, 1999. /s/ BDO SEIDMAN, LLP --------------------- BDO Seidman, LLP Denver, Colorado December 5, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR SEP-30-1999 OCT-01-1998 SEP-30-1999 590,236 299,649 166,532 8,000 287,321 1,540,319 611,587 478,540 2,161,036 443,844 0 0 3 115 1,717,074 2,161,036 787,408 823,753 619,665 619,665 3,309,406 0 0 (3,041,634) 0 (3,041,634) 0 0 0 (3,041,634) (.33) (.33)
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