<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION DECEMBER 11, 1997
REGISTRATION NO. 333-_____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NORRIS COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
----------
DELAWARE 3651 NONE
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
organization)
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13114 EVENING CREEK DRIVE SOUTH
SAN DIEGO, CALIFORNIA 92128
(619) 679-1504
(Address and telephone number of principal executive offices
and principal place of business)
----------
ELWOOD G. NORRIS, CHAIRMAN
NORRIS COMMUNICATIONS, INC.
13114 EVENING CREEK DRIVE SOUTH
SAN DIEGO, CALIFORNIA 92128
(619) 679-1504
(Name, address and telephone number of agent for service)
COPY TO:
CURT C. BARWICK, ESQ.
HIGHAM, MCCONNELL & DUNNING LLP
28202 CABOT ROAD, SUITE 450
LAGUNA NIGUEL, CALIFORNIA 92677
COUNSEL FOR THE COMPANY
----------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON
AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
IF THE ONLY SECURITIES REGISTERED ON THIS FORM ARE BEING OFFERED
PURSUANT TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING
BOX: [ ]
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED
ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT
OF 1933, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND OR
INTEREST REINVESTMENT PLANS, CHECK THE FOLLOWING BOX: [X]
SHARES PREVIOUSLY REGISTERED PURSUANT TO REGISTRATION STATEMENT NO.
333-7709 ARE INCLUDED HEREIN IN ACCORDANCE WITH RULE 429.
<PAGE> 2
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE FEE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK, $.001 PAR VALUE 3,699,279 SHARES(1) $1.16(6) $4,291,164(6) $1,480
- -----------------------------------------------------------------------------------------------------
COMMON STOCK, $.001 PAR VALUE 5,003,857 SHARES(2) $0.94(6) $4,703,626(6) $1,622
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COMMON STOCK, $.001 PAR VALUE 9,610,807 SHARES(3) $0.55(6) $5,285,944(6) $1,652
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COMMON STOCK, $.001 PAR VALUE 12,665,224 SHARES(4) $0.12(6) $1,519,827(6) $ 449
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COMMON STOCK, $.001 PAR VALUE 400,000 SHARES(5) $0.12(6) $ 48,000(6) 14
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TOTAL REGISTRATION FEE $5,217
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PREVIOUSLY PAID $4,754
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TOTAL DUE $ 463
=====================================================================================================
</TABLE>
(1) Includes the registration for resale of the following: (i) 2,666,074 shares
of Common Stock issued in a private placement in June 1996, and (ii)
1,033,205 shares of Common Stock (subject to adjustment) issuable upon the
exercise of warrants issued in the foregoing private placement. The
registration fee for these shares was previously paid with Registration
Statement No. 333-7709. Such shares are included herein in accordance with
Rule 429.
(2) Includes the registration for resale of 5,003,857 shares of Common Stock
(subject to adjustment) issuable upon the exercise of warrants issued in
private placements in July and August, 1996. The registration fee for these
shares was previously paid with Registration Statement No. 333-7709. Such
shares are included herein in accordance with Rule 429.
(3) Includes the registration for resale of 6,045,160 additional shares of
Common Stock estimated to be issuable upon the exercise of warrants issued
in the foregoing private placements in the event of a decline in the price
of the Common Stock to $0.45 per share and 2,811,723 shares of Common Stock
estimated to be issuable to purchasers of warrants and Common Stock in such
private placements due to delays in the registration process. Estimated
solely for purposes of calculating the registration fee in connection with
the Registration Statement. The registration fee for these shares was
previously paid with Registration Statement No. 333-7709. Such shares are
included herein in accordance with Rule 429.
(4) Includes registration for resale of 12,622,196 additional shares of Common
Stock issued to private placement placees upon the exercise of Warrants
issued in the foregoing private placements due to a decline in the price of
the Common Stock after the May 15, 1997 effective date of Registration
Statement No. 333-7709 and 43,028 shares of Common Stock issued upon
adjustment of private placement penalties.
(5) Includes registration for resale of 400,000 shares of Common Stock issuable
upon the exercise of a warrant issued for services.
(6) These figures are estimates made solely for the purpose of calculating the
registration fee pursuant to Rule 457(c). The average of the bid and asked
prices for the Common Stock on July 3, 1996, August 27, 1996 and on February
7, 1997, as reported by NASDAQ, was $1.16, $0.94 and $0.55, respectively.
The average bid and asked prices for the Common Stock on December 5, 1997,
as reported by the OTC Bulletin Board, was $0.12.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
2
<PAGE> 3
NORRIS COMMUNICATIONS, INC.
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CROSS REFERENCE SHEET
BETWEEN ITEMS OF FORM SB-2 AND PROSPECTUS
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND HEADING PROSPECTUS CAPTION
- --------------------------------------- ------------------
<S> <C>
1. Forepart of the Registration Statement Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk Factors Prospectus Summary, Risk Factors
4. Use of Proceeds Not Applicable
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Shareholders
8. Plan of Distribution Cover Page; Selling Shareholders
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Certain Beneficial Principal Shareholders
Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on Management
Indemnification of Securities Act Liabilities
15. Organization Within Last 5 Years Not Applicable
16. Description of Business Business
17. Management's Discussion and Analysis or Management's Discussion and Analysis of
Plan of Operations Financial Condition and Results of Operations
18. Description of Property Business
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market Price for Common Equity and Market for Common Stock and
Related Shareholder Matters Related Shareholder Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Not Applicable
Accountants on Accounting and Financial
Disclosure
</TABLE>
3
<PAGE> 4
PROSPECTUS
31,379,167 SHARES OF COMMON STOCK ($.001 PAR VALUE)
NORRIS COMMUNICATIONS, INC.
This Prospectus relates to 31,379,167 shares of Common Stock, $.001 par
value ("Common Stock") of Norris Communications, Inc., a Delaware corporation
(the "Company"), heretofore issued to the persons listed as the Selling
Shareholders. Such shares of Common Stock are being offered for the respective
accounts of the Selling Shareholders, and will be sold from time to time by the
Selling Shareholders in the national over-the-counter market or otherwise at
their prevailing prices, or in negotiated transactions. The Company will receive
no proceeds from the sale of such shares of Common Stock by the Selling
Shareholders. The expenses of preparing and filing the Registration Statement of
which this Prospectus forms a part are being paid by the Company.
The shares of Common Stock offered hereby includes the resale of such
presently indeterminate number of shares of Common Stock as shall be issued in
respect of (i) 2,666,074 shares of Common Stock (subject to adjustment) issued
in private placements in or about June 1996, (ii) 12,082,222 shares of Common
Stock (subject to adjustment) issuable upon the exercise of warrants
("Warrants") issued in connection with the June 1996 private placement, as well
as, additional private placements in July and August 1996, (iii) 2,811,723
shares of Common Stock issuable to the Selling Shareholders due to delays in the
registration process, (iv) 12,665,224 shares of Common Stock issuable upon
exercise of the Warrants or otherwise pursuant to the terms of the foregoing
private placements due to a decline in the average bid and asked prices per
share of the Common Stock and (v) 400,000 shares of Common Stock issuable upon a
warrant issued for services. The number of shares of Common Stock issuable in
connection with such transactions is subject to adjustment and could be less or
more than the estimated amount depending upon factors which cannot be predicted
by the Company at this time, including, among others, the future market price of
the Common Stock.
----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGE 7 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
The shares offered hereby were acquired by the Selling Shareholders from
the Company in private transactions and are "restricted securities" under the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus has
been prepared for the purpose of registering the shares under the Act to allow
for future sales by the Selling Shareholders to the public without restriction.
To the knowledge of the Company, the Selling Shareholders have made no
arrangement with any brokerage firm for the sale of the shares. The Selling
Shareholders may be deemed to be "underwriters" within the meaning of the
Securities Act. Any commissions received by a broker or dealer in connection
with resales of the shares may be deemed to be underwriting commissions or
discounts under the Securities Act. See "Selling Shareholders."
The shares offered hereby may have been acquired by the Selling
Shareholders from the Company in a transaction deemed to involve general
solicitation. Such a transaction may have created a contingent liability of the
Company to the Selling Shareholders. See "Risk Factors."
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The Common Stock is traded in the over-the-counter market on the
National Association of Securities Dealers, Inc. ("NASD") Electronic Bulletin
Board ("OTC Bulletin Board") under the symbol "NCII." On December 5, 1997, the
bid and asked prices per share, as reported by the OTC Bulletin Board were
$0.___ and $0.___ respectively.
-----------------------------------------------------
The date of this Prospectus is December __, 1997
1
<PAGE> 5
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission. Reports, proxy statements and other information filed by
the Company with the Securities and Exchange Commission may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: 75 Park Place, New York, New York 10007; and the
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60621; and copies of such material may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W. Judiciary Plaza, Washington,
D.C. 20549 at prescribed rates. In addition, such information may be accessed
electronically at the Commission's web site on the Internet at www.sec.gov.
The Company intends to distribute to its stockholders annual reports
containing audited consolidated financial statements with a report thereon by
independent chartered accountants after the end of each fiscal year. In
addition, the Company will furnish to its shareholders quarterly reports for the
first three quarters of each fiscal year containing unaudited financial and
other information after the end of each fiscal quarter, upon written request to
the secretary of the Company.
The Company has filed with the Commission a registration statement on
Form SB-2 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFERING CONTEMPLATED HEREBY, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE SELLING SHAREHOLDERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED
BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
2
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY............................................................. 4
RISK FACTORS....................................................................7
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS........................14
SELECTED FINANCIAL DATA........................................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................16
BUSINESS.......................................................................22
MANAGEMENT.....................................................................29
CERTAIN TRANSACTIONS...........................................................31
PRINCIPAL SHAREHOLDERS.........................................................32
SELLING SHAREHOLDERS...........................................................35
DESCRIPTION OF SECURITIES......................................................37
LEGAL MATTERS..................................................................38
EXPERTS........................................................................38
FURTHER INFORMATION............................................................38
INDEX TO FINANCIAL STATEMENTS..................................................40
</TABLE>
3
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. See "Risk Factors" for a discussion of important
factors that should be considered by prospective investors related to
forward-looking statements included in this Summary.
THE COMPANY
The Company is a holding company which, through its wholly-owned United
States subsidiary, is an innovator in developing and marketing advanced
electronic product designs and technologies employing a rapidly growing
non-volitile storage media (flash memory) for the portable computing, digital
recording, mobile office and telecommunication markets. The Company is engaged
in a single industry segment: the development, manufacture and marketing of
proprietary electronic technology and products. The Company was incorporated in
Canada under the British Columbia Company Act on February 11, 1988 under the
name 340520 B.C. Ltd. The Company changed its name to Norris Communications
Corp. on April 7, 1988 and on November 22, 1994 continued its jurisdiction of
incorporation to the Yukon Territory, Canada. The Company further continued its
jurisdiction of incorporation to Wyoming on August 30, 1996 and on September 4,
1996 reincorporated into Delaware.
As described more fully below, through a series of transactions, the
Company has evolved to its present structure as a holding company for its
principal, wholly-owned subsidiary, Norris Communications, Inc., a California
corporation ("NCI"). Through NCI, the Company is principally involved in
developing, manufacturing and marketing products such as the FLASHBACK recording
device, a proprietary technology for information storage and retrieval and
related electronic technology and products to original equipment manufacturer
("OEM") customers. The Company also holds as an investment, 940,734 common
shares (approximately 12.1% as of March 31, 1997) of JABRA Corporation
("JABRA"). Prior to January 15, 1993, JABRA was a wholly-owned subsidiary of the
Company. JABRA is a developer and manufacturer of communication products for
desktop, mobile and wireless applications.
During 1993, the Company invented and commenced development of advanced
digital recording technology that does not involve mechanical moving parts.
Although various digital techniques have been adapted to sound recording and
reproduction, such as compact disc players and digital tape recorders, these
devices still utilize mechanical techniques for moving the storage media as well
as positioning the read/write head in the case of compact discs. The Company's
technology is designed to substitute all solid state electronic control for
traditional mechanical functions and magnetic media. The Company's technology
combines a micro-processor based control system with data compression and a
non-volatile storage media to produce a no-moving-parts recording scheme with
advanced features and capabilities.
Management believes the Company's newly developed proprietary technology
for information storage lends itself to a broad array of product applications.
Through a technique of combining digital signal processing with state-of-the-art
compression algorithms and a non- volatile storage array all managed by a
microcontroller, it is possible to store data without the need for magnetic
media such as is presently used in audio/video tape recording equipment as well
as computer hard drives and diskettes. Since there are no moving parts, there
are correspondingly no motors, belts, or other control devices required. All
functions associated with devices designed around this new technology can be
operated by existing microprocessor control devices. Should the prices of
various forms of storage arrays, such as flash memory chips, continue to decline
as is generally predicted, more applications utilizing these techniques will
become cost effective.
The Company has utilized this proprietary technology to develop its
FLASHBACK recording device, as part of its strategy of developing practical
electronic products with broad applications. In November 1996 the Company
entered into an OEM contract with Sanyo Information Systems U.K. Ltd. and in
January 1997 entered into an OEM development agreement with Lanier Worldwide,
Inc. The Company anticipates the majority of its future revenues will be from
license and royalty fees and from contract development services. The FLASHBACK
and related electronic technology and products are being marketed to OEM
customers by the Company's subsidiary, NCI.
4
<PAGE> 8
The address of the Company's principal executive office is 13114 Evening
Creek Drive South, San Diego, California 92128 and its telephone number is (619)
679-1504. The Company's primary operating facilities are located at that
address.
THE SELLING SHAREHOLDER OFFERING
<TABLE>
<S> <C>
Common Stock outstanding as of
November 30, 1997 (1) 56,413,405 shares
Common Stock offered by Selling
Shareholders (2) 31,379,167 shares
OTC Bulletin Board Symbol NCII
Risk Factors The securities offered hereby involve a high
degree of risk. See "Risk Factors" and
"Selling Shareholders."
</TABLE>
- ----------
(1) Does not include 3,586,595 shares (subject to adjustment) issuable upon
the exercise of presently outstanding options and warrants.
(2) Includes the resale of such presently indeterminate number of shares of
Common Stock as shall be issued in respect to (i) 2,666,074 shares of
Common Stock (subject to adjustment) issued in private placements in or
about June 1996, (ii) 12,082,222 shares of Common Stock (subject to
adjustment) issuable upon the exercise of Warrants issued in connection
with the June 1996 private placement, as well as, additional private
placements in July and August 1996, (iii) 2,811,723 shares of Common
Stock issuable to the Selling Shareholders due to delays in the
registration process, (iv) 12,665,224 shares of Common Stock issuable
upon exercise of the Warrants or otherwise due to a decline in the
average bid and asked prices per share of the Common Stock and (v)
400,000 shares of Common Stock issuable to a Selling Shareholder upon
the exercise of a Warrant.
5
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE DATA)
The summary financial information which is set forth below should be
read in conjunction with the Consolidated Financial Statements and related Notes
thereto appearing elsewhere in this Prospectus. The selected consolidated
statements of operations and balance sheets data for the fiscal years ended
March 31, 1997 and 1996, have been derived from Consolidated Financial
Statements of the Company which have been audited by Ernst & Young, independent
auditors, and included herein. The unaudited consolidated balance sheets data as
of September 30, 1997, and the unaudited consolidated statements of operations
information for the six months ended September 30, 1997 and 1996, have been
derived from unaudited financial information prepared on the same basis as the
audited Consolidated Financial Statements. In the opinion of management, such
unaudited financial information includes all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the information presented.
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED MARCH 31, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATIONS DATA:
Revenues $ 653,700 $ 1,328,502 $ 704,403 $ 301,543
Cost of revenues 2,111,999 4,413,814 484,694 1,049,318
Operating expenses 7,266,715 4,859,733 678,175 2,857,336
Loss for the period (9,597,102) (8,455,696) (325,197) (3,657,852)
Loss per share (0.44) (0.64) (0.01) (0.19)
Weighted average
number of common
shares outstanding 21,632,233 13,143,188 39,145,164 19,641,347
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30, 1997
---------------------------- ------------------
1997 1996
----------- -----------
<S> <C> <C> <C>
BALANCE SHEETS DATA:
Total assets $ 2,165,073 $ 8,914,705 $ 2,835,494
Working capital (deficit) (564,503) 1,056,029 1,003,757
Current liabilities 2,488,188 5,351,811 1,626,683
Long term liabilities -- 4,285,714 611,030
Redeemable Preferred Stock -- -- 782,500
Stockholders' equity
(deficiency) (323,115) (722,820) (184,719)
</TABLE>
6
<PAGE> 10
RISK FACTORS
THE SECURITIES WHICH ARE OFFERED HEREBY ARE SPECULATIVE IN NATURE,
INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE PURCHASED BY PERSONS WHO CAN AFFORD
TO LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY
THE FOLLOWING FACTORS INHERENT IN AND AFFECTING THE BUSINESS OF THE COMPANY, IN
ADDITION TO THE INFORMATION CONCERNING THE COMPANY AND ITS BUSINESS CONTAINED IN
THIS PROSPECTUS, BEFORE PURCHASING THE SECURITIES OFFERED HEREBY.
Dependence Upon New Product and Technology. An investment in the
securities offered hereby must be considered an investment risk due to the
nature of the Company's business, the industry in which it is operating, and the
present stage of its development. The scale and scope of the Company's business
is changing. Historically, a majority of the Company's revenues have been
derived from its contract manufacturing business, which was discontinued in
fiscal 1997, and from direct sales of the Company's FLASHBACK family of
products. The Company has completed the transition from a manufacturing and
sales organization to an OEM provider of technology, product development
services and technology licensing. The Company's future growth, as a
consequence, is greatly dependent upon the successful marketing of the FLASHBACK
family of products and related technology (through existing OEM relationships
and new relationships) and contract development services for custom digital
products. The Company's performance will be dependent upon the risks that are
inherent in any business venture that is undergoing a major change in the scope
of its operations, certain specific risks that are discussed below, future
events and developments, and changes in the Company's policies and methods of
operations in the future.
No Established Market for New Products. The Company has developed a
proprietary technology which is used in its FLASHBACK MOBILE OFFICE. The
FLASHBACK MOBILE OFFICE is currently sold on an OEM basis through Sanyo in the
United Kingdom, Germany, France and elsewhere in Europe. As of September 30,
1997, relatively few sales have occurred, a limited number of written purchase
orders have been received and no established market for the Company's products
exists. There can be no assurance that Sanyo will be successful in distributing
the products in Europe or continue to order from the Company or that such
products will be favorably accepted by the marketplace or that significant sales
of such product will occur.
Significant Losses From Operations. The Company has incurred operating
losses in six of its past seven fiscal years with operating losses from
continuing operations of $8,725,000, $7,945,000, $7,142,000, $2,442,000,
$4,427,000 and $236,000 for the fiscal years ended March 31, 1997, March 31,
1996, March 31, 1995, March 31, 1994, March 31, 1993 and March 31, 1991,
respectively. The Company, additionally, has reported an operating loss for the
period ended September 30, 1997 of $458,000. The Company's losses are expected
to continue until such time as the Company is able to sell the FLASHBACK family
of products in commercial quantities and/or increase license and royalty fees
from OEM contracts and development services. No assurance can be given as to the
Company's ability to accomplish the foregoing. The Company's inability to
accomplish the foregoing would have a material adverse effect upon the Company's
ability to operate profitably, and may force the Company to reduce or curtail
operations. The Company is also subject to the risks normally associated with
any new business activity, including unforeseeable expenses, delays and
complications. Accordingly, no assurance can be given that the Company can or
will report operating profits in the future.
Possible Inability to Continue as a Going Concern. The Company has
suffered recurring losses from operations. This factor, in combination with (i)
reliance upon debt and new equity financing to fund the continuing, losses from
operations and cash flow deficits, (ii) substantial inventory and material
decline in inventory turnover, (iii) material net losses and cash flow deficits
from operations during fiscal 1996 and fiscal 1997 and (iv) the possibility that
the Company may be unable to meet its debts as they come due, raise substantial
doubt about the Company's ability to continue as a going concern. The Company's
ability to continue as a going concern is dependent upon its ability to obtain
adequate financing and achieve a level of revenues, adequate to support the
Company's capital requirements, as to which no assurance can be given. In the
event the Company is unable to continue as a going concern, it may elect or be
required to seek protection from its creditors by filing a voluntary petition in
bankruptcy or may be subject to an involuntary petition in bankruptcy. To date,
management has not considered this alternative, nor does management view it as a
likely occurrence.
Management's Plans for Improving Operations. Management has undertaken
steps as part of a plan to improve operations with the goal of sustaining
Company operations for the next twelve months and beyond. These steps include
(i) re-focusing the Company on a family of products, technology components and
software and not
7
<PAGE> 11
having the Company be reliant on a single recorder product, (ii) expanding the
Company's private label product offering by introducing VOICELINK and MOBILE
OFFICE products, (iii) focusing sales and marketing on the OEM markets, and (iv)
controlling overhead and expenses. There can be no assurance the Company can
attain profitable operations in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Management's Plans
For Improving Operations."
Substantial Working Capital Requirements. At September 30, 1997, the
Company had working capital of $1.0 million, compared to working capital deficit
of $0.6 million at March 31, 1997. The Company had approximately $1.6 million of
working capital invested in inventories at September 30, 1997 similar to the
level of inventories at March 31, 1997. The increase in working capital is a
result of the issuance of preferred stock and long term notes as well as the
settlement of an accrued lease obligation through the issuance of a three year
term note offset by the Company's continuing losses and included a $0.2 million
reduction in accounts payable and accrued liabilities and a $0.2 million
increase in accounts receivable. At September 30, 1997, the Company had no bank
lines of credit or related financing facilities and $0.6 million in long term
debt. Given the Company's cash position and assuming the rate of revenues and
expenditures and level of operations after the restructuring, the Company will
require additional capital within the next twelve months to meet its debts as
they become due and to continue as a going concern. The Company is currently
financing its operations from the sale of inventory and from funds received from
OEM and contract development agreements. The Company estimates that at current
expenditure levels and projected working capital requirements it will require a
minimum of an additional $0.5 million to continue operating for the next twelve
months. The existing OEM and licensing business may be able to generate some of
the additional funding required depending on the ability of OEM and licensing
activities to generate revenues, however there can be no assurance thereof. The
Company is currently pursuing various alternatives to meet its needs for
additional capital. There can be no assurance the Company will be successful and
any such financing may be dilutive to current shareholders. The failure to raise
additional funds could have a material adverse effect on the Company and could
force the Company to further reduce or curtail operations. The Company may, from
time to time, seek additional funds through lines of credit, public or private
debt or equity financing. The Company estimates that it will require additional
capital to finance future developments and improvements to its technology. There
can be no assurances that additional capital will be available when needed.
Possible Contingent Liability-Under Federal and State Securities Law.
The Company may have a liability to certain of the Selling Shareholders due to a
possible violation of Securities and Exchange Commission Rule 502(c) and
comparable state securities rules and regulations which prohibit an issuer from
selling securities in a private placement by any form of general solicitation or
general advertising. This violation, in turn, could cause the Company to be in
violation of Section 5 of the Securities Act which prohibits the sale of
securities pursuant to a prospectus that does not satisfy the requirements of
the Securities Act. Such violations, if deemed to occur, could give rise to a
private right of action by the Selling Shareholders against the Company for
rescission and/or damages.
Potential Detrimental Effect on the Company. If all of the Selling
Shareholders were to exercise their rights, assuming a violation, and
seek to rescind their purchases of Common Stock (sold at a per share
price of $0.69-$0.70 per share and Warrants sold at face value and
exercisable into Common Stock at a 30% discount to the average sales
price per share for the five trading days preceding the date of
exercise), the Company would have to return approximately $5,670,000 to
such shareholders, plus interest. If the Company did not have sufficient
working capital to satisfy its obligation to repurchase such securities,
the Company would have to borrow the necessary funds. If it is unable to
borrow funds, the Company would have to sell assets to satisfy its
obligation. Given the Company's historic reliance upon debt and new
equity to fund the continuing losses from operations and cash flow
deficits and its possible present inability to continue as a going
concern, such liability, if it occurs, could require the Company to seek
protection from its creditors by filing a voluntary petition in
bankruptcy. The closing price for the Common Stock on December 5, 1997
was $0.12.
Release and Waiver Agreements. The Company has provided each of the
Selling Shareholders with agreements providing notice of the possible
violation of federal and state securities laws prohibiting an issuer
from selling securities in a private placement by any form of general
solicitation or general advertising and has requested that each Selling
Shareholder forego any private right of action that such Selling
Shareholder may have as a result of such possible violation. In
connection therewith, Selling Shareholders with aggregate purchases of
Common Stock and Warrants equal to $5,420,000 upon request, without
payment or other monetary inducement, have executed written releases and
waivers with respect thereto, effectively reducing the possible
liability to approximately $250,000. While the Company believes that
other exemptions and defenses may be available in the event of violation
of Rule 502(c), there can be no assurance that the Selling Shareholder
who has elected not to release the Company will not commence
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<PAGE> 12
litigation against the Company or that an unfavorable decision in such
litigation will not materially adversely affect the Company.
Enforceability. It is possible that the release and waiver agreements
could be challenged at some later date by a Selling Shareholder on
grounds of enforceability (i.e., that such agreements are unenforceable
under federal or state law) or because individual state securities laws
were not specific references. Although the Company has no present reason
to believe that the release and waiver agreements are not enforceable, a
contrary finding by a federal or state court may result in a continuing
risk of potential liability to other Selling Shareholders.
Limited Release. The releases and waivers provided by the Selling
Shareholders were limited to any private right of action which such
shareholders may have had as a result of any violation of federal and
state securities laws prohibiting an issuer from selling securities in a
private placement by any form of general solicitation. Such releases and
waivers, as a result, will not be applicable as a defense to other
claims under the securities laws which, at a later date, may be
asserted, including fraud liability for false and misleading statements
in the Prospectus.
Competition. The market for electronics products is intensely
competitive and has been affected by foreign competition. The Company competes
and expects to compete with a number of large foreign companies with U.S.
operations and a number of domestic companies, many of which have substantially
greater financial, marketing, personnel and other resources than the Company. In
addition, the industry in which the Company competes has been characterized in
recent years by rapid and significant technological changes and frequent new
product introductions. Current competitors or new market entrants could
introduce new or enhanced products with features which render the Company's
technology or products obsolete or less marketable, or could develop means of
producing competitive products at a lower cost. The ability of the Company to
compete successfully will depend in large measure on its ability to maintain its
capabilities in connection with upgrading its products and quality control
procedures and to adapt to technological changes and advances in the industry.
In addition, the Company's FLASHBACK product competes with a number of
conventional tape recording devices, and has to compete in an established market
with a technology that is not compatible with the present standard in such
market. The major manufacturers of micro cassette recorders which are the most
competitive include Thomson (GE), Olympus, Panasonic, Sanyo and Sony. There can
be no assurance that the Company will be able to keep pace with the
technological demands of the marketplace or successfully enhance its products or
develop new products which are compatible with the products of the electronics
industry.
Product Line; Reliance on Major Customers. The Company has recently
completed a transition from a manufacturing and sales organization to an OEM
provider of technology, product development services and technology licensing.
As a result of this restructuring and change in the source of revenues,
comparisons to prior results are less meaningful and prior operating results are
not indicative of future results. Moreover, demand for the Company's private
labeled FLASHBACK products is uncertain as the Company's OEM customers are in
the early stages of entering various marketing channels. Sales are expected to
be subject to significant month to month variability resulting from the limited
market penetration achieved to date and the seasonal nature of demand for
consumer electronic products. The markets for consumer electronic products are
subject to rapidly changing customer tastes and its OEM customers face a high
level of competition. Demand for FLASHBACK products and technology is expected
to be influenced by marketing and advertising expenditures, product positioning
in retail outlets, technological developments and general economic conditions.
Because these factors can change rapidly, customer demand can also shift
quickly. The Company may not be able to respond to changes in customer demand
because of the time required to change or introduce products, production
limitations and limited financial resources. Any failure to manufacture and sell
the FLASHBACK products in commercial quantities will have a material adverse
effect on the Company and jeopardize its ability to continue as a going concern.
See "Possible Inability to Continue as a Going Concern." Moreover, a substantial
portion of the Company's revenues have been derived primarily from a limited
number of customers. For the six month period ended September 30, 1997, sales of
the Company's FLASHBACK product to Sanyo and provision of contract development
services to Lanier accounted for approximately 94% of its revenues. There can be
no assurance that any such customers will continue to purchase FLASHBACK
products or development services from the Company in the future. The loss of
certain large customers or a decline in the economic prospects of such customers
would have a material adverse effect on the Company.
Dependence Upon Major Suppliers. In the past the Company "box-built" its
FLASHBACK product from parts and electronic components purchased from regular
distribution channels. The Company owns its own tooling and although plastic
cases have been produced by one supplier, other suppliers exist to supply
plastic parts. Delays could occur, however, should the Company be required to
change suppliers. The Company is currently reliant on
9
<PAGE> 13
DSP Group, Inc., a sole source supplier, for one key electronic component
produced to the Company's specifications. Although other suppliers of the basic
component exist, additional time would be required to modify components to meet
the Company's specifications, and any delays could have an adverse impact on the
Company's results of operations. The Company believes there are secondary
suppliers of components such that it is not otherwise reliant on one supplier,
although delays could result should the Company be required to change suppliers
of longer lead time components. Delays could also result from component
shortages, which are common to the electronics industry. The occurrence of any
such events could have a material adverse impact on the Company's operations.
The Company's business is subject to the risk of price fluctuations and
periodic shortages of components. The Company has no supply agreements with its
suppliers and, accordingly, purchases components pursuant to purchase orders
placed from time to time in the ordinary course of business. Failure or delay by
such suppliers in supplying necessary components to the Company could adversely
affect the Company's ability to manufacture and deliver products on a timely and
competitive basis.
Dependence on Contract Manufacturer. To date, the Company's sales of
FLASHBACK products to Sanyo have been from existing inventory. Continued future
sales of FLASHBACK products to Sanyo or others and the sale of future products
pursuant to the Lanier development agreement, if any, requires that the Company
establish a contract manufacturing arrangement with one or more assemblers of
electronic components. Thereafter, the Company will be dependent on such party
or parties to assemble products for the Company's customers. Failure to
establish a relationship on acceptable terms could have an adverse effect on the
Company's operations.
Limited Marketing Capability. The Company has limited marketing
capabilities and resources and is primarily dependent upon in-house employees
for the marketing and sale of its private labeled FLASHBACK product and its OEM
and licensing business. Attracting new OEM customers requires ongoing marketing
and sales efforts and expenditure of funds to create awareness of and demand for
the Company's products and technology. There can be no assurance that the
Company's marketing efforts will be successful or result in significantly
increased levels of revenues.
Reliance on Key Employees. The Company is currently dependent upon the
continued support and involvement of existing management, some of whom do not
have employment contracts. The loss of members of existing management would
severely curtail the Company's ability to operate and implement its business
plan. Elwood Norris serves as a director of two other companies. As such, he
currently devotes only part-time services to the Company (approximately 20 hours
per week). The Company may need to hire additional skilled personnel, including
additional engineers, to support the anticipated growth in its business. The
inability to attract and retain additional qualified employees or the loss of
current key employees could materially and adversely affect the Company's
business.
Certain Transactions/Conflict of Interest. Elwood Norris, the Chairman
of the Board and a Director of the Company, is also a director of American
Technology Corporation ("ATC"). He is the beneficial owner of approximately 29%
of the issued and outstanding shares of ATC. Robert Putnam, the Secretary and a
Director of the Company, is also a Vice President and Treasurer of ATC. Mr.
Putnam is the beneficial owner of approximately 4% of the issued and outstanding
shares of ATC. As a result of their ownership and involvement with ATC, Mr.
Norris and Mr. Putnam have in the past, and may in the future, devote a
substantial portion of their time to their other endeavors. See "Certain
Transactions."
Unpredictable Product Acceptance. The Company's sales and marketing
strategy contemplates sales of its existing private label FLASHBACK products and
related companion products (upon completion of their development), to the
electronics and computer software markets, including sales to markets through
its OEM customers yet to be established. The failure of the Company's OEM
customers to penetrate their projected markets would have a material adverse
effect upon the Company's operations and prospects. Market acceptance of the
Company's private label products will depend in part upon the ability of the
Company to demonstrate the advantages of its products over competing products.
Technological Obsolescence. The electronics, contract manufacturing and
computer software markets are characterized by extensive research and
development and rapid technological change resulting in very short product life
cycles. Development of new or improved products, processes or technologies may
render the Company's proposed products obsolete or less competitive. The Company
will be required to devote substantial efforts and financial resources to
enhance its existing products and methods of manufacture and to develop new
products and methods. There can be no assurance that the Company will succeed
with these efforts. Moreover, there can be no
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<PAGE> 14
assurance that the Company will be able to overcome the obstacles necessary to
complete its proposed products or that other products will not be developed
which would render the Company's proposed products obsolete.
Protection of Proprietary Information. The Company owns one patent
protecting its products. The Company has applied for additional multiple patents
for its FLASHBACK technology, but there is no assurance that any additional
patents will be awarded. The Company has received notification of allowance from
the United States Patent and Trademark Office for use of FLASHBACK as a
registered trade name. Other trade names are owned by the Company and
applications for registration of additional trade names are pending. The Company
does not own any copyrights. The Company treats its technical data as
confidential and relies on internal nondisclosure safeguards, including
confidentiality agreements with employees, and on laws protecting trade secrets,
to protect its proprietary information. There can be no assurance that these
measures will adequately protect the confidentiality of the Company's
proprietary information or that others will not independently develop products
or technology that are equivalent or superior to those of the Company. With
respect to patented products, there can be no assurance that the Company will be
able to identify, and successfully prosecute, infringements of such patents. The
Company may receive in the future communications from third parties asserting
that the Company's products infringe the proprietary rights of third parties.
There can be no assurance that any such claims would not result in protracted
and costly litigation. There can be no assurance that any particular aspect of
the Company's technology will not be found to infringe the products of other
companies. Other companies may hold or obtain patents on inventions or may
otherwise claim proprietary rights to technology useful or necessary to the
Company's business. The extent to which the Company may be required to seek
licenses under such proprietary rights of third parties and the cost or
availability of such license, cannot be predicted. While it may be necessary or
desirable in the future to obtain licenses relating to one or more of its
proposed products or relating to current or future technologies, there can be no
assurance that the Company will be able to do so on commercially reasonable
terms.
Lack of Dividends. The Company has never paid any cash dividends on its
Common Stock and does not anticipate paying any cash dividends in the future.
The Company currently intends to retain any future earnings to fund the
development and growth of its business. See "Market for Common Stock and Related
Shareholder Matters."
NASDAQ Listing Requirements; Risk of Low-Price Securities. The
Securities and Exchange Commission (the "Commission") approved rules imposing
more stringent criteria for the listing of securities on NASDAQ, including total
assets and net worth requirements of $4,000,000 and $2,000,000, respectively.
The Company does not currently satisfy NASDAQ's listing criteria and if it is
unable to satisfy such criteria in the future, trading, if any is and will be
conducted in the over-the-counter market in the so-called "pink sheets" or the
OTC Bulletin Board. As a consequence, investors could find it more difficult to
dispose of, or to obtain accurate quotations as to the price of, the Company's
securities.
In addition, the Common Stock is subject to Rules 15g1-15g6 promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act") that imposes
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally, a person with assets in excess of $1,000,000 or annual income
exceeding $200,000 or $300,000 together with his or her spouse). For
transactions covered by this rule, the broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, the rule may
affect the ability of broker-dealers to sell the Company's securities and may
affect the ability of investors to sell their securities in the secondary
market.
The Commission has also adopted regulations which define a "penny stock"
to be any equity security that has a market price (as defined) of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt,
the regulations require the delivery, prior to the transaction, of a disclosure
schedule prepared by the Commission relating to the penny stock market. The
broker-dealer must also disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock in the account and information on the limited
market in penny stocks. While many NASDAQ-listed securities are covered by the
definition of penny stock, transactions in a NASDAQ-listed security are exempt
from all but the sole market-maker provision for (i) issuers who have $2,000,000
in tangible assets ($5,000,000 if the issuer has not been in continuous
operation for three years), (ii) transactions in which the customer is an
institutional accredited investor, or (iii) transactions that are not
recommended by the broker-dealer. In addition, transactions in a NASDAQ security
directly with a NASDAQ
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<PAGE> 15
market-maker for such security are subject only to the sole market-maker
disclosure, and the disclosure with respect to commissions to be paid to the
broker-dealer and the registered representative.
Recent Sales of Securities; Possible Future Dilution. During fiscal
1997, the Company received $3,396,505 from the issuance and sale of Warrants net
of offering costs of $409,395. The original terms of the Warrants provided that
the face amount of the Warrants or $3,805,900 was exercisable, without further
cash payment, into shares of Common Stock of the Company at the lessor of: $0.70
per share (with respect to $805,900 of Warrants) and $0.69125 per share (with
respect to $3,000,000 of Warrants) or a 30% discount to the five day moving
average bid price of the shares on the day prior to exercise with the exercise
price of the warrants further discounted by 7% per year until the Warrants are
exercised. The Company does not presently have sufficient authorized and
unissued shares of Common Stock for the exercise of the remaining Warrants.
Under the terms of the Warrants, the Company is obligated to take action to
increase the authorized shares and conversions in excess of authorized and
unissued Common Stock are suspended pending such increase. In September 1997,
the remaining three Warrant holders executed Amendment No. 1 to Stock Purchase
Warrants. Among other terms, the Amendment fixes the exercise price at $0.0875
per share subject to certain adjustments. The fixed price of $0.0875 per share
may be adjusted down (i) to 80% of the market price following certain changes in
the Company's Common Stock including a reverse stock split, and (ii) to the
price at which new securities are issued if at a price below $0.0875 per share.
At the fixed price of $0.0875 per share the remaining Warrants ($1.3 million, as
adjusted) are convertible into approximately 15.3 million shares as of September
30, 1997. The number of shares issuable further increases by 7% per annum. The
original expiration of the Warrants was in July and August 1999, however, such
date is currently being extended during the suspension period as described
above. Under terms of Amendment No. 1, the Company issued 1,000,000 additional
shares of Common Stock to Warrant holders during September 1997 from shares
previously reserved for other warrants and options and issued a second 1,000,000
shares of Common Stock to be made available from shares previously reserved for
other warrants and options in October 1997. The Company also has agreed to hold
a stockholders meeting or otherwise conduct a consent solicitation to increase
the authorized number of shares on or before January 5, 1998 and have sufficient
shares authorized by Feb. 15, 1998. Failure by the Company to meet these
conditions allows the Warrant holders, at their option, to nullify Amendment No
1. The conversion or exercise of these securities could be dilutive and the
potential dilution to existing stockholders could be material.
In June 1997, the Company issued secured notes which bear interest at
12%, payable quarterly. The notes are collateralized by the Company's issued and
pending patents and the FLASHBACK technology. The notes may become convertible
only when and if allowable under the terms of the Warrants and when sufficient
authorized stock is available and are then convertible at the lowest Warrant
conversion price used by the Warrant holders (currently $0.0875 per share),
subject to certain future adjustments. Upon conversion, the note holders will
receive a stock purchase warrant exercisable into the same number of shares as
converted at the conversion price for a period of three years. If these notes
were convertible by their terms on September 30, 1997, they would have been
convertible into approximately 5.7 million shares of Common Stock with warrants
exercisable into a like number of shares at $0.0875 per share for three years.
During September 1997, the Company sold 82,000 shares of Series A
Preferred Stock (the "Series A Preferred Stock") at $10.00 per share or $820,000
with net proceeds of $782,500. Subsequent to September 30, 1997 the Company sold
an additional 17,500 shares for gross proceeds of $175,000.
The Series A Stock is convertible into shares of Common Stock computed
by dividing $10.00 plus accrued and unpaid dividends by the lesser of (i)
$0.0875 or (ii) 80% of the average closing bid price for the Common Stock for
the ten trading days immediately following any and each distribution in shares,
subdivision, split up, combination, reclassification, or other change in Common
Stock. There are not currently sufficient authorized but unissued shares of
Common Stock available for conversion of the Series A Stock and the Company is
obligated to take appropriate corporate action to authorize additional shares of
its Common Stock, to be reserved and kept available solely for issuance upon the
conversion of the Series A Stock. There can be no assurance when or if the
Series A Stock will become convertible. The Company is required to redeem the
Series A Stock on September 1, 2000 ("Mandatory Redemption Date") and upon the
occurrence of certain other events. The Company may redeem the Series A Stock
earlier only if there are sufficient shares available for conversion of the
Series A Stock. The redemption price is $10.00 per share plus accrued and unpaid
dividends if there are sufficient shares available for conversion of the Series
A Stock, otherwise the redemption price is equal to the greater of (i) $10.00
per share plus accrued and unpaid dividends or (ii) an amount equal to a five
day market price multiplied by the shares into which the Series A Stock would be
convertible if shares were authorized, plus a 10% premium. If sufficient shares
of Common Stock for conversion of the Series A Stock are not authorized by March
31, 1998, the dividend rate shall
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<PAGE> 16
be increased to 12% until sufficient shares are authorized and the Mandatory
Redemption Date shall be accelerated to December 31, 1998.
At October 31, 1997, the Company had 56,413,405 shares of Common Stock
outstanding. In addition to stock options and stock purchase warrants as
described in the footnotes to the Company's financial statements, at October 31,
1997, an additional 14,375,613, 5,714,286 and 11,454,077 shares of Common Stock
are issuable, under certain circumstances, upon conversion or exercise of the
Warrants, secured notes and Series A Preferred Stock, respectively.
Lack of Authorized Shares of Common Stock. The Company currently has no
authorized and unissued or unreserved shares of Common Stock. This factor
severely limits the Company's ability to obtain additional sources of financing.
The Company is pursuing various options to resolve the deficiency of authorized
Common Stock, including seeking stockholder approval to increase the authorized
number of shares. However, there can be no assurance of a timely resolution.
Failure to increase the authorized number of shares of Common Stock could have a
material adverse effect on the Company, results of operations and may cause it
to be unable to continue as a going concern.
Volatility of Stock Price. To date, the price of the Company's Common
Stock has been extremely volatile. The Company believes that future
announcements concerning the Company, its competitors or its principal
customers, including technological innovations, new product introductions,
governmental regulations, litigation or changes in operating results, may cause
the market price of the Common Stock to fluctuate substantially in the future.
Trading in the Company's Common Stock is currently conducted in the
over-the-counter market on the NASD Electronic Bulletin Board or in what are
commonly referred to as the "pink sheets." As a result, an investor may find it
difficult to dispose of, or to obtain accurate quotations as to the price of,
the Company's Common Stock. Sales of substantial amounts of the Company's
outstanding Common Stock in the public market could materially adversely affect
the market price of the Common Stock. Further, in recent years the stock market
has experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many high technology
companies and that often have been unrelated or disproportionate to the
operating performance of such companies. These fluctuations as well as general
economic, political and market conditions such as recessions or international
currency fluctuations, may materially adversely affect the market price of the
Common Stock. See "Risk Factors - Recent Sales of Securities; Possible Future
Dilution."
Important Factors Related to Forward-Looking Statements and Associated
Risks. This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act") and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to the products and
future economic performance of the Company. The forward-looking statements and
associated risks set forth in this Prospectus may include or relate to (i)
re-focusing the Company on a family of products, technology components and
software and not having the Company be reliant on a single recorder product;
(ii) expanding the retail product offering by introducing a computer interface
VOICELINK which allows the FLASHBACK recorder to interact with a personal
computer, and communicate with other computers via the internet; (iii)
repositioning the core retail product, the FLASHBACK recorder, at the computer
peripheral and telephony markets; (iv) building a sales and marketing
infrastructure to focus on the computer retail and OEM markets; and (v)
upgrading and expanding the management team; (vi) development of appropriate
technology and the ability of the Company to enforce its patent or obtain
additional patents; (vii) increasing sales through the introduction and
development of new products and product lines; (viii) success of marketing
initiatives to be undertaken by the Company; (ix) increasing distribution
through expansion of the Company's network of distributors and its customer
base; (x) success of the Company in forecasting demand for particular products
and its success in establishing production and delivery schedules and forecasts
which accurately anticipate and respond to market demand; (xi) success in
expanding the Company's market through increasing sales to large regional and
national distributor accounts; and (xii) success of the Company in achieving
increases in net sales such that cost of goods sold and selling, general and
administrative expenses may decrease as a percentage of net sales.
The forward-looking statements included herein are based upon current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based upon assumptions that the Company will
continue to design, manufacture, market and ship new products on a timely basis,
that competitive conditions within the computer peripheral and telephony markets
will not change materially or adversely, that the computer peripheral and
telephony markets will continue to experience steady growth, that demand for the
Company's products will increase, that the Company will obtain and/or retain
existing distributors and key management personnel, that
inventory risks due to shifts in market demand will be minimized, that the
Company's forecast will accurately anticipate market demand and that there will
be no material adverse change in the Company's operations or business.
Assumptions relating to the foregoing involve judgments with respect, among
other things, to future
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<PAGE> 17
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in forward-looking information will be realized.
In addition, as disclosed above, the business and operations of the Company are
subject to substantial risks which increase the uncertainty inherent in such
forward-looking statements. Any of the other factors disclosed above could cause
the Company's net sales or net income (or loss), or growth in net sales or net
income (or loss), to differ materially from prior results. Growth in absolute
amounts of costs of sales and selling and administrative expenses or the
occurrence of extraordinary events could cause actual results to vary materially
from the results contemplated in the forward-looking statements. Budgeting and
other management decisions are subjective in many respects and thus susceptible
to interpretations and periodic revisions based on actual experience and
business developments, the impact of which may cause the Company to alter its
marketing, capital expenditure or other budgets, which may in turn affect the
Company's results of operations. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock was quoted on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) (symbol NCII) from April
6, 1993 until August 20, 1997. Since August 20, 1997 the Company's Common Stock
has been traded in the over-the-counter market on the OTC Bulletin Board. The
following table sets forth, for the periods indicated, the high and low closing
bid prices for the Common Stock, as reported by NASDAQ or the OTC Bulletin
Board, for the quarters presented. Bid prices represent inter-dealer quotations
without adjustment for markups, markdowns, and commissions.
<TABLE>
<CAPTION>
(STATED IN UNITED STATES DOLLARS PER SHARE)
High Low
<S> <C> <C>
Fiscal year ended March 31, 1996
First quarter 3 5/8 1 9/16
Second quarter 2 3/8 1 1/4
Third quarter 2 3/32 7/8
Fourth quarter 1 15/16 1
Fiscal year ended March 31, 1997
First quarter 1 13/16 1
Second quarter 1 3/16 3/4
Third quarter 29/32 3/8
Fourth quarter 1 13/32
Fiscal year ended March 31, 1998
First quarter 13/32 1/8
Second quarter 1/4 1/10
</TABLE>
At November 30, 1997, there were 56,413,405 shares of Common Stock
outstanding, which were held by approximately 423 shareholders of record.
The Company has never paid any dividends to its Common Stock
shareholders. Future cash dividends or special payments of cash, stock or other
distributions, if any, will be dependent upon the Company's earnings, financial
condition and other relevant factors. The Board of Directors does not intend to
pay or declare any dividends in the foreseeable future, but instead, intends to
have the Company retain all earnings, if any, for use in the Company's business.
14
<PAGE> 18
SELECTED FINANCIAL DATA
The following summary of certain financial information relating to the
Company for the fiscal years ended March 31, 1996 and March 31, 1997, has been
derived from, and is qualified by reference to, the audited Consolidated
Financial Statements of the Company included elsewhere herein and should be read
in conjunction with such audited Consolidated Financial Statements and Notes
thereto. The unaudited consolidated balance sheets information as of September
30, 1997, and the unaudited statements of operations information for the six
months ended September 30, 1997, has been derived from unaudited financial
information prepared on the same basis as the audited financial statements. In
the opinion of management, such unaudited financial information includes all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the information presented. The results of operations for the six months
ended September 30, 1997 are not necessarily indicative of the results of
operations to be expected in any future quarter or the fiscal year ending March
31, 1998. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes related thereto
included elsewhere in this Prospectus.
<TABLE>
FISCAL YEAR ENDED MARCH 31, SIX MONTHS ENDED SEPTEMBER 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATIONS DATA:
Revenues $ 653,700 $ 1,328,502 $ 704,403 $ 301,543
Cost of revenues 2,111,999 4,413,814 484,694 1,049,318
Operating expenses 7,266,715 4,859,733 678,175 2,857,336
Loss for the period (9,597,002) (8,455,696) (325,197)
Loss per share (0.44) (0.64) (0.01) (0.19)
Weighted average
number of common
shares outstanding 21,632,233 13,143,188 39,145,164 19,641,347
MARCH 31, SEPTEMBER 30, 1997
---------------------------- ------------------
1997 1996
----------- -----------
<S> <C> <C> <C>
BALANCE SHEETS DATA:
Total assets $ 2,165,073 $ 8,914,705 $ 2,835,494
Working capital (deficit) (564,503) 1,056,029 1,003,757
Current liabilities 2,488,188 5,351,811 1,626,683
Long term liabilities -- 4,285,714 611,030
Redeemable Preferred Stock -- -- 782,500
Stockholders' equity
(deficiency) (323,115) (722,820) (184,719)
</TABLE>
15
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING INFORMATION INCLUDES FORWARD-LOOKING STATEMENTS, THE
REALIZATION OF WHICH MAY BE IMPACTED BY CERTAIN IMPORTANT FACTORS DISCUSSED
UNDER "RISK FACTORS - IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS
AND ASSOCIATED RISKS."
General. The Company has completed the transition from a manufacturing
and sales organization to an OEM provider of technology, product development
services, and technology licensing. The Company, as a consequence, anticipates
that the majority of its future revenues will be from license and royalty fees,
private label agreements for the Company's Flashback family of products and from
contract development services for custom digital products. The Company currently
has contracts with Lanier Worldwide, Inc. ("Lanier") and Sanyo Information
Systems UK Ltd., and Sanyo Buro Electronic Europa (collectively, "Sanyo") and is
pursuing OEM contracts with other companies seeking to penetrate the digital
sound recording and playback market. Under the terms of the Sanyo Agreement, as
amended, Sanyo is private labeling current Company products (principally,
FLASHBACK, SOUNDCLIP and VOICELINK) under an exclusive arrangement in Europe.
The agreement, which terminates in October 1999, provides that Sanyo must
purchase at least 500 product units per month (plus or minus 20%) in order to
maintain exclusivity. As of September 30, 1997, the Company has received
approximately $414,000 in orders from Sanyo, of which approximately $249,000 has
been shipped. Under the terms of the Lanier Agreement, the Company is receiving
non-recurring engineering expense ("NRE"), upon the satisfaction of certain
milestones, to develop a new portable digital voice recorder and related
accessory products. The Lanier Agreement contemplates that the products to be
developed will be completed in early 1998, with the Company to provide Lanier
with manufactured product thereafter to be sold by Lanier's sales force
worldwide. As of September 30, 1997, the Company was on schedule with respect to
the product to be developed. The Company, as of such date, in connection
therewith, has received NRE of approximately $493,000. The agreement is for an
initial term of three years, terminating January 6, 2000. The quantity of
product to be purchased and sold by Lanier is to be determined by Lanier
according to periodic forecast reports submitted to the Company.
As a result of the recent restructuring and change in the source of
revenues, comparisons to prior results are less meaningful and prior results are
not necessarily indicative of future results.
The Company has incurred operating losses in six of its past seven years
and these losses have been material. The Company incurred an operating loss of
$7.9 million in fiscal 1996 and $8.7 million in fiscal 1997 (including a
restructuring charge of $2.2 million). As a result of the restructuring of the
Company to discontinue its contract manufacturing operations and focus on
licensing and contract development, the Company has reduced its monthly cash
operating costs from an average of approximately $540,000 per month in fiscal
1997 to approximately $120,000 per month at the current time. However, the
Company intends to increase expenditure levels to support its new Flashback
Audio technology and support OEM customers. Accordingly, the Company's losses
are expected to continue until such time as the Company is able to increase
sales of Flashback proprietary products and/or obtain licensing, royalty and
development revenues sufficient to cover fixed costs of operations. Should the
Company be unable to accomplish the foregoing and operate profitably, the
Company may be forced to reduce or curtail operations. The Company continues to
be subject to the risks normally associated with any new business activity,
including unforeseeable expenses, delays and complications. Accordingly, there
is no assurance the Company can or will report operating profits in the future.
Sales of and demand for the Company's Flashback recorder and Mobile
Office products (including VoiceLink) introduced into the domestic retail
channel in September 1996 never met management's expectations due to a variety
of factors including competitive pressure in the portable recording industry and
insufficient financial resources to meet the demands of the retail distribution
market. However, management believes initial shipments of the foregoing to the
Company's OEM customer, Sanyo, for distribution in Europe have been positively
received. Management is focused on OEM licensing with respect to the Micro OS
Imbedded Operating System and MultiChip modules and contract development of
private label and custom-designed products for computers, dictation systems,
computer peripherals and telecommunication equipment.
Revenues from licensing, royalties and development services, as well as
continuing sales of the Company's private labeled Flashback and related products
are expected to be subject to significant month to month variability resulting
from the limited market penetration and license activity to date, the timing and
delays associated with OEM new product introductions and the seasonal nature of
demand for consumer electronic products. Development and OEM contracts may be
delayed or terminated by customers and are subject to a number of factors beyond
the Company's control. The markets for consumer electronic products are subject
to rapidly changing customer tastes
16
<PAGE> 20
and a high level of competition. Demand for the Company's products is expected
to be influenced by OEM market success, technological developments and general
economic conditions. Because these factors can change rapidly, customer demand
for the Company's technology can also shift quickly. The Company may not be able
to respond to technical developments by competitors because of the time required
and risks involved in the development or introduction of new or improved
technology and due to limited financial resources.
Results of Operations. For the fiscal year ended March 31, 1997, the
Company reported revenues of $653,700, 51% less than revenues of $1,328,502 for
fiscal 1996. Fiscal 1996 revenues are primarily from sales of Flashback
products. Fiscal 1997 revenues consisted of $307,296 in Flashback product sales,
$250,882 in contract manufacturing revenues and $95,522 in contract development
and other revenues. A substantial portion of the Company's revenues have been
derived from a limited number of customers. The loss of certain large customers
or a decline in the economic prospects of such customers would have a further
adverse effect on the Company. The Company expects that its revenues in fiscal
1998 will be derived primarily from sales of Flashback products to OEM customers
and from contract development revenues.
For fiscal 1997, the Company reported a gross loss of $1,458,299 or 223%
of revenues, as compared to a gross loss of $3,085,312 or 232% for fiscal 1996.
The material gross losses in each year resulted from low sales volumes of
Flashback products and limited contract manufacturing revenues accompanied by
high fixed manufacturing costs, material costs and direct labor costs. Fiscal
1996 cost of sales of $4.4 million included $980,000 expended in the first
quarter representing the cost of 7,000 discontinued Flashback units sold to
Active Media Services, Inc., an independent media trading firm. These units were
sold in exchange for $1,172,500 of media trade credits and 50% of the cash
proceeds realized on the ultimate sale of the units. The Company recognized no
prepaid asset nor any revenue in connection with the trade credits since their
use requires certain matching cash payments. The Company believes no revenues
will be realized nor any trade credits used in the future in connection with
this arrangement. Fiscal 1997 cost of sales of $2.1 million included $756,000 of
equipment and facility costs, $630,000 of direct labor charges and approximately
$726,000 of materials and other charges. In connection with the Company's
restructuring, it disposed of first generation Flashback materials and inventory
to OEM customers and wrote-down obsolete and excess inventory aggregating $1.3
million (included in the restructuring charge described below).
During fiscal 1997 the Company ceased contract manufacturing and
production of Flashback products for the retail market and as a part of its
restructuring dramatically changed the nature of its operations and reduced its
cost structure. The Company's plans for fiscal 1998 include selling existing
finished goods inventory (approximately $800,000) to OEM customers and
thereafter contract for outside manufacturing of Flashback products using
existing inventory of materials to the extent possible. The Company also intends
to provide contract development services under the Lanier contract and seek
other development arrangements. The Company believes, but there can be no
assurance, that it will report a gross profit in fiscal 1998 based on existing
sales, contracts and plans. It is unlikely that such gross profit, if obtained,
will be sufficient to cover operating expenses and the Company expects to report
operating losses until sufficient margins can be achieved. There can be no
assurance the Company can achieve or maintain positive gross margins or that any
such margins will contribute materially to other operating costs.
Total operating expenses were $7.3 million for the fiscal year ended
March 31, 1997 as compared to $4.9 million for fiscal 1996. Operating expenses
in fiscal 1997 included a $2.2 million restructuring charge which included a
$1.4 million write-down of inventory and related purchase commitment losses and
a $742,000 write-down and loss on equipment. At March 31, 1997 a total of
$162,000 was accrued relating to the $2.2 million restructuring charge which was
completed in the first fiscal 1998 quarter. Fiscal 1996 operating expenses
included a $236,000 write-off of goodwill.
Selling and administrative expenses totaled $4.0 million in fiscal 1997
compared to $3.6 million in fiscal 1996. In both periods the Company incurred
significant expenses attempting to direct market the Flashback line of products.
Late in fiscal 1997 the Company terminated these efforts in favor of selling
products to OEMs for their private label selling. As a result of the Company's
restructuring, selling and administrative costs have been dramatically reduced
and management believes a comparison between prior years and future periods is
not meaningful and prior results are not indicative of future results. Major
selling and administrative expenditures in fiscal 1997 included $1.2 million of
selling and marketing expenditures (including personnel and consulting costs of
$548,000 and advertising and promotions of $557,000) associated primarily with
direct marketing of Flashback products, $905,000 of legal, filing and accounting
costs (including $186,000 of litigation settlement costs) associated primarily
with redomiciling the Company to the U.S., corporate financings and filing and
registration costs during the year, $763,000 of administrative personnel and
consulting costs and $486,000 of occupancy costs.
17
<PAGE> 21
Research and related expenditures were $991,487 for fiscal 1997 compared
to $1,048,540 for fiscal 1996 which included $370,000 of Flashback
pre-production development costs. Excluding this item, the $313,000 increase in
the current period resulted primarily from a $176,000 increase in personnel and
consulting costs due to increased staffing and a $130,000 increase in outside
design and consulting cost. The Company recognized $40,000 of contract
development revenues for sponsored research incurring approximately $69,000 in
direct costs in initial development work. The Company has reduced its base
research and development expenditures but anticipates future increases due to
new projects such as the Flashback Audio technology. Research and related
expenditures are subject to significant quarterly variations depending on the
use of outside services and the availability of financial resources.
As a result of the restructuring and reduction in personnel, the Company
has reduced monthly cash operating costs from approximately $540,000 per month
to approximately $120,000 per month. Monthly operating costs can vary
significantly from month to month and quarter to quarter based on management
decisions regarding OEM marketing and support, research and development projects
and from continued efforts to control expenses. Although the Company presently
has approximately 20 full-time employees, management anticipates hiring
additional engineering and technical personnel to support OEM customers and
develop new products and technologies. The timing and extent of any growth in
personnel and operating costs cannot presently be determined by management.
The Company reported an operating loss of $8.7 million for fiscal 1997,
as compared to an operating loss of $7.9 million for fiscal 1996. The Company
has dramatically reduced operating costs and management anticipates that
operating losses in fiscal 1998 will be substantially less but there is no
assurance that positive operating results can be achieved in the future.
Other income and expenses in fiscal 1997 included $1.1 million of
embedded non-cash interest on convertible notes based on the difference between
the conversion price and the market price at the first conversion date of the
notes. A like amount was recorded as paid in capital. Interest expense
(excluding the $1.1 million of non-cash embedded interest) for the year ended
March 31, 1997 was $79,518 inclusive of $33,772 of interest paid in common
stock. The $79,518 of interest was a reduction from $356,429 (excluding non-cash
embedded interest of $188,153) for the prior period resulting from the
retirement of demand loans and other interest bearing debt outstanding during
fiscal 1996 and more reliance on equity to finance operations in fiscal 1997.
During fiscal 1997 the Company sold shares of JABRA common stock held as an
investment for proceeds of and a gain of $276,300. This stock has a carrying
value of nil. At March 31, 1997 the Company owned 940,734 shares of JABRA which
has no market value and therefore there is no assurance these shares will
provide any future source of liquidity for the Company.
The Company reported a net loss of $9.6 million in fiscal 1997 and a net
loss of $8.5 million in fiscal 1996.
For the first six months of fiscal 1998, the Company reported revenues
of $704,403, a 133% increase over revenues of $301,543 for the first six months
of fiscal 1997. For the three months ended September 30, 1997, revenues were
$315,344 versus $147,817 for the second quarter of the prior fiscal year.
Revenue for the first six months of fiscal 1998 included $270,114 of product
sales to OEMs and development services of $434,289. Two customers accounted for
78% of fiscal 1998's first six months of revenues and the loss of a customer
could have a material adverse impact on the Company. The Company's development
arrangements are designed to produce limited current revenues while creating
proprietary OEM products to be sold to OEM customers or to be produced under
long-term license or royalty arrangements. The Company had no development
services revenues for the first six months of the prior year and the $301,543 of
the prior year's first six months revenues included $140,000 of contract
manufacturing sales which have since been discontinued. The Company's future
revenues are expected to consist primarily of product sales to OEM customers and
development, license and royalty fees.
For the six months ended September 30, 1997, the Company reported a
gross profit of $219,709 or 31% of revenues as compared to a gross loss of
$747,775 for the first six months of fiscal 1997. The gross profit for the
second fiscal 1998 quarter was $120,779 or 38% of revenues versus a gross loss
of $642,244 for the prior comparable quarter. The improvement in gross margins
resulted from the restructuring of the Company which has resulted in the
termination of manufacturing overhead and the addition of new development
services. There can be no assurance the Company can maintain positive gross
margins in the future.
18
<PAGE> 22
Total operating expenses (consisting of research and related
expenditures and selling and administrative expenses) for the three and six
months ended September 30, 1997 were $298,147 and $678,175, respectively, as
compared to $1,572,452 and $2,857,336, respectively, for the three and six
months ended September 30, 1996. In connection with its restructuring, the
Company dramatically reduced the number of personnel and related operating
costs. Accordingly, comparisons of costs with prior periods are less meaningful.
Selling and administrative costs aggregated $573,776 in the first six months of
fiscal 1998 compared to $2,449,651 in the prior period. The $1,875,875 reduction
was comprised primarily of a $545,000 decrease in compensation costs, a $220,000
decrease in legal and related costs, a $160,000 decrease in depreciation and
amortization, a $670,000 decrease in advertising and related costs, and a
$120,000 reduction in occupancy related costs.
Research and related expenditures for the three and six months ended
September 30, 1997 were $44,229 and $104,399, respectively, as compared to
$196,101 and $407,685, respectively, for the three and six months ended
September 30, 1996. An aggregate of $241,912 of development costs were incurred
for contract development work and are included in cost of revenues. This
included approximately $160,000 of personnel costs which were included in
research and related expenditures in the prior comparable period. Research and
development costs are subject to significant quarterly variations depending on
the use of outside services and the availability of financial resources.
The Company reported an operating loss of $458,466 for the six months
ended September 30, 1997, as compared to an operating loss of $3,605,111 for the
six months ended September 30, 1996 with the decreased loss resulting primarily
from the improved gross margins combined with the reduction in operating
expenses described above. In addition to variances in operating expenses, the
Company's operating losses are impacted by the timing and amount of OEM product
sales and the recognition of contract service revenues. Accordingly, there is
substantial uncertainty about future operating results and the results for the
first six months are not necessarily indicative of operating results for future
periods or the fiscal year.
The Company's interest expense for the six months ended September 30,
1997 was $22,613, a reduction from $77,522 for the prior period resulting from
the retirement of demand loans and other interest bearing debt outstanding
during fiscal 1997. The Company also received a $153,000 payment from a former
vendor in the first fiscal 1998 quarter resulting from prior year overpayments
by the Company. This payment has been included in other income.
The Company reported a net loss for the first six months of the current
fiscal year of $325,197 compared to a net loss of $3,657,852 for the prior
year's first six months. The Company anticipates reduced losses during the
current fiscal year as compared to fiscal 1997, however there can be no
assurance of future profitability.
Liquidity and Capital Resources. At March 31, 1997, the Company had a
working capital deficit of $564,503, compared to working capital of $1,056,029
at March 31, 1996. The Company had approximately $1.6 million of working capital
invested in inventories at March 31, 1997, compared to approximately $3.2
million at March 31, 1996 with the decrease due to reduction of Flashback
components and products resulting from termination of production, finished good
sales to OEM customers and writedowns of obsolete and excess inventory. The
decrease in working capital was a result of the Company's continuing losses
which consumed working capital during the period. Approximately $5.8 million in
cash was used in operating activities by the Company for the year ended March
31, 1997.
In March 1996, the Company obtained $3 million from a convertible debt
financing (by June 30, 1996 all the debt had been converted to Common Stock),
and in June 1996, the Company obtained net proceeds of $2.4 million in funds
from a private placement of securities and in July and August 1996, the Company
obtained additional equity from the private placement of securities for cash of
approximately $3.1 million. During fiscal 1997 the Company retired the $2.2
million obligation related to the demand loan payable to CVD Financial
Corporation ("CVD"). The balance of funds were used to reduce debt and for
working capital. As a result of these transactions, as of March 31, 1997, the
Company had no long-term debt nor any bank lines of credit or related financing
facilities. During fiscal 1997 the Company also financed operations from the
sales of equipment for $98,175 and inventory and from the sale of JABRA stock
for $276,300. The Company also paid legal, litigation and other expenses
aggregating $581,000 through the issuance of common stock.
For the fiscal year ended March 31, 1997, net cash decreased by $2.7
million. Cash used in operating activities was $5.8 million. Major components
using cash were a net loss of $9.6 million reduced by $2.6 million of aggregate
depreciation and amortization, write-downs and non-cash expenses and investment
gains to a net cash operating loss of $7.0 million prior to changes in assets
and liabilities. The major changes in assets and liabilities
19
<PAGE> 23
providing net cash used in operating activities was a reduction in inventory of
$1.6 million, a reduction in prepaid expenses of $226,000, an increase in other
liabilities of $438,000 and an increase in advances on research and development
contract of $174,000. The major change in assets and liabilities using operating
cash was a reduction in accounts payable of $1.3 million.
In June 1997 the Company sold $500,000 of long-term 12% secured notes
due September 30, 1999 with limited common stock conversion rights and stock
purchase warrants issuable on conversion to nine investors. The proceeds are
being applied to reduce debt and for working capital.
In September 1997 the Company sold 82,000 shares of Series A Preferred
Stock at $10.00 per share for net proceeds of $782,500. The proceeds are being
applied to reduce debt and for working capital. Subsequent to September 30,
1997, the Company sold an additional 17,500 shares of Series A Preferred Stock
at $10.00 per share.
At September 30, 1997, the Company had working capital of $1,003,757
compared to a working capital deficit of $564,503 at March 31, 1997. The Company
had approximately $1.6 million of working capital invested in inventories at
September 30, 1997. The increase in working capital was a result of a long-term
preferred stock issuance as well as a settlement of an accrued lease obligation
through the issuance of a three year term note offset by the Company's
continuing losses which consumed working capital during the period.
The Company also paid accrued liabilities or operating expenses
aggregating $463,593 through the issuance of Common Stock during the first six
months. The Company also obtained $76,256 of proceeds from net equipment
disposals during the first six months.
For the six months ended September 30, 1997, net cash increased by
$607,902. Cash used in operating activities was $750,854. Major components using
cash were a net loss of $325,197 reduced by $40,733 of aggregate depreciation
and amortization and $42,708 of expenses paid in shares and increased by $12,088
of equipment sale gains, or a net loss use of cash of $253,844. The major change
in assets and liabilities providing net cash used in operating activities was a
reduction in inventory of $62,386. The major changes in assets and liabilities
using operating cash was an increase in accounts receivable of $223,607, a
reduction in other payables and accrued liabilities of $220,133 and a reduction
of research and development advances of $119,375.
Based on the Company's cash position and continuation of existing OEM
development arrangements and currently planned expenditures and level of
operations, the Company estimates it will require additional capital within the
next twelve months to meet its debts as they become due and to continue as a
going concern. Given such assumptions, the Company estimates that at current
expenditure levels and projected working capital requirements it will require a
minimum of an additional $500,000 to continue operating for the next twelve
months. The Company's OEM and licensing business may be able to generate the
additional funding required depending on the ability of OEM and licensing
activities to generate additional revenues, however there can be no assurance
thereof. The Company is currently pursuing various alternatives to meet its
needs for capital. There can be no assurance the Company will be successful and
any such financing may be dilutive to current shareholders. The failure to raise
additional funds could have a material adverse effect on the Company and could
force the Company to further reduce or curtail operations.
The Company may, from time to time, seek additional funds through lines
of credit, public or private debt or equity financing. The Company estimates
that it will require additional capital to finance future developments and
improvements to its technology. There can be no assurances that additional
capital will be available when needed. The Company currently has no authorized
and unissued or unreserved (for prepaid warrants, warrants and options) shares
of Common Stock. This factor severely limits the Company's ability to obtain
additional sources of financing. This factor already impacted the Company
resulting in the Company obtaining long-term debt financing secured by
technology and redeemable preferred stock rather than more common equity
financing (see Notes 4 and 5 to the interim statements). The Company is pursuing
various options to resolve the deficiency of authorized Common Stock, but there
can be no assurance of a timely resolution. The Company has scheduled an annual
meeting on January 5, 1998 to increase its authorized common shares and failure
of this resolution and/or subsequent efforts could have a material adverse
effect on the Company, its business and results of operations and may cause it
to be unable to continue as a going concern.
Management's Plans for Improving Operations. Management has taken steps
to improve operations with the goal of sustaining the Company operations for the
next twelve months and beyond. These steps include (i) refocusing the Company on
a family of products, technology components and software and not having the
Company be reliant on a single recorder product; (ii) expanding the Company's
private label product offering by introducing
20
<PAGE> 24
VoiceLink and Mobile Office products; (iii) focusing sales and marketing on the
OEM markets; and (iv) reducing overhead and operating expenses by discontinuing
its contract manufacturing services and direct sales. There can be no assurance
the Company can attain profitable operations in the future.
The Company is actively developing a number of licensing, private label
and OEM opportunities and has signed agreements, as of May 1997, with Sanyo
Information Systems UK Ltd. and with Lanier Worldwide, Inc. Under the terms of
the Sanyo Agreement, Sanyo is private labeling current Company products
(principally, FLASHBACK, SOUNDCLIP and VOICELINK) under an exclusive arrangement
in the United Kingdom. In March 1997, the Sanyo Agreement was expanded to
provide for sales by Sanyo Buro-Electronic Europa to the rest of Europe. The
agreement, which terminates in October 1999, provides that Sanyo must purchase
at least 500 product units per month (plus or minus 20%) in order to maintain
exclusivity. For the current fiscal year, the Company has received approximately
$414,000 in orders from Sanyo, of which approximately $249,000 has been shipped
and paid for. Under the terms of the Lanier Agreement, the Company is receiving
non-recurring engineering expenses ("NRE"), upon the satisfaction of certain
milestones, to develop a new portable digital voice recorder and related
accessory products. The Lanier Agreement contemplates that the product to be
developed will be completed in early 1998, with the Company to provide Lanier
with manufactured product thereafter to be sold by Lanier's sales force
worldwide. As of September 30, 1997, the Company is beginning the software
development stage with respect to the product to be developed. The Company, as
of such date, in connection therewith, has received NRE of approximately
$493,000. The agreement is for an initial term of three years, terminating
January 6, 2000. The quantity of product to be purchased and sold by Lanier is
to be determined by Lanier according to periodic forecast reports submitted to
the Company. Neither Lanier, nor Sanyo, are affiliates of the Company.
Future Commitments and Financial Resources. The Company's future
commitments are related to its operating leases (see footnote 13 to the
financial statements). Estimated remaining commitments are included in the cash
requirements discussed above. The Company was in arrears on an operating
equipment lease obligation to Comdisco, Inc. during fiscal 1997 but has
negotiated a settlement providing for future payments of approximately $550,000
from time-to-time based on agreed upon percentages of future equity issues.
The Company recently announced a new Flashback Audio(TM) technology that
provides the means of near CD-quality, stereo audio playback from a
CompactFlash(TM) cartridge. This technology can be employed in a stand-alone
product, or integrated into a variety of products, such as laptop or hand-held
PC's, pagers, cellular phones, etc. The Company's plans are to continue to
develop the technology and seek OEM partnerships to exploit the technology. The
Company may require additional funds to continue development of this and other
technologies and the extent of such requirements are not presently determinable
by management.
If in the future, operations of the Company increase significantly, the
Company may require additional funds. The Company might also require additional
capital to finance future developments, acquisitions or expansion of facilities.
The Company currently has no plans, arrangements or understandings regarding any
acquisitions.
Possible Inability To Continue As A Going Concern. The Company has
suffered recurring losses from operations. This factor, in combination with (i)
reliance upon debt and new equity financing to fund the continuing, increasing
losses from operations and cash flow deficits, (ii) substantial inventory and
material decline in inventory turnover, (iii) material net losses and cash flow
deficits from operations during fiscal 1996 and fiscal 1997 and (iv) the
possibility that the Company may be unable to meet its debts as they come due,
raise substantial doubt about the Company's ability to continue as a going
concern. The Company's ability to continue as a going concern is dependent upon
its ability to obtain adequate financing and achieve a level of revenues,
adequate to support the Company's capital requirements, as to which no assurance
can be given. In the event the Company is unable to continue as a going concern,
it may elect or be required to seek protection from its creditors by filing a
voluntary petition in bankruptcy or may be subject to an involuntary petition in
bankruptcy. To date, management has not considered this alternative, nor does
management view it as a likely occurrence.
21
<PAGE> 25
BUSINESS
THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY. SEE "RISK FACTORS - IMPORTANT FACTORS
RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS."
The Company is a holding company which, through its wholly owned
California subsidiary, NCI, is an innovator in developing and marketing advanced
electronic product designs and technologies employing a rapidly growing
non-volatile storage media (flash memory) for the portable computing, digital
recording, mobile office and telecommunication markets. The Company is engaged
in a single industry segment: the development, manufacture and marketing of
electronic products and technologies.
The Company is involved in (i) researching, developing and manufacturing
products sold to major OEM customers of digital voice recording and processing
technology using flash storage media and (ii) marketing its MicroOS(TM)
operating system technology, a proprietary method for information storage,
manipulation and retrieval.
The address of the Company's principal executive office is 13114 Evening
Creek Drive South, San Diego, California 92128, and its telephone number is
(619) 679-1504. The Company's primary operating facilities are located at that
address. Its Internet site is located at WWW.NORRISCOMM.COM. The Company
presents its consolidated financial statements in United States dollars.
History. The Company was started in 1988 based on technology that its
founder, Elwood G. Norris, developed while researching and developing
headset/microphone alternatives for NASA. The successful combination of a
speaker and microphone was developed into the EarPHONE(TM) product line, now
owned by JABRA Corporation ("JABRA") in which the Company holds an equity
investment. The Company was incorporated under the Company Act (British
Columbia), Canada on February 11, 1988 under the name 340520 B.C. Ltd. The
Company changed its name to Norris Communications Corp. on April 7, 1988 and on
November 22, 1994 the Company continued its jurisdiction of incorporation from
British Columbia to the Yukon Territory. The Company further continued its
jurisdiction of incorporation to Wyoming on August 30, 1996 and on September 4,
1996 reincorporated into Delaware under the name Norris Communications, Inc.
In August 1989, the Company acquired Advanced Surface Mounted Devices,
Inc., subsequently merged into NCI, establishing the Company as a regional
full-service independent supplier of turnkey manufacturing of circuit board
assemblies, systems and subsystems, to OEM's in the computer, defense,
telecommunications and medical industries. The Company invested over $2.5
million in equipping a 31,000 square foot manufacturing and administrative
facility. Prior to the late fiscal 1995 launch of the Company's first
information storage and retrieval technology product, a personal digital
recorder, ASMD's contract manufacturing services accounted for substantially all
of the Company's revenues. In January 1996, due to the startup of the
manufacturing of the Company's proprietary Flashback recorder in the facility,
the Company scaled back outside contract manufacturing services. During fiscal
1997 the Company substantially reduced Flashback production and terminated
contract manufacturing taking a $2.2 million restructuring charge. The Company
during the same period also discontinued retail marketing of Flashback products
in favor of private labeling for OEM customers to sell.
As of the date of this report the Company has completed its
restructuring by selling most of its contract manufacturing equipment, moving to
a smaller facility more suited for its operations and disposing of or making
allowances for excess and obsolete inventory. The Company has dramatically
reduced its monthly operating expenditures from an average of $540,000 during
fiscal 1997 to approximately $120,000 currently. In November 1996, the Company
entered into an OEM contract with Sanyo Information Systems U.K. Ltd. (extended
into the rest of Europe with Sanyo Buro-Electronic Europa) (collectively
"Sanyo") and in January 1997 entered into an OEM and development contract with
Lanier Worldwide, Inc. ("Lanier"). Management believes it has substantially
completed the transition from a manufacturing and sales organization to an OEM
provider of technology, product development services, and technology licensing.
The Company, as a consequence, anticipates that the majority of its future
revenues will be from license and royalty fees, private label agreements for the
Company's Flashback family of products and from contract development services
for custom digital products.
The Company also holds as an investment 940,734 common shares
(approximately 12.1%) of JABRA. JABRA is a former wholly-owned subsidiary of
which control was sold in 1993. JABRA is a developer and manufacturer of
communication products for desktop, mobile and wireless applications.
Flash Memory Industry. The Company's technology employs flash ("Flash")
memory as the storage media. The traditional data storage market encompasses
several types of memory and storage devices designed primarily
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for specific components of computer systems. Dynamic random access memory
("DRAM") provides main system memory; static random access memory ("SRAM")
provides specialized and high speed memory; hard disk drives provide high
capacity data storage; and floppy disk drives permit low capacity removable data
storage.
In recent years, digital computing and processing have expanded beyond
the boundaries of desktop computer systems to include an array of electronic
systems. These new devices include handheld data collection terminals, medical
monitors, mobile communication systems, highly portable computers, digital
cameras, cellular telephones, communications switches, wireless base stations,
network computers, pay telephones, digital audio recorders and other electronic
systems. These emerging applications have storage requirements that are not well
addressed by traditional storage solutions. Important requirements include small
form factor, high reliability, low power consumption and the capability to
withstand high levels of shock and vibration and extreme temperature
fluctuations. In the late 1980s, a new memory technology, known as Flash memory,
was developed as an extension of ultraviolet erasable programmable read-only
memory ("EPROM"). Flash memory is non-volatile, unlike DRAM and SRAM, requiring
no power to retain data and is electrically reprogrammable, unlike read-only
memory ("ROM").
Flash memory-based products are solid-state devices, making them very
reliable. Flash products are non- volatile, meaning that no on-going source of
power is required in order for the products to retain data, images or audio
indefinitely. Flash is noiseless, considerably lighter, more rugged and consumes
less than 10 percent of the power required by a rotating disk drive. The use of
Flash memory is seen by the Company as the most practical solution for storing
data on removable and interchangeable modules, given that other memory
technologies either require battery back-up, draw too much power, are physically
too large, or are mechanically or magnetically sensitive.
Flash products are produced by a large number of firms including Intel
Corp., SanDisk Corporation, AMD, M-Systems, Samsung, TDK, Toshiba and others.
Industry estimates indicate Flash cartridge shipments exceeded 859,000 units in
1995 and are projected to exceed 10.7 million units in 1999 according to
Disk/Trend, Inc. Recent product applications by the Company have focused on
CompactFlash a product of SanDisk Corporation. CompactFlash products provide
full PC Card ATA functionality but are only one-fourth the size of a standard
Type II PCMCIA card (a CompactFlash cartridge is approximately 1.7" x 1.4" x
0.13"). CompactFlash is compact, rugged and has low-power requirements.
CompactFlash is available in capacities ranging from 2 megabyte to 24 megabyte
with higher capacities expected to be available in the future and at reduced
unit costs over time.
CompactFlash is being promoted as a standard form factor by the 70+
corporations, including the Company, who are members of the CompactFlash
Association ("CFA"). The CFA is actively promoting the development of products
using CompactFlash. Founding members of the CFA were SanDisk Corporation, Apple
Computer, Inc., Canon Inc., Eastman Kodak Co., Hewlett-Packard Company, LG
Semicon, Matsushita Electric Industrial Co. (Panasonic), Motorola, NEC
Corporation ("NEC"), Polaroid Corp., Seagate Technology, Inc.
("Seagate") and Seiko Epson Corp.
The Company's technology also supports the Intel Miniature Card format
offering customers design flexibility and choices among Flash memory.
As a developer of advanced electronic products and technologies
employing Flash memory the Company's success is in part dependent upon the
continued growth and use of various forms of Flash memory. New product
applications are also premised on continued reductions in the per-megabyte cost
of Flash memory of which there can be no assurance.
Existing OEM Consumer Products. The Company has developed a line of
consumer products, including the Flashback(R), the Flashback VoiceLink(TM),
SoundClips(R), and bundles of these products as the Flashback Mobile Office(TM)
family all based on the Company's proprietary Flashback technology. The
technology developed for the Flashback product line integrates a sophisticated
micro-processor based control system, digital signal processing ("DSP"),
sophisticated digital/analog and analog/digital conversion along with advanced
data compression and non-volatile storage media (Flash memory) to produce a
no-moving-parts recording scheme with advanced features and capabilities. The
Company's unique patent-pending approach eliminates the need for a high powered
CPU thereby reducing cost and improving efficiency of Flash memory utilization.
The Company was unsuccessful in its efforts to directly distribute the
products and incurred significant expenditures and operating losses. In late
1996 the Company, as a part of its restructuring, discontinued direct sales and
elected to private label the products. In November 1996, under the terms of the
Sanyo agreement, Sanyo
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<PAGE> 27
commenced private labeling the products under an exclusive arrangement in the
United Kingdom. In March 1997, the Sanyo agreement was expanded to provide for
sales to the rest of Europe. The agreement, which terminates in October 1999,
provides that Sanyo must purchase at least 500 product units per month (plus or
minus 20%) in order to maintain exclusivity. For the current fiscal year through
September 30, 1997, the Company had received approximately $414,000 in orders
from Sanyo, of which approximately $249,000 had been shipped. Management
believes Sanyo has the established infrastructure, brand recognition, and
marketing expertise required to be successful in retail channels. There can be
no assurance that Sanyo will be successful in distributing Flashback products in
Europe or continue to order from the Company.
The Company is seeking additional OEM private label relationships for
existing Flashback products in other markets.
A description of each of the Company's proprietary products follows:
FLASHBACK: The Flashback digital hand-held voice recorder is a 3
ounce, palm-sized unit that is used to record ideas, conversations, and
voice memos. The Company believes it is the first and leading digital
recorder to feature removable, reusable Flash memory cartridges for long
recording times. The Company holds the US patent #5,491,774 for the
product. A two-button control pad lets users record, playback, fast
forward, and reverse as well as rapid search, instant rewind and
variable speed playback without altering pitch. On-board editing
functions include insert and delete of words, sentences or even whole
paragraphs.
FLASHBACK VOICELINK: The Flashback VoiceLink not only turns a PC
(personal computer) into a long-length audio recorder, it also allows
users to download voice messages from SoundClip cartridges directly onto
a computer hard drive. The VoiceLink plugs directly into the PC card
slot of a notebook or a desktop computer and permits connection of
either a wired or wireless microphone for recording directly to the hard
disk at a compressed rate of 18 minutes per megabyte of storage. Users
can send compressed files over the Internet saving time and money. With
a headset, keyboard and the VoiceLink software, users can manipulate
sound files for controlled record, play, fast forward, reverse and edit
functions. The VoiceLink product was selected as an Innovations '97
award winner at the 1997 International Winter Consumer Electronics Show.
SOUNDCLIP: Interchangeable SoundClip Flash cartridges are
compatible with both the Flashback and the VoiceLink. Users can remove
SoundClips and add new ones thereby extending recording time. SoundClips
store digitally recorded Flashback voice messages and transfer them to
the VoiceLink for downloading into a computer. Available in 18- or
36-minute capacities or longer capacities on special order, they feature
a write-protect switch to protect important recordings. Users can store
SoundClip cartridges indefinitely, and use them repeatedly. They're not
affected by magnets, X-rays, heat or cold.
FLASHBACK MOBILE OFFICE: The Flashback Mobile Office includes a
Flashback, SoundClip cartridge, VoiceLink and Software. The Flashback
Mobile Office Professional includes two VoiceLink cards for sending
compressed e-mail messages back and forth.
The technology developed for the Flashback products provide an
alternative to cassette sound recorders. VoiceLink also permits users to
interface with notebook and PC computers to record, edit and transmit highly
compressed sound files over networks and the Internet. The Company's voice
recording technology enables business travelers to carry a voice recorder and
use it anywhere to create voice memos or E-Mail. The digital recorder or a
notebook or portable computer become the transport and storage mediums for sound
files which are transmitted over existing networks to remote users. The direct
benefits of the Company's voice recording approach include:
Digital recorders can be smaller, more compact and have no moving parts
as compared to cassette recorders.
Digital voice recording technology permits users to compose messages
with editing, insertion and deletion capabilities. Analog tape can
only be appended and has no editing capabilities
Unlike analog tape digital voice recording technology interfaces
directly with computers, networks and the Internet.
Digital voice recording provides the convenience of voice communication
instead of keyboard entry for messages.
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<PAGE> 28
The Company and its OEM customers are seeking additional markets to
benefit from the advantages of digital recording.
OEM Technology Components. The Company owns intellectual property and
expertise in the use of Flash media for storing data, such as sound, pictures,
and video. The development of the proprietary MicroOS(TM) for both of the
industry standard Flash memory formats---Intel's Miniature Card and
CompactFlash---establishes the Company with experience developing for both. The
Norris Micro OS(TM) Flash File System is efficient when compared to competing
compression algorithms. In addition, the Company holds a patent on the use of
removable Flash media as storage for a hand-held digital voice recording device.
A key feature of the Company's Flashback technology is the ease of
computer compatibility. The Company's approach to managing digital sound
information allows information to be manipulated, saved and transferred over any
number of digital communication paths including the Internet and corporate
Intranets. Information may also be compressed or saved in traditional sound
formats on hard drives or other media. Management believes the rapid growth of
the Internet and corporate Intranets and the growing use of electronic mail will
provide a growing market for an efficient method to transmit voice messages,
sound and other data over these networks. Management believes the Company's
technology provides an efficient method to link this information between
networks, personal, portable and network computers and an array of miniature
electronic devices.
The Company believes its expertise and technology offers OEMs a rapid
path to develop digital recording products using Flash memory. These products
may integrate the Company's technology as a primary or secondary feature set. In
most cases, the Company believes it offers less costly development and a faster
time to market for companies who would otherwise have to develop expertise in
the following technology areas available for licensing:
MICRO OS: The MicroOScf is a compact operating system with logic
specifically designed to interface with CompactFlash, a Flash memory
card about the size of a matchbook that was originally developed by
SanDisk and is now supported by a number of manufacturers. MicroOSi was
designed with logic specifically for the Intel Miniature Card, a
competing Flash technology to the CompactFlash. Management believes
MicroOS is the only operating system for Flash memory that has a data
transfer rate limited only by the Flash memory write speed. The
operating system therefore supports the recording speeds required to
write directly to primary memory without intermediary memory. This
reduces overall hardware costs, especially for imaging applications.
Written in highly compact and optimized C computer language code, the
MicroOS operates in 14K of ROM and requires only 300 bytes of RAM.
NORRIS FLASH FILE SYSTEM: The Norris Flash File System (.nfs) is
a software module that speeds up and simplifies the integration of Flash
memory into embedded systems by transparently managing the peculiarities
of different types of Flash memory and by offering a sophisticated and
feature rich API (Advanced Protocol Interface, a file protocol) and
advanced fault tolerance.
MULTICHIP MODULE (MCM): The MCM is a single, highly compact chip
that contains a DSP and micro controller. With the MicroOS operating
system and the Norris Flash File System, the unit is designed to reduce
the hardware and software development time for products such as digital
voice recorders, telephone answering devices, and cellular phone
answering machines. It can also be integrated as a voice processing
feature into products such as digital cameras.
OEM Strategy and Current Customers. The Company's recent restructuring
focuses the Company as a leading provider to OEM customers of digital sound
recording and processing technology for Flash memory and related media. The
Company's strategy is to:
1. Private label the Company's existing consumer products
(Flashback, VoiceLink and Mobile Office System). The Sanyo private label
relationship described above is the Company's first contract for
in-house developed consumer products. The Company will similarly private
label its consumer products and proprietary technology to selected
name-brand companies in the dictation, personal computer, consumer
electronics, telecommunications, paging, and other industries.
2. Develop products for OEMs under contract. In January 1997 the
Company entered into an OEM and development contract with Lanier. Under
the terms of the agreement, the Company is receiving
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non-recurring engineering expenses ("NRE"), upon the satisfaction of
certain milestones, to develop a new portable digital voice recorder and
related accessory products. The Lanier agreement contemplates that the
product to be developed will be completed in early 1998, with the
Company to provide Lanier with manufactured product thereafter to be
sold by Lanier's sales force worldwide. The Company, as of September 30,
1997, in connection therewith, recognized NRE revenue of approximately
$493,000. The agreement is for an initial term of three years,
terminating January 6, 2000. The agreement provides for NCI to
manufacture or arrange for manufacture of the product. The Company's
strategy is to arrange for outside custom manufacturing of this product
on a turnkey basis. There can be no assurance a successful product can
be produced or that Lanier will elect to distribute the product or can
distribute the product such that sufficient margins can inure to NCI.
In June 1997 the Company announced that it was working to
integrate elements of its Flashback recorder into a handheld tactical
signal homing system being developed by VisiCom Laboratories, Inc. for
evaluation by the United States Marine Corps. Management believes this
is an example of the diverse applications of the Company's core
technology. The Company is seeking to develop other products to meet
other OEM customer needs.
3. Develop products for licensing to or private labeling by OEM
customers. The Company is continuing to develop in-house proprietary
products that may be private labeled or licensed to one or more OEMs.
There can be no assurance the Company will successfully complete
development of such technologies or products, that OEMs will be
attracted to the technologies or products or that commercial
technologies or products can be produced by any such OEMs.
4. Expand the technology base through continued enhancements of
the Flashback technology and new inventions. The Company's engineering
team continues to enhance and update the Flashback technology,
specifically the OEM technology components described above. The Company
also devotes resources to expanding the technology to new applications.
In addition to improved voice recorders, management believes the
Company's proprietary technology may have applications in a wide range
of products including voice pagers, answering machines, cellular phones,
computers, compact disc quality sound devices and for the storage of
pictures and video images.
New Technology in Development. In June 1997 the Company prepared
additional patent applications on its technology as applied to high-bandwidth
music fidelity applications. The Company has developed a prototype device (the
Flashback Audio(TM) player) capable of replaying music stored on CompactFlash
and other Flash media. This technology is in the early stage of development and
the Company intends to continue product development and thereafter produce
designs and products for OEMs. There can be no assurance this technology can be
successfully commercialized or marketed.
Manufacturing, Production and Distribution. During fiscal 1997 the
Company ceased contract manufacturing services and also substantially reduced
in-house manufacturing of Flashback products. Flashback products accounted for
47% of consolidated revenues during fiscal 1997. Current product sales are being
made from inventory.
The Company is reviewing alternatives for contracting with other
manufacturing facilities to produce products for its OEM customers (including
the existing consumer products and newly developed products) and will select,
when warranted, organizations who will provide a secondary source of supply,
and/or additional capacity. The Company's strategy is to arrange for the
production of products for its OEM customers on a turn-key basis, when possible.
In other instances the Company may enter into licensing and royalty agreements
with OEM customers who have existing manufacturing abilities or arrangements.
The Company believes, but there is no assurance, that it can provide
manufacturing for its customers through contract manufacturing relationships on
terms that will not require substantial financial risk or the provision of
working capital by the Company.
Major Customers and Export Sales. For the fiscal year ended March 31,
1996, two customers The Sharper Image and The Good Guys accounted for 10% each
of total revenues. During the fiscal year ended March 31, 1997 three customers,
Martin Decker, Sanyo and Alan Marketing accounted for 31%, 17% and 12%,
respectively each of total revenues. For the six month period ending Sept. 30,
1997, two customers Sanyo and Lanier accounted for 35%, and 59%, respectively
each of total revenues. No other customer accounted for more than 10% of
revenues. For the six month period ended September 30, 1997 export sales
aggregated $249,000. For the fiscal year ended
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March 31, 1997 export sales aggregated $155,000. There were no material export
sales in the prior fiscal year. At September 30, 1997 the Company had no
material backlog.
Competition. Management believes there is no direct competition with
regard to a hand held digital voice recorder that offers the ability to download
recorded sound and data information to a computer in compressed format. However,
without the VoiceLink device, the Flashback recorder is frequently compared to
the "note taker" type of products which offer limited recording capabilities and
feature sets. The Mobile Office package competes with companies that sell
traditional dictation/transcription devices. The success of Flashback products
will depend greatly on how the end user plans to utilize the product or
technology and the distribution strengths of the Company's OEM customers. The
Company believes it has a technical advantage in its solid state removable
recording technology. Management is not aware of any competing portable product
with comparable features that can be utilized for sending sound messages across
the Internet or corporate Intranets.
The primary competition, in general, for the Company's current products
are analog tape products and traditional dictation equipment. Increasingly, the
Company is competing against other companies which are also offering digital
recording products. The Company and its OEM customers therefore will compete
with a wide range of consumer and business product suppliers producing a wide
variety of products and solutions. The electronics product market is highly
competitive with many large international companies competing for the consumer
and business market.
The Company further believes its existing know-how, contracts, pending
patent applications, customized components, existing copyrights, trade secrets
and potential future patents and copyrights, will be significant in enabling it
to compete successfully in the field of digital sound recording and processing
technology for Flash memory and related media. There are other methods of
managing Flash memory in digital sound applications, and although management
believes they are less efficient, there is no assurance the Company can compete
against other providers of digital recording solutions many of which have
substantially greater resources than that of the Company.
Barriers to entry by new competitors are not significant and new
competitors in consumer electronics are continually commencing operations. The
technology of electronics and electronic components, features and capabilities
is also rapidly changing, in many cases causing rapid obsolescence of existing
products and technologies. Although the Company believes it has a technological
advantage at the present time, there can be no assurance that it can
successfully exploit or maintain this technological advantage in the future.
Patents, Tradenames and Copyrights. The Company owns one patent
protecting its products. The Company has made multiple additional patent
applications with multiple claims which are pending on innovations in audio and
other forms of recording. The Company's software is subject to copyrights and
pending patent applications. The patent position of any item for which the
Company has filed a patent application is uncertain and may involve complex
legal and factual issues. Although the Company is currently prosecuting multiple
patent and trademark applications with the U.S. Patent and Trademark Office and
also has filed certain international patent applications corresponding to its
U.S. patent applications, the Company does not know whether any of its
applications will result in the issuance of patents, or, for any patents issued,
whether they will provide significant proprietary protection or will be
circumvented or invalidated. Additionally, since an issued patent does not
guarantee the right to practice the claimed invention, there can be no assurance
others will not obtain patents that the Company would need to license or design
around in order to practice its patented technologies, or that licenses that
might be required would be available on reasonable terms. Further there can be
no assurance that any unpatented manufacture, use, or sale of the Company's
technology or products will not infringe on patents or proprietary rights of
others. The Company however has made reasonable efforts in the design and
development of its products not to infringe on other known patents.
The Company also relies on trade secret laws for protection of its
intellectual property, but there can be no assurance others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can protect its rights to unpatented trade
secrets.
The Company also has filed a number of trademark applications with the
U.S. Patent and Trademark Office. The Company has received notification of
allowance from the United States Patent Office for use of Flashback as a
registered trade name. The Company believes the trademark on Flashback to be
significant to its operations and the loss or infringement of the name could
have an adverse impact on operations.
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The Company intends to make every reasonable effort to protect its
proprietary rights to make it difficult for competitors to market equivalent
competing products without being required to conduct the same lengthy testing
and development conducted by the Company and not use any of the Company's
innovative and novel solutions to the many technical obstacles involved in
portable recording using Flash memory.
Employees. As of September 30, 1997, the Company, employed approximately
20 employees of which 5 were production, 2 were sales/customer service, 7 were
research and development, 2 were accounting/administrative and 3 were executive
officers. None of the Company's employees are represented by a labor union, and
the Company is not aware of any current efforts to unionize the employees.
Management of the Company considers the relationship between the Company and its
employees to be good.
Government Regulation. The Company's manufacturing operations are
subject to certain federal, state and local regulatory requirements relating to
environmental, waste management, health and safety matters and there can be no
assurance that material costs and liabilities will not be incurred or that past
or future operations will not result in exposure or injury or claims of injury
by employees or the public. Some risk of costs and liabilities related to these
matters are inherent in the Company's business, as with many similar businesses.
Management believes its business is operated in substantial compliance with
applicable environmental, waste management, health and safety regulations, the
violation of which could have a material adverse effect on the Company. In the
event of violation, these requirements provide for civil and criminal fines,
injunctions and other sanctions and, in certain instances, allow third parties
to sue to enforce compliance. In addition, new, modified or more stringent
requirements or enforcement policies could be adopted which could adversely
affect the Company.
Research and Development Costs. For the years ended March 31, 1997 and
1996, the Company spent $991,487 and $1,048,500, respectively, on research and
development. The Company anticipates it will continue to devote substantial
resources to research and development activities. During fiscal 1997
approximately $40,000 of research and development was borne by a contract
development customer.
Investment in JABRA. Between January 15, 1993 and March 31, 1996 the
Company sold an aggregate of 800,000 common shares of JABRA stock for $2,375,000
and owned 1,800,000 JABRA shares with a zero cost basis. On or about December
31, 1996 and January 2, 1997, the Company sold an additional 859,266 common
shares of JABRA stock for $276,300. As a result of these transactions, the
Company's ownership in JABRA at March 31, 1997, represented by 940,734 common
shares was 12.1%. Accordingly, the Company exercises no control over the shares
of JABRA. JABRA is a private company engaged in developing, manufacturing and
marketing cellular, desktop, mobile and wireless communications products.
JABRA's principal technology is the patented "all-in-the-ear" EarPHONE
technology originally conceived and developed by the Company when JABRA was a
wholly owned subsidiary. As a minority shareholder in JABRA, which has reported
operating losses since its inception, there can be no assurance as to when or if
the Company's remaining shares can produce any financial return to the Company.
The Company's investment in JABRA shares is carried on its balance sheet at a
cost of nil.
Miscellaneous. No material portion of the Company's business is subject,
at the election of the United States government, to renegotiation or termination
of contracts or subcontracts.
Compliance with federal, state and local provisions enacted or adopted
regulating the discharge of materials into the environment, or otherwise related
to the protection of the environment, has not had and is not expected to have
material effect on the Company's capital expenditures, earnings and competitive
position.
Description of Property. Commencing July 11, 1997 the Company jointly
leased with ATC an aggregate of 12,925 square feet of engineering office space
at 13114 Evening Creek Drive South, San Diego, California of which the Company
occupies approximately 5,500 square feet at a cost of $5,800 per month. From
April 1996 to July 1997, the Company provided approximately 2,407 square feet of
space at the Company's 12725 Stowe Drive, Poway, California facility and certain
support services to ATC at the rate of $3,095 per month. The Company believes
that the terms of the above arrangements are no less favorable than could be
obtained from an independent and unaffiliated party. The Company's former
facility was sublet by the landlord and the Company effective on September 30,
1997 entered into a three year term note for $182,129 representing a settlement
of unpaid rentals and termination of the lease agreement.
Legal Proceedings. The Company is involved in routine litigation
incidental to the conduct of its business. There are currently no material
pending legal proceedings to which the Company is a party or to which any of its
property is subject.
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MANAGEMENT
Directors and Executive Officers. The executive officers and directors
of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Elwood G. Norris 59 Chairman of the Board, Chief Executive
Officer and Director
Alfred H. Falk 42 President and Director
Robert Putnam 39 Vice President, Secretary and Director
Renee Warden 33 Controller
</TABLE>
- ----------
Elwood G. Norris - Mr. Norris has been Chairman of the Board of
Directors of the Company since 1988. From 1988 to October 1995, he was President
and Chief Executive Officer. In October 1995 he was appointed Chief Technology
Officer and in January 1997 was reappointed as Chief Executive Officer. Since
1980, Mr. Norris has also been a Director of American Technology Corporation
("ATC") and served as its President and Chief Executive Officer until February
1994. ATC is a publicly held consumer electronic products company, from which
the Company acquired JABRA. Since August 1989, he has served as director of
Patriot Scientific Corporation ("Patriot") and served as Chairman and Chief
Executive Officer until June 1994. From June 1995 until June 1996 when he was
reappointed Chairman, Mr. Norris served as temporary President and Chief
Executive Officer of Patriot, upon the illness and subsequent death of its
Chairman, President and Chief Executive Officer. Patriot is a public company
engaged in the development of microprocessor technology, digital modem products
and radar and antenna engineering. He invented the patented EarPHONE technology
owned by JABRA and is the primary inventor of the Company's digital recording
technology. Mr. Norris devotes only part-time services to the Company,
approximately twenty hours per week.
Alfred H. Falk - Mr. Falk was appointed President and a director of the
Company in January 1997. From March 1995, prior to his appointment as President,
he served as Vice President, Business Development and Vice President of OEM and
International Sales of the Company. Before joining the Company, Mr. Falk was
with Resources Internationale where he served as Director of U.S. Sales. From
1988 to 1993, Mr. Falk was the Manager of OEM Sales and Technology Licensing for
Personal Computer Products, Inc. in San Diego. From 1978 to 1988, Mr. Falk held
several management positions at DH Technology and was instrumental in its
successful startup. Mr. Falk attended Palomar College in San Marcos and Foothill
College in Los Altos, California.
Robert Putnam - Mr. Putnam was appointed Secretary of the Company in
March 1988, and Vice President in April 1993. He was appointed a director of the
Company in 1995. He served as a director of ATC from 1984 to September 1997 and
served as Secretary/Treasurer until February 1994, President and Chief Executive
Officer from February 1994 to September 1997 and currently serves as Vice
President, Treasurer and Assistant Secretary of ATC. He has also served as
Secretary/Treasurer and a director of Patriot since 1989. Mr. Putnam obtained a
B.A. degree in mass communications/advertising from Brigham Young University in
1983. Mr. Putnam devotes only part-time services to the Company, approximately
ten hours per week.
Renee Warden - Ms. Warden was appointed Controller of the Company in
June 1997. From November 1991 to June 1997 she was Accounting Manager for the
Company. Since 1993 she has attended Palomar College and most recently the
accounting program at the University of Phoenix, San Diego.
Executive Compensation. The following table sets forth for the fiscal
years ended March 31, 1997, 1996 and 1995, the cash compensation of the Chief
Executive Officer and the four most highly compensated executive officers of the
Company who received cash compensation in excess of $100,000 in that year (the
"Named Executive Officers").
29
<PAGE> 33
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term All Other
Compensation Compensation Compensation
----------------- ------------- ------------
Options
Name and Fiscal (# of Shares)
Principal Position Year Salary Bonus Other -------------
------------------ ------ -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Elwood G. Norris, Chairman 1997 $105,788 -0- -0- -0- $ 5,940(2)
and Chief Executive 1996 $163,500 -0- -0- 400,000 -0-
Officer(1) 1995 $120,384 -0- -0- -0- -0-
R. Gordon Root, President & 1997 $150,900 $30,000 -0- -0- $ 5,940(2)
Chief Executive Officer(3) 1996 $ 85,615 $20,000(4) -0- 150,000 -0-
1995 $-0- -0- -0- -0- -0-
Peter Gorrie, Chief 1997 $ 86,742 $31,990 $13,726(6) -0- $40,000(7)
Operating Officer(6) 1996 $ 29,262 -0- -0- -0- -0-
1995 $-0- -0- -0- -0- -0-
</TABLE>
(1) In September 1995, the Company entered into an employment agreement with
Elwood G. Norris, the Company's Chief Executive Officer. The employment
agreement provides for payment of a base salary of $115,000 per year until
October 31, 1997, when the base salary shall automatically increase 10% per
year. The employment agreement, which terminates on September 30, 1999,
further provides that Mr. Norris (or his estate) shall continue to receive
his base salary for a period of not longer than twelve months in the event
Mr. Norris is unable to fulfill his duties due to mental or physical
disabilities or death. Under terms of the employment agreement, Mr. Norris
also is entitled to participate in the Company's bonus pool and health
insurance plan. From time to time, Mr. Norris has waived certain
compensation due him under this employment agreement. There are no deferred
amounts payable to Mr. Norris.
(2) Represents bonus paid by issuance of 10,000 shares of Common Stock valued
at $5,940.
(3) Chief Executive Officer from October 1995 to December 1996.
(4) Amount stated reflects fair market value of 13,333 shares of Common Stock
as of the date of grant.
(5) Chief Operating Officer from February 1996 to January 1997.
(6) Amount stated reflects automobile expenses of $13,726.
(7) Amount stated reflects a severance payment of $40,000.
There were no options to purchase shares of the Company's Common Stock
granted in the fiscal year ended March 31, 1997 to the Chief Executive Officers
or any of the Named Executive Officers.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
There were no options exercised by the Named Executive Officers during
the fiscal year ended March 31, 1997. The following table provides information
on unexercised options at March 31, 1997:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options At In-the-Money Options At
March 31, 1997 March 31, 1997
-------------- --------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Elwood G. Norris 700,000(1) -0- $-0- $-0-
</TABLE>
(1) Subsequent to March 31, 1997 a total of 192,500 of these options expired
and the balance was voluntarily canceled to allow share issuances to
Prepaid Warrant holders.
The Company has not awarded stock appreciation rights to any employee of
the Company and has no long-term incentive plans, as that term is defined in
United States Securities and Exchange Commission regulations.
The Company has no defined benefit or actuarial plans covering any person.
30
<PAGE> 34
Compensation of Directors. The Company has no other arrangements to pay
any direct or indirect remuneration to any directors of the Company in their
capacity as directors other than in the form of reimbursement of expenses for
attending directors' or committee meetings. However, directors have received in
the past and may receive in the future stock or options pursuant to the
Company's stock option plans. No options were issued to non-employee directors
during the fiscal year ended March 31, 1997.
Employment Contracts. In September 1995, the Company entered into an
employment agreement with Elwood G. Norris, the Company's former President and
current Chief Executive Officer and Chief Technology Officer. The employment
agreement provides for payment of a base salary of $115,000 per year until
October 31, 1997, when the base salary shall automatically increase 10% per
year. The employment agreement, which terminates on September 30, 1999, further
provides that Mr. Norris (or his estate) shall continue to receive his base
salary for a period of not longer than twelve months in the event Mr. Norris is
unable to fulfill his duties due to mental or physical disabilities or death.
Under terms of the employment agreement, Mr. Norris also is entitled to
participate in the Company's bonus pool and health insurance plan. From
time-to-time, Mr. Norris has deferred and/or waived compensation due him under
this employment agreement.
CERTAIN TRANSACTIONS
Elwood Norris, Chairman and Chief Technology Officer of the Company, is
also a director of ATC. He is the beneficial owner of 2,844,438 shares of ATC
(representing approximately 29% of its issued and outstanding capital) and
Robert Putnam, the Vice President/Secretary and a director of the Company is
also Vice President, Treasurer and Assistant Secretary of ATC. He is the
beneficial owner of 420,000 shares of ATC (representing approximately 4% of its
issued and outstanding shares).
Commencing July 11, 1997 the Company jointly leased with ATC an
aggregate of 12,925 square feet of engineering office space at 13114 Evening
Creek Drive South, San Diego, California of which the Company occupies
approximately 5,500 square feet at a cost of $5,800 per month. From April 1,
1996 to July 1, 1997, the Company provided approximately 2,407 square feet of
space at the Company's 12725 Stowe Drive, Poway, California facility and certain
support services to ATC at the rate of $3,095 per month. As of September 30,
1997, the Stowe Drive lease was terminated. The Company believes that the terms
of these arrangements are no less favorable than could be obtained from an
independent and unaffiliated party.
Conflicts of Interest. Certain conflicts of interest now exist and will
continue to exist between the Company and its officers and directors due to the
fact that they have other employment or business interests to which they devote
some attention and they are expected to continue to do so. The Company has not
established policies or procedures for the resolution of current or potential
conflicts of interest between the Company and its management or
management-affiliated entities. There can be no assurance that members of
management will resolve all conflicts of interest in the Company's favor. The
officers and directors are accountable to the Company as fiduciaries, which
means that they are legally obligated to exercise good faith and integrity in
handling the Company's affairs. Failure by them to conduct the Company's
business in its best interests may result in liability to them.
Officer and director Robert Putnam also acts as Treasurer and Secretary
of Patriot where he ultimately reports to the Board of Directors of which Mr.
Norris is Chairman. Mr. Putnam is also Vice President, Treasurer and Assistant
Secretary of ATC, a company effectively controlled by Mr. Norris. The
possibility exists that these other relationships could affect Mr. Putnam's
independence as a director of the Company. The Company has not provided a method
of resolving this conflict and probably will not do so, partly due to inevitable
extra expenses and delay any measures would occasion. Mr. Norris and Mr. Putnam
are obligated to perform their duties in good faith and to act in the best
interest of the Company and its stockholders, and any failure on their part to
do so may constitute a breach of their fiduciary duties and expose them to
damages and other liability under applicable law. While the directors and
officers are excluded from liability for certain actions, there is no assurance
that Mr. Norris or Mr. Putnam would be excluded from liability or indemnified if
they breached their loyalty to the Company.
31
<PAGE> 35
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of Nov. 30, 1997, information
regarding ownership of Common Stock by each person known by the Company to be
the beneficial owner of more than 5% of the Company's outstanding Common Stock,
by each director and by all executive officers and directors of the Company as a
group. All persons named have sole voting and investment power over their shares
except as otherwise noted.
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address of Beneficial Owner(1) Beneficial Ownership(2) Percent of Class
- --------------------------------------- ----------------------- ----------------
<S> <C> <C>
Elwood G. Norris 709,838 (3) 1.3%
Robert Putnam 40,000 (4) *
Alfred H. Falk 0 (5) *
Renee Warden 2,000 (6) *
Gross Foundation, Inc. 3,142,640 (7) 5.6%
All officers, directors and nominees
as a group (4 persons) 751,838 (8) 1.3%
* Less than 1%
</TABLE>
- ----------
(1) The address of each beneficial owner (other than the Gross Foundation, Inc.
and Morgen Christiano & Co., LLC) is 13114 Evening Creek Drive South, San
Diego, California 92128. The address of the Gross Foundation, Inc. is 1660
49th Street, Brooklyn, New York 11204.
(2) Unless otherwise noted, sole voting and dispositive power are possessed
with respect to all shares of Common Stock owned.
(3) Includes 225,000 shares of the Company's Common Stock owned by ATC, which
shares are deemed to be beneficially owned by Mr. Norris as a result of Mr.
Norris' 29% ownership of ATC. Excludes unvested options granted to Mr.
Norris in June 1997 to purchase 450,000 shares (original June 1997 option
issuance was for 700,000 shares with options on 250,000 shares subsequently
voluntarily canceled by Mr. Norris to allow share issuances to Warrant
holders).
(4) Excludes unvested options to purchase 150,000 shares.
(5) Excludes unvested options to purchase 369,684 shares (original June 1997
option issuance was for 500,000 shares with options on 130,316 shares
subsequently voluntarily canceled by Mr. Falk to allow share issuances to
Warrant holders).
(6) Consists entirely of presently exercisable options to purchase shares.
(7) Based solely on the information provided to the Company by such beneficial
owner. Does not include any shares of Common Stock which may be acquired
from time to time upon exercise of Prepaid Warrants upon the approval of
the amendment to the Company's Certificate of Incorporation to increase the
authorized number of shares of Common Stock.
(8) Includes presently exercisable options to purchase 2,000 shares and the
225,000 shares owned by ATC and attributable to Mr. Norris.
The above table does not include ownership of over 5% of the Company's
outstanding Common Stock that may beneficially exist by holders of Warrants
exercisable into Common Stock at a discount to market. Other than as disclosed
herein, the Company has received no current information regarding the beneficial
holdings of Warrant holders, nor has it been advised, other than as disclosed
herein, by any holders that they beneficially own more than 5% of the Company's
Common Stock.
On July 17, 1997 an electronic Form 13D was filed by UFH Endowment Ltd.
with an address of Liechtenstein not specifying a number of shares owned. The
Company has no additional information regarding the number of shares held
currently or the investment intent of this investor.
32
<PAGE> 36
The following security ownership information is set forth as of November
14, 1997, with respect to certain persons or groups known to the Company to be
beneficial owners of more than 5% of the Company's outstanding Series A
Redeemable Convertible Preferred Stock, the only class of preferred stock
outstanding. Other than as set forth below, the Company is not aware of any
other person who may be deemed to be a beneficial owner of more than 5% of the
Company's preferred stock.
<TABLE>
<CAPTION>
Amount and
Nature of Percent
Beneficial of Class
Name and address of Beneficial Owner Ownership(1)
- ------------------------------------ ------------ --------
<S> <C> <C>
CCL Pacific Ltd.
David Chang, Director(2)
1005A Lippo Tower
89 Queensway, Central
Hong Kong 20,000 20.1%
Taishin Company (Hong Kong) Ltd.
Bunsei Ko, Director(2)
Room 605 Central Building
No. 1 Pedder Street, Central
Hong Kong 15,000 15.1%
Canusa Trading Ltd.
W.A. Manuel, Director(2)
37 Reld Street, 2nd Flr., Armoury Bldg.
Hamilton, Bermuda 7,500 7.5%
Neo Optics Ltd.
Douglas Tufts, Director(2)
1600-555 Burrard Street
Vancouver, B.C. V7X1S6 Canada 7,500 7.5%
Paril Holding
Josef Goldenburg, Director(2)
137 Mariastrasse
Zurich 8040
Switzerland 7,500 7.5%
R. Kirk Avery
6121 Vista de la Mesa
La Jolla, California 92037 5,000 5.0%
Jerry E. Polis Family Trust
Jerry E. Polis, Trustee(2)
3188 Bel Air Drive
Las Vegas, Nevada 89109 5,000 5.0%
Barbara C. Roemer
7175 Eads Avenue
La Jolla, California 92037 5,000 5.0%
TIA Ltd.
David Roberts, Director(2)
1600-555 Burrard Street
Vancouver, B.C. V7X1S6 Canada 5,000 5.0%
Arcadia Mutual Fund Inc.
Nancy Lake, President(2)
55 Frederick Street
Box CB 13029
Nassau, Bahamas 5,000 5.0%
</TABLE>
33
<PAGE> 37
- ----------
(1) Represents number of shares of preferred stock, $.001 par value, held as of
November 14, 1997. At such date an aggregate of 99,500 shares of preferred
stock were issued and outstanding.
(2) The Company believes that the representative named has the authority to
vote the shares on behalf of the preferred stockholder.
34
<PAGE> 38
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
Selling Shareholders. Except as set forth below, none of the Selling
Shareholders is currently an affiliate of the Company, and none of them has had
a material relationship with the Company during the past three years.
<TABLE>
<CAPTION>
Maximum Number of Shares Offered For Sale
-----------------------------------------
(c) Shares of Shares of
(a) (b) Additional Common Stock Common Stock
Beneficial Number of Shares Due (b) + (c) Beneficially Beneficially
Ownership Shares of To Market Maximum Owned Owned
of Common Common Price Number Before After
Stock at Stock Decline and of Shares Offering (4) Offering (5)
February 7, Previously Warrant Offered --------------- -------------
Name 1997(1) Registered(2) Amendment(3) Hereby Number % Number %
- ----------------------------- ------------ ------------ ----------- --------- -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dina Partners, L.P. 464,824 464,824 4,469 469,293 469,293 0.8% 0 0
Porter Capital Management 348,618 348,618 3,352 351,970 351,970 0.6% 0 0
EDJ Ltd. 116,206 116,206 1,117 117,323 117,323 0.2% 0 0
Irwin Roberts 166,185 166,185 1,587 167,772 167,772 0.3% 0 0
Stu Zimmerman 87,154 87,154 838 87,992 87,992 0.2% 0 0
Sanwa Bank Trustee for
Joe Wizan IRA 83,004 83,004 799 83,803 799 0.0% 0 0
Kamren Ghiasi 52,293 52,293 502 52,795 52,795 0.1% 0 0
Privatim Finanz AG 830,043 830,043 7,980 838,023 612,323 1.1% 0 0
Jerome Moss 415,021 415,021 3,990 419,011 3,990 0.0% 0 0
Michael Klein 268,170 268,170 16,000 284,170 15,208 0.0% 0 0
Michael Klein Trustee Under 83,004 83,004 799 83,803 799 0.0% 0 0
Agreement dated 12/22/80 Joyce
Faye Klein Trust FBO Michael
Klein Issue Trust
Gregory Hookstratten 166,009 166,009 1,595 167,604 1,595 0.0% 0 0
St. Claire Options Trading, L.P. 1,162,974 1,162,974 1,569,807 2,732,781 1,658,681 2.9% 0 0
JMG Management, Inc. 1,162,974 1,162,974 1,399,439 2,562,413 1,415,000 2.5% 0 0
Iacocca Capital Partners, L.P. 410,531 410,531 549,349 959,880 549,349 1.0% 0 0
William Elkus 193,830 193,830 142,980 336,810 142,982 0.3% 0 0
Richard Bertagna 193,830 193,830 279,374 473,204 279,374 0.5% 0 0
Kolel Zera Kodesh (6) 378,739 378,739 62,262 441,001 62,262 0.1% 0 0
Gross Foundation, Inc. (6) 5,681,085 5,681,085 3,142,640 8,823,725 3,142,640 5.6% 0 0
Morgen Christiano & Co., LLC 1,893,695 1,893,695 2,511,657 4,405,352 2,511,657 4.5% 0 0
Milton Klein 227,244 227,244 226,656 453,900 226,656 0.4% 0 0
</TABLE>
35
<PAGE> 39
<TABLE>
<CAPTION>
Maximum Number of Shares Offered For Sale
-----------------------------------------
(c) Shares of Shares of
(a) (b) Additional Common Stock Common Stock
Beneficial Number of Shares Due (b) + (c) Beneficially Beneficially
Ownership Shares of To Market Maximum Owned Owned
of Common Common Price Number Before After
Stock at Stock Decline and of Shares Offering (4) Offering (5)
February 7, Previously Warrant Offered --------------- -------------
Name 1997(1) Registered(2) Amendment(3) Hereby Number % Number %
- ----------------------------- ------------ ------------ ----------- --------- -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.C. Financial Ltd. 946,848 946,848 1,644,696 2,591,544 2,236,807 4.0% 0 0
Steve Katznelson 943,957 943,957 1,093,336 2,037,293 1,744,293 3.1% 0 0
Madison Trading, Inc. (6) 1,283,781 1,283,781 0 1,283,781 525,677 0.9% 0 0
Klein Investment Group, L.P. 401,924 401,924 400,000 801,924 801,924 1.4% 0 0
Higham, McConnell & Dunning 150,000 150,000 0 150,000 150,000 0.3% 0 0
Gray, Cary, Ware & Friedenrich 154,000 154,000 0 154,000 0 0.0% 0 0
Set Marketing On 48,000 48,000 0 48,000 48,000 0.1% 0 0
Total 18,313,943 18,313,943 13,065,224 31,379,167 17,377,161
</TABLE>
(1) Based solely upon the review of a shareholder transcript prepared by the
Transfer Agent for the Company as of such date. Includes shares issuable on
the exercise of Warrants beneficially owned by certain of the Selling
Shareholders at such date, assuming the average sales price per share of
Common Stock for the five trading days preceding the date of exercise (used
to determine the number of shares of Common Stock into which the Warrants
could be exercised) equaled $0.45, less a discount of 30%.
(2) Includes 2,666,074 shares of Common Stock issued in private placements in or
about June 1996, 12,082,222 shares of Common Stock issued upon exercise of
Warrants in connection with June, July and August private placements,
2,811,723 shares of Common Stock issued to Selling Shareholders due to
delays in the registration process, 202,000 shares of Common Stock issued
for services and 551,924 shares of Common Stock issuable upon the exercise
of warrants to purchase Common Stock. These shares were previously
registered pursuant to Registration Statement No. 333-7709 (effective on May
15, 1997) and are included herein pursuant to Rule 429. A portion of these
shares already have been sold by the Selling Shareholders pursuant to such
prior Registration Statement.
(3) Includes 12,622,196 additional shares of Common Stock issued upon the
exercise of Warrants due to a decline in the exercise price. These shares
were not registered pursuant to Registration Statement No. 333-7709 but may
qualify for resale under Rule 144. Accordingly, qualifying Selling
Shareholders may elect to sell under Rule 144 pending the effectiveness of
this Registration Statement or thereafter. Also includes 400,000 shares
issuable on the exercise of a warrant agreement and 43,028 shares of Common
Stock issued upon adjustment of private placement penalties.
(4) Based upon a review of a shareholder transcript prepared by the Company as
of November 30, 1997 and other information available to the Company or
provided by the Selling Shareholder. There can be no assurance that Selling
Shareholders do not beneficially own shares in addition to those listed
herein. Excludes any shares issuable upon future exercise of remaining
Warrants when, and if, additional shares of Common Stock are authorized.
(5) Assumes the sale of all shares of Common Stock covered by this Prospectus.
There can be no assurance that any of the Selling Shareholders will sell any
or all of the shares of Common Stock offered hereby.
(6) Beneficial ownership excludes shares of Common Stock issuable upon the
exercise of $1,012,956 face value of Warrants. Exercise of those Warrants
has been suspended due to the lack of authorized shares of Common Stock. If
these Warrants were exercisable at November 30, 1997, the Selling
Shareholders could elect to convert such Warrants into 14,450,273 shares of
Common Stock, subject to future adjustment. These shares are excluded from
beneficial ownership table. No Selling Shareholder can convert Warrants such
that they would beneficially own more than 10% of the Company's outstanding
shares of Common Stock.
36
<PAGE> 40
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 60,000,000
shares of Common Stock $.001 per share par value, and 5,000,000 shares of
preferred stock, $.001 per share par value ("Preferred Stock"). As of November
30, 1997, there were 56,413,405 shares of Common Stock issued and outstanding
and 99,500 shares of Preferred Stock are outstanding.
Common Stock. Holders of Common Stock are entitled to one vote per share
on matters to be voted upon by the shareholders of the Company. Holders of
Common Stock do not have cumulative voting rights; therefore, the holders of a
simple majority of the outstanding shares of Common Stock will have the right to
elect all of the Company's directors. Holders of Common Stock will be entitled
to receive dividends when, as and if declared by the Company's Board of
Directors and to share ratably in the assets of the Company legally available
for distribution to its shareholders in the event of the liquidation,
dissolution or winding up of the Company, in each case subject to the rights of
the holders of any Preferred Stock issued by the Company. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights.
Preferred Stock. The Company's Board of Directors has the authority
without further action by the stockholders of the Company to issue shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions of those shares. The issuance of Preferred Stock
could adversely affect the voting power and economic rights of holders of Common
Stock and could have the effect of delaying, deferring or preventing a change in
control of the Company.
During September 1997, the first series, consisting of up to 100,000
shares, was designated by the Board of Directors as Series A. The Series A Stock
has voting rights equal to the number of shares of Common Stock into which the
Series A Stock is convertible. Dividends of 8% per annum are cumulative and may
be payable in cash or shares of Common Stock, at the Company's election. The
Series A Stock has a liquidation preference of $10.00 per share, plus accrued
and unpaid dividends, with no participation after the preference is paid. The
Series A Stock is convertible into shares of Common Stock computed by dividing
$10.00 plus accrued and unpaid dividends by the lesser of (i) $0.0875 or (ii)
80% of the average closing bid price for the Common Stock for the ten trading
days immediately following any and each distribution in shares, subdivision,
split up, combination, reclassification, or other change in Common Stock. There
are not currently sufficient authorized but unissued shares of Common Stock
available for conversion of the Series A Stock and the Company is obligated to
take appropriate corporate action to authorize additional shares of its Common
Stock, to be reserved and kept available solely for issuance upon the conversion
of the Series A Stock. There can be no assurance when or if the Series A Stock
will become convertible. The Company is required to redeem the Series A Stock on
September 1, 2000 ("Mandatory Redemption Date") and upon the occurrence of
certain other events. The Company may redeem the Series A Stock earlier only if
there are sufficient shares available for conversion of the Series A Stock. The
redemption price is $10.00 per share plus accrued and unpaid dividends if there
are sufficient shares available for conversion of the Series A Stock, otherwise
the redemption price is equal to the greater of (i) $10.00 per share plus
accrued and unpaid dividends or (ii) an amount equal to a five day market price
multiplied by the shares into which the Series A Stock would be convertible if
shares were authorized, plus a 10% premium. If sufficient shares of Common Stock
for conversion of the Series A Stock are not authorized by March 31, 1998, the
dividend rate shall be increased to 12% until sufficient shares are authorized
and the Mandatory Redemption Date shall be accelerated to December 31, 1998.
California Law. The Company may be a "quasi-California corporation"
within the meaning of Chapter 21 of the California Corporations Code. This would
be the case if the average of its property factor, payroll factor and sales
factor (as defined in the California Revenue and Taxation Code) is more than
fifty percent (50%), and more than one-half of its outstanding voting securities
are held of record by persons having addresses in California. If a corporation
is a quasi-California corporation, California law provides that certain portions
of the California Corporations Code shall govern it, to the exclusion of the law
of the true jurisdiction of incorporation (Delaware).
One such provision is Section 708, pertaining to cumulative voting for
directors.
Under Section 708, if any shareholder gives notice at a meeting, prior
to voting for directors, of his intention to cumulate his votes, all
shareholders may cumulate their votes in the election for directors; i.e., give
one candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the shareholder's shares are normally
entitled, or distribute the shareholder's votes on the same principle among as
many candidates as the shareholder thinks fit. The candidates receiving the
highest number of affirmative votes, up to the number of directors to be
elected, are the winners.
37
<PAGE> 41
Transfer Agent. The transfer agent and registrar for the Common Stock is
Interwest Transfer Co., Salt Lake City, Utah.
LEGAL MATTERS
The validity of the securities offered will be passed on for the Company
by Higham, McConnell & Dunning LLP, Laguna Niguel, California. Higham, McConnell
and Dunning LLP owns warrants to acquire 150,000 shares of Common Stock.
EXPERTS
The Consolidated Financial Statements of the Company for the years ended
March 31, 1997 and March 31, 1996, respectively, have been audited by Ernst &
Young, independent auditors, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement, and are included herein in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
FURTHER INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 with respect to the securities which are
offered by this Prospectus. This Prospectus omits certain information which is
contained in the Registration Statement as permitted by the Rules and
Regulations of the Commission. For further information, reference is made to the
Registration Statement including the exhibits filed therewith, which may be
examined without charge at the Washington, D.C. offices of the Commission and
copies of all or any part thereof may be obtained upon payment of the
Commission's charge for copying. The statements contained in this Prospectus as
to the contents of any contract or other document identified as exhibits in this
Prospectus are not necessarily complete, and in each instance, reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement, each statement being qualified in any and all respect by such
reference.
38
<PAGE> 42
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
FINANCIAL STATEMENTS OF THE COMPANY
Report of Independent Auditors F-1
Consolidated Balance Sheets as of March 31, 1997
and 1996 F-2
Consolidated Statements of Operations for the years
ended March 31, 1997 and 1996 F-3
Consolidated Statements of Stockholders' Equity (Deficiency)
for the years ended March 31, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the years
ended March 31, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
Unaudited Interim Consolidated Balance Sheets as of September 30,
1997 and March 31, 1997 (unaudited) F-25
Unaudited Interim Consolidated Statements of Operations for the three
and six months ended September 30, 1997 and 1996 F-26
Unaudited Interim Consolidated Statements of Cash Flows for the
six months ended September 30, 1997 and 1996 F-27
Notes to Unaudited Interim Consolidated Financial Statements F-28
</TABLE>
40
<PAGE> 43
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
We have audited the accompanying consolidated balance sheets of NORRIS
COMMUNICATIONS, INC. AND SUBSIDIARY (FORMERLY NORRIS COMMUNICATIONS CORP.) as of
March 31, 1997 and 1996 and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Norris
Communications, Inc. and subsidiary at March 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the company has suffered recurring losses
from operations and has an accumulated deficit that raise substantial doubt
about the company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 2, the company's consolidated financial statements for the
year ended March 31, 1996, have been restated to reflect a change in their
method of accounting for convertible notes payable.
Vancouver, Canada, /s/ ERNST & YOUNG
June 13, 1997. Chartered Accountants
F-1
<PAGE> 44
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
CONSOLIDATED BALANCE SHEETS
As at March 31
<TABLE>
<CAPTION>
1997 1996
$ $
----------- -----------
(Restated-
note 2)
<S> <C> <C>
ASSETS [note 9]
CURRENT
Cash and cash equivalents 176,158 2,843,540
Accounts receivable, less allowance for doubtful
accounts of $36,330 and $11,647, respectively 30,097 94,619
Inventory [note 6] 1,648,863 3,243,245
Prepaid expenses and other -- 226,436
Property and equipment held for
sale [notes 2 and 18] 68,567 --
----------- -----------
TOTAL CURRENT ASSETS 1,923,685 6,407,840
----------- -----------
Property and equipment [note 7] 199,320 1,359,791
Unearned discount [note 2] -- 1,097,561
Intangible assets, net of accumulated amortization
of $32,341 and $24,896, respectively 42,068 49,513
----------- -----------
2,165,073 8,914,705
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Demand loan payable [note 9] -- 2,185,546
Accounts payable, trade 1,264,150 2,554,209
Other accounts payable and accrued
liabilities [note 18] 1,049,697 612,056
Advances on research and development
contract [note 10] 174,341 --
----------- -----------
TOTAL CURRENT LIABILITIES 2,488,188 5,351,811
----------- -----------
Convertible notes payable [note 13] -- 4,285,714
----------- -----------
TOTAL LIABILITIES 2,488,188 9,637,525
----------- -----------
Commitments and contingencies [notes 1, 13 and 16]
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, $.001 par value, authorized
60,000,000 and 30,000,000 shares, respectively;
23,370,008 and 15,103,703 shares outstanding,
respectively [notes 12, 14 and 19] 23,370 21,762,337
Additional paid-in capital [note 12] 28,459,269 --
Prepaid warrants [note 17] 3,276,505 --
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (33,674,575) (24,077,473)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (323,115) (722,820)
----------- -----------
2,165,073 8,914,705
=========== ===========
</TABLE>
See accompanying notes
F-2
<PAGE> 45
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31
<TABLE>
<CAPTION>
1997 1996
$ $
----------- -----------
(Restated
note 2)
<S> <C> <C>
REVENUES [note 15] 653,700 1,328,502
Cost of sales [note 15] 2,111,999 4,413,814
----------- -----------
Gross profit (loss) (1,458,299) (3,085,312)
----------- -----------
OPERATING EXPENSE
Selling and administrative 4,047,227 3,574,597
Research and related expenditures 991,487 1,048,540
Restructuring charge [note 18] 2,228,001 --
Write-down of purchased goodwill -- 236,636
----------- -----------
7,266,715 4,859,773
----------- -----------
Operating loss (8,725,014) (7,945,085)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (79,518) (356,429)
Non-cash interest expense [note 2] (1,097,561) (188,153)
Interest income 28,691 33,971
Gain on sale of investment [note 8] 276,300 --
----------- -----------
(872,088) (510,611)
----------- -----------
Loss before provision for income taxes (9,597,102) (8,455,696)
Provision for income taxes [note 11] -- --
----------- -----------
LOSS FOR THE YEAR (9,597,102) (8,455,696)
=========== ===========
LOSS PER SHARE (0.44) (0.64)
=========== ===========
</TABLE>
See accompanying notes
F-3
<PAGE> 46
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIENCY)
Year ended March 31
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN CONTRIBUTED ACCUMULATED
SHARES AMOUNT CAPITAL SURPLUS DEFICIT
# $ $ $ $
----------- ----------- ----------- ----------- -----------
(Restated - (Restated -
note 2) note 2)
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995 11,616,814 17,849,751 -- 1,592,316 (15,621,777)
Stock issued as compensation expense 13,333 20,000 -- -- --
Stock issued under stock option plan 15,000 30,303 -- -- --
Stock issued as payment for
refinancing fee [note 9] 75,000 101,250 -- -- --
Stock issued as payment for professional
services rendered 215,842 319,498 -- -- --
Issuance of common stock for cash 3,167,714 3,441,535 -- -- --
Loss for the year -- -- -- -- (8,455,696)
----------- ----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1996 15,103,703 21,762,337 -- 1,592,316 (24,077,473)
Stock issued on legal settlement 85,000 127,500 -- -- --
Stock issued on conversion of convertible
notes payable 4,366,050 4,319,486 -- -- --
Issuance of common stock for cash 2,666,075 1,699,444 -- -- --
Transfer from common stock to additional
paid-in capital resulting from change to
$.001 par value shares from no par value
shares [note 12] -- (27,886,546) 27,886,546 -- --
Stock issued as directors' fees 60,000 60 35,580 -- --
Stock issued on exercise of prepaid warrants 392,702 393 119,607 -- --
Stock issued as payment for professional
services rendered 696,478 696 417,536 -- --
Loss for the year -- -- -- -- (9,597,102)
----------- ----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1997 23,370,008 23,370 28,459,269 1,592,316 (33,674,575)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes
F-4
<PAGE> 47
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31
<TABLE>
<CAPTION>
1997 1996
$ $
---------- -----------
(Restated
note 2)
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the year (9,597,102) (8,455,696)
Adjustments to reconcile loss to net cash used by
operating activities:
Depreciation and amortization 412,416 524,399
Loss on disposal of property and equipment 365,864 38,550
Write-down of property and equipment 376,538 --
Write-down of purchased goodwill -- 236,636
Professional services paid by issuance of common stock 418,232 319,498
Directors' fees paid by issuance of common stock 35,640 --
Refinancing fee paid by issuance of common stock -- 101,250
Compensation paid by issuance of common stock -- 20,000
Legal settlement paid by issuance of common stock 127,500 --
Interest charges on convertible notes payable paid by issuance
of common stock 33,772 --
Non-cash interest expense 1,097,561 188,153
Gain on sale of investment (276,300) --
Changes in assets and liabilities:
Accounts receivable 64,522 58,054
Inventory 1,594,382 (579,842)
Prepaid expenses and other 226,436 170,208
Accounts payable, trade (1,290,059) 1,319,635
Other accounts payable and accrued liabilities 437,641 8,288
Advances on research and development contract 174,341 --
---------- -----------
CASH (USED IN) OPERATING ACTIVITIES (5,798,616) (6,050,867)
---------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (153,644) (84,932)
Proceeds on disposal of property and equipment 98,175 30,752
Proceeds on sale of investment 276,300 --
---------- -----------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 220,831 (54,180)
---------- -----------
FINANCING ACTIVITIES
Repayments under demand loan payable (2,185,546) (814,454)
Issuance of convertible notes payable -- 3,000,000
Proceeds from issuance of prepaid warrants 3,396,505 --
Proceeds from issuance of shares 1,699,444 3,471,838
---------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 2,910,403 5,657,384
---------- -----------
DECREASE IN CASH DURING THE YEAR (2,667,382) (447,663)
Cash and cash equivalents, beginning of year 2,843,540 3,291,203
---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR 176,158 2,843,540
========== ==========
</TABLE>
See accompanying notes
F-5
<PAGE> 48
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The Company operates in one major line of business, the development, manufacture
and marketing of electronic products.
On August 30, 1996, Norris Communications Corp. continued its jurisdiction to
the State of Wyoming, then on September 4, 1996, to the State of Delaware.
During the continuation process, Norris Communications Corp. changed its name
to Norris Communications, Inc. (the "Company").
The consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States on
a going concern basis, which contemplates the realization of assets and the
discharge of liabilities in the normal course of business for the foreseeable
future.
The Company has incurred significant losses and negative cash flow from
operations in each of the last three years and has an accumulated deficit of
$33,674,575 at March 31, 1997 [1996 - $24,077,473]. The Company's ability to
continue as a going concern is in substantial doubt and is dependent upon
achieving a profitable level of operations and, if necessary, obtaining
additional financing.
Management of the Company has undertaken steps to improve operations with the
goal of sustaining Company operations for the next twelve months and beyond.
These steps include (i) re-focusing the Company on a family of products,
technology components and software and not having the Company be reliant on a
single recorder product; (ii) expanding the Company's private label product
offering by introducing VoiceLink and Mobile Office products; (iii) focusing
sales and marketing on the Original Equipment Manufacturing markets; and (iv)
reducing overhead and operating expenses by discontinuing its contract
manufacturing services and direct sales.
These consolidated financial statements do not give effect to any adjustments
which would be necessary should the Company be unable to continue as a going
concern and therefore be required to realize its assets and discharge its
liabilities in other than the normal course of business and at amounts different
from those reflected in the accompanying consolidated financial statements.
F-6
<PAGE> 49
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
2. SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENTS
The Company has restated their March 31, 1996 consolidated financial statements
to recognize a recently announced position by the staff of the Securities and
Exchange Commission regarding the accounting for the issuance of debt that can
be converted at a discount to the market price of the Company's common stock. In
this regard, the implicit return provided by the conversion terms of the debt is
accounted for as additional interest expense and accreted over the period
between the date of issuance of the debt and the date the debt first become
convertible. This restatement has resulted in additional non-cash interest
expense of $188,153 in the year ended March 31, 1996 or $0.014 per share and an
unearned discount of $1,097,561 at March 31, 1996.
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Norris Communications, Inc. ("NCI") (a company
incorporated in the State of California). All significant intercompany accounts
and transactions have been eliminated.
RECLASSIFICATIONS
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the 1997 presentation.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable trade, other
accounts payable and accrued liabilities, capital lease obligations and
convertible notes payable approximate their fair values.
F-7
<PAGE> 50
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
CASH EQUIVALENTS
Cash equivalents, consisting of commercial paper with maturities of less than 90
days, certificates of deposit and money market funds, are recorded at cost,
which approximates market value.
TRANSLATION OF FOREIGN CURRENCIES
Monetary assets and liabilities are translated at the rate in effect at the
balance sheet date. Other balance sheet items and revenues and expenses are
translated at the rates prevailing on the respective transaction dates. Gains
and losses on foreign currency transactions, which have not been material, are
reflected in the consolidated statements of operations.
EARNINGS PER SHARE
Primary and fully diluted earnings per share amounts are based on the weighted
average number of common shares and common stock equivalents outstanding for
each year.
INVESTMENT
The Company's 940,734 [1996 - 1,800,000] shares or 12.1% [1996 - 23.1%]
investment in JABRA Corporation ("JABRA"), a private corporation, is accounted
for using the cost method [see Note 8].
REVENUE RECOGNITION
Revenue is recognized on the basis of shipment of products or delivery of
services. Research and development contract revenue is recognized in the period
the related research and development expenditures are incurred. Funds received
in advance of meeting the criteria for revenue recognition are deferred and are
recorded as revenue as they are earned.
RESEARCH AND RELATED EXPENDITURES
Research and related expenditures are charged to operations as incurred.
F-8
<PAGE> 51
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
INVENTORY
Inventory of raw materials, work in process and finished goods is recorded at
the lower of cost and net realizable value. Cost is determined on a first-in,
first-out basis.
PROPERTY AND EQUIPMENT HELD FOR SALE
Property and equipment held for sale are recorded at their net realizable
amount.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization are
provided on the straight-line method over the estimated useful lives of the
related assets, ranging from 3 to 7 years or, in the case of leasehold
improvements, over the lesser of the useful life of the related asset or the
lease term. When assets are sold or retired, the cost and accumulated
depreciation are removed from the respective accounts and any gain or loss on
the disposition is credited or charged to income. Maintenance and repair costs
are charged to operations when incurred.
GOODWILL
Purchased goodwill was created upon acquisition of subsidiaries. The goodwill
pursuant to the acquisition of subsidiaries is amortized over a four year
period. Goodwill is written down to fair value when declines in value are
considered to be other than temporary based upon undiscounted cash flows of the
respective subsidiary.
INTANGIBLE ASSETS
Intangible assets include government bidding rights and rights to technology,
which are amortized over a 10 year period, and costs relating to obtaining
patents, which are deferred when management is reasonably certain the patent
will be granted. Upon granting of the patent, such costs will be amortized to
operations over the life of the patent. If management determines that
development of products to which patent costs relate is not reasonably certain,
or that deferred patent costs exceed net recoverable value, such costs are
charged to operations.
F-9
<PAGE> 52
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
LEASES
Leases entered into are classified as either capital or operating leases. Leases
which substantially transfer all benefits and risks of ownership of property to
the Company are accounted for as capital leases. At the time a capital lease is
entered into, an asset is recorded together with its related long-term
obligation to reflect the purchase and financing.
Rental payments under operating leases are expensed as incurred.
STOCK OPTIONS GRANTED
The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), Accounting for Stock-Based Compensation, which encourages
companies to recognize expense for stock-based awards based on their estimated
fair value on the date of the grant. SFAS 123, effective for the period ended
March 31, 1997, does not require companies to change their existing accounting
for stock-based awards, but if the new fair value method is not adopted, pro
forma income and earnings per share data must be provided in the footnotes to
the consolidated financial statements. The Company supplementally discloses the
required pro forma information as if the fair value method had been adopted
effective April 1, 1995 [see Note 12].
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share. SFAS
128 eliminates the requirement for primary earnings per share previously
required under APB Opinion No. 15, Earnings Per Share, which showed the amount
of income attributable to each share of common stock if every common stock
equivalent were converted into common stock. SFAS 128 provides for the
calculation and disclosure of basic and diluted earnings per share. Basic
earnings per share is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution to common
shareholders on the exercise of options, warrants or convertible instruments.
SFAS 128 is effective for fiscal periods ending after December 15, 1997. Loss
per share for the year ended March 31, 1997 under the provisions of SFAS 128
would have been $0.45.
F-10
<PAGE> 53
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
3. CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and trade
receivables. At March 31, 1997, the Company was not subject to any material
credit risk. The Company performs ongoing credit evaluations of its customers
and maintains allowances for potential credit losses which, when realized, have
been within the range of management's expectations.
4. MAJOR CUSTOMERS AND EXPORT SALES
The Company operates in one major line of business, the development, manufacture
and marketing of electronic products. Sales to three major customers comprise
31%, 17% and 12%, respectively, of revenues in 1997. Sales to three major
customers comprise 10%, 10% and 9%, respectively, of revenues in 1996. During
1997, the Company had export sales of approximately $155,000 [1996 - $Nil].
5. STATEMENT OF CASH FLOWS
The Company had non-cash operating and financing activities and made cash
payments as follows:
<TABLE>
<CAPTION>
1997 1996
$ $
--------- --------
<S> <C> <C>
Non-cash financing activities
Professional services paid by issuance of common stock 418,232 319,498
Refinancing fee paid by issuance of common stock -- 101,250
Compensation paid by issuance of common stock -- 20,000
Directors' fees paid by issuance of common stock 35,640 --
Legal settlement paid by issuance of common stock 127,500 --
Interest charges on convertible notes payable paid by
issuance of common stock 33,772 --
Common stock issued on conversion of convertible notes
payable 4,285,714 --
Common stock issued on exercise of prepaid warrants 120,000 --
Cash payments for interest and income taxes were as follows:
Interest 45,746 356,429
Income taxes -- --
========= =========
</TABLE>
F-11
<PAGE> 54
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
6. INVENTORY
<TABLE>
<CAPTION>
1997 1996
$ $
--------- ---------
<S> <C> <C>
Raw materials 666,634 1,569,812
Work in process 179,967 194,437
Finished goods 802,262 1,478,996
--------- ---------
1,648,863 3,243,245
========= =========
</TABLE>
During 1995, the Company introduced a new electronic product for sale in the
retail market. The amount of revenues to date from the sale of the electronic
product have not been significant. In addition, the Company's experience with
sales returns and warranty provisions has been limited. At March 31, 1997,
inventory of the Company is substantially all comprised of three successive
models of the electronic product.
Management of the Company has established, in the normal course of business,
provisions for sales returns, warranty and obsolescence in respect of sales to
March 31, 1997 and inventory as at March 31, 1997. In addition, management of
the Company has developed programs for the sale of earlier models of the
electronic product which are expected to result in the sale of this inventory in
the near term. No estimate can be made of the range of amounts of loss that are
reasonably possible should actual experience exceed estimates for sales returns
or warranty or should the programs to sell inventory not be successful.
F-12
<PAGE> 55
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
$ $ $
--------- --------- ---------
<S> <C> <C> <C>
1997
Computer hardware and software 187,645 64,962 122,683
Furniture and equipment 55,758 46,738 9,020
Machinery and equipment 177,883 110,266 67,617
--------- --------- ---------
421,286 221,966 199,320
--------- --------- ---------
1996
Computer hardware and software 402,794 231,196 171,598
Furniture and equipment 131,755 93,643 38,112
Leasehold improvements 589,979 203,203 386,776
Machinery and equipment 1,761,076 997,771 763,305
--------- --------- ---------
2,885,604 1,525,813 1,359,791
========= ========= =========
</TABLE>
8. INVESTMENT IN JABRA
The Company owns 940,734 [1996 - 1,800,000] common shares of JABRA or 12.1%
[1996 - 23.1%] of JABRA's common shares with a carrying value of $Nil on the
Company's consolidated balance sheets. The Company has granted an option to a
prior lender, expiring July 31, 1997, to purchase 300,000 of JABRA's common
shares at a price of $1.50 per share pursuant to the Company's demand loan
payable [see Note 9]. During 1997, the Company sold 859,266 common shares of
JABRA for cash proceeds of $276,300 and recorded a gain on sale of investment of
$276,300.
F-13
<PAGE> 56
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
9. DEMAND LOAN PAYABLE
During 1995, the Company negotiated a demand loan payable, as amended, of $3.5
million, bearing interest at prime plus 2%, repayable on demand and expiring on
July 31, 1995. In connection with the demand loan payable, as amended, share
warrants providing the right to acquire 450,000 common shares of the Company on
or before June 20, 1999 at a price of $4.00 per share were issued. During 1996
and in the period subsequent thereto, the demand loan payable was amended on
August 1, 1995, February 1, 1996 and April 1, 1996. Pursuant to the various
amendments: the expiry date was extended to October 31, 1996; the Company
granted an additional share warrant providing the right to acquire 200,000
common shares of the Company on or before September 1, 1998 at a price of $2.00
per share; the existing share warrants providing the right to acquire 450,000
common shares of the Company on or before June 20, 1999 were repriced to $1.75
per share from $4.00 per share; 75,000 common shares of the Company were issued
at an agreed price of $1.35 per share; the Company granted an option to acquire
up to 300,000 common shares of JABRA on or before July 31, 1997 at a price of
$1.50 per share; 33% of the net proceeds from any equity financing prior to
April 1, 1996 and 50% of the net proceeds from any equity financing thereafter
must be used to pre-pay the demand loan payable; and the lender may convert at
any time prior to repayment all or any portion of the outstanding principal
balance of the demand loan payable, including accrued interest thereon, into
common shares of the Company at the lesser of $1.50 per share or following the
occurrence of an event of default, the higher of $1.00 per share and the average
closing price for the 20 days preceding the date of notice of an event of
default.
The demand loan payable was collateralized by a first security interest covering
accounts receivable, inventory, property and equipment, and other assets, and a
specific pledge of the Company's shares in NCI and JABRA.
The demand loan payable plus accrued interest was retired on July 31, 1996.
10. RESEARCH AND DEVELOPMENT CONTRACT
The Company has entered into a long-term contract with an independent company to
provide research and development services. The Company will receive cash of up
to $860,000 for engineering services. Costs not specified in the contract are
the responsibility of the independent company. The contract requires the Company
to produce a working prototype by February 1998 which conforms to the product
specifications defined in the contract. To date, the Company has incurred
approximately $69,000 in direct costs of initial development work and has
recorded $39,909 of revenue related to the contract. Total payments received to
date on the contract are $214,250.
F-14
<PAGE> 57
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
11. INCOME TAXES
The Company accounts for income taxes under the liability method required by
FASB Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. For financial
statement purposes, a change in valuation allowance of $2,619,000 has been
recognized to offset certain deferred tax assets for which realization is
uncertain. Significant components of the Company's deferred tax liabilities and
assets as of March 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
$ $
---------- ----------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Tax over book depreciation 301,000 85,000
---------- ----------
TOTAL DEFERRED TAX LIABILITIES 301,000 85,000
---------- ----------
DEFERRED TAX ASSETS
Bad debt reserve 15,000 5,000
Interest expense 450,000 --
Inventory capitalization 70,000 108,000
Inventory reserve 210,000 20,000
Net operating loss carryforwards 8,169,000 5,912,000
Warranty reserve 14,000 8,000
Other 43,000 83,000
---------- ----------
TOTAL DEFERRED TAX ASSETS 8,971,000 6,136,000
Valuation allowance for deferred tax assets (8,670,000) (6,051,000)
---------- ----------
NET DEFERRED TAX ASSETS 301,000 85,000
---------- ----------
NET DEFERRED TAX -- --
========== ===========
</TABLE>
The net provision for income taxes in 1997 and 1996 is $Nil as the Company
incurred losses in those years. Pre-tax income (loss) from Canadian operations
was approximately $681,000 in 1997 and $969,000 in 1996.
F-15
<PAGE> 58
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
11. INCOME TAXES (CONT'D.)
A reconciliation between federal statutory income tax rates and the effective
tax rate of the Company at March 31 is as follows:
<TABLE>
<CAPTION>
LIABILITY METHOD
-------------------
1997 1996
% %
----- ------
<S> <C> <C>
U.S. federal statutory rate 35.0 35.0
U.S. federal net operating loss rate (35.0) (35.0)
U.S. state tax rate -- --
Canadian statutory rate 45.6 44.1
Canadian non-capital loss rate (45.6) (44.1)
----- ------
Effective rate on operating loss -- --
===== ======
</TABLE>
The Company has U.S. net operating loss carryforwards available at March 31,
1997 of approximately $15,682,000 and $11,213,000 for federal and state tax
purposes, respectively, to offset income in future years. These carryforwards
will begin to expire in the years 2005 and 1998, respectively, unless previously
utilized.
The tax attributes of the Company identified above may be subject to limitation
arising from changes of ownership over the three year statutory testing period.
F-16
<PAGE> 59
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
12. CAPITAL STOCK
AUTHORIZED CAPITAL
The authorized capital of the Company consists of 60,000,000 common shares [1996
- - 30,000,000 common shares] with a par value of $.001 per share [1996 no par
value] and 5,000,000 preferred shares [1996 - nil preferred shares] with a par
value of $.001 per share.
COMMON STOCK
The issued common stock of the Company consisted of 23,370,008 and 15,103,703
common shares as of March 31, 1997 and 1996, respectively.
During 1997, convertible notes payable and accrued interest therein and prepaid
warrants were converted into 4,758,752 shares of common stock. In addition,
subsequent to March 31, 1997, prepaid warrants of $875,591 were converted into
5,453,685 shares of common stock. If these conversions had occurred on April 1,
1996, the reported loss per share for the year ended March 31, 1997 would have
decreased $0.10 to $0.34.
PREFERRED STOCK
The Company has no issued preferred stock at March 31, 1997 and 1996.
STOCK OPTIONS
The Company maintains two stock option plans. The 1992 Stock Option Plan is a
non-qualified stock option plan which entitles certain directors and key
employees to purchase common shares of the Company. A maximum of 10% of
outstanding common shares are authorized for grant under the Plan. Options are
granted at a price not less than fair market value at the date of grant, and are
subject to approval of the Board of Directors. The 1994 Stock Option Plan
entitles certain directors, key employees and consultants of the Company to
purchase common shares of the Company. The 1994 Plan covers a maximum aggregate
of 4,000,000 shares, as amended and approved by shareholders on July 25, 1996.
The 1994 Plan provides for the granting of options which either qualify for
treatment as incentive stock options or non-statutory stock options.
No options were granted during 1997. Options granted during 1996 were under the
1994 and 1992 Stock Option Plan.
F-17
<PAGE> 60
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
12. CAPITAL STOCK (CONT'D.)
The following table summarizes stock option transactions:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
# $
--------- ---------------
<S> <C> <C>
BALANCE, MARCH 31, 1995 694,658 2.15
Granted 843,000 2.85
Exercised (15,000) 2.02
Expired (23,000) 3.30
Cancelled (6,000) 3.38
--------- ---------------
BALANCE, MARCH 31, 1996 1,493,658 2.71
Granted -- --
Exercised -- --
Expired (73,000) 3.08
Cancelled (250,000) 1.70
--------- ---------------
BALANCE, MARCH 31, 1997 1,170,658 2.89
========= ===============
</TABLE>
All outstanding options were exercisable at March 31, 1997. The options are
exercisable at prices ranging from U.S. $2.09 to U.S. $3.65 [1996 - U.S. $1.50
to U.S. $3.65] and expire over the period to April 2000.
F-18
<PAGE> 61
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
12. CAPITAL STOCK (CONT'D.)
The Company adopted Statement of Financial Accounting Standard No. 123 entitled
Accounting for Stock-Based Compensation ("SFAS 123") as of April 1, 1995. The
provisions of SFAS 123 allow companies to either expense the estimated fair
value of stock options or to continue their current practice but disclose the
pro forma effects on net income and earnings per share had the value of the
options been expensed. The Company has elected to continue its practice of
recognizing compensation expense for its stock option and warrant incentive
plans using the intrinsic value based method of accounting [see Note 2] and to
provide the required pro forma information for stock options and warrants
granted after April 1, 1995. Under the terms of the intrinsic value method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date, or other measurement date, over the amount an employee must
pay to acquire stock. Had compensation expense for the Company's stock options
and warrants granted after April 1, 1995 been determined based on the fair value
at the grant dates for awards under those plans, the Company's pro forma loss
for the year and loss per share for the reported years would have been as
follows:
<TABLE>
<CAPTION>
1997 1996
$ $
---------- ----------
<S> <C> <C>
Loss for the year (9,597,102) (8,455,696)
Compensation expense 107,377 1,458,330
---------- ----------
Pro forma net loss (9,704,479) (9,914,026)
========== ==========
Pro forma loss per share (0.45) (0.75)
========== ==========
</TABLE>
The effects on pro forma loss per share of expensing the estimated fair value of
stock options and warrants are not necessarily representative of the effects on
reported net income for future years due to such things as the potential for
issuance of additional stock options and warrants in future years.
The fair value of options and warrants granted after April 1, 1995, used as a
basis for the above pro forma disclosures, was estimated at the date of grant
using the Black-Scholes option pricing model. The option and warrant pricing
assumptions include a dividend yield of 0%; and expected volatility of 1.390; a
risk free interest rate of 6.17%; and an expected life of half the period from
grant to expiration.
F-19
<PAGE> 62
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
12. CAPITAL STOCK (CONT'D.)
SHARE WARRANTS
The Company has outstanding share warrants as of March 31, 1997, in connection
with private placements, convertible debentures, equipment leasing and
establishing and amending the demand loan payable, entitling the holders to
purchase one common share for each warrant held as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
WARRANTS $ EXPIRATION DATE
--------- -------------- ---------------
<S> <C> <C>
200,000 2.00 September 1998
33,750 4.00 June 1999
450,000 1.75* July 1999
82,100 4.00 August 1999
106,986 1.61** February 2000
88,014 1.61** March 2000
129,230 1.625 March 2001
401,924 0.469*** July 2001
400,000 0.469*** August 2001
150,000 0.65625** October 2001
146,866 1.09** October 2005
---------
2,188,870
=========
</TABLE>
- ----------
* Repriced to $1.75 per share from $4.00 per share pursuant to amendments to
demand loan payable [see Note 9].
** These warrants contain provisions for adjustment for dilutive events. The
exercise prices and where applicable, the number of warrants, have been
adjusted to reflect any such events or agreements through March 31, 1997.
*** Repriced to $0.469 per share from $0.9875 and $0.9375, respectively,
pursuant to amendments to a consulting agreement.
F-20
<PAGE> 63
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
13. COMMITMENTS
The Company has a lease for office space in Poway, California which is subject
to annual increases based on the CPI index. The lease expires in 2002. Office
rent expense for the years ended March 31, 1997 and 1996 was $312,422 and
$271,620, respectively.
Minimum commitments under operating leases are as follows:
<TABLE>
<CAPTION>
$
---------
<S> <C>
1998 221,000
1999 221,000
2000 221,000
2001 221,000
2002 166,000
---------
1,050,000
=========
</TABLE>
14. CONVERTIBLE NOTES PAYABLE
<TABLE>
<CAPTION>
1997 1996
$ $
------ ----------
<S> <C> <C>
7% convertible notes payable, due March 1999 -- 4,285,714
====== ==========
</TABLE>
The convertible notes payable were convertible at the option of the holder into
common shares of the Company at any time after May 4, 1996. The convertible
notes payable were convertible at the lesser of: $1.765 for each common share;
or a 30% discount to the 5 day moving average price of the common shares on the
day prior to conversion.
During the period May 13, 1996 to May 24, 1996, the holders of the convertible
notes payable exercised their options and converted all of the convertible notes
payable, together with accrued interest thereon, into 4,366,050 common shares of
the Company at conversion prices per share ranging from US $0.981 to US $1.269.
F-21
<PAGE> 64
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
15. BARTER TRANSACTION
During 1996, the Company sold 7,000 units of product to an independent media
trading firm in exchange for $1,172,500 of media trade credits and 50% of the
cash proceeds realized on the ultimate sale of the units. The costs of the 7,000
units, amounting to $980,000, has been charged to cost of sales. The Company
recognized no prepaid asset or any revenue in connection with the trade credits
since their use requires matching cash payments and the Company's ability to
continue as a going concern is in substantial doubt. In addition, the amount of
cash to be received on the ultimate sale of the units cannot be reasonably
estimated. Accordingly, the Company intends to recognize future revenue from the
trade credits only when ascertainable economic value is realized from their use
or cash proceeds are received from the ultimate sale of the units.
During 1996, the Company recorded revenue on the utilization of approximately
$37,000 of trade credits.
16. CONTINGENT LIABILITY
The Company may have a liability to certain security holders due to a possible
violation of federal and state securities laws prohibiting an issuer from
selling securities in a private placement by any form of general solicitation or
advertising. Section 5 of the Securities Act of 1933 prohibits the sale of
securities pursuant to a prospectus that does not satisfy the requirements of
the Securities Act. Such violation, if deemed to have occurred, could give rise
to a private right of action by the affected security holders for rescission of
recently issued securities in the amount of $5.67 million and for damages.
Management of the Company has provided notice to each of the affected security
holders of the possible violation and has obtained from affected security
holders, representing $5.42 million of the above shares, written release and
waivers with respect thereto. It is possible that the release and waiver
agreements could be challenged at some later date by an affected security holder
on grounds of enforceability. Although management of the Company has no present
reason to believe that the release and waiver agreements are not enforceable, a
contrary finding by a federal or state court may result in a continuing risk of
potential liability. Management of the Company believes the likelihood of a
future event occurring to confirm the contingent liability is remote.
F-22
<PAGE> 65
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
17. PREPAID WARRANTS
During 1997, the Company received cash from prepaid warrants of $3,396,505, net
of offering costs of $409,395. The face amount of the warrants of $3,805,900 is
exercisable, without further cash payment, into common shares of the Company at
the lesser of $0.70 per common share (with respect to $805,900 of warrants) and
$0.69125 per common share (with respect to $3,000,000 of warrants) or a 30%
discount to the 5 day moving average bid price of the common shares on the day
prior to exercise. The exercise price of the warrants will be further discounted
by 7% per year and for other events until the warrants are exercised. During
1997, the holders of prepaid warrants exercised this option and converted
$120,000 of prepaid warrants into 392,702 common shares of the Company at a
conversion price of U.S. $0.305. At March 31, 1997, the outstanding prepaid
warrants were exercisable into approximately 14.9 million common shares.
18. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $2,228,001 as follows:
<TABLE>
<CAPTION>
1997
$
----------
<S> <C>
Write-down of inventory 1,290,039
Losses on cancellation of purchase commitments 98,295
Severance costs 47,265
Write-down of property and equipment to net realizable amount 376,538
Loss on disposal of property and equipment 365,864
Facility reduction and other 50,000
----------
2,228,001
==========
</TABLE>
At March 31, 1997, a total of $162,423 was included in other accounts payable
and accrued liabilities relating to the restructuring, which is expected to be
substantially completed by June 1997. The restructuring charge is as a result of
the change in the Company's operations due to the discontinuation of contract
manufacturing services arising from a decision to focus on Original Equipment
Manufacturing and licensing activities related to the Company's FLASHBACK
technology.
F-23
<PAGE> 66
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
19. SUBSEQUENT EVENT
On June 13, 1997, the Company completed the sale of $500,000 of 12% secured
notes due September 30, 1999 ("Notes") to nine investors ("Noteholders"). The
Notes are collateralized by the Company's issued and pending patents and the
FLASHBACK technology. The Notes may become convertible only when and if
allowable under the terms of the prepaid warrants (see Note 18) and are then
convertible at the lowest warrant conversion price used by the prepaid
warrantholders, subject to certain future adjustments. Upon conversion, the
Noteholders will receive a stock purchase warrant exercisable at the conversion
price for a period of three years.
F-24
<PAGE> 67
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30 1997 MARCH 31, 1997
$ $
----------------- --------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 784,060 176,158
Accounts receivable, less allowance for doubtful
accounts of $20,999 and $36,330, respectively 253,704 30,097
Inventory [note 3] 1,586,477 1,648,863
Property and equipment held for sale -- 68,567
Prepaid expenses and other 6,199 --
----------------- --------------
2,630,440 1,923,685
----------------- --------------
Property and equipment, net 166,708 199,320
Other intangible assets, net of accumulated
amortization of $36,063 and $32,341
respectively 38,346 42,068
----------------- --------------
205,054 241,388
----------------- --------------
TOTAL ASSETS 2,835,494 2,165,073
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Accounts payable, trade 758,050 1,264,150
Other accounts payable and accrued liabilities [note 10] 742,064 1,049,697
Advances in excess of earnings on development contract 54,966 174,341
Current portion of term note payable [note 4] 71,603 --
----------------- --------------
1,626,683 2,488,188
----------------- --------------
LONG-TERM [NOTE 4]
Secured notes payable 500,000 --
Term note payable, net of current portion 111,030 --
----------------- --------------
611,030 --
----------------- --------------
TOTAL LIABILITIES 2,237,713 2,488,188
----------------- --------------
Contingencies [note 12]
REDEEMABLE PREFERRED STOCK
Series A, $.001 par value (redeemable at
anytime at variable prices of $10 or
more), 8% cumulative and convertible
voting preferred stock, $10 liquidation
preference, 100,000 shares authorized,
82,000 shares issued and outstanding
at September 30, 1997 [note 5] 782,500 --
----------------- --------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, $0.001 par value,
authorized 60,000,000 and
30,000,000 respectively;
55,413,405 and 23,370,008 shares
outstanding, respectively [note 6] 55,413 23,370
Additional paid-in capital 31,200,396 28,459,269
Prepaid warrants [note 7] 966,928 3,276,505
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (33,999,772) (33,674,575)
----------------- --------------
(184,719) (323,115)
----------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIENCY) 2,835,494 2,165,073
================= ==============
</TABLE>
See notes to interim consolidated financial statements
F-25
<PAGE> 68
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30 September 30
1997 1996 1997 1996
$ $ $ $
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Product sales 107,906 147,817 270,114 301,543
Development services 207,438 -- 434,289 --
---------- ---------- ---------- -----------
Total revenues 315,344 147,817 704,403 301,543
---------- ---------- ---------- -----------
COST OF REVENUES:
Cost of product sales 87,882 790,061 242,782 1,049,318
Cost of development services 106,683 -- 241,912 --
---------- ---------- ---------- -----------
Total cost of revenues 194,565 790,061 484,694 1,049,318
---------- ---------- ---------- -----------
Gross profit (loss) 120,779 (642,244) 219,709 (747,775)
OPERATING EXPENSES:
Selling and administrative 253,918 1,376,351 573,776 2,449,651
Research and related expenditures 44,229 196,101 104,399 407,685
---------- ---------- ---------- -----------
Total operating expenses 298,147 1,572,452 678,175 2,857,336
---------- ---------- ---------- -----------
Operating loss (177,368) (2,214,696) (458,466) (3,605,111)
OTHER INCOME (EXPENSE)
Interest expense (15,123) (1,042) (22,613) (77,522)
Interest income 1,467 13,589 2,882 24,781
Other income [note 9] -- -- 153,000 --
---------- ---------- ---------- -----------
Other income (expense), net (13,656) 12,547 133,269 (52,741)
---------- ---------- ---------- -----------
Loss before provision for income taxes (191,024) (2,202,149) (325,197) (3,657,852)
Provision for income taxes -- -- -- --
---------- ---------- ---------- -----------
NET LOSS (191,024) (2,202,149) (325,197) (3,657,852)
========== =========== ========== ===========
NET LOSS PER COMMON SHARE [NOTE 14] (0.004) (0.10) (0.01) (0.19)
========== =========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES 52,465,515 22,287,418 39,145,164 19,641,347
========== =========== ========== ===========
</TABLE>
See notes to interim consolidated financial statements
F-26
<PAGE> 69
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
SEPTEMBER 30,
1997 1996
OPERATING ACTIVITIES $ $
---------- ----------
<S> <C> <C>
Net loss (325,197) (3,657,852)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 40,733 202,998
Gain on disposal of equipment (12,088)
Interest paid by issuance of common stock -- 33,772
Professional services paid by issuance of common stock 42,708 72,000
Legal settlement paid by issuance of common stock -- 127,500
Changes in assets and liabilities:
Accounts receivable (223,607) (18,616)
Inventory 62,386 (2,841)
Prepaid expenses and other (6,199) 61,637
Accounts payable, trade 9,918 (1,215,479)
Other accounts payable and accrued liabilities (220,133) (217,150)
Advances on research and development contract (119,375) --
---------- ----------
Cash (used in) operating activities (750,854) (4,614,031)
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (4,663) (148,803)
Proceeds on disposal of property and equipment 80,919 --
---------- ----------
Cash provided by (used in) investing activities 76,256 (148,803)
---------- ----------
FINANCING ACTIVITIES
Repayments under demand loan payable -- (2,185,546)
Proceeds from secured notes payable 500,000 --
Proceeds from sale of preferred stock 782,500 --
Proceeds from issuance of common shares and warrants -- 5,095,949
---------- ----------
Cash provided by financing activities 1,282,500 2,910,403
---------- ----------
Net increase (decrease) in cash 607,902 (1,852,431)
Cash and cash equivalents, beginning of period 176,158 2,843,540
---------- ----------
Cash and cash equivalents, end of period 784,060 991,109
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid during the period for:
Interest 15,123 77,521
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Interest paid by issuance of common stock -- 33,772
Professional services and legal settlements
paid by issuance of common stock 42,708 199,500
Conversion of long-term convertible note to
common stock -- 3,033,772
Common stock issued on exercise of prepaid
warrants 2,309,578 --
Accounts payable and accruals paid by issuance
of common stock 420,885 --
Settlement of accrued lease termination by
issuance of term notes 182,633 --
</TABLE>
See notes to interim consolidated financial statements
F-27
<PAGE> 70
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
1. OPERATIONS
Norris Communications, Inc. (the "Company") was incorporated in the Province of
British Columbia, Canada on February 11, 1988 and on November 22, 1994, changed
its domicile from British Columbia to the Yukon Territory, Canada. The Company
further changed its domicile to Wyoming on August 30, 1996 and on September 4,
1996 reincorporated into Delaware. The Company is engaged through its
wholly-owned U.S. subsidiary in developing and exploiting proprietary electronic
technologies.
2. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Norris Communications, Inc.
("NCI"), a California corporation, based in San Diego, California.
The interim consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future. The
Company has incurred significant losses and negative cash flow from operations
in each of the last three fiscal years and for the six month period ended
September 30, 1997 and has an accumulated deficit of $33,999,772 at September
30, 1997. The Company's operational plan involves focusing on licensing and
product development on a contract basis and for the Company's own account. The
Company's ability to continue as a going concern is in doubt and is dependent
upon achieving a profitable level of operations.
These interim consolidated financial statements do not give effect to any
adjustments which would be necessary should the Company be unable to continue as
a going concern and therefore be required to realize its assets and discharge
its liabilities in other than the normal course of business and at amounts
different from those reflected in the accompanying interim consolidated
financial statements.
These interim consolidated financial statements have been prepared in accordance
with accounting principles generally accepted for interim financial information
and the instructions to Form 10-QSB. They do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. The interim consolidated financial statements and notes
thereto should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto for the fiscal year ended March 31, 1997.
Loss per common share is computed by dividing net loss, adjusted for dividends
related to the Company's preferred stock, by the weighted average number of
common shares and common share equivalents, unless antidilutive, outstanding
during the period (see Note 14).
In the opinion of management, the interim consolidated financial statements
reflect all adjustments of a normal recurring nature necessary for a fair
statement of the results for interim periods. Operating results for the three
and six month periods ended September 30, 1997 are not necessarily indicative of
the results that may be expected for the fiscal year ending March 31, 1998.
F-28
<PAGE> 71
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
3. INVENTORY
Inventory of raw material, work in process and finished goods is recorded at the
lower of cost and net realizable value. Cost is determined on a first-in,
first-out basis. Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1997 March 31, 1997
------------------ --------------
<S> <C> <C>
Raw material $ 748,744 $ 666,634
Work in process 170,785 179,967
Finished goods 666,948 802,262
------------------ --------------
$ 1,586,477 $ 1,648,863
================== ===============
</TABLE>
4. LONG-TERM DEBT
Secured Notes Payable
The secured notes payable bear interest at 12%, payable quarterly. The notes are
collateralized by the Company's issued and pending patents and the FLASHBACK
technology. The notes may become convertible only when and if allowable under
the terms of the prepaid warrants (see note 7) and when sufficient authorized
stock is available and are then convertible at the lowest warrant conversion
price used by the prepaid warrant holders (currently $0.0875 per share), subject
to certain future adjustments. Upon conversion, the note holders will receive a
stock purchase warrant exercisable into the same number of shares as converted
at the conversion price for a period of three years. If these notes were
convertible by their terms on September 30, 1997 they would have been
convertible into approximately 5.7 million common shares with warrants
exercisable into a like number of shares at $0.0875 per share for three years.
See Note 13.
Term Note Payable
A 10% unsecured term note was issued effective September 30, 1997 in connection
with the settlement of accrued balances owing related to the Company's former
facility lease. The Company made a principal payment of $25,000 in October 1997
and is obligated to make monthly payments of principal and interest of $5,000
for 38 months through November 1, 2000. At September 30, 1997 the total note
obligation was $182,633 with $71,602 being the current portion.
5. REDEEMABLE PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of $.001 par value preferred
stock in one or more series from time to time by action of the Board of
Directors. During September 1997, the first series, consisting of up to 100,000
shares, was designated by the Board of Directors as Series A. The Series A Stock
has voting rights equal to the number of shares of Common Stock into which the
Series A Stock is convertible. Dividends of 8% per annum are cumulative and may
be payable in cash or shares of Common Stock, at the Company's election. The
Series A Stock has a liquidation preference of $10.00 per share, plus accrued
and unpaid dividends, with no participation after the preference is paid.
The Series A Stock is convertible into shares of Common Stock computed by
dividing $10.00 plus accrued and unpaid dividends by the lesser of (i) $0.0875
or (ii) 80% of the average closing bid price for the Common Stock for the ten
trading days immediately following any and each distribution in shares,
subdivision, split up, combination, reclassification, or other change in Common
Stock. There are not currently sufficient authorized but unissued shares of
Common Stock available for conversion of the Series A Stock and the Company is
obligated to take appropriate corporate action to authorize additional shares of
its Common Stock, to be reserved and kept available solely for issuance upon the
conversion of the Series A Stock. There can be no assurance when or if the
Series A Stock will become convertible. See Note 13.
F-29
<PAGE> 72
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
5. REDEEMABLE PREFERRED STOCK (CONT.)
The Company is required to redeem the Series A Stock on September 1, 2000
("Mandatory Redemption Date") and upon the occurrence of certain other events.
The Company may redeem the Series A Stock earlier only if there are sufficient
shares available for conversion of the Series A Stock. The redemption price is
$10.00 per share plus accrued and unpaid dividends if there are sufficient
shares available for conversion of the Series A Stock, otherwise the redemption
price is equal to the greater of (i) $10.00 per share plus accrued and unpaid
dividends or (ii) an amount equal to a five day market price multiplied by the
shares into which the Series A Stock would be convertible if shares were
authorized, plus a 10% premium. If sufficient shares of Common Stock for
conversion of the Series A Stock are not authorized by March 31, 1998, the
dividend rate shall be increased to 12% until sufficient shares are authorized
and the Mandatory Redemption Date shall be accelerated to December 31, 1998.
During September 1997 the Company sold 82,000 shares of Series A Stock at $10.00
per share or $820,000 with net proceeds of $782,500. Subsequent to September 30,
1997 the Company sold an additional 17,500 shares for gross proceeds of
$175,000.
6. COMMON STOCK
The following table summarizes common equity transactions during the six month
period ended September 30, 1997 (see Note 5 for preferred stock transactions):
<TABLE>
<CAPTION>
Additional
paid-in Prepaid Contributed Accumulated
Shares Amount capital Warrants Surplus Deficit Total
---------- --------- ------------ ------------ ------------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997 23,370,008 $ 23,370 $ 28,459,269 $ 3,276,505 $ 3,276,505 $(33,674,575) $ (323,115)
Stock issued on exercise of
prepaid warrants 29,805,455 29,805 2,279,772 (2,309,577) -- -- --
Stock issued pursuant to private
placement fees 457,484 457 (457) -- -- -- --
Stock issued in debt settlement 400,000 400 87,100 -- -- -- 87,500
Stock issued as payment for
accrued professional services
and compensation 1,380,458 1,381 374,712 -- -- -- 376,093
Net loss -- -- -- -- -- (325,197) (325,197)
---------- --------- ------------ ------------ ------------ ------------ ----------
Balance, September 30, 1997 55,413,405 $ 55,413 $ 31,200,396 $ 966,928 $ 1,592,316 $(33,999,772) $ (184,719)
========== ========= ============ ============ ============ ============ ==========
</TABLE>
7. PREPAID WARRANTS
During fiscal 1997, the Company received cash from prepaid warrants of
$3,396,505, net of offering costs of $409,395. The original terms of the Prepaid
Warrants provided that the face amount of the warrants or $3,805,900 was
exercisable, without further cash payment, into common shares of the Company at
the lessor of: $0.70 per common share (with respect to $805,900 of warrants) and
$0.69125 per common share (with respect to $3,000,000 of warrants) or a 30%
discount to the 5 day moving average bid price of the common shares on the day
prior to exercise with the exercise price of the warrants further discounted by
7% per year until the warrants are exercised.
The Company does not presently have sufficient authorized and unissued common
shares for the exercise of the remaining Prepaid Warrants. Under the terms of
the Prepaid Warrants, the Company is obligated to take action to increase the
authorized shares and conversions in excess of authorized and unissued Common
Stock are suspended pending such increase.
F-30
<PAGE> 73
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
7. PREPAID WARRANTS (CONT.)
In September 1997, the remaining three Prepaid Warrant holders executed
Amendment No. 1 to the warrant agreement. Among other terms, the Amendment fixes
the exercise price at $0.0875 per share subject to certain adjustments. The
fixed price of $0.0875 per share may be adjusted down (i) to 80% of the market
price following certain changes in the Company's Common Stock including a
reverse stock split, and (ii) to the price at which new securities are issued if
at a price below $0.0875 per share. At the fixed price of $0.0875 per share the
remaining Prepaid Warrants ($1.3 million, as adjusted) are convertible into
approximately 15.3 million shares as of September 30, 1997. The number of shares
issuable further increases by 7% per annum. The original expiration of the
Prepaid Warrants was in July and August 1999, however, such date is currently
being extended during the suspension period as described above.
Under terms of Amendment No. 1, the Company made 1,000,000 additional shares of
Common Stock available for exercise by Prepaid Warrant holders during September
1997 from shares previously reserved for other warrants and options. The Company
is required to make a second 1,000,000 shares of Common Stock to be made
available from shares previously reserved for other warrants and options by
October 31, 1997. The Company has also agreed to hold a stockholders meeting or
otherwise conduct a consent solicitation to increase the authorized number of
shares on or before December 15, 1997 and have sufficient shares authorized by
January 31, 1998. Failure by the Company to meet these conditions allows the
Prepaid Warrant holders, at their option, to nullify Amendment No 1.
8. WARRANTS AND OPTIONS
At September 30, 1997, warrants were outstanding/exercisable into the following
listed shares. Also see Note 4 for additional warrants that may become issuable
upon conversion of secured notes payable.
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ Expiration Date
- ------------ -------- --------------- ----------------
<S> <C> <C> <C>
Warrants 200,000 2.00 September 1998
Warrants 33,750 4.00 June 1999
Warrants 450,000 1.75 July 1999
Warrants 82,100 4.00 August 1999
Warrants (a) 20,570 0.25 February 2000
Warrants (a) 25,000 0.25 March 2000
Warrants (a) 27,500 0.25 March 2001
Warrants (a) 401,924 0.25 July 2001
Warrants (a) 400,000 0.25 August 2001
Warrants (a) 150,000 0.15625 October 2001
Warrants (a) 128,067 0.25 October 2005
- ------------ ---------
Total 1,918,911
============ =========
</TABLE>
(a) During the current period, the Company amended the terms of these warrants
to adjust and fix the exercise price in conjunction with a reduction in the
number of shares subject to exercise and/or to eliminate future adjustments
for certain dilutive events.
F-31
<PAGE> 74
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
8. WARRANTS AND OPTIONS (Cont'd)
The following table summarizes stock option activity for the period:
<TABLE>
<CAPTION>
<S> <C>
Outstanding at March 31, 1997 1,170,658
Granted 1,920,000
Exercised -
Expired (347,818)
Canceled (345,113)
---------
Outstanding at September 30, 1997 2,397,727
=========
</TABLE>
Options outstanding are exercisable at prices ranging from $0.1562 to $3.65 and
expire over the period from 1997 to 2002.
9. OTHER INCOME
The Company received $153,000 from a former vendor resulting from prior period
overpayments. The overpayments were recorded as an expense in the prior period
because of uncertainty regarding the amount and likelihood of recovery.
10. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $2,228,001 in fiscal 1997
resulting from the change in the Company's operations due to the discontinuance
of contract manufacturing services. At March 31, 1997, a total of $162,423 was
included in other accounts payable and accrued liabilities relating to the
restructuring. During the fiscal quarter ended June 30, 1997, the restructuring
was completed.
11. INCOME TAXES
The Company has not provided a tax provision for the current period, due to
current losses. The Company has U.S. net operating loss carryforwards of
approximately $15,682,000 and $11,213,000 for federal and state tax purposes,
respectively, subject to certain limitations.
12. CONTINGENT LIABILITY
The Company may have a liability to certain security holders due to a possible
violation of federal and state securities laws prohibiting an issuer from
selling securities in a private placement by any form of general solicitation or
advertising. Section 5 of the Securities Act of 1933 prohibits the sale of
securities pursuant to a prospectus that does not satisfy the requirements of
the Securities Act. Such violation, if deemed to have occurred, could give rise
to a private right of action by the affected security holders for rescission of
recently issued securities in the amount of $5.67 million and for damages.
Management of the Company has provided notice to each of the affected security
holders of the possible violation and has obtained from affected security
holders, representing $5.42 million of the above shares, written release and
waivers with respect thereto. It is possible that the release and waiver
agreements could be challenged at some later date by an affected security holder
on grounds of enforceability. Although management of the Company has no present
reason to believe that the release and waiver agreements are not enforceable, a
contrary finding by a federal or state court may result in a continuing risk of
potential liability. Management of the Company believes the likelihood of a
future event occurring to confirm the contingent liability is remote. See notes
6 and 7 for partial conversions to Common Stock by these security holders.
F-32
<PAGE> 75
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
13. ACCOUNTING FOR CONVERTIBLE SECURITIES AT A DISCOUNT (Cont'd)
The position of the Securities & Exchange Commission on convertible preferred
stock and convertible debt that are in the money at the time of issuance
requires recording the discount as a non-cash dividend or interest. The imputed
dividend or interest is recognized beginning with the issuance of the security
to the first date that conversion can occur. The Secured Notes (Note 4) issued
in June 1997 and the Series A Stock (Note 5) issued in September 1997 are not
presently convertible due to certain restrictions including the unavailability
of authorized but unissued common shares. The date the Secured Notes or Series A
Stock may become convertible is indeterminate and unless additional common
shares are authorized they may not become convertible prior to their maturity or
redemption. There can be no assurance of authorization of additional common
shares or the future convertibility of the securities. The Company, therefore
has not recorded any imputed dividend or interest on the Series A Stock or
Secured Notes. If these securities had been convertible at issuance the Company
would have recorded non-cash interest of approximately $178,000 in the first
quarter of the current year related to the Secured Notes (increasing the net
loss) and approximately $550,000 as a non-cash dividend on preferred stock
(impacting the computation of loss per common share, see Note 14) during the
second quarter. The Company has no contractual obligation to pay such non-cash
imputed dividends or interest.
14. NET LOSS PER COMMON SHARE
Net loss per share applicable to common stockholders is calculated as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $ (191,024) $ (2,202,149) $ (325,197) $ (3,657,852)
Preferred stock dividends
at stated rate (1,085) -- (1,085) --
------------ ------------ ------------ ------------
Net loss applicable to
common stockholders $ (192,109) $ (2,202,149) $ (326,282) $ (3,657,852)
Net loss per common share $ (0.004) $ (0.10) $ (0.01) $ (0.19)
============ ============ ============ ============
Weighted average shares
outstanding 52,465,515 22,287,418 39,145,164 19,641,347
============ ============ ============ ============
</TABLE>
The net loss per common share for the three and six months ended September 30,
1997 would have been $(0.01) and $(0.03), respectively, assuming the secured
notes and convertible preferred stock were convertible at issuance as described
in Note 13.
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings Per
Share," which will be effective for financial statements issued for periods
ending after December 15, 1997. SFAS No. 128 requires that public companies
present basic and diluted earnings per share, which are computed differently
than the currently used earnings per share. Basic and diluted earnings per share
for the above periods would not have been materially different than the earnings
per common share reported for those periods.
F-33
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article TENTH of the Certificate of Incorporation of the Company
provides:
"TENTH: The corporation shall, to the fullest extent legally permissible
under the provisions of the Delaware General Corporation Law, as the same may be
amended and supplemented, shall indemnify and hold harmless any and all persons
whom it shall have power to indemnify under said provisions from and against any
and all liabilities (including expenses) imposed upon or reasonably incurred by
him in connection with any action, suit or other proceeding in which he may be
involved or with which he may be threatened, or other matters referred to in or
covered by said provisions both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director or officer of the corporation. Such
indemnification provided shall not be deemed exclusive of any other rights to
which those indemnified may be entitled under any Bylaw, Agreement or Resolution
adopted by the shareholders entitled to vote thereon after notice."
The Company's Bylaws provide that an officer, director, employee or
agent of the Company is entitled to be indemnified for the expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred by him by
reason of any action, suit or proceeding brought against him by virtue of his
acting as such officer, director, employee or agent, provided he acted in good
faith or in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful.
The Company has directors and officers liability insurance. The
insurance policy covers liability for claims made against directors and officers
for their wrongful acts involving errors, misstatements, misleading statements
or acts or omissions or neglect or breach of duty, while acting in their
individual or collective capacities for any matter claimed against them solely
by reason of their being directors or officers of the Company. The coverage
includes damages, judgment, settlements and costs of legal actions, claims or
proceedings and appeals therefrom but does not include fines or penalties
imposed by law for matters which may be deemed uninsurable under the law.
If Delaware law and California law are in conflict with regard to the
Company's power or obligation to indemnify, and the issue were to be contested
in the Delaware and/or California, the legal outcome is unpredictable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses payable in connection with the distribution of the securities
being registered (estimated except for the registration fee), all of which will
be borne by the Registrant, are as follows:
Registration Fee $ 463
Blue Sky Fees and Expenses $ 2,000
Legal Fees and Expenses $ 20,000
Accounting Fees and Expenses $ 2,000
Miscellaneous Expenses $ 1,000
Total $ 25,463
=======
II-1
<PAGE> 77
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has sold the following securities within the last three
years:
1. In December 1994 and in May 1995, the Company issued 887,048 shares
of Common Stock for $1,700,000 cash to an accredited investor. The issuance of
such securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
2. In April 1995, the Company issued 3,050,000 shares of Common Stock
for $5,814,000 cash to accredited investors in the United States and to
qualified investors outside of the United States. The securities issued to
non-United States investors were issued in accordance with Regulation S of the
Securities Act of 1933. The issuance of such securities to United States
investors was exempt from registration under the Securities Act of 1933 pursuant
to Section 4(2) thereof and Regulation D promulgated thereunder.
3. In connection with the April 1995 private placement, the Company
issued to the placement agent in consideration of the efforts of the placement
agent, warrants to purchase 195,000 shares of Common Stock at a price (subject
to adjustment) of $2.01 per share.
4. In August 1995, the Company issued 250,000 shares of Common Stock for
$300,000 cash to an accredited investor. The issuance of such securities was
exempt from registration under the Securities Act of 1933 pursuant to Section
4(2) thereof and Regulation D promulgated thereunder.
5. In October 1995, the Company issued 1,280,666 shares of Common Stock
for $1,700,000 cash to qualified investors outside of the United States. The
securities were issued in accordance with Regulation S of the Securities Act of
1933.
6. In connection with the October 1995 private placement, the Company
issued to the placement agent in consideration of the efforts of the placement
agent, warrants to purchase 128,067 shares of Common Stock at a price (subject
to adjustment) of $1.25 per share.
7. In October 1995, the Company issued 13,333 shares of Common Stock to
R. Gordon Root, President and Chief Executive Officer of the Company, as a
bonus. The issuance of such securities was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder.
8. In October 1995, the Company issued 28,436 shares of Common Stock to
the placement agent for consulting services. The issuance of such securities was
exempt from registration under the Securities Act of 1933 pursuant to Section
4(2) thereof and Regulation D.
9. In October 1995, the Company issued 25,000 shares of Common Stock to
CVD Financial Corporation for payment of refinance fees. The issuance of such
securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
10. In November 1995, the Company issued 174,095 shares of Common Stock
to Day & Campbell for legal services. The issuance of such securities was exempt
from registration under the Securities Act of 1933 pursuant to Section 4(2)
thereof and Regulation D promulgated thereunder.
11. In December 1995, the Company issued 13,312 shares of Common Stock
to the Wall Street Group for consulting services. The issuance of such
securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
12. In December 1995, the Company issued 1,000,000 shares of Common
Stock for $1,000,000 cash to accredited investors. The issuance of such
securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) and Regulation D promulgated thereunder.
13. In December 1995, the Company issued 600,000 shares of Common Stock
for $600,000 cash to qualified investors outside of the United States. The
securities were issued in accordance with Regulation S of the Securities Act of
1933.
II-2
<PAGE> 78
14. In March 1996, the Company issued convertible notes with a face
value of $3,000,000 to qualified investors outside of the United States. The
notes subsequently were converted into Common Stock in May and June 1996 without
payment of additional consideration. The securities were issued in accordance
with Regulation S of the Securities Act of 1933.
15. In connection with the March 1996 private placement, the Company
issued to the placement agent in consideration of the efforts of the placement
agent, warrants to purchase 129,230 shares of Common Stock at a price (subject
to adjustment) of $1.625 per share.
16. In May 1996, the Company issued 48,000 shares of Common Stock to Set
Marketing On for consulting services. The issuance of such securities was exempt
from registration under the Securities Act of 1933 pursuant to Section 4(2)
thereof and Regulation D promulgated thereunder.
17. In May 1996, the Company issued 85,000 shares of Common Stock to
Norm Finkelstein in settlement of certain litigation. The issuance of such
securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder
18. In June 1996, the Company issued 2,420,143 shares of Common Stock
for $1,695,000 cash and Warrants with a face value of $805,000 to accredited
investors in the United States and to qualified investors outside of the United
States. The securities issued to non- United States investors were issued in
accordance with Regulation S of the Securities Act of 1933. The issuance of such
securities to United States investors was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder.
19. In connection with the June 1996 private placement, the Company
issued to the placement agent in consideration of the efforts of the placement
agent, warrants to purchase 401,924 shares of Common Stock at a price (subject
to adjustment) of $0.9875 per share.
20. In July and August 1996, the Company issued 245,931 shares of Common
Stock for $170,000 cash and Warrants with a face value of $3,000,000 to
accredited investors in the United States and to qualified investors outside of
the United States. The securities issued to non- United States investors were
issued in accordance with Regulation S of the Securities Act of 1933. The
issuance of such securities to United States investors was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof
and Regulation D promulgated thereunder.
21. In June 1997, the Company issued Secured Promissory Notes with
limited conversion features with a face value of $500,000 to accredited
investors in the United States and to qualified investors outside of the United
States. The securities issued to non- United States investors were issued in
accordance with Regulation S of the Securities Act of 1933. The issuance of such
securities to United States investors was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder.
22. In September and October 1997, the Company issued 99,500 shares of
Series A Redeemable Convertible Preferred Stock for $995,000 cash to accredited
investors outside of the United States. The securities issued to non- United
States investors were issued in accordance with Regulation S of the Securities
Act of 1933. The issuance of such securities to United States investors was
exempt from registration under the Securities Act of 1933 pursuant to Section
4(2) thereof and Regulation D promulgated thereunder.
ITEM 27. EXHIBITS.
The exhibits are listed in the Exhibit Index commencing at page II-5
hereof.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-3
<PAGE> 79
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this Registration
Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective amendment
to this Registration Statement any of the securities being registered which
remain unsold at the termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
issuer's Annual Report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Poway, State of California on December 11,
1997.
NORRIS COMMUNICATIONS, INC.
By: /s/ Elwood G. Norris
---------------------------------------
Elwood G. Norris, Chairman of the Board
---------------------
POWER OF ATTORNEY
Each person whose signature to this Registration Statement appears below
hereby appoints Elwood G. Norris, Alfred H. Falk, Robert Putnam, and each of
them, as his attorney-in-fact to sign on his behalf individually and in the
capacity stated below and to file all amendments and post-effective amendments
to this Registration Statement as such attorney-in-fact may deem necessary or
appropriate.
---------------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME POSITION DATE
---- -------- ----
<S> <C> <C>
/s/ Elwood G. Norris Chairman of the Board, Chief December 11, 1997
- ------------------------- Executive Officer and Director
Elwood G. Norris (principal executive officer)
/s/ Fred Falk President and Director December 11, 1997
- -------------------------
Fred Falk
/s/ Renee Warden Controller December 11, 1997
- ------------------------- (principal financial and
Renee Warden accounting officer)
/s/ Robert Putnam Vice President and Director December 11, 1997
- -------------------------
Robert Putnam
</TABLE>
II-5
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL DESCRIPTION
NUMBER ----------------------
- -------
<S> <C>
2.1 Share Exchange Agreement among the Company, Norcom Communications
Corporation, and American Technology Corporation, dated for reference
March 23, 1988 and filed as an Exhibit to the Company's Registration
Statement on Form 10, as amended.
2.1.1 Amendment of Agreement among the Company, Norcom Communications
Corporation, and American Technology Corporation, dated for reference
March 23, 1988 and filed as an Exhibit to the Company's Registration
Statement on Form 10, as amended.
2.2 Plan and Agreement of Reorganization among the Company, American
Surface Mounted Devices, Inc. and ASMD, Inc.,dated August 11, 1989 and
filed as an Exhibit to the Company's Registration Statement on Form 10,
as amended.
2.3 Plan and Agreement of Reorganization among the Company, Sage
Microsystems, Inc., and Sage Micro, Inc., dated November 7, 1991 and
filed as an Exhibit to the Company's Registration Statement on Form 10,
as amended.
2.4 Plan and Agreement of Reorganization among the Company, C.A.D. Co.
Engineering, Inc. and CADCO Design Group, Inc., dated June 1, 1992 and
filed as an Exhibit to the Company's Registration Statement on Form 10,
as amended.
2.5 Plan and Agreement of Reorganization between American Surface Mounted
Devices, Inc. and Comp General Corporation, Inc., dated March 31 1995
and filed previously as an Exhibit to Registration Statement No.
33-92978.
2.6 Plan of Reorganization and Agreement of Merger, dated July , 1996 and
filed as Exhibit A to the Company's July 3, 1996 Proxy Statement.
3.1 Certificate of Incorporation of Norris Communications, Inc. (as amended
through May 28, 1996) and filed as Exhibit B to the Company's July 3,
1996 Proxy Statement.
3.2 Bylaws of Norris Communications, Inc., filed as Exhibit C to the
Company's July 3, 1996 Proxy Statement.
4.1 Certificate of Incorporation of Norris Communications, Inc. (as amended
through May 28, 1996),filed as Exhibit B to the Company's July 3, 1996
Proxy Statement.
4.2 Bylaws of Norris Communications, Inc., filed as Exhibit C to the
Company's July 3, 1996 Proxy Statement.
4.3 Form of Warrant Agreement dated June 7, 1996 for an aggregate of
$3,805,900 issued to a total of twelve investors and filed as an
Exhibit to the Company's Current Report on Form 8-K dated April 5,
1996.
4.3.1 Form of Amendment No. 1 to Common Stock Warrant between the Company and
three Warrant Holders holding an aggregate of $1,154,409 face value of
warrants granted in July and August 1996 (Each Amendment is identical
except for the dates and the name of the Warrant Holder), filed as
Exhibit 4.11.1 to the Company's Form 8-K, dated September 10, 1997.
4.4 Warrant Agreement for 401,924 shares of Common Stock between the
Company and Klein Investment Group, L.P. (formerly known as Iacocca
Capital Partners, L.P.) dated August 7, 1997 and filed previously as an
Exhibit to the Company's Current Report on Form 8-K dated August 29,
1996.
</TABLE>
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4.4.1 First Amendment to Common Stock Warrant, Termination of January 7, 1997
Letter Agreement and Amendment to Consulting Agreement dated September
29, 1997 between the Company and Klein Investment Group, L.P., filed as
Exhibit 4.12.1 to the Company's Form 10-QSB for the quarter ended
September 30, 1997.
4.5 Note Agreement and Form of Note between the Company and nine investors
dated August 23, 1997 and filed previously as Exhibit 10.33 to the
Company's Annual Report on Form 10-KSB dated March 31, 1997.
5.1 Opinion of Higham, McConnell & Dunning LLP.*
10.1 Stock Purchase Warrant for 33,750 Common Shares between the Company and
Cruttenden & Co., Inc. dated July 15,1994 and filed as Exhibit 4.3 to
the Company's 1995 Form 10-KSB.
10.2 Stock Purchase Warrant for 300,000 Common Shares between the Company
and CVD Financial Corporation dated July 15, 1994 and filed as Exhibit
4.4 to the Company's 1995 Form 10-KSB.
10.2.1 First Amendment to Stock Purchase Warrant for 300,000 Common Shares
between the Company and CVD Financial Corporation dated November 14,
1994 and filed as Exhibit 4.4.1 to the Company's 1995 Form 10-KSB.
10.2.2 Second Amendment to Stock Purchase Warrant (for 300,000 shares), dated
August 1, 1995 and filed as Exhibit 10.5.5 to the Company's Form 8-K
dated October 27, 1995.
10.3 Stock Purchase Warrant for 150,000 Common Shares between the Company
and CVD Financial Corporation dated July 15, 1994 and filed as Exhibit
4.5 to the Company's 1995 Form 10-KSB.
10.3.1 First Amendment to Stock Purchase Warrant for 150,000 Common Shares
between the Company and CVD Financial Corporation dated November 14,
1994 and filed as Exhibit 4.5.1 to the Company's 1995 Form 10-KSB.
10.3.2 Second Amendment to Stock Purchase Warrant (for 150,000 shares), dated
August 1, 1995 and filed as Exhibit 10.5.4 to the Company's Form 8-K
dated October 27, 1995.
10.4 Stock Purchase Warrant (for 200,000 shares) dated August 1, 1995 and
filed as Exhibit 10.5.6 to the Company's Form 8-K dated October 27,
1995.
10.4 Warrant Agreement for 82,100 Common Shares between the Company and
Comdisco, Inc. dated as of August 15, 1994 and filed as Exhibit 4.6 to
the Company's 1995 Form 10-KSB.
10.5 Warrant Agreement No. 1 for 106,986 Common Shares between the Company
and Pennsylvania Merchant Group Ltd. dated March 1, 1995 and filed as
Exhibit 4.7 to the Company's 1995 Form 10-KSB.
10.5.1 Warrant Agreement No. 2 for 87,300 Common Shares between the Company
and Pennsylvania Merchant Group Ltd. dated March 17, 1995 and filed as
Exhibit 4.7.1 to the Company's 1995 Form 10-KSB.
10.5.2 First Amendments to Warrant Agreements No. 1, 2 and 3 between the
Company and Pennsylvania Merchant Group Ltd. dated as of September 29,
1997, filed as Exhibit 4.7.3 to the Company's Form 10-QSB for the
quarter ended September 30, 1997.
10.6 Master Lease Agreement between Comdisco, Inc. and American Surface
Mounted Devices, Inc. dated as of August 15, 1994 and filed as Exhibit
10.7 to the Company's 1995 Form 10-KSB.
10.6.1 First Amendment to Warrant Agreement between the Company and First
Bermuda Securities Ltd. dated as of September 30, 1997, filed as
Exhibit 4.10.1 to the Company's Form 10-QSB for the quarter ended
September 30, 1997.
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<PAGE> 83
10.7 Form of Warrant Agreement dated June 7, 1996 for an aggregate of
$3,805,900 issued to a total of twelve investors and filed as an
Exhibit to the Company's Current Report on Form 8-K dated April 5,
1996.
10.7.1 Form of Amendment No. 1 to Common Stock Warrant between the Company and
three Warrant Holders holding an aggregate of $1,154,409 face value of
warrants granted in July and August 1996 (Each Amendment is identical
except for the dates and the name of the Warrant Holder), filed as
Exhibit 4.11.1 to the Company's Form 8-K, dated September 10, 1997.
10.8 Warrant Agreement for 401,924 Common Shares between the Company and
Klein Investment Group, L.P. (formerly known as Iacocca Capital
Partners, L.P.) dated August 7, 1996 and filed previously as an Exhibit
to the Company's Current Report on Form 8-K dated August 29, 1996.
10.9 Placement Agent's Warrant Agreement between Auerback, Pollack &
Richardson, Inc. and the Company, filed as Exhibit 10.17 to the
Company's Form 8-K dated November 13, 1995.
10.10 Warrant Certificate Issued to Auerbach, Pollak & Richardson, Inc. and
filed as Exhibit 10.18 to the Company's Form 8-K dated November 13,
1995 and filed previously as an Exhibit to the Company's Current Report
on Form 8-K, dated November 13, 1995.
10.10.1 Release and Termination of Right of First Refusal and Amendment to
Warrant between the Company and Auerbach, Pollak & Richardson, Inc.
dated May 13, 1996 and filed previously as an Exhibit to the Company's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996.
10.10.2 Form of Amendment to Warrant Certificate and Warrant Agreement between
the Company and Auerbach, Pollack & Richardson, Inc. and six individual
assignees (identical amendments except as to the number of shares
(total of 128,067 shares) and the name of holder) dated as of September
30, 1997, filed as Exhibit 10.18.2 to the Company's Form 10-QSB for the
quarter ended September 30, 1997.
10.11 Warrant Agreement for 150,000 Common Shares between the Company and
Higham, McConnell & Dunning dated October 10, 1996 and filed previously
as an Exhibit to Registration Statement No. 333- 13779.
10.11.1 Amendment No. 1 to Stock Purchase Warrant Agreement between the Company
and Higham, McConnell & Dunning dated September 30, 1997, filed as
Exhibit 4.13.1 to the Company's Form 10-QSB for the quarter ended
September 30, 1997.
10.12 Note Agreement and Form of Note between the Company and nine investors
dated August 23, 1997 and filed previously as Exhibit 10.33 to the
Company's Annual Report on Form 10-KSB dated March 31, 1997.
10.13 Stock Option Plan adopted by the Company on August 21, 1992 ("1992
Plan"), filed as Exhibit 10.10 to the Company's Registration Statement
on Form 10, as amended.
10.14 Stock Option Plan adopted by the Company on September 29, 1994 ("1994
Plan"), filed as Exhibit 10.10 to the Company's 1995 Form 10-KSB.
10.15 Employment Agreement dated September 12, 1995 between the Company and
Elwood G. Norris, filed as an Exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996.
10.16 Employment Agreement dated September 8, 1995 between the Company and
Robert Putnam, filed as an Exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996.
10.17 Placement Agreement dated April 16, 1996 between the Company and
Iacocca Capital Partners, L.P., filed as an Exhibit to the Company's
Annual Report on Form 10-KSB for the fiscal year ended March 31, 1996.
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<PAGE> 84
10.18 Form of Registration Rights Agreement effective June 7, 1996 between 11
investors and the Company aggregating $1,694,100, filed as an Exhibit
to the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1996.
10.19 First Amendment to Placement Agreement dated May 20, 1996 between the
Company and Iacocca Capital Partners, L.P., filed as an Exhibit to
Registration Statement No. 333-7709.
10.20 Agreement dated July 30, 1996 between the Company and Greystone
Capital, Ltd., filed as an Exhibit to Registration Statement No.
333-7709
10.21 OEM Purchase Agreement dated October 18, 1996 between the Company and
Sanyo Information Systems (U.K.) Ltd., filed as an Exhibit to
Registration Statement 333-7709.
10.22 Release and Waiver Agreement between the Company and certain Selling
Shareholders, filed as an Exhibit to Registration Statement No.
333-7709.
10.23 Agreement dated January 6, 1997 between the Company and Lanier
Worldwide, Inc., filed as an Exhibit to Registration Statement No.
333-7709 [Portions of this Exhibit have been omitted (based upon a
request for confidential treatment) and have been filed separately with
the Securities & Exchange Commission pursuant to Rule 406].
10.24 Controlled Liquidation and Lock Up Agreement dated March 1997 between
the Company and certain Selling Shareholders filed as Exhibit 10.31 to
Registration Statement 333-7709.
10.25 Consulting Agreement (with Warrants) between the Company and Klein
Investment Group, L.P. dated January 7, 1997, filed as an Exhibit to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1997.
10.25.1 Amendment to the Consulting Agreement (with Warrants between the
Company and Klein Investment Group, L.P. dated January 7, 1997, filed
as an Exhibit to the Company's Annual Report on Form 10- KSB for the
fiscal year ended March 31, 1997.
10.25.2 First Amendment to Common Stock Warrant, Termination of January 7, 1997
Letter Agreement and Amendment to Consulting Agreement dated September
29, 1997 between the Company and Klein Investment Group, L.P., filed as
Exhibit 4.12.1 to the Company's Form 10-QSB for the quarter ended
September 30, 1997.
10.26 Note Agreement and form of Note between the Company and nine investors
dated June 13, 1997 for an aggregate of $500,000, filed as an Exhibit
to the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1997.
10.26.1 Collateral Patent Assignment between the Company and nine investors
dated June 13, 1997, filed as an Exhibit to the Company's Annual Report
on Form 10-KSB for the fiscal year ended March 31, 1997.
10.27 Lease Settlement Agreement and Promissory Note dated as of September
30, 1997 between the Company and Pomerado Properties, filed as Exhibit
10.13.1 to the Company's Form 10-QSB for the quarter ended September
30, 1997.
11.1 Statement re computation of per share earnings, filed as an Exhibit to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1997.
21.1 List of subsidiaries, filed as an Exhibit to the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1997.
23.1 Consent of Higham, McConnell & Dunning LLP, included in Exhibit 5.1.
23.2 Consent of Ernst & Young.*
- ----------
* Each exhibit marked with an asterisk is filed concurrently herewith.
Each exhibit not marked with an asterisk is incorporated by reference to
an exhibit previously filed by the Company as indicated above.
II-9
<PAGE> 1
EXHIBIT 5.1
HIGHAM, MCCONNELL & DUNNING LLP
28202 CABOT ROAD, SUITE 450
LAGUNA NIGUEL, CALIFORNIA 92677
(714) 365-5515
December 11, 1997
Norris Communications, Inc.
13114 Evening Creek Drive South
San Diego, California 92128
Re: Registration on Form SB-2 of
31,379,167 Shares of Common Stock
of Norris Communications, Inc.
Gentlemen:
We have acted as counsel to Norris Communications, Inc., a Delaware
corporation (the "Company"), in connection with the Company's filing with the
Securities and Exchange Commission (the "Commission") of a registration
statement on Form SB-2 (the "Registration Statement") under the Securities Act
of 1933, as amended (the "1933 Act"), with respect to 31,379,167 shares
("Shares") of its Common Stock, $.001 par value, which may be sold from time to
time by certain shareholders of the Company described in the Registration
Statement.
In connection with the opinion expressed below, we have examined and
relied upon, as to factual matters, originals and photostatic or certified
copies of such corporate records, including, without limitation, minutes of the
meetings of the Board of Directors of the Company and other instruments,
certificates or corporate officers, and such other documents as we have deemed
necessary or appropriate as a basis for the opinions hereinafter expressed. In
making such examinations, we have assumed the genuineness of all signatures and
the authenticity of all documents submitted to us as originals, and the
conformity
<PAGE> 2
Norris Communications, Inc.
December 11, 1997
Page 2
to original documents of all documents submitted to us as certified or
photostatic copies. We also have assumed that appropriate action will be taken
prior to the offer and sale of the Common Stock to register and qualify the
Common Stock for issuance and sale under any applicable state "Blue Sky" or
securities laws.
We have examined and relied upon, as matters of law, such
considerations of law as we, in our judgement, have deemed necessary or
appropriate to render the opinion expressed below. This opinion is limited to
federal law and the corporate laws of the States of California and Delaware,
and we can assume no responsibility for the law of any other jurisdiction.
Based upon the foregoing, we are of the opinion that the Shares of the
Company's Common Stock being registered under the 1933 Act pursuant to the
Registration Statement are, or upon exercise of warrants described therein will
be, legally issued, fully paid and nonassessable shares of Common Stock of the
Company.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to all references to our firm in the Registration
Statement. In giving this opinion, we do not hereby admit that we are acting
within the category of persons whose consent is required under Section 7 of the
1933 Act or the rules and regulations of the Commission promulgated thereunder.
This opinion is being delivered solely in regard to the transactions
contemplated by the Registration Statement and is intended for use solely in
connection with the consummation of such transactions. This opinion should not
be relied upon for any other purpose without our prior written consent; this
opinion should not be quoted in whole or in part or distributed in any way.
Very truly yours,
HIGHAM, MCCONNELL & DUNNING LLP
<PAGE> 1
EXHIBIT 23.2
CONSENT OF
INDEPENDENT AUDITORS
We consent to the reference to our Firm under the caption "Experts" and to the
use of our report dated June 13, 1997 relating to the consolidated financial
statements of Norris Communications, Inc. for the years ended March 31, 1997
and March 31, 1996 in the Form SB-2 Registration Statement and related
Prospectus of Norris Communications, Inc. for the registration of 31,379,167
shares of its Common Stock.
Vancouver, Canada
December 11, 1997 Chartered Accountants
