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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended June 30, 1997
Commission File Number 0-20734
NORRIS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware None
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)
13114 Evening Creek Drive South, San Diego, California 92128
(Address of principal executive offices) (Zip Code)
(619) 679-1504
(Registrant's telephone number, including area code)
12725 Stowe Drive, Poway, California, 92064
(Former Address)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES __ NO X
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, par value $.001 53,849,529
(Class) (Outstanding at July 29, 1997)
Transitional Small Business Disclosure Format (check one): YES __ NO X
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NORRIS COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and
and March 31, 1997 (unaudited) 3
Consolidated Statements of Operations for the three
months ended June 30, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended June 30, 1997 and 1996 (unaudited) 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 12
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
</TABLE>
* No information provided due to inapplicability of the item.
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NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
JUNE 30, 1997 MARCH 31, 1997
$ $
------------- --------------
<S> <C> <C>
ASSETS
CURRENT
Cash 332,998 176,158
Accounts receivable, less allowance for doubtful
accounts of $36,330 and $36,330, respectively 178,022 30,097
Inventory [note 3] 1,605,208 1,648,863
Property and equipment held for sale 2,458 68,567
------------- -------------
TOTAL CURRENT ASSETS 2,118,686 1,923,685
------------- -------------
Property and equipment, net 183,158 199,320
Other intangible assets, net of accumulated amortization of
$34,202 and $32,341 respectively 40,207 42,068
------------- -------------
TOTAL ASSETS 2,342,051 2,165,073
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Accounts payable, trade 1,018,454 1,264,150
Other accounts payable and accrued liabilities [note 9] 853,571 1,049,697
Advances in excess of earnings on development contract 93,929 174,341
------------- -------------
TOTAL CURRENT LIABILITIES 1,965,954 2,488,188
------------- -------------
Secured notes payables [note 4] 500,000 --
------------- -------------
TOTAL LIABILITIES 2,465,954 2,488,188
------------- -------------
Commitment and contingencies [notes 11 and 12]
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, $0.001 par value, authorized 60,000,000 and 30,000,000
respectively; 34,060,385 and 23,370,008 shares
outstanding, respectively 34,060 23,370
Additional paid-in capital 29,695,310 28,459,269
Prepaid warrants [note 6] 2,363,159 3,276,505
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (33,808,748) (33,674,575)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (123,903) (323,115)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 2,342,051 2,165,073
============= =============
</TABLE>
See notes to interim consolidated financial statements
3
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NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three months ended June 30
1997 1996
$ $
----------- -----------
<S> <C> <C>
REVENUE:
Product sales 162,208 153,726
Development services 226,851 --
----------- -----------
Total revenues 389,059 153,726
----------- -----------
COST OF REVENUES:
Cost of product sales 154,900 259,257
Cost of development services 142,528 --
----------- -----------
Total cost of revenues 297,428 259,257
----------- -----------
Gross profit (loss) 91,631 (105,531)
OPERATING EXPENSES:
Selling and administrative 319,858 1,073,299
Research and related expenditures 52,871 211,584
----------- -----------
Total operating expenses 372,729 1,284,883
----------- -----------
Operating loss (281,098) (1,390,414)
OTHER INCOME (EXPENSE)
Interest expense (7,490) (76,480)
Interest income 1,415 11,192
Other income [note 8] 153,000 --
----------- -----------
Other income (expense), net 146,925 (65,288)
----------- -----------
Loss before provision for income taxes (134,173) (1,455,702)
Provision for income taxes -- --
----------- -----------
NET LOSS (134,173) (1,455,702)
=========== ===========
NET LOSS PER SHARE (0.01) (0.09)
=========== ===========
WEIGHTED AVERAGE SHARES 25,678,434 16,964,510
=========== ===========
</TABLE>
See notes to interim consolidated financial statements
4
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NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30
1997 1996
$ $
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss (134,173) (1,455,702)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 20,355 103,360
Financing fee paid by issuance of common stock -- 33,773
Professional services paid by issuance of common stock -- 72,000
Legal settlement paid by issuance of common stock -- 127,500
Changes in assets and liabilities:
Accounts receivable (147,925) (26,052)
Inventory 43,655 (112,332)
Prepaid expenses and other -- (78,613)
Accounts payable, trade (32,310) (1,119,296)
Other accounts payable and accrued liabilities (76,127) (273,206)
Advances on research and development contract (80,412) --
----------- -----------
Cash (used in) operating activities (406,937) (2,728,568)
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (2,332) (143,629)
Proceeds on disposal of property and equipment 66,109 --
----------- -----------
Cash provided by (used in) investing activities 63,777 (143,629)
----------- -----------
FINANCING ACTIVITIES
Repayments under demand loan payable -- (1,878,130)
Principal payments on capital lease obligations -- (490)
Proceeds from secured notes payable 500,000 --
Proceeds from issuance of shares and warrants -- 2,472,945
----------- -----------
Cash provided by financing activities 500,000 594,325
----------- -----------
Net increase (decrease) in cash 156,840 (2,277,872)
Cash, beginning of period 176,158 2,843,540
----------- -----------
Cash, end of period 332,998 565,668
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid during the period for:
Interest 7,490 43,555
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of long-term convertible note to common stock -- 3,000,000
Common stock issued on exercise of prepaid warrants 913,346 --
Accounts payable and accruals paid by issuance of common stock 333,385 --
</TABLE>
See notes to interim consolidated financial statements
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NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 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 County, 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 three month period ended June
30, 1997 and has an accumulated deficit of $33,808,748 at June 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 substantial doubt and is dependent
upon obtaining additional financing and 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.
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
month period ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 1998.
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>
June 30, 1997 March 31, 1997
-------------- --------------
<S> <C> <C>
Raw material $ 729,602 $ 666,634
Work in process 179,967 179,967
Finished goods 695,639 802,262
-------------- --------------
$ 1,605,208 $ 1,648,863
============== ==============
</TABLE>
4. 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 6) and when sufficient authorized
stock is available 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 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
June 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.
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NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1997
5. COMMON STOCK
The following table summarizes shares issued during the three month period ended
June 30, 1997:
<TABLE>
<CAPTION>
Additional
paid-in Contributed
Shares Amount capital surplus
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, March 31, 1997 23,370,008 $ 23,370 $ 28,459,269 $ 1,592,316
Stock issued on exercise of prepaid warrants 9,162,368 9,162 904,184 --
Stock issued pursuant to private placement fees 457,484 457 (457) --
Stock issued as payment for accrued professional
services and compensation 1,070,525 1,071 332,314 --
- ---------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 34,060,385 $ 34,060 $ 29,695,310 $ 1,592,316
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Subsequent to June 30, 1997, the Company issued 269,399 common shares for legal
and other services in the amount of $36,628. See note 6 below for subsequent
issuances of common stock on conversion of prepaid warrants. The Company has
also agreed to issue 400,000 common shares in connection with the settlement of
an old equipment lease obligation, amounting to $87,500.
6. PREPAID WARRANTS
During fiscal 1997, the Company received cash from prepaid warrants of
$3,396,505, net of offering costs of $409,395. The terms 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. The exercise price
of the warrants are further discounted by 7% per year and for other events until
the warrants are exercised.
At June 30, 1997, $2,648,000 face amount of these warrants remained outstanding.
Subsequent to June 30, 1997 and through July 22, 1997, an additional $1,483,000
face amount of warrants were converted into 19,519,745 common shares leaving a
balance of $1,165,000 warrants exercisable into approximately 10.8 million
common shares (based on July 24, 1997 pricing), subject to the availability of
authorized shares. The Company does not presently have sufficient authorized and
unissued common shares for the exercise of the remaining prepaid warrants. Under
the terms of the prepaid warrants, the Company is obligated to take action to
increase the authorized shares and conversions in excess of authorized and
unissued common stock are suspended pending such increase.
7. OPTIONS AND WARRANTS
At June 30, 1997, warrants were outstanding/exercisable into the following
listed shares. Also see Note 4 for additional warrants that may become issuable
upon conversion of secured notes payable.
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ 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) 106,986 1.61 February 2000
Warrants (a) 88,014 1.61 March 2000
Warrants 129,230 1.625 March 2001
Warrants 401,924 0.469 July 2001
Warrants 400,000 0.469 August 2001
Warrants (a) 150,000 0.65625 October 2001
Warrants (a) 146,866 1.09 October 2005
- ------------------------------------------------------------------------------------
Total 2,188,870
- ------------------------------------------------------------------------------------
</TABLE>
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NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1997
7. OPTIONS AND WARRANTS (Continued)
(a) These warrants, amongst other provisions, contain a provision for
adjustment for dilutive events. The exercise prices and where applicable,
the number of warrants, have been adjusted to reflect any such events
through June 30, 1997.
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 (60,000)
Canceled -
---------
Outstanding at June 30, 1997 3,030,658
=========
</TABLE>
Options outstanding are exercisable at prices ranging from $0.1562 to $3.65 and
expire over the period from 1997 to 2002.
8. 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.
9. 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.
10. 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.
11. 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
5 and 6 for partial conversions to common stock by these security holders.
12. SUBSEQUENT EVENT
On July 11, 1997, the Company entered into a three year lease for approximately
5,500 square feet of office space in San Diego, California providing for monthly
payments of approximately $5,800. To meet the credit requirements of the
landlord, both the Company and American Technology Corporation, an affiliated
corporation, entered into a joint lease
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agreement for approximately 12,925 square feet with aggregate monthly payments
of $13,830 inclusive of utilities and costs. The Company's former facility
requiring annual minimum payments of $221,000 is being sublet by the landlord
and the Company has accrued a liability of $140,000 representing prior unpaid
rentals and an estimated settlement on the old lease agreement. See notes 5 and
6 for subsequent share issuances.
13. NET LOSS PER SHARE
Earnings per share amounts are based on the weighted average number of common
shares and common stock equivalents outstanding for the period. Common
equivalent shares consisting of outstanding prepaid warrants, stock options and
stock purchase warrants have been excluded because their effect would be
antidilutive.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW AND UNDER THE SUB-HEADING,
"BUSINESS RISKS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED MARCH 31, 1997.
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 arrangements for the Company's Flashback family of products and from
contract development services for custom digital products. The Company currently
has contracts with Lanier and Sanyo and is pursuing OEM contracts with other
companies seeking to penetrate the digital sound recording and playback market.
As a result of the 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 each of the last three fiscal 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 in future periods 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 on an international basis 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 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
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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 first three months of fiscal 1998, the Company reported revenues of
$389,059, a 153% increase over revenues of $153,726 for the first three months
of fiscal 1997. Revenue for the first fiscal quarter of 1998 included $162,208
of product sales to OEMs and development services of $226,851. The Company's
development arrangements are designed to produce limited current return 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 in the prior year and the $153,726 of the prior comparable
quarters revenues consisted primarily 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 three months ended June 30, 1997, the Company reported a gross profit of
$91,631 as compared to a gross loss of $105,531 for the first three months of
fiscal 1997. 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.
Total operating expenses (including research and related expenditures and
selling and administrative expenses) were $372,729 for the three months ended
June 30, 1997 as compared to $1,284,883 for the three months ended June 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 $319,858 in the current quarter compared to $1,073,299 in the prior
period. The $690,961 reduction was comprised primarily of a $350,000 decrease in
compensation costs, a $100,000 decrease in legal and related costs, a $80,000
decrease in depreciation and amortization, a $70,000 decrease in advertising and
related costs, and a $40,000 reduction in occupancy related costs.
Research and related expenditures were $52,871 for the first three months of
fiscal 1998, as compared to $211,584 for the first three months of fiscal 1997.
An aggregate of $142,528 of development costs were incurred for contract
development work and are included in cost of revenues. This included
approximately $60,000 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 $281,098 for the three months ended
June 30, 1997, as compared to an operating loss of $1,390,414 million for the
three months ended June 30, 1996 with the decrease resulting primarily from the
reduction in operating expenses described above.
The Company's interest expense for the three months ended June 30, 1997 was
$7,490 a reduction from $76,480 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
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 fiscal quarter of $134,173
compared to a net loss of $1,455,702 million for the prior years first quarter.
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 June 30, 1997, the Company had working capital of $152,732 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 June
30, 1997. The increase in working capital was a result of the Company's
continuing losses which consumed working capital during the period offset by a
long-term debt issuance.
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.
The Company also paid accrued legal, consulting and other expenses aggregating
$333,385 through the issuance of common stock during the first quarter. The
Company also obtained $63,777 of proceeds from net equipment disposals during
the quarter.
For the three months ended June 30, 1997, net cash increased by $156,840. Cash
used in operating activities was $406,937. Major components using cash were a
net loss of $134,173 reduced by $20,355 of aggregate depreciation and
amortization. The major change in assets and liabilities providing net cash used
in operating activities was a reduction in inventory of
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$43,655. The major changes in assets and liabilities using operating cash was an
increase in accounts receivable of $147,925, a reduction in accounts payable of
$32,310, a reduction of accrued liabilities of $76,127 and a reduction of
research and development advances of $80,412.
Based on the Company's cash position assuming the completion of backlog at June
30, 1997, of approximately $275,000 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 rather than traditional equity financing (see Note 4 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.
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) 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
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.
FUTURE COMMITMENTS AND FINANCIAL RESOURCES
The Company's future commitments are related to its facility lease (see footnote
10 to the interim financial statements included herein). 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 $515,000 at times to be further negotiated.
The Company recently announced a new Flashback Audio(TM) technology that
provides the means of 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.
BUSINESS RISKS
This report contains a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical results or
those anticipated. In this report, the words "anticipates," "believes,"
"expects," "intends," "future" and similar expressions identify forward-looking
statements. Readers are cautioned to consider the specific business risk factors
described above and in the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1997 and not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking statements, to
reflect events or circumstances that may arise after the date hereof.
11
<PAGE> 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.34 Sublease Agreement between Global Associates, Ltd. and
American Technology Corporation and the Company dated
July 11, 1997.
(b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NORRIS COMMUNICATIONS, INC.
Date: July 30, 1997 By: /s/RENEE WARDEN
---------------------------
Renee Warden
Controller
(Principal Financial and Accounting
Officer and duly authorized to sign on
behalf of the Registrant)
12
<PAGE> 1
EXHIBIT 10.34
SUBLEASE AGREEMENT
This Sublease Agreement ("Sublease") is made this 11th day of July, 1997,
by and between Global Associates, Ltd., a Virginia corporation ("Landlord") and
Norris Communications, Inc., a Delaware corporation, and American Technology
Corporation, a Delaware corporation (collectively the "Tenant").
RECITALS
A. Landlord, as tenant, has leased the premises (the "Prime Lease
Premises") located at 13112 Evening Creek Drive, South, San Diego, California
92128, from Bedford Property Investors, Inc. (the "Prime Landlord," such Prime
Landlord being the successor-in-interest to Scientific-Atlanta, Inc., a Georgia
corporation and the original landlord under the Prime Lease (as hereinafter
defined)), by lease agreement dated August 14, 1996, as amended by amendment
dated October 23, 1996, and amendment dated January 24, 1997 (collectively the
"Prime Lease," a copy of which is attached hereto and by this reference made a
part hereof as Exhibit A), as the Prime Lease Premises are more particularly
described in the Prime Lease; and
B. Landlord has agreed to sublet to Tenant and Tenant has agreed to sublet
from Landlord a portion of the Prime Lease Premises, deemed and agreed to
comprise approximately 12,925 rentable square feet (the "Premises") in the
building (the "Building") comprising a part of the Prime Lease Premises, as such
Premises are outlined and shown on Exhibit B attached hereto and by this
reference made a part hereof.
NOW THEREFORE, Landlord and Tenant, in consideration of the mutual
covenants herein contained and each with intent to be legally bound, for
themselves and respective successors and assigns, hereby agree as follows:
1. INCORPORATION OF RECITALS
The above recitals are by this reference incorporated as if fully restated
herein.
2. SUBLEASE
Landlord hereby subleases the Premises to Tenant and Tenant hereby
subleases the Premises from Landlord, on the terms and conditions contained in
this Sublease. Landlord shall be entitled, prior to the Commencement Date (as
hereinafter defined), to remove any or all of its fixtures, equipment and other
personal property located ar the Premises, except that Landlord shall leave, and
hereby grants to Tenant a license to use, during the term of this Sublease, the
furniture and equipment of Landlord identified in Exhibit C attached hereto and
by this reference made a part hereof. Tenant hereby accepts the existing "as is"
condition of such furniture and equipment. Tenant represents that it has
inspected the Premises and the Prime Lease Premises and has found the same in
satisfactory condition, subject to the completion of the pre-occupancy tenant
improvements specified in Exhibit B attached hereto and made a part hereof.
3. TERM
(A) The term of this Sublease shall commence on that date (the
"Commencement Date") which is the later to occur of (i) July 14, 1997 (the
"Target Date"), or (ii) the date Landlord shall have substantially completed the
improvements specified in Exhibit B and notified Tenant that the Premises are
ready for delivery. Landlord and Tenant agree that if, for any reason, the
Commencement Date shall not have occurred by the Target Date, Landlord shall use
reasonable efforts to deliver the Premises to Tenant as soon as reasonably
practicable thereafter. In the event that Landlord has not delivered the
Premises to Tenant on or before August 1, 1997, Tenant shall have the right to
terminate this Sublease by written notice to Landlord, and in such event this
Sublease shall terminate as of the date upon which Landlord receives Tenant's
notice, Landlord shall promptly return any monies advanced to Landlord by
Tenant, and neither party shall have any obligation to the other accruing
thereafter.
(B) The term of this Sublease shall expire at the close of business on July
31, 2000, unless sooner terminated pursuant to the provisions of this Sublease,
applicable law or as a result of the termination of the Prime Lease
(collectively the "Expiration Date").
<PAGE> 2
(C) At the request of Landlord, Tenant shall execute and deliver to
Landlord written confirmation of the Commencement Date established pursuant to
this section of the Sublease.
4. RENT
(A) Tenant covenants and agrees to pay to Landlord an annual base rent (the
"Base Rent") in equal monthly installments, each in advance on the first day of
each calendar month during the term of this Sublease in accordance with the
following schedule:
<TABLE>
<CAPTION>
Annual Rate
Per Square Foot of
Time Period Premises Rentable Area Annual Base Rent Monthly Base Rent
----------- ---------------------- ---------------- -----------------
<S> <C> <C> <C>
From August 1, 1997 $ 12.84 $ 165,957.00 $ 13,829.75
through July 31, 1998
From August 1, 1998 $ 13.44 $ 173,712.00 $ 14,476.00
through July 31, 1999
From August 1, 1999 $ 14.04 $ 181,467.00 $ 15,122.25
through July 31, 2000
</TABLE>
The installment of Base Rent for the first full calendar month of the term of
this Sublease shall be paid by Tenant at the time of execution and delivery of
this Sublease. Landlord hereby agrees to abate and forgive the payment of Base
Rent for the period from the Commencement Date through July 31, 1997.
(B) Tenant shall pay Base Rent and all other amounts due from Tenant to
Landlord pursuant to this Sublease (all such other amounts collectively called
"Additional Rent"), at such place as Landlord may designate in writing from time
to time, by good check, in lawful money of the United States of America, without
demand and without any deduction, setoff or abatement. Landlord shall have the
same rights and remedies with respect to the nonpayment of Additional Rent as
with respect to the nonpayment of Base Rent.
5. SECURITY DEPOSIT
Upon the execution of this Sublease, Tenant shall deposit with Landlord the
sum of Thirteen Thousand Eight Hundred Twenty-Nine and 75/100 Dollars
($13,829.75) as security for the full and faithful performance of every portion
of this Sublease to be performed by Tenant. If Tenant shall default with respect
to any provision of this Sublease, Landlord may use or apply such portion of
this security deposit as shall reasonably be required to remedy such default. If
any portion of said deposit is so used or applied, Tenant shall, as Additional
Rent, within ten (10) days after demand therefor, deposit funds with Landlord in
an amount sufficient to restore the security deposit to its original amount and
Tenant's failure to do so shall be a breach of this Sublease. Landlord shall not
be required to keep such security deposit separate from its general funds and
Tenant shall not be entitled to interest on such deposit. If Tenant shall fully
and faithfully perform every provision of this Sublease to be performed by it,
the security deposit or any balance thereof shall be returned to Tenant within
thirty (30) days after the expiration of this Sublease.
6. REPAIRS AND MAINTENANCE OF THE PREMISES
(A) Except as provided below in Paragraph 6(B) or otherwise in this
Sublease, any repair and maintenance obligations with respect to the Premises
which are caused solely by ordinary wear and tear and which are the
responsibility of the Landlord, as tenant under the Prime Lease, shall be
performed by Landlord, at Landlord's sole cost and expense. Tenant shall
promptly notify Landlord of the need for any such repair or maintenance.
2
<PAGE> 3
(B) Notwithstanding the foregoing provisions of Paragraph 6(A), any repair
or maintenance with respect to the Premises or the Building caused by the
negligence, act or omission of Tenant, its employees, agents, contractors,
subtenants, licensees or invitees shall be made by Landlord at Tenant's sole
cost and expense, which amounts shall be payable by Tenant as Additional Rent
within ten (10) days after demand therefor. Tenant shall promptly notify
Landlord of the need for any such repair or maintenance.
7. TENANT'S USE
(A) Tenant shall use and occupy the Premises for general office, research
and development, and manufacturing purposes only, consistent with Landlord's use
of the Prime Lease Premises, and for no other purpose.
(B) Tenant shall comply with all covenants, conditions and restrictions
governing the Prime Lease Premises and all Federal, State and local laws,
ordinances, rules and regulations and the requirements of any Board of Fire
Insurance Underwriters, applicable to Tenant's use of the Premises.
(C) Tenant shall keep the interior of the Premises and all furniture,
equipment and fixtures therein in good order and condition and, on the
Expiration Date, shall remove all personal property, fixtures, equipment and
supplies which Tenant has placed in or about the Premises and any alterations,
additions or improvements which Landlord shall request Tenant to remove. Any
damage caused to the Premises by such removal shall be repaired by Landlord, or
by Tenant with Landlord's approval, at Tenant's sole expense. The furniture and
equipment of Landlord listed in Exhibit C and to be used by Tenant during the
term of this Sublease shall remain in the Premises and be surrendered by Tenant
on the Expiration Date in good condition and repair.
(D) Tenant shall not, by its acts or omissions, cause any increase in the
premium for fire or other insurance covering the Prime Lease Premises or the
termination of any such insurance.
(E) Tenant shall not commit waste on or to the Premises.
(F) Tenant shall not use the Premises for any unlawful or immoral use.
(G) Tenant shall comply with all of the environmental covenants,
requirements and obligations of Landlord as tenant under the Prime Lease, upon
the terms and conditions set forth in Article 4 (or in any other article or
section) of the Prime Lease.
8. ALTERATIONS
(A) Landlord shall perform the pre-occupancy tenant work, improvements,
installations and alterations as shown on Exhibit B attached hereto and as
specified on those certain drawings filed with and approved by the City of San
Diego, California, Plan File Number A103953-97 entitled "Signal Processing
Systems." Landlord shall perform such pre-occupancy tenant work and improvements
at its sole cost and expense, except as otherwise provided below in Paragraph
(B).
(B) Tenant shall reimburse Landlord for the costs incurred by Landlord to
perform certain pre-occupancy tenant work and improvements requested by Tenant
and performed by Landlord at Tenant's sole cost and expense, including all those
improvements to performed in and to Rooms 17, 19, 20, 22 and 24, as such rooms
are identified on Exhibit B attached hereto. Landlord and Tenant hereby agree
that the amount to be paid by Tenant to Landlord to reimburse it for such costs
is $21,407.08, together with such additional costs as Landlord may incur because
of change orders or other modifications requested by Tenant and approved the
Landlord. Such amount shall be payable as follows: $10,000.00 shall be paid by
Tenant to Landlord upon Tenant's execution and delivery of this Sublease. The
remaining $11,407.08 shall be paid in six (6) equal installments of $1,901.18
each. The first such installment shall be paid to Landlord on August 1,
3
<PAGE> 4
1997, and such payments shall continue to be made on the first day of each next
succeeding calendar month until paid in full.
(C) Tenant shall not make any alterations, improvements or installations
(collectively, "Alterations") in or to the Premises without Landlord's prior
written consent which shall not be unreasonably withheld. All Alterations shall
be subject to the approval of Prime Landlord and the terms and conditions of the
Prime Lease. Any Alterations consented to by Landlord shall be performed at the
sole cost and expense of Tenant, by contractors approved in advance by Landlord
and Prime Landlord, but shall become the property of Landlord (subject to the
terms of the Prime Lease and this Sublease). Landlord may condition its approval
to any Alterations on the removal of the same on the Expiration Date, and
restoration of any damage caused by installation and removal.
9. ASSIGNMENT AND SUBLETTING
(A) Tenant shall not (i) assign, mortgage, pledge, hypothecate, encumber or
otherwise transfer this Sublease, (ii) sublease (which term shall be deemed to
include the granting of concessions and licenses and the like) all or any part
of the Premises, (iii) suffer or permit this Sublease or the leasehold estate
hereby created or any other rights arising under this Sublease to be assigned,
transferred, mortgaged, pledged, hypothecated or encumbered, in whole or in
part, whether voluntarily, involuntarily or by operation of law, or (iv) permit
the use or occupancy of the Premises by anyone other than Tenant, or the
Premises to be offered or advertised for assignment or subletting, without
Landlord's prior written consent which shall not be unreasonably withheld
provided that Prime Landlord's consent has been granted.
(B) For purposes of this Section 9, an assignment of this Sublease shall be
deemed to include any change in control of Tenant or any transaction pursuant to
which Tenant is merged or consolidated with another entity or pursuant to which
all or substantially all of Tenant's assets are transferred to any other entity.
For purposes hereof, "control" shall mean possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of the
applicable person or entity, whether through the ownership of voting securities,
partnership or beneficial interests, by contract or otherwise.
(C) If this Sublease is assigned or if the Premises or any part thereof are
sublet (or occupied by anybody other than Tenant and its employees) Landlord,
after default by Tenant hereunder, may collect the rents from such assignee,
subtenant or occupant, as the case may be, and apply the net amount collected to
the rent herein reserved, but no such collection shall be deemed a waiver of the
provisions set forth in the first paragraph of this Section 9, the acceptance by
Landlord of such assignee, subtenant or occupant, as the case may be, as a
tenant, or a release of Tenant from the future performance by Tenant of its
covenants, agreements or obligations contained in this Sublease.
(D) No subletting or assignment shall in any way impair the continuing
primary liability of Tenant hereunder, and no consent to any subletting or
assignment in a particular instance shall be deemed to be a waiver of the
obligation to obtain the Landlord's written approval in the case of any other
subletting or assignment. No assignment, subletting or occupancy shall affect
uses permitted hereunder. Any subletting, assignment or other transfer of
Tenant's interest in this Lease in contravention of this Section shall be
voidable at Landlord's option.
(E) If the rent and other sums (including, without limitation, the
reasonable value of any services performed by any assignee or subtenant in
consideration of such assignment or sublease), net of reasonable expenses such
as brokerage commissions, tenant improvements and rental abatements, either
initially or over the term of any assignment or sublease, payable by such
assignee or subtenant on account of an assignment of sublease of all or any
portion of the Premises exceed the sum of Rent plus Additional Rent called for
hereunder with respect to the space assigned or sublet, Tenant shall pay to
Landlord as Additional Rent one hundred percent (100%) of such excess payable
monthly at the time for payment of Rent. Nothing in this paragraph shall be
deemed to abrogate the provisions of this Section and Landlord's acceptance of
any sums pursuant to this paragraph shall not be deemed a granting of consent to
any assignment of the Lease or sublease of all or any portion of the Premises.
4
<PAGE> 5
10. TENANT'S EQUIPMENT
(A) Tenant will not install or operate in the Premises any electrically
operated equipment or other machinery except that listed in Exhibit D attached
hereto and by this reference made a part hereof, without first obtaining the
prior written consent of Landlord, who may condition such consent upon payment
by Tenant of Additional Rent as compensation for additional consumption of
electricity and/or other utility services. Such Additional Rent shall be in
addition to Tenant's obligations to pay its Base Rent.
(B) If any or all of Tenant's equipment and machinery in the Premises
(except for the equipment and machinery listed in Exhibit D) requires
electricity consumption in excess of the capacity of the electrical system in
and serving the Premises, then subject to the approval of Prime Landlord, all
additional transformers, distribution panels and wiring that may be required to
provide the amount of electricity required for Tenant's equipment shall be
installed by Landlord at the cost and expense of Tenant. If Tenant's equipment
and machinery or any item thereof (including without limitation the equipment
and machinery listed in Exhibit D) is to be consistently operated beyond the
normal Building hours of 8:00 a.m. to 5:00 p.m., Monday through Friday (as such
consumption is determined by Landlord in its reasonable discretion), Landlord
may install at its option (i) a separate electric meter for the Premises at
Tenant's sole cost and expense, or (ii) a separate meter for the specific
equipment that is causing Tenant's excessive consumption of electricity at
Tenant's sole cost and expense. In the event Landlord installs a separate meter
for the Premises, Tenant shall then pay the cost of electricity it consumes as
recorded by such meter directly to the electric company. In the event Landlord
separately meters the specific equipment, Tenant shall be billed periodically by
Landlord based upon such consumption.
(C) Tenant shall not install any equipment or machinery of any kind or
nature whatsoever which will or may necessitate any changes, replacements or
additions to, or in the use of, the water system, heating system, plumbing
system, air-conditioning system, or electrical system of the Premises or the
Building without first obtaining the prior written consent of Landlord and Prime
Landlord. Business machines and mechanical equipment belonging to Tenant which
cause noise or vibration that may be transmitted to the structure of the
Building or to any space therein to such a degree as to be objectionable to
Landlord or to any tenant in the Building shall be installed and maintained by
Tenant, at Tenant's expense, on vibration eliminators or other devices
sufficient to eliminate such noise and vibration.
(D) Landlord shall have the right to prescribe the weight and position of
all heavy equipment, machinery and fixtures which Tenant intends to install or
locate within the Premises. Tenant shall obtain Landlord's and Prime Landlord's
prior review and approval before installing or locating heavy equipment and
fixtures in the Premises, and if installation or location of such equipment or
fixtures, in Landlord's opinion, requires structural modifications or
reinforcement of any portion of the Premises or the Building, Tenant agrees to
reimburse Landlord, as additional rent, for any and all costs incurred by
Landlord to make such required modifications or reinforcements, and such
modifications or reinforcements shall be completed prior to Tenant installing or
locating such equipment or fixtures in the Premises. Tenant shall reimburse
Landlord within thirty (30) days of receipt of any statement setting forth those
costs.
11. SERVICES, UTILITIES AND REAL ESTATE TAXES
(A) Landlord shall provide the following utilities and services, which are
included in the payment of Base Rent:
(1) Hot and cold water to the wet stacks of the Building.
(2) Cleaning services as specified in Exhibit E, Monday through Friday
of each week, except on the holidays listed in subparagraph (iii) below.
(3) Heat and air-conditioning to the Premises in season, Monday
through Friday from 8:00 a.m. to 5:00 p.m., except for the following holidays:
New Year's Day, Presidents' Day, Memorial Day, Fourth of July, Labor Day,
Thanksgiving Day and the Friday immediately following Thanksgiving Day, and
Christmas Day, and any other national
5
<PAGE> 6
holiday promulgated by a Presidential Executive Order or Congressional Act.
Landlord may agree to provide heat and air-conditioning at times in addition to
those specified in the preceding sentence at Tenant's expense as Additional
Rent, provided Tenant gives Landlord prior reasonable written notice requesting
such after-hours service. Landlord reserves the right to charge Tenant for said
after-hours services at a reasonable rate as determined by Landlord from time to
time.
(4) A card-entry or other controlled-access system to the Premises.
(5) Electricity and electrical facilities to furnish commercially
reasonable amounts of electricity for equipment and machinery of Tenant
installed pursuant to Section 10 of this Sublease.
(B) In the event any public utility supplying energy requires, or
government law, regulation, executive or administrative order results in a
requirement, that Landlord or Tenant must reduce, or maintain at a certain
level, the consumption of electricity for the Premises or Building, which
affects the heating, air-conditioning, lighting, or hours of operation of the
Premises or Building, Landlord and Tenant shall each adhere to and abide by said
laws, regulations or executive orders without any reduction in Base Rent.
(C) Landlord's inability to furnish, to any extent or for any reason, these
defined services, or any interruption or cessation thereof, shall not render
Landlord liable for damages to either person or property, nor be construed as an
eviction of Tenant, nor work an abatement of any portion of rent, nor relieve
Tenant from fulfillment of any covenant or agreement hereof. Should any of the
Building equipment or machinery cease to function properly for any cause,
Landlord shall use reasonable diligence to repair the same promptly, but Tenant
shall have no claim for damages or for a rebate of any portion of rent on
account of any interruptions in any services occasioned thereby or resulting
therefrom.
(D) Tenant shall have no obligation to pay any part of the real estate
taxes or operating expenses relating to the Premises or Prime Lease Premises,
except as otherwise expressly provided in this Sublease.
12. INSURANCE
Tenant shall comply with all of the insurance requirements and obligations
of Landlord, as tenant under the Prime Lease, upon the terms and conditions set
forth in Article 10 (or in any other article or section) of the Prime Lease.
13. TENANT'S INDEMNITY
Tenant shall save Landlord and Prime Landlord harmless, and shall exonerate
and indemnify Landlord and Prime Landlord from and against any and all claims,
liabilities or penalties asserted by or on behalf of any person, firm,
corporation or public authority on account of injury, death, damage or loss to
person or property in or about the Premises and the Prime Lease Premises arising
out of the use or occupancy of the Premises by Tenant or by any person claiming
by, through or under Tenant (including, without limitation, all subtenants,
invitees, agents, contractors, patrons, employees and customers of Tenant), or
arising out of any delivery to or service supplied to the Premises, or on
account of or based upon anything whatsoever done on or occurring in or about
the Premises or Prime Lease Premises, except that Landlord shall not be
indemnified to the extent of any damage caused by Landlord's gross negligence or
willful misconduct. In respect of all of the foregoing, Tenant shall indemnify
Landlord and Prime Landlord from and against all costs, expenses (including
reasonable attorneys' fees), and liabilities incurred in or in connection with
any such claim, action or proceeding brought thereon.
14. PARKING
Landlord shall provide to Tenant up to fifty-two (52) unreserved parking
spaces in the parking lot serving the Prime Lease Premises. Landlord and Tenant
shall mutually agree upon the location of such parking spaces. Tenant shall not
use, and shall not permit its employees, subtenants, visitors and invitees to
use, more than the fifty-two (52) parking spaces allocated to Lessee for use by
its employees, visitors, customers and invitees.
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<PAGE> 7
15. SIGNAGE
Subject to the consent of Prime Landlord and any covenants, conditions,
restrictions and regulations governing such signage, Landlord shall provide to
Tenant, at Tenant's expense, the following signage:
(A) Suite entry signage on the door of the Premises; and
(B) Monument signage on the lawn of the Prime Lease Premises.
The design, size, style and location of such signage shall be subject to the
approval of Landlord and Prime Landlord, and should Prime Landlord disapprove or
withhold its consent to any such signage, or should any covenant, condition,
restriction or regulation prohibit any such signage, Landlord shall have no
further obligation to provide such signage to Tenant. Tenant shall pay to
Landlord as Additional Rent all design, purchase, installation, maintenance,
repair and removal costs incurred by Landlord in connection with such signage.
16. TENANT'S OBLIGATIONS UPON TERMINATION OF THIS SUBLEASE
Tenant shall keep the Premises in good order and condition and, at the
expiration or sooner termination of this Sublease, shall surrender and deliver
up the same, broom clean and in good order and condition, as otherwise required
by this Sublease and by the Prime Lease, ordinary wear and tear and damage by
fire and other casualty excepted (unless the same results from the act of Tenant
or its subtenants, agents, contractors or employees). Tenant shall repair any
damage to the Premises or the Prime Lease Premises caused by removal of any
property by or on behalf of Tenant. Any of Tenant's or its subtenant's personal
property, fixtures or equipment which shall remain in the Premises after the
expiration or sooner termination of this Sublease shall be deemed conclusively
to have been abandoned and either may be retained by Landlord as its property or
may be disposed of in such manner as Landlord may see fit, at Tenant's sole cost
and expense.
17. BROKERS
Each of Landlord and Tenant represents that it has dealt only with Cushman
& Wakefield of California, Inc. (in the case of Landlord) and no one (in the
case of Tenant) and with no other brokers. Landlord shall be responsible for any
commission or fee due or owing to said broker(s) under a separate agreement.
Each party shall indemnify and hold harmless the other from and against any and
all claims of any other broker claiming to have dealt with such party.
18. DEFAULTS
(A) Each of the following shall be a "Default of Tenant":
(1) Tenant shall fail to make any payment of Rent, Additional Rent or
any other payment Tenant is required to make when such payment is due and such
failure shall continue for five (5) days after notice from Landlord to Tenant.
(2) Tenant shall fail to perform any other obligation of Tenant
pursuant to this Sublease (either directly or derivatively pursuant to
obligations arising under the Prime Lease) and such failure shall continue for
ten (10) days after notice from Landlord; provided, if such failure cannot be
cured solely by the payment of money and more than ten (10) days are reasonably
required for its cure, a Default of Tenant shall not be deemed to have occurred
if Tenant shall commence such cure within said ten (10) day period and
thereafter diligently prosecute such cure to completion.
(3) Tenant or any guarantor of Tenant shall (u) file a voluntary
petition in bankruptcy or insolvency, or (v) be adjudicated bankrupt or
insolvent, or (w) take any action seeking or consenting to or acquiescing in a
reorganization arrangement, composition, liquidation, dissolution, appointment
of a trustee or receiver or liquidator or
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similar relief under any federal or state bankruptcy or other law or (x) make an
assignment for the benefit of creditors, or (y) dissolve or liquidate or adopt
any plan or commence any proceeding, the result of which is intended to include
dissolution or liquidation, or (z) fail to discharge, within thirty (30) days,
any proceeding brought against Tenant seeking the relief described in clause (w)
above.
(4) Tenant's leasehold interest shall be taken on execution.
(5) A custodian or similar agent is authorized or appointed to take
charge of all or substantially all of the assets of Tenant or any guarantor or
Tenant.
(6) An order is entered in any proceeding by or against Tenant or any
guarantor of Tenant decreeing or permitting the dissolution of Tenant or any
guarantor of Tenant or the winding up of its affairs.
19. REMEDIES
(A) In the event of a Default of Tenant, Landlord (by and through its
agents, if and as appropriate) shall have the power and right:
(1) To enforce any remedies generally available at law or in equity to
a landlord on account of a default by a tenant.
(2) To obtain injunctive relief against any continuing Default of
Tenant.
(3) To maintain this Sublease in effect and collect the Rent,
Additional Rent and any other payments due from Tenant to Landlord.
(4) In addition to and not in derogation of any remedies for any
preceding breach of covenant, immediately or at any time thereafter without
demand or notice and with or without process of law (forcibly, if necessary) to
enter into and upon the Premises or any part thereof or mail a notice of
termination addressed to Tenant, and repossess the same as of Landlord's former
estate and expel Tenant and those claiming through or under Tenant and remove
its and their effects (forcibly, if necessary) without being deemed guilty of
any manner of trespass or wrongful eviction, and without prejudice to any
remedies which might otherwise be used for arrears of rent or prior breach of
covenant, and upon such entry or mailing as aforesaid this Lease shall
terminate, Tenant hereby waiving all statutory rights to the Premises (including
without limitation rights of redemption, if any, to the extent such rights may
be lawfully waived) and Landlord, without notice to Tenant, may store Tenant's
effects, and those of any person claiming through or under Tenant, at the
expense and risk of Tenant, and, if Landlord so elects, may sell such effects at
public auction or private sale and apply the net proceeds to the payment of all
sums due to Landlord from Tenant, if any, and pay over the balance, if any, to
Tenant.
(B) In the event of any termination pursuant to Section 17(A), Tenant shall
pay the Rent, Additional Rent and other charges payable hereunder up to the time
of such termination, and thereafter Tenant, until the end of what would have
been the term of this Sublease in the absence of such termination, less the net
proceeds, if any, of any reletting of the Premises, after deducting all
reasonable expenses in connection with such reletting, including, without
limitation, all repossession costs, brokerage commissions, legal expenses,
attorneys' fees, advertising, expenses of employees, alteration costs and
expenses of preparation for such reletting. Tenant shall pay such current
damages to Landlord monthly on the days on which the Rent would have been
payable hereunder if this Sublease had not been terminated.
(C) At any time after such termination, whether or not Landlord shall have
collected any such current damages, Land lord may elect to collect as liquidated
final damages and in lieu of all such current damages beyond the date of such
demand an amount equal to the excess, if any of the Rent, Additional Rent and
other charges as hereinbefore provided which would be payable hereunder from the
date of such demand would be the same as payments required for the immediately
preceding twelve calendar months (or if less than twelve calendar months have
expired since the Commencement Date, the payments required for such lesser
period projected to an annual amount) for what would be the
8
<PAGE> 9
then unexpired term of this Sublease if the same remained in effect, over the
then fair net rental value of the Premises for the same period. Nothing
contained in this Sublease shall, however, limit or prejudice the right of
Landlord to prove for and obtain in proceedings for bankruptcy or insolvency by
reason of the termination of this Sublease, an amount equal to the maximum
allowed by any statute or rule of law in effect at the time when, and governing
the proceedings in which, the damages are to be proved, whether or not the
amount be greater than, equal to, or less than the amount of the loss or damages
referred to above.
(D) In case of any Default by Tenant, re-entry, expiration and
dispossession by summary proceedings or otherwise, Landlord may (i) relet the
Premises or any part or parts thereof, either in the name of Landlord or
otherwise, for a term or terms which may at Landlord's option be equal to or
less than or exceed the period which would otherwise have constituted the
balance of the term of this Sublease and may grant concessions or free rent to
the extent that Landlord considers advisable and necessary to relet the same and
(ii) may make such reasonable alterations, repairs and decorations in the
Premises as Landlord in its sole judgment considers advisable and necessary for
the purpose of reletting the Premises; and the making of such alterations,
repairs and decorations shall not operate or be construed to release Tenant from
liability hereunder as aforesaid. Landlord shall in no event be liable in any
way whatsoever for failure to relet the Premises, or, in the event that the
Premises are relet, for failure to collect the rent under such reletting.
(E) To the fullest extent permitted by law, Tenant hereby expressly waives
any and all rights of redemption or of limitation or exemption from liability or
stays or other rights that contravene the rights granted to Landlord hereunder
or under any present of future laws in the event of Tenant being evicted or
dispossessed, or in the event of Landlord obtaining possession of the Premises
by reason of the violation by Tenant of any of the covenants and conditions of
this Sublease. Any and all rights and remedies which Landlord may have under
this Sublease, and at law and equity (including without limitation) actions at
law for direct, indirect, special and consequential (foreseeable and
unforeseeable) damages, for Tenant's failure to comply with its obligations
under the Sublease shall be cumulative and shall not be deemed inconsistent with
each other, and any two or more of all such rights and remedies may be exercised
at the same time insofar as permitted by law.
(F) At any time with or without notice, Landlord shall have the right, but
shall not be required, to pay such sums or do any act which requires the
expenditure of monies which may be necessary or appropriate by reason of the
failure or neglect of Tenant to comply with any of its obligations under this
Sublease (irrespective of whether the same shall have ripened into a Default of
Tenant), and in the event of the exercise of such right by Landlord, Tenant
agrees to pay to Landlord forthwith upon demand, as Additional Rent, all such
sums including reasonable attorneys fees, together with interest thereon at a
rate equal to the lesser of 5% over the then applicable Wall Street Journal
Prime Rate (U.S. money center commercial banks) (the "Prime Rate"), or the
maximum rate permitted by law.
(G) The failure of Landlord to seek redress for violation of, or to insist
upon the strict performance of, any covenant or condition of this Sublease shall
not be deemed a waiver of such violation nor prevent a subsequent act, which
would have originally constituted a violation, from having all the force and
effect on an original violation. The receipt by Landlord of rent with knowledge
of the breach of any covenant of this Sublease shall not be deemed to have been
a waiver of such breach by Landlord unless such waiver be in writing signed by
the party to be charged. No consent or waiver, express or implied, by Landlord
to or of any breach of any agreement or duty shall be construed as a waiver or
consent to or of any other breach of the same or any other agreement or duty.
(H) No acceptance by Landlord of a lesser sum than the Rent, Additional
Rent or any other charge then due shall be deemed to be other than on account of
the earliest installment of such rent or charge due, nor shall any endorsement
or statement on any check or any letter accompanying any check or payment as
rent or other charge be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the balance of such installment or pursue any other remedy in this Sublease
provided.
9
<PAGE> 10
20. SUBORDINATION TO THE PRIME LEASE
(A) In addition to Tenant's obligations under this Sublease and to the
extent not inconsistent with this Sublease, Tenant shall observe and perform all
of the terms, covenants and conditions of the Prime Lease which Landlord, as
tenant under the Prime Lease, is obligated to observe and perform with respect
to the Premises, to the same extent as if such terms, covenant and conditions of
the Prime Lease were set forth at length in this Sublease but incorporating such
provisions herein shall not obligate Landlord or be construed as causing
Landlord to assume or agree to perform any obligations assumed by the Prime
Landlord under the Prime Lease. Tenant shall not do, omit to do or permit to be
done or omitted any act in or related to the Premises which could constitute a
breach or default under the terms of the Prime Lease or result in the
termination of the Prime Lease by the Prime Landlord, and Tenant hereby
indemnifies and holds harmless Landlord for any claims, losses or damages
resulting from or suffered by Landlord as a result of Tenant's breach of the
foregoing covenant.
(B) Notwithstanding the foregoing, Tenant shall have no option to renew or
extend the term of this Sublease or right of first negotiation to lease
additional premises in the Building.
21. LIMITATIONS ON LANDLORD'S LIABILITY
(A) If Landlord assigns its leasehold estate in the Prime Lease Premises,
Landlord shall be released of its obligations hereunder and shall have no
further obligation to Tenant arising thereafter. Tenant shall then recognize and
attorn to Landlord's assignee as Landlord of this Sublease. The Landlord, upon
serious contemplation of a lease assignment, agrees to promptly notify Tenant
and to keep Tenant informed in that regard.
(B) Except as otherwise expressly stated herein, Landlord shall not be
required to perform any of the covenants and obligations of the Prime Landlord
under the Prime Lease. If the Prime Landlord shall default in the performance of
any of its obligations under the Prime Lease or breach any provision of the
Prime Lease pertaining to the Premises, such default shall not constitute an
actual or constructive eviction nor result in any offset, abatement or deduction
against the Base Rent, Additional Rent or other charges due under this Sublease.
In any such event, Tenant shall promptly notify Landlord of Prime Landlord's
breach, and Landlord shall make a demand upon Prime Landlord. If this demand
does not result in a satisfactory response, Landlord may elect to institute an
action or proceeding, in accordance with and not contrary to any provision of
the Prime Lease, against the Prime Landlord under the Prime Lease for the
enforcement of the Prime Landlord's obligations thereunder.
(C) In no event shall Landlord be liable to Tenant for any indirect or
consequential damages.
22. FIRE, CASUALTY AND EMINENT DOMAIN
In the event of a fire, casualty or taking that affects the Premises but
does not result in termination of the Prime Lease, the rent hereunder shall be
abated to the extent that the rent payable by Landlord under the Prime Lease
with respect to the Premises shall be abated. The provisions of this Section 20
shall be considered an express agreement governing any cause of damage or
destruction to the Premises by fire or other casualty, and no local or state
statute, law, rule or regulation, now or hereafter in effect, providing for such
a contingency shall have any application in such case, to the extent permitted
by law.
23. LANDLORD ACCESS
Landlord and Landlord's agents, contractors and employees shall have the
right to enter onto the Premises at reasonable times, from time to time, upon
reasonable notice to Tenant (which notice may be oral and shall not be required
in the event of emergency) to ascertain whether Tenant is in compliance with the
provisions of this Sublease, to perform such inspections or to make such repairs
as Landlord deems advisable or necessary, to comply with Landlord's obligations
hereunder or under the Prime Lease, to perform work with respect to the
remainder of the Prime Lease Premises and (within
10
<PAGE> 11
the last year of the Sublease term) to exhibit the Premises.
24. GOVERNING LAW
This Sublease shall be construed and interpreted in accordance with the
laws of the State of California.
25. INTEREST ON UNPAID RENT
All installments of Base Rent, Additional Rent and all other charges which
are not paid within five (5) days after the date when due shall bear interest
from the date due until paid, at a rate equivalent to the lesser of 5% over the
Prime Rate, or the maximum rate permitted by law.
26. HOLDOVER
If Tenant holds possession of the Premises after the Expiration Date or
sooner termination of this Sublease, Tenant shall become a tenant at sufferance
on a day-to-day basis upon the terms specified herein at 200% of the then
existing Base Rent, Additional Rent and other charges. In addition, Tenant shall
be responsible for any and all damages suffered by Landlord, including, without
limitation, damages or costs resulting from actions initiated by third parties
(including the Prime Landlord) as a result of said holding over. Such tenancy
shall not constitute a renewal of this Sublease.
27. NOTICES
Any notice, statement, certificate, consent, approval, disapproval, request
or demand required or permitted to be given in this Sublease shall be in writing
and delivered by hand, by Federal Express next business day delivery (or other
comparable commercial courier night business day delivery service), or sent by
United States mail, registered or certified, postage prepaid, addressed, as the
case may be:
To Landlord at the following address:
Global Associates, Ltd.
7600 Leesburg Pike
West Building
Falls Church, Virginia 22043-2004
with a copy to:
Holland & Knight LLP 2100 Pennsylvania Avenue, N.W.
Suite 400
Washington, D.C. 20037
Attn: William Mutryn, Esq.
and to Tenant, at the Premises.
Either party by notice to the other may change the place where notices are
to be sent or delivered. In no event shall notice have to be sent on behalf of
either party to more than two (2) persons. Mailed notices will be deemed served
three (3) business days after mailing certified or registered mail properly
addressed with postage prepaid, provided the same are received in the ordinary
course of business.
11
<PAGE> 12
28. LANDLORD'S AND TENANT'S POWER TO EXECUTE
Landlord and Tenant each covenants, warrants and represents that it has
full power and proper authority to execute this Sublease.
29. ENTIRE AGREEMENT
This Sublease contains the entire agreement between Landlord and Tenant and
can be changed only by a signed agreement.
30. CONSENT TO SUBLEASE BY PRIME LANDLORD
This Sublease shall be contingent upon and shall not become operative
unless and until the Prime Landlord has given to Landlord its consent hereto.
Landlord shall not be responsible for the failure of the Prime Landlord to
consent to this Sublease or the failure or refusal of Prime Landlord to grant
any consent of Prime Landlord required by this Sublease or the Prime Lease.
Should the Prime Landlord not grant its consent to this Sublease within thirty
(30) days from the date hereof, Landlord and Tenant shall be released from all
obligations with respect hereto and neither shall have any further rights at law
or in equity with respect to this Sublease. It is hereby acknowledged by the
parties that Prime Landlord's consent to this Sublease shall not make Prime
Landlord a party to this Sublease, shall not create any contractual liability or
duty on the part of Prime Landlord and shall not in any manner increase,
decrease or otherwise affect the rights and obligations of Prime Landlord and
Landlord, as lessor and lessee, with respect to the Prime Lease Premises.
31. BINDING EFFECT
The submission of this document for examination and negotiation does not
constitute an offer to sublease or a reservation of, or option for, the Premises
and Tenant shall have no right to the Premises hereunder until the execution
hereof by both Landlord and Tenant. Once fully executed, all the covenants,
agreements and undertakings in this Sublease contained shall extend to and be
binding upon the legal representatives, successors and assigns of the respective
parties hereto, the same as if they were in every case named and expressed, but
nothing herein shall be construed as a consent by Landlord to any assignment or
subletting by Tenant of any interest of Tenant in this Sublease.
12
<PAGE> 13
32. MISCELLANEOUS
If any provisions of this Sublease shall to any extent be invalid, the
remainder of this Sublease shall not be affected thereby. There are no oral or
written agreements between Landlord and Tenant affecting this Sublease. This
Sublease may be amended, and the provisions hereof may be waived or modified,
only by instruments in writing executed by Landlord and Tenant. The titles of
the several Sections contained herein are for convenience only and shall not be
considered in construing this Sublease. Except as herein otherwise provided, the
terms hereof shall be binding upon and shall inure to the benefit of the
successors and assigns, respectively, of Landlord and Tenant. If two or more
parties are named as Tenant herein, each of such party shall be jointly and
severally liable for the obligations of the Tenant hereunder, and Landlord may
proceed against any one without first having commenced proceedings against any
other of them. Each term and each provision of this Sublease to be performed by
Tenant shall be construed to be both an independent covenant and a condition.
The reference contained to successors and assigns of Tenant is not intended to
constitute a consent to assignment of Tenant. Except as otherwise set forth in
this Sublease, any obligations of Tenant (including, without limitation, rental
and other monetary obligations, repair obligations and obligations to indemnify
Landlord), shall survive the expiration or sooner termination of this Sublease,
and Tenant shall immediately reimburse Landlord for any expense incurred by
Landlord in curing Tenant's failure to satisfy any such obligation
(notwithstanding the fact that such cure might be effected by Landlord following
the expiration or earlier termination of this Sublease). If any installment of
Base Rent or Additional Rent is collected by or through an attorney, or if
Landlord shall require the services of an attorney after a breach by Tenant of
any of the terms, covenants or conditions of this Sublease, Tenant shall pay to
Landlord the reasonable fees of such attorney regardless of whether formal legal
proceedings have been commenced.
IN WITNESS WHEREOF, Landlord and Tenant have each caused these presents to
be executed, as a sealed instrument, as of the date first above written.
LANDLORD:
GLOBAL ASSOCIATES, LTD.
Attest: /s/Cathy Francis By: /s/ JAMES T. LUNNEY
--------------------------------
Name:James T. Lunney
Title:President SPS
TENANT:
NORRIS COMMUNICATIONS, INC.
Attest:/s/ Cathy Francis By: /s/ ALFRED H. FALK
--------------------------------
Name:Alfred H. Falk
Title:President
AMERICAN TECHNOLOGY CORPORATION
Attest:/s/Cathy Francis By: /s/ ROBERT PUTNAM
--------------------------------
Name:Robert Putnam
Title:President
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 332,998
<SECURITIES> 0
<RECEIVABLES> 214,352
<ALLOWANCES> 36,330
<INVENTORY> 1,605,208
<CURRENT-ASSETS> 2,118,686
<PP&E> 423,618
<DEPRECIATION> 240,460
<TOTAL-ASSETS> 2,342,051
<CURRENT-LIABILITIES> 1,965,954
<BONDS> 500,000
<COMMON> 34,060
0
0
<OTHER-SE> (157,963)
<TOTAL-LIABILITY-AND-EQUITY> 2,342,051
<SALES> 162,208
<TOTAL-REVENUES> 389,059
<CGS> 154,900
<TOTAL-COSTS> 297,428
<OTHER-EXPENSES> 372,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,490
<INCOME-PRETAX> (134,173)
<INCOME-TAX> 0
<INCOME-CONTINUING> (134,173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (134,173)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
