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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION JANUARY 15, 1997
REGISTRATION NO. 333-7709
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 2
ON FORM SB-2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
NORRIS COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
-------------------------
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DELAWARE 3651 NONE
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code No.)
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12725 STOWE DRIVE
POWAY, CALIFORNIA 92064
(619) 679-1504
(Address and telephone number of principal executive offices and
principal place of business)
-------------------------
ELWOOD G. NORRIS, CHAIRMAN
NORRIS COMMUNICATIONS, INC.
12725 STOWE DRIVE
POWAY, CALIFORNIA 92064
(619) 679-1504
(Name, address and telephone number of agent for service)
Copy to:
CURT C. BARWICK, ESQ.
HIGHAM, MCCONNELL & DUNNING
28202 CABOT ROAD, SUITE 450
LAGUNA NIGUEL, CA 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/
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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
- ------------------------------------------------------------------------------------------------------------------
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Common Stock, no par value 3,699,279 Shares (1) $1.16 (3) $4,291,164 (3) $1,480
- -----------------------------------------------------------------------------------------------------------------
Common Stock, no par value 5,003,857 Shares (2) $0.94 (3) $4,703,626 (3) $1,622
- ------------------------------------------------------------------------------------------------------------------
Total Registration Fee $3,102
- ------------------------------------------------------------------------------------------------------------------
Previously Paid $3,102
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Total Due $ 0
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(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. Estimated solely for purposes of calculating the
registration fee in connection with this Registration Statement.
(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. Estimated solely
for purposes of calculating the registration fee in connection with the
Registration Statement.
(3) 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 and on August 27,
1996, as reported by NASDAQ, was $1.16 and $0.94, respectively.
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.
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<PAGE> 3
NORRIS COMMUNICATIONS, INC.
CROSS REFERENCE SHEET
Between Items of Form SB-2 and Prospectus
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Registration Statement Item and Heading Prospectus Caption
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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
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<TABLE>
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18. Description of Property Business
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market Price for Common Equity and Market Price 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
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<PAGE> 5
PROSPECTUS
8,703,136 SHARES OF COMMON STOCK ($.001 PAR VALUE)
NORRIS COMMUNICATIONS, INC.
This Prospectus relates to 8,703,136 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 and (ii) 6,037,062 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. 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 8 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 "Plan of Distribution."
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 on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") under the NASDAQ symbol
"NCII." On January 13, 1997, the bid and asked prices per share, as reported by
NASDAQ, were $____ and $_____ respectively.
-------------------------------------
The date of this Prospectus is January 15, 1997.
<PAGE> 6
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.
The Company intends to distribute to its stockholders annual reports
containing audited financial statements with a report thereon by independent
certified public 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.
3
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TABLE OF CONTENTS
Prospectus Summary........................................................... 5
Risk Factors..................................................................8
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...................................................................28
Certain Transactions.........................................................31
Principal Shareholders.......................................................32
Selling Shareholders.........................................................33
Description of Securities....................................................34
Legal Matters................................................................36
Experts......................................................................36
Further Information..........................................................36
Index to Financial Statements................................................F-1
4
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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 engaged in the development, manufacture and marketing of
electronic 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
manufacturing and marketing the FLASHBACK recording device, a newly developed
proprietary technology for information storage and retrieval. In addition, the
Company, through Primus Contract Manufacturing Services, Inc. ("Primus"),
provides contract manufacturing services for circuit board assemblies, systems,
and subsystems. The Company also holds as an investment, subject to a third
party option, 1,033,334 common shares 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. The Company believes the FLASHBACK fits into the
Company's strategy of developing practical electronic products with broad
applications. The FLASHBACK is being marketed by the Company's subsidiary, NCI.
5
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The address of the Company's principal executive office is 12725 Stowe
Drive, Poway, California 92064 and its telephone number is (619) 679-1504. The
Company's primary operating facilities are located at that address.
THE SELLING SHAREHOLDER OFFERING
Common Stock outstanding as
of September 30, 1996 (1) 22,308,611 shares
Common Stock offered by
Selling Shareholders (2) 8,703,136 shares
NASDAQ Symbol NCII
Risk Factors The securities offered
hereby involve a high degree
of risk. See "Risk Factors"
and "Selling Shareholders."
(1) Does not include 8,947,118 shares (subject to adjustment) issuable upon
the exercise of presently outstanding options and warrants, including the
Warrants.
(2) As set forth on the cover of this Prospectus, represents 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 and (ii)
6,037,062 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.
6
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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, 1996 and 1995, 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, 1996, and the unaudited consolidated statements of operations
information for the six months ended September 30, 1996 and 1995, 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.
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Fiscal Year Ended March 31, Six Months Ended September 30,
-------------------------- ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
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OPERATIONS DATA:
Revenues $ 1,328,502 $ 5,593,081 $ 301,543 $ 806,603
Cost of sales 4,413,814 6,729,320 1,049,318 2,192,401
Operating expense 5,182,231 6,006,117 2,910,077 2,461,354
Loss for the period (8,267,543) (7,142,356) (3,687,852) (3,847,156)
Loss per share (0.63) (0.88) (0.19) (0.33)
Weighted average
number of common
shares outstanding 13,065,095 8,097,624 19,641,347 11,697,510
</TABLE>
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March 31, September 30, 1996
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1996 1995
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BALANCE SHEETS DATA:
Total assets $ 7,817,144 $ 8,658,632 $ 5,870,338
Working capital 1,056,029 1,665,581 2,781,594
Current liabilities 5,351,811 4,838,342 1,733,635
Long term liabilities 3,000,000 -- --
Stockholders' equity
(deficiency) (534,667) 3,820,290 4,136,703
</TABLE>
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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 Products. 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. The Company's future growth is greatly
dependent upon the successful marketing of the FLASHBACK family of 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 MOBILE OFFICE PACKAGE. The MOBILE
OFFICE PACKAGE is currently in production and as of December 31, 1996,
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.
The Company commenced its initial production of the product during the quarterly
period ended December 31, 1994 and commenced full commercial scale production
during the quarterly period ended September 30, 1995, but there can be no
assurance that such product 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 five of its past six fiscal years with operating losses from
continuing operations of $8,268,000, $7,142,000, $2,442,000, $4,427,000 and
$236,000 for the fiscal years ended March 31, 1996, March 31, 1995, March 31,
1994, March 31, 1993 and March 31, 1991, respectively. The Company,
additionally, has reported a loss for the period ended September 30, 1996 of
$3,657,852. The losses for fiscal 1996 and the first six months of fiscal 1997
resulted primarily from the higher costs associated with bringing the Company's
new FLASHBACK product to market and the decline in revenues and increased
operating losses from NCI's contract manufacturing operations. See "Product
Line; Reliance on Major Customers." In this regard, management anticipates
research, development and marketing costs associated with the FLASHBACK and new
FLASHBACK products for fiscal 1997 to continue at levels equivalent to prior
years. The Company's losses have increased and are expected to continue and/or
increase until such time as the Company is able to manufacture and sell the
FLASHBACK family of products in commercial quantities and/or reestablish the
Company's contract manufacturing business and increase its historical operating
margins. 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, increasing
losses from operations and cash flow deficits, (ii) substantial inventory
buildup during fiscal 1995 and fiscal 1996 consisting of raw materials,
components and finished product to be utilized in the manufacture and sale of
its FLASHBACK product and material decline in inventory turnover, (iii)
materially increased net losses and cash flow deficits from operations during
fiscal 1996 and (iv) the likelihood that the Company may be unable to meet its
debts as they come due, raise
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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
increasing volume of existing products and adding new products, improving
pricing, reducing manufacturing costs and obtaining new revenues from the OEM
and licensing division. There can be no assurance the Company can successfully
implement its plan to improve operations and/or achieve positive gross margins
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, 1996, the
Company had working capital of $2.8 million, compared to working capital of $1.1
million at March 31, 1996. The Company had approximately $3.2 million of working
capital invested in inventories at September 30, 1996, comparable to the balance
at March 31, 1996. The increase in working capital is a result of the Company's
financing activities offset by continuing losses which consumed working capital
during the period. Approximately $4.6 million in cash was used in operating
activities by the Company in the six months ended September 30, 1996 which
included a $1.4 million reduction in accounts payable and accrued liabilities.
During the quarter ended September 30, 1996, the Company retired the remaining
$307,416 obligation related to the demand loan payable to CVD Financial
Corporation ("CVD"). During the period, $3 million of long-term convertible
notes, plus accrued interest, were converted into Common Stock. At December 31,
1996, the Company had no long-term debt nor any bank lines of credit or related
financing facilities. In June, July and August, 1996, the Company obtained
equity from the sale of Common Stock and the Warrants for cash of approximately
$5.6 million. The Company estimates that its cash position, adjusted for the
above-described items and assuming no increase in revenues, can provide the
Company with sufficient working capital for the next three months. If there is
no increase in revenues, expenditures and level of operations remain at prior
levels and there is no contribution from operations, the Company estimates it
would require a minimum of $2.4 million in the fourth quarter of fiscal 1997 to
continue operating for the next twelve months. The Company currently estimates
that additional funding could be obtained through increased sales of existing
and new products through new retail and OEM channels, success in obtaining
additional contract manufacturing business and the ability of the licensing
division to generate revenue, however there can be no assurances thereof. The
Company may, from time to time, seek additional funds through lines of credit,
public or private debt or equity financing. The Company might require additional
capital to finance future developments, new products, production, marketing,
acquisitions or extraordinary expansion of facilities in accordance with its
business strategy. There can be no assurances that additional capital will be
available when needed. In order to fund its working capital requirements, the
Company must achieve a profitable level of operations, obtain lines of credit
and raise additional funds through various financing methods, including equity
offerings, which may result in dilution to shareholders. No assurance can be
given that additional financing, including new lines of credit, can be obtained
or obtained under acceptable terms. The failure to raise additional funds would
have a material adverse effect on the Company's ability to operate profitably,
and would force the Company to reduce or curtail operations.
Disruption of Contract Manufacturing Business; Historical Dependence Upon
Renewal of Short-Term Contracts. The Company is currently utilizing its contract
manufacturing operations to build the Company's new FLASHBACK product. In so
doing, the Company de-emphasized its contract manufacturing business, upon which
it has historically been dependent for revenue. This occurrence disturbed the
long-standing relationships which the Company has had with certain of its
contract manufacturing customers; such relationships have historically been
predicated upon one-year contracts, which in the past have been renewed for
subsequent years. During fiscal 1997, the Company has been attempting to
reestablish its contract manufacturing business. Notwithstanding goodwill and
pre-existing relationships, no assurance can be given that such relationships
and contracts will continue to be in place or renewed in the future, that the
Company will
9
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acquire new contracts or that the Company will elect to maintain contract
manufacturing as a separate line of business. In addition, the Company's
contract manufacturing operations are subject to intense competition from
significantly larger domestic competitors, from overseas assemblers with far
lower costs and from other intermediate-size assemblers and many smaller shops.
The contract manufacturing services provided by the Company are available from
many independent sources as well as in-house manufacturing capabilities of
current and potential customers. Some of the Company's larger competitors,
including SCI Systems, Inc., Avex Electronics, Inc., Solectron Corporation,
Comptronix Corporation, and Benchmark Electronics, Inc. have greater financial,
manufacturing and marketing resources than the Company and each have annual
sales in excess of $50 million. These competitors generally operate regionally
from multiple plant locations. Such competitors and others continue to expand
regionally and although none of the named competitors have a regional
manufacturing facility in San Diego County, the establishment of such a facility
by a competitor could have an adverse effect on the Company's contract
manufacturing operations, should it elect to maintain this line of business in
the future.
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. Prior to the introduction of
the FLASHBACK in December 1994, substantially all of the Company's revenues had
been derived from its contract manufacturing operations. Contract manufacturing
accounted for over 90% of total revenues in fiscal 1995. However, as a result of
the termination of certain contract manufacturing services, the reconfiguration
of manufacturing to accommodate FLASHBACK production and other changes, sales of
the FLASHBACK accounted for approximately 82% of revenues in fiscal 1996. As a
result of these changes and the introduction of FLASHBACK prior operating
results are not indicative of future results. Moreover, demand for the Company's
FLASHBACK recorder is uncertain as the Company is 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 a high level of competition. Demand for
FLASHBACK 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 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 fiscal 1996, sales of the
Company's FLASHBACK product to its three largest customers accounted for
approximately 29% of its revenues. There can be no assurance that any such
customers will continue to purchase the FLASHBACK 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.
10
<PAGE> 14
Dependence Upon Major Suppliers. The Company "box-builds" 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 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.
Government Regulation. Management believes that the Company's activities
conform to present Federal, state and local environmental and other regulations.
There can be no assurance that current laws and regulations will not be changed
or interpreted in such a manner as to require the Company to obtain licenses or
approvals to conduct its business or otherwise restrict its activities. Although
the Company has not experienced any materially adverse effects on its operations
from governmental regulations, there can be no assurance that such regulations
will not adversely effect the Company in one or more ways, including, but not
limited to, the need for additional capital equipment and/or potential liability
if it is determined that the Company improperly discharged or disposed of a
hazardous substance.
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 contract manufacturing business and its
FLASHBACK product. Attracting new customers requires substantial marketing and
sales efforts and expenditure of significant funds to create awareness of and
demand for the Company's products. While the Company has recently hired and put
into place a sales and marketing structure for its FLASHBACK product which
includes an emphasis in telemarketing, computer retail channel, OEM, private
labeling and strategic alliances, there can be no assurance that the Company's
expanded marketing efforts in new areas 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 senior management, 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 38%
of the issued and outstanding shares of ATC. Robert Putnam, the Secretary and a
Director of the Company, is also the President and Chief Executive Officer of
ATC. Mr. Putnam is the beneficial owner of approximately 8% 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 FLASHBACK product and related
companion products (upon completion of their development), to the electronics
and
11
<PAGE> 15
computer software markets, including sales to markets yet to be established.
There can be no assurance that the Company's marketing strategy will be
effective and that consumers will buy the Company's FLASHBACK product. The
failure of the Company to penetrate its projected markets would have a material
adverse effect upon the Company's operations and prospects. Market acceptance of
the Company's proposed 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 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 product, 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."
Reliance on Small Number of Customers. The Company has relied on a small
number of customers for a large percentage of its FLASHBACK sales. Loss of any
major customer could have a material adverse effect on the Company's financial
condition.
Impact of Possible Delisting of Securities from NASDAQ System; Penny
Stock Regulations. The Company's Common Stock is currently quoted on NASDAQ. In
order to maintain the Company's NASDAQ listing, the Company must have at least
$2 million in assets, $1 million in capital and surplus, a minimum bid price of
$1.00 per share and two market-makers. If the Company is unable to maintain the
listing criteria, its securities will be subject to delisting from NASDAQ.
Trading, if any, in the Company's securities would thereafter be 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
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Company's securities. In
12
<PAGE> 16
addition, if the Company's securities are delisted from NASDAQ, the securities
would be subject to a rule that imposes additional sales practice requirements
on broker-dealers who sell such securities.
Shares Eligible for Future Sales. In addition to the shares of Common
Stock to be sold hereunder, 2,637,808 shares of the Company's Common Stock were
registered pursuant to a registration statement filed with the Securities and
Exchange Commission on December 16, 1994, an additional 3,854,041 shares of the
Company's Common Stock were registered pursuant to a registration statement
filed with the Securities and Exchange Commission on May 8, 1995, an additional
1,461,143 shares of the Company's Common Stock were registered pursuant to a
Registration Statement filed with the Securities and Exchange Commission on
December 12, 1995 and an additional 379,059 and 1,280,666 shares of the
Company's Common Stock were purchased in transactions closing on or about March
21, 1995 and October 26, 1995, respectively, by certain investors who were not
"U.S. Persons," as such term is defined in Regulation S adopted under the
Securities Act. An additional 4,336,167 shares of Common Stock were issued upon
the conversion of an aggregate of $3 million of 7% notes which were converted
into shares of Common Stock of the Company in or about May 1996. Future sales of
these shares could depress the market price for the Common Stock in any market
which may exist.
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
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 forwardlooking 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
13
<PAGE> 17
(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.
Possible Contingent Liability. The Company may have a liability to the
Selling Shareholders due to a possible violation of Securities and Exchange
Commission Rule 502(c) which prohibits an issuer from selling securities in a
private placement by any form of general solicitation or general advertising.
The Company has provided each of the Selling Shareholders with notice of the
possible violation 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 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 litigation against the
Company or that an unfavorable decision in such litigation will not materially
adversely affect the Company.
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock has been quoted on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) (symbol NCII) since April
6, 1993. The following table sets forth, for the periods indicated, the high and
low closing bid prices for the Common Stock, as reported by NASDAQ, for the
quarters presented. Bid prices represent inter-dealer quotations without
adjustment for markups, markdowns, and commissions.
(Stated in United States dollars per share)
High Low
Fiscal year ended March 31, 1995
First quarter [4 1/2 3 1/8
Second quarter 3 7/8 3
Third quarter 3 1/2 2 1/8
Fourth quarter 3 3/4 2 1/2
Fiscal year ended March 31, 1996
First quarter 2 1/16 1 15/16
Second quarter 1 15/16 1 3/4
Third quarter 1 1/2 1 1/4
Fourth quarter 1 27/32 1 3/4
Fiscal year ended March 31, 1997
First quarter 1 27/32 1 3/4
Second quarter 1 1/4 1 1/8]
At September 30, 1996, there were 22,308,611 shares of Common
Stock outstanding, which were held by approximately 323 shareholders of record.
14
<PAGE> 18
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.
SELECTED FINANCIAL DATA
The following summary of certain financial information relating to the
Company for the fiscal years ended March 31, 1995 and March 31, 1996, 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, 1996, and the unaudited statements of operations information for the six
months ended September 30, 1996 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, 1996 are not necessarily indicative of the results of
operations to be expected in any future quarter or the fiscal year ending March
31, 1997. 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>
<CAPTION>
Fiscal Year Ended March 31, Six Months Ended September 30,
-------------------------- ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATIONS DATA:
Revenues $ 1,328,502 $ 5,593,081 $ 301,543 $ 806,603
Cost of sales 4,413,814 6,729,320 1,049,318 2,192,401
Operating expense 5,182,231 6,006,117 2,910,077 2,461,354
Loss for the period (8,267,543) (7,142,356) (3,687,852) (3,847,156)
Loss per share (0.63) (0.88) (0.19) (0.33)
Weighted average
number of common
shares outstanding 13,065,095 8,097,624 19,641,347 11,697,510
</TABLE>
<TABLE>
<CAPTION>
March 31, September 30,
--------- -------------
1996 1995
---- ----
<S> <C> <C> <C>
BALANCE SHEETS DATA:
Total assets $ 7,817,144 $ 8,658,632 $ 5,870,338
Working capital 1,056,029 1,665,581 2,781,594
Current liabilities 5,351,811 4,838,342 1,733,635
Long term liabilities 3,000,000 -- --
Stockholders' equity
(deficiency) (534,667) 3,820,290 4,136,703
</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. Prior to the introduction of the FLASHBACK recorder
in December 1994, the revenues of the Company were generated by contract
manufacturing. Contract manufacturing accounted for over 90% of total revenues
in fiscal 1995 compared to 18% of total revenues in fiscal 1996. As a result of
the reduction of outside contract manufacturing services, the reconfiguration of
manufacturing to accommodate the production of FLASHBACK proprietary products,
i.e. FLASHBACK and accessories, the sale of FLASHBACK products accounted for the
majority of revenues for the fiscal year ended March 31, 1996. As a result of
the significant change in the source of revenue, comparisons to prior results
are less meaningful and prior results are not necessarily indicative of future
results.
The Company has incurred operating losses in seven of its past
eight years and these losses have been material. The Company incurred an
operating loss of $8.3 million in fiscal 1996. This resulted from the
development and launch of the FLASHBACK and losses incurred in reducing contract
manufacturing operations in preparation of FLASHBACK production. Since future
results are primarily dependent on proprietary product (FLASHBACK and new
products scheduled for introduction) results, the Company's losses are expected
to continue until such time as the Company is able to manufacture and sell
quantities of proprietary products at sufficient margins 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.
Since the Company utilizes its own facility and equipment for
the manufacture of proprietary products, gross margins are especially dependent
upon sales volumes as a result of a substantial fixed manufacturing overhead.
The Company estimates that its monthly fixed cash operating costs approximate
$400,000 per month. At low sales volumes it is unlikely that positive gross
margins from proprietary products can be achieved, however at higher volumes the
allocation of fixed costs over more sales can result in increasing gross
margins. Accordingly, the Company anticipates variances in gross margins from
quarter to quarter in future quarters as production is still in the early stages
and product sales volumes can vary as the various distribution channels are
launched and as a result of seasonal and other factors associated with the sale
of consumer electronic products.
Sales of and demand for the Company's FLASHBACK recorder have
not met management's expectations due to a variety of factors including
competitive pressure in the portable recording industry and insufficient
financial resources to differentiate the product from competitors. The Company
has responded by changing distribution channel emphasis to the high end business
markets, by less reliance on outside sales representatives through the hiring of
a director of sales and marketing and by educating retailers and customers on
the differences between FLASHBACK and less expensive memo recorders. The
introduction of the Company's VOICELINK computer peripheral in the second fiscal
1997 quarter is expected to open new channels of distribution and further
differentiate the Company's product offerings. Sales are expected to be subject
to significant month to month variability resulting from the limited market
penetration achieved to date, the impact of new product introductions and the
seasonal nature of demand for consumer electronic products. 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 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.
16
<PAGE> 20
On November 10, 1995, the Company announced an original
equipment manufacturer ("OEM") sales division had been created to meet the
demand for the FLASHBACK technology. The three goals of the OEM sales division
are to (i) license the microprocessor and software, (ii) design and manufacture
custom products, and (iii) offer private label branding of current Company
products. Also, the Company announced the availability of the Norris FlashFile
System ("NFFS") as a development tool for individuals and companies preparing to
use flash memory in their systems and/or products. The Company anticipates, but
there can be no assurance, that OEM revenues will become a significant component
of future revenues of the Company.
Results of Operations. For the fiscal year ended March 31,
1996, the Company reported revenues of $1.3 million, 76% less than revenues of
$5.6 million for fiscal 1995. The decrease in revenues is due to FLASHBACK sales
not meeting expectations and not achieving sales levels comparable to prior
contract manufacturing revenues. Fiscal 1996 revenues are primarily from sales
of FLASHBACK. Fiscal 1995 revenues were primarily from the operations of the
contract manufacturing business. A substantial portion of the Company's
FLASHBACK 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.
For fiscal 1996, the Company reported a gross loss of $3.1
million or 232% of revenues, as compared to a gross loss of $1.1 million or 20%
for fiscal 1995. The decrease in gross profit in fiscal 1996 was due to the
Company's reduction of contract manufacturing and minimal sales of the FLASHBACK
while fixed manufacturing overhead related to cost of sales plus the cost of
product exceeded the revenues generated by sales of FLASHBACK. Also in the first
quarter of fiscal 1996 cost of sales included $980,000 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 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 can not 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 fiscal 1995, the contract manufacturing operation
experienced high manufacturing costs due to FLASHBACK startup costs, low margin
turnkey and consignment orders and an increased mix of through-hole printed
circuit boards which required more hand placement of components (which increased
labor costs with no corresponding increase in revenues). In fiscal 1996, the
Company reconfigured its operations in light of the FLASHBACK developed products
and significantly downsized its contract manufacturing business. The Company
expects to report gross losses until product sales and/or margins improve
sufficiently to cover manufacturing overhead. The Company's strategies to
produce positive margins includes increasing volume of existing products and
adding new products, improving pricing, reducing manufacturing costs, obtaining
additional contract manufacturing business, and obtaining new revenues from the
OEM division. There can be no assurance the Company can achieve positive gross
margins.
Total operating expenses (including research and related
expenditures, selling and administrative and interest expense less interest
income) were $4.9 million for the fiscal year ended March 31, 1996 as compared
to $5.9 million for fiscal 1995. Operating expenses for the fiscal year 1996
decreased by $1.0 million primarily due to a concerted effort to reduce
expenses, while manufacturing and selling the FLASHBACK. The material changes
and reasons for the changes from fiscal 1996 compared to fiscal 1995 were: a
decrease in legal fees and settlements of $263,000 (the decrease was due to a
reduction of settlements and legal fees being paid in the current fiscal year),
a decrease in salaries of $100,000 (the Company reduced staffing due to
financial constraints), a decrease in finders fees of $130,000 (a large line of
credit was established in the prior year where a finders fee was paid), a
decrease in public relations of $60,000 (the Company has reduced outside public
relations internally assuming many of these duties), and a reduction of other
advertising, promotions and trade show expenses of $80,000 (associated with the
prior year new product launch), offset by an increase associated with a $120,000
refinancing fee on the convertible note. Research and related expenditures
(associated with new product development) were $1 million for fiscal 1996, as
compared to $1.9 million for fiscal 1995 which included intensive
17
<PAGE> 21
FLASHBACK development costs. The research and development associated with new
products, although subject to quarterly variations, are expected to continue at
recent levels.
In August 1989, the Company acquired American Surface Mounted
Devices ("ASMD") which provided the contract manufacturing operations. In light
of the Company's decision to significantly downsize manufacturing operations
during fiscal 1996, the carrying value of the remaining goodwill associated with
the purchase of ASMD was determined by the Company to be in question and the
Company subsequently wrote off the unamortized balance of $0.2 million in March
1996.
The Company reported an operating loss of $8.3 million for
fiscal 1996, as compared to an operating loss of $7.1 million for fiscal 1995.
Liquidity and Capital Resources. At March 31, 1996, the
Company had working capital of $1.1 million, compared to working capital of $1.7
million at March 31, 1995. The Company had approximately $3.2 million of working
capital invested in inventories at March 31, 1996, compared to approximately
$2.7 million at March 31, 1995 with the increase due to FLASHBACK components.
The decrease in working capital was a result of the Company's continuing losses
which had consumed working capital during the period. The Company also exhausted
its available credit under its credit line during such period which was
converted to a fixed note, as discussed below. Approximately $6 million in cash
was used in operating activities by the Company for the year ended March 31,
1996. The Company's current cash position is insufficient to enable the Company
to meet either its obligations to creditors or its on-going expenses beyond
approximately three months.
On October 17, 1995, the Company executed a Loan Modification
Agreement with CVD, regarding a line of credit. The Loan Modification Agreement,
which had an effective date of August 1, 1995, provided for (i) the extension of
the maturity date of the loan (the "Loan") to January 31, 1996, (ii) a reduction
in the interest rate charged by CVD from prime rate plus seven percent (7%) to
prime rate plus two percent (2%), (iii) the waiver by CVD of certain events of
default which had occurred, (iv) the issuance of 75,000 shares of the Company's
common stock, to CVD, (v) the issuance of a new warrant to CVD to purchase
200,000 shares of Common Stock at $2.00 per share, (vi) the repricing of
existing warrants to purchase 450,000 shares of Common Stock to $1.75 per share,
(vii) the issuance of an option to acquire up to 300,000 shares of JABRA
Corporation ("JABRA") common stock at a price of $1.50 per share, (viii) the
grant of certain conversion rights to CVD to enable CVD to convert at anytime
prior to repayment all or any portion of the outstanding principal balance of
the Loan (including accrued but unpaid interest) into shares of Common Stock at
the lesser of (a) $1.50 per share or (b) 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, and (ix) in the event
CVD becomes the holder of not less than 1,000,000 shares of Common Stock, to
nominate and appoint one director to the Company's board of directors.
Substantially all of the assets of the Company and its subsidiary (including
JABRA shares) were pledged to CVD as collateral for the amounts loaned and the
Company was prohibited from incurring additional indebtedness without CVD's
prior consent. In addition, as a result of the Loan Modification Agreement, the
loan became non-revolving (i.e. no additional funds could be borrowed prior to
maturity) and 50% of the net proceeds from any equity financing had to be used
to pre-pay the loan.
On October 17, 1995, the Company paid CVD $429,000, reducing
the outstanding principal balance of the note to $2,703,646. On January 8, 1996,
the Company made an additional $518,100 principal payment on the note. On
February 1, 1996 the Company obtained an extension of the convertible note to
April 30, 1996 in consideration of an extension fee of $33,155 which was added
to the principal balance of the note.
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 used the proceeds to make the April principal payment on the
CVD convertible note as well as to provide short-term working capital. In June
1996, the Company obtained $2.4 million in funds from a private placement of
securities and used the proceeds for a $1.1 million principal payment on the CVD
convertible note (reducing the outstanding balance to approximately $0.3
million) with the balance allocated for working capital. In July
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and August 1996, the Company obtained additional equity from the private
placement of securities for cash of approximately $3.1 million. On July 31, 1996
the Company retired the remaining $307,416 obligation related to the demand loan
payable to CVD. As a result of these transactions, as of September 30, 1996, the
Company had no long-term debt nor any bank lines of credit or related financing
facilities.
On June 7, 1996, the Company closed a private placement of
Common Stock and Warrants and received gross proceeds of $2,500.000. The
purchase price for the 2,420,143 shares of Common Stock was $.70. The five
warrants (sold at a face value of $805,000) are convertible into common stock
(without additional consideration) in an amount equal to the face value of the
warrant divided by the lesser (i) $.70 per share or (ii) a 30% discount to the
average closing bid price for the shares for the five days prior to (but not
including) the conversion date. The purchases were granted certain demand and
piggyback registration rights under certain conditions. The private placement
was effected through Iaccoca Capital Partners, L.P. acting as a placement agent
who was paid a fee of 7% in cash and granted a Warrant to purchase 401,924
shares of Common Stock at an exercise price of $.9875 per share through July 31,
2001.
On July 31, 1996 and August 7, 1996, the Company closed an
additional private placement and received gross proceeds of $3,170,000. The
purchase price for the 245,931 shares of Common Stock sold was $.69125. The
seven Warrants (sold at a face value of $3,000,000) are convertible into Common
Stock (without additional consideration) in an amount equal to the face value of
the Warrant divided by the lesser of (i) $.69125 per share or (ii) a 30%
discount to the average closing bid price for the shares for the five days prior
(but not including) the conversion date. The purchasers were granted certain
demand and piggyback registration rights under certain conditions. The private
placement was effected through Greystone Capital, Ltd., with fees (including
finders' fees) of 10% being paid in cash.
The Company will require additional capital within the next
three months to meet its debts as they become due and to continue as a going
concern. The Company will also require additional working capital to finance
production and sales of its proprietary products. Successful commercialization
of proprietary products and the introduction of the PVP-2000 will require
additional working capital. The Company estimates that at current expenditure
levels and projected working capital requirements, after reflecting the private
placements described above, it will require a minimum of an additional $3
million to continue operating for the next twelve months without any
contribution from operations. The existing business may be able to generate some
of the additional funding required depending on proprietary product results,
success in obtaining contract manufacturing business and the ability of the OEM
division 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 reduce or curtail operations.
Changes in Cash. For the fiscal year ended March 31, 1996, net
cash decreased $0.4 million. Cash used in operating activities was $6.0 million.
Major components using cash were a net loss of $8.3 million, and an increase in
inventory of $0.6 million. The increase in inventory resulted from a build-up of
finished goods and raw materials. Major components providing cash were an
increase in accounts payable of $1.3 million, depreciation and amortization
(including the write-off the unamortized balance of goodwill) of $0.8 million
and the reduction of trade payables, other liabilities and loans of $0.4 million
through issuance of stock. The major components of cash provided by financing
activities were proceeds from issuance of shares of $3.5 million and proceeds of
$3.0 million from issuance of convertible notes payable.
Comparison of Six Months Ended September 30, 1996 and Six
Months Ended September 30, 1995. For the first six months of fiscal 1997, the
Company reported revenues of $301,543, 63% less than revenues of $806,603 for
the first six months of fiscal 1996. The decrease in revenues is due primarily
to reduced FLASHBACK sales comparable to the prior year. Sales for the prior
period included some initial stocking orders by retailers. A substantial portion
of the Company's FLASHBACK 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.
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For the first six months of fiscal 1997, the Company reported
a gross loss of $747,775 as compared to a gross loss of $1,385,802 for the first
six months of fiscal 1996. Gross losses are due to the minimal sales of the
FLASHBACK product while fixed manufacturing overhead related to cost of sales
plus the cost of product continue to exceed the revenues generated by sales.
Total operating expenses (including research and related
expenditures, selling and administrative and interest expense less interest
income) were $1.6 million for second quarter of fiscal 1997 as compared to $1.1
million for the second quarter of fiscal 1996. Selling and administrative
expenses increased in the first six months of fiscal 1997 to $2.4 million
compared to $1.7 million for the comparable period of the prior year. The
increase of $0.7 million in the first six months of fiscal 1997 included an
increase in personnel and consulting of $250,000 due primarily to additional
sales and marketing expense associated with the advertising launch of the Mobile
Office, $65,000 costs of a recently established office in the United Kingdom, a
$111,000 increase in legal and related costs primarily associated with
financing, registration and regulatory activities and general increases in other
administrative expenses as compared to the prior period. Research and related
expenditures were $408,000 for the first six months of fiscal 1997, as compared
to $604,000 for the first six months of fiscal 1996 which included $370,000 of
FLASHBACK pre-production development costs. The research and related
expenditures associated with new products, although subject to quarterly
variations, are expected to continue at recent quarter levels.
The Company reported an operating loss of $3.7 million for the
first six months of fiscal 1997, as compared to an operating loss of $3.8
million for the first six months of fiscal 1996.
At September 30, 1996, the Company had working capital of $2.8
million, compared to working capital of $1.1 million at March 31, 1996. The
Company had approximately $3.2 million of working capital invested in
inventories at September 30, 1996, comparable to the balance at March 31, 1996.
The increase in working capital is a result of the Company's financing
activities offset by continuing losses which consumed working capital during the
period. Approximately $4.6 million in cash was used in operating activities by
the Company in the six months ended September 30, 1996 which included a $1.4
million reduction in accounts payable and accrued liabilities.
During the quarter ended June 30, 1996, the Company obtained
approximately $3 million from a convertible debt financing and approximately
$2.5 million from the private placement of Common Stock and a portion of the
Warrants and made principal payments to CVD aggregating $1,878,130. On July 31,
1996, the Company retired the remaining $307,416 obligation related to the
demand loan payable to CVD. During the first fiscal quarter, the $3 million
convertible debt, plus accrued interest, was converted into Common Stock. As of
December 31, 1996, the Company had no long-term debt nor any bank lines of
credit or related financing facilities. In July and August 1996, the Company
obtained additional equity from the sale of Common Stock and Warrants for cash
of approximately $3.2 million.
For the six months ended September 30, 1996, net cash
decreased by $1.9 million. Cash used in operating activities was $4.6 million.
Major components using cash were a net loss of $3.5 million after depreciation
and a decrease in other accounts payable and accruals of $1.4 million. The major
component of cash provided by financing activities was net cash proceeds
(exclusive of fees and costs) from issuance of shares of Common Stock and
Warrants of $5.1 million less $2.2 million used to reduce the obligation on the
demand loan payable.
Management's Plans for Improving Operations. Management has
undertaken steps as part of a plan 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 retail product offering by introducing a
computer interface VOICELINK which allows 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. The Company's next generation
retail product,
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the Mobile Office began shipping in October 1996. The Mobile Office includes the
Company's FLASHBACK recorder, 36 minute SOUNDCLIP, VOICELINK (which links the
FLASHBACK to a personal computer) and the related software.
The Company is actively developing a number of distributions,
licensing and OEM opportunities and has signed agreements, as of October 1996,
with Mobile Planet, a US based distributor; Pocket Power, an Italian
distributor, OEM agreements with Thin Spin Holdings LLC and with Sanyo
Information Systems UK Ltd. The Company continues to progress with additional
licensing and OEM opportunities, which management believes could have a positive
impact on future operations. Due to the Company's high manufacturing overhead,
the Company expects to report gross losses until product sales and/or margins
improve sufficiently to cover the overhead. The Company's strategies to produce
positive margins includes increasing the volume of existing products and adding
new products such as Mobile Office, reducing manufacturing cost, obtaining
additional contract manufacturing business and obtaining new revenues from OEM
and licensing agreements with companies like Sanyo. The Company believes the
successful implementation of these steps will bring the Company to profitability
within the next twelve months, however, there can be no assurances that the
Company can successfully implement its plan to improve operations and/or achieve
positive gross margins in the future.
Future Commitments and Financial Resources. The Company's
future commitments are related to its capital and operating leases (see footnote
12 to the financial statements). These commitments are included in the cash
requirements discussed above. The Company is currently in arrears and in breach
of payment obligations totaling $5 million for a capital lease. The Company,
however, has not received notice of default from the lessor and is discussing
with the lessor various financing alternatives.
The Company is committed to purchase orders providing for the
future delivery of components in accordance with production schedules.
Generally, these orders may be canceled or extended should production schedules
change, however, purchase orders for customized components often involve vendors
less willing to cancel purchase orders although generally open to extensions or
modifications which are common to the industry. Since the Company's production
schedules have been extended, should production be further curtailed or cease,
then the Company could become liable for outstanding purchase orders and the
liability could be material.
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
extraordinary expansion of facilities. The Company currently has no plans,
arrangements or understanding 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) the Company's reliance upon debt and new equity financing to fund the
continuing, increasing losses from operations and cash flow deficits, (ii)
substantial inventory buildup during the fiscal 1995 and fiscal 1996 consisting
of raw material, components and finished product to be utilized in the
manufacture and sale of its FLASHBACK product and material decline in inventory
turnover, (iii) materially increased net losses and cash flow deficits from
operations during fiscal 1995 and fiscal 1996 and (iv) the likelihood 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.
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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 engaged in a single industry segment: the
development, manufacture and marketing of electronic products. 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. Through NCI the Company is involved in (i) marketing its FLASHBACK(TM)
technology, a proprietary method for information storage and retrieval and (ii)
using its state-of-the-art electronic manufacturing facility to manufacture its
proprietary products and provide contract manufacturing services for others. The
Company also holds as an investment 1,033,334 common shares (approximately
13.2%) of JABRA. JABRA is a developer and manufacturer of communication products
for desktop, mobile and wireless applications.
The address of the Company's principal executive office is
12725 Stowe Drive, Poway, California 92064 and its telephone number is (619)
679-1504. The Company's primary operating facilities are located at that
address. The Company presents its consolidated financial statements in United
States dollars.
History. The Company, through a predecessor corporation, was
started in 1988 based on a new technology that its founder Elwood G. Norris had
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.
In August 1989, the Company acquired ASMD, subsequently merged
into NCI. This acquisition enabled the Company to become 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. Since acquiring ASMD, the Company has invested over $2.5
million in equipping a new 31,000 square foot manufacturing and administrative
facility. Prior to the late fiscal 1995 launch of the first FLASHBACK technology
product, a personal digital recorder, ASMD's contract manufacturing services
accounted for substantially all of the Company's revenues. During the 1996
fiscal year, due to the startup of the manufacturing of the FLASHBACK recorder,
the Company scaled back certain contract manufacturing services. As the Company
develops and expands its FLASHBACK technology product line and develops or
acquires new technologies, it is management's strategy to utilize its strong
printed circuit board assembly capability to produce components by combining
added-value technology with added-value manufacturing. The Company intends to
aggressively pursue the outside contract manufacturing business.
On January 15, 1993, the Company sold 300,000 common shares of
JABRA stock for $750,000, and JABRA sold 500,000 newly issued common shares with
warrants for $1.25 million. The Company retained 2,300,000 common shares or
74.2% of JABRA stock and the Company agreed to surrender operating control of
JABRA pursuant to the stock sale agreement. On July 15, 1993, the Company sold
an additional 500,000 common shares for $1.625 million and JABRA sold 1,000,000
newly issued common shares for $3.25 million. The Company's 1,800,000 common
shares represented 42.8% of the outstanding shares of JABRA and as a result of
the lack of operating control, the Company ceased consolidating JABRA's
operations and recorded its investment on the cost basis because it no longer
has significant influence over the operations of JABRA. At March 31, 1996 the
Company had a zero cost basis in its 1,800,000 JABRA common shares. During
fiscal 1995 and 1996, JABRA reported to the Company the sale of 1,154,671 newly
issued common shares for proceeds of $4.0 million. On or about December 31, 1996
and January 2, 1997, the Company sold 766,666 common shares of JABRA stock for
$230,000. As a result of these transactions, the Company's ownership in JABRA at
January 15, 1997 represented by 1,033,334 common shares is 13.2% (or 11.6% on a
fully diluted basis).
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The Company's FLASHBACK Technology. 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 technology developed 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.
Management believes the 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. The prices of various forms
of storage arrays, and specifically flash memory chips, continue to decline
making more applications utilizing the Company's proprietary technology cost
effective.
In addition to improved voice recorders, the Company believes
the technology may have applications in a wide range of products including
pagers, answering machines, telephones, compact disc quality sound recordings
and for the storage of pictures and video images.
Current Product. The Company's first digital recording
technology product is the FLASHBACK portable digital voice recorder. The
FLASHBACK is a self contained miniature hand held voice recording device with
features unavailable in conventional tape recorders. In addition to standard
features such as playback, recording, fast forward and reversing functions, the
FLASHBACK recorder provides the ability to electronically insert, delete, or
edit the content of messages/recordings, to randomly access recordings instantly
and play back at high or low speed without changing voice pitch.
The FLASHBACK personal digital recorder is approximately the size of a half deck
of playing cards, weighs less than three ounces and is ergonomically designed to
fit in the palm of a user's hand. FLASHBACK has two controls (from which all
major functions are controlled) plus a volume control and two light emitting
diodes ("LED's"), one serving as a power indicator and the other as a record
indicator. The FLASHBACK runs on two AAA batteries.
All the sound information on a FLASHBACK is stored on a
removable, interchangeable, playback/recording media (SOUNDCLIP(TM)) that
functions similar to a tape cassette in a conventional cassette recorder.
SOUNDCLIPs are solid-state non-volatile storage devices developed by the
Company. SOUNDCLIPs utilize state-of-the-art flash memory chips as the storage
medium and they retain recorded information, even in the absence of applied
power. This is a major distinguishing feature of flash memory versus traditional
random access memory ("RAM") chips which require constant power to retain
information. Flash memory has been commercialized by Intel Corporation, from
whom the Company is purchasing flash memory chips, although other suppliers are
available. Unlike recordings on tape media, information stored on a SOUNDCLIP is
unaffected in the presence of magnets and magnetic fields. SOUNDCLIPs are
presently available in 18 and 36 minute capacities but longer capacity
SOUNDCLIPs are both feasible and planned for longer recording applications.
SOUNDCLIPs have been designed to be compatible with type II
PCMCIA (Personal Computer Memory Card International Association) card slots,
common to portable personal computers and personal digital assistant ("PDA")
devices allowing the future connection between voice recordings and computers.
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Additional FLASHBACK Products For Commercial Marketing in
Fiscal 1997. In October 1996 the Company completed testing and commenced initial
commercial shipments of its VOICELINK (formerly named SOUNDLINK) product.
VOICELINK is an accessory to the FLASHBACK product, a computer peripheral which
plugs into the PC card slot common to personal computers and personal digital
assistant (PDA) devices, which incorporate a port for the VOICELINK. Working
prototypes of the product have been produced and internal testing is scheduled
to begin in the first fiscal quarter of 1997 with external testing planned to be
completed shortly thereafter. Management anticipates, but there can be no
assurance, that the VOICELINK will be ready to enter the market by the end of
the second quarter of fiscal 1997. Management anticipates that VOICELINK, when
available, will allow up to 36 minutes of recorded information to be downloaded
to the hard drive in under two seconds. This introduces the concept of the voice
memo, which can be transmitted to other PCs over existing networks including the
Internet. Recipients will hear the original recording, including voice quality
and inflection, through their computer's sound card, and by sending voice memos,
users save nine tenths of the time it would take to type the same information.
In the near future, as standards are established, automatic 'voice to text'
transcription and automatic language translation is expected to be possible
which will enhance the value of voice memos.
MOBILE OFFICE PACKAGE: In October 1996, the Company also
completed testing and commenced initial commercial shipments of its MOBILE
OFFICE PACKAGE, a bundled package consisting of FLASHBACK, SOUNDCLIP, VOICELINK
and PC (IBM compatible) computer driver software on a floppy disk. The Company
is developing a Macintosh compatible version although no availability date has
yet been determined by Management.
NORRIS FLASH FILE SYSTEM(TM): A developmental tool that lends
itself to licensing for a broad range of technological applications. The system
stores and manipulates data using a file manager API, and supports compressed
voice, image or video as well as conventional file data. Norris' proprietary
methods compress sound or video into digital form and structure the data
specifically for flash memory. Although flash memory can be difficult to
integrate, it is preferred to other types of solid state memory because of its
large capacity, low power requirements, and internal stability. The feature-rich
system was created to painlessly overcome the intricacies of dealing with flash
memory. Unlike other flash file systems, the Norris system can support an
unlimited number of files, directories, and / or subdirectories, requiring no
ATA or portable computer (PC) Card support hardware or software. 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. The NFFS is
particularly well suited for use with multimedia data in a flash memory
environment, but can be adapted for use with other types of memory if desired.
MULTI-CHIP MODULE ("MCM"): As part of the development of
FLASHBACK, the Company developed a MCM which it is marketing as a resource to
system developers. The MCM contains a microprocessor, digital signal processor,
firmware and software. Available already sub-assembled in a very compact format,
the MCM integrates all the basic core processing functions needed to implement a
digital recording device. As of December 1996, the Company estimates that the
product development was 70% complete.
PVP-2000(TM): The next generation of FLASHBACK recorder,
scheduled to enter the market the second quarter of calendar 1997. In addition
to the digital recording features showcased in the FLASHBACK, the PVP-2000 will
incorporate a liquid crystal display ("LCD") screen to display the number and
length of messages, a calendar/clock function to set alarms and reminders,
longer recording capacity, and a built-in pager. The PVP-2000 is also expected
to link with PCs and allow downloading of recorded and received material.
Markets for the Company's Products and Technology . The United
States retail market for the Company's consumer products (FLASHBACK, SOUNDCLIP,
VOICELINK, and PVP-2000) includes 32 million mobile professionals, owners,
managers and entrepreneurs. Of those, 71% are computer literate, 45% use e-mail,
27% use cellular phones, and 28% use pagers. In general, these professionals
spend at least 20% of their time away from the office. They see portable
technology as critical to their success. They drive the usage, purchase, and
acceptance of mobile information technology among their colleagues, peers and
others.
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The mobile professional, along with telecommuters and
professionals conducting business out of a small office or home office, are the
main markets for Norris' FLASHBACK recorder and the MOBILE OFFICE PACKAGE
comprising a FLASHBACK, SOUNDCLIP, and VOICELINK.
The OEM and licensing market for the Company's products
includes companies and individuals preparing to use flash memory in their
systems and/or products. These potential customers and partners span a number of
industries including mobile telecommunications, mobile computing, office
products, consumer electronics, etc. The MCM module and the NFFS can be
incorporated into two-way voice pagers, digital recorders, cellular in-phone
answering machines or voice mail systems, set top boxes, flight data recorders,
conference phone recorders, surveillance devices, and digital dictation systems,
among others. The common factor in many of these products will be the need to
store data in compressed format, while keeping it accessible and safe. Another
common factor will be a standard form factor such as CompactFlash, being
promoted by the 14+ major corporations, including Norris, SanDisk, Polaroid,
Eastman Kodak, Apple, Canon, Seagate, Hewlett Packard, NEC Motorola, Matsushita
and Sony, who are members of the CompactFlash Association.
The Company will also 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.
The Market and Distribution Channels. The Company's current
and planned consumer products, FLASHBACK, SOUNDCLIP, VOICELINK, the MOBILE
OFFICE PACKAGE and PVP-2000 are sold through VARs, resellers and external
distributors specializing in serving the mobile computing and computer
peripheral markets. While existing VARs, resellers and distributors are
presently primarily in the United States, the Company has signed contracts for
Asian Pacific distribution, and is seeking international distribution partners.
The Company's core technology, embodied in the NFFS and MCM,
is being sold through OEM, partnership, private label and licensing agreements
prospected internally by the OEM sales division. The Company's contract
manufacturing services are sold by the Company's management and sales staff.
Manufacturing. The Company also provides contract
manufacturing including component procurement, ICT and ASIC testing, printed
circuit board assembly using surface mount, custom wire-bonding,
pin-through-hole technology assembly, post assembly testing, and final product
packaging.
In fiscal 1995 the contract manufacturing services accounted
for over 90% of the Company's consolidated revenues. However in fiscal 1996, the
Company reconfigured its operations in light of the FLASHBACK developed products
and significantly downsized its contract manufacturing business which
contributed 18% of total consolidated revenues for fiscal 1996. Maintaining its
charter as a revenue center for fiscal 1997, management is pursuing additional
outside contract manufacturing business.
During fiscal 1996, the Company utilized its contract
manufacturing experience to manufacture the FLASHBACK for its own account, from
parts and electronic components purchased from regular distribution channels.
With the establishment of manufacturing as a separate revenue
center, the Company plans on completing a make versus buy analysis prior to the
production of each new product. The Company will review alternatives for
contracting with other manufacturing facilities to produce its products and will
select, when warranted, organizations who will provide a lower unit product cost
than internal manufacturing, a secondary source of supply, and/or additional
capacity.
Major Customers. During the fiscal year ended March 31, 1995,
IVAC Corporation accounted for 31% of total revenues. No other customer
accounted for more than 10% of revenues in fiscal 1995. For the fiscal year
ended March 31, 1996, two customers The Sharper Image and The Good Guys
accounted for 10% each of total revenues. The Company has not had enough
FLASHBACK marketing history and experience to determine if it will be reliant on
a small number of customers.
25
<PAGE> 29
Competition. There is no known 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 is frequently compared to the "note taker"
type of products which offer limited recording capabilities and feature sets.
The MOBILE OFFICE PACKAGE will be competing with companies that sell traditional
dictation/transcription devices. The success of product will depend greatly on
how the end user plans to utilize the product or technology. The Company
maintains a clear advantage in its solid state removable recording technology.
If the product is to be utilized for sending voice messages across the Internet,
there is no currently competitive product.
The Company further believes its existing know-how, issued
contracts, present pending patent applications, customized components, existing
copyrights, trade secrets and potential future patents and copyrights, will be
significant in enabling it to compete successfully.
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, Trade names and Copyrights. The Company owns one
patent protecting its products. The Company has applied for additional multiple
pending patent applications with multiple claims on innovations in audio and
other forms or 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 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.
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 December 31, 1996, the Company, through its
wholly owned subsidiary NCI, employed approximately 40 employees of which 21
were production, four were sales/customer service, five were research and
development, five were accounting/MIS and three were administrative officers.
None of the Company's employees are
26
<PAGE> 30
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,
1996 and 1995, the Company spent $1,048,500 and $1,897,000, respectively, on
research and development. The Company anticipates it will continue to devote
substantial resources to research and development activities.
Investment in JABRA. The Company owns 1,033,334 common shares
of JABRA representing 13.2% ownership (11.6% on a fully diluted basis).
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. CVD
continues to have an option (until July 31, 1997) to purchase 300,000 shares at
a price of $1.50 per share.
Description of Property. The Company leases 31,000 square feet
of office and manufacturing space, located at 12725 Stowe Drive in Poway,
California. This facility was occupied in late December of 1992. The lease
expires in 2002.
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.
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 of 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.
The Company does not have, and has not had in any of its last
three fiscal years, any significant export sales or operations outside the
United States.
27
<PAGE> 31
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 (1) 57 Chairman of the Board, Chief Executive Officer and
Director
Alfred H. Falk 42 President and Director
Robert Putnam (2) 38 Vice President, Secretary and Director
Kathleen E. Terry 43 Chief Financial Officer and Director
Michael W. Joe 31 Director
R. Gordon Root 45 Director
</TABLE>
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
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. Prior to his appointment as President,
he served as Vice President, Business Development and Vice President OEM and
International Sales for 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, OEM Sales for PCPI in San Diego. Mr.
Falk was also an Account Manager at DH Technology. 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 has been a director of ATC since 1984 and
also served as Secretary/Treasurer until February 1994 when he was appointed
president and Chief Executive Officer 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.
28
<PAGE> 32
Kathleen E. Terry - Ms. Terry joined the Company as Chief
Financial Officer in May 1996 and was appointed a director in January 1997. From
March 1995 to May 1996, she was Chief Financial Officer at BioSafety Systems
Inc. From April 1992 to March 1995, Ms. Terry held the positions of Corporate
Secretary and Chief Financial Officer at IRT Corporation. Prior to joining IRT
Corporation, Ms. Terry was a co-founder and Vice President of Finance for Health
Vu from May 1991 to March 1992. Previous positions included executive finance
positions with Emerald Systems Corporation, Carlisle Corporation and M/ACOM
Telecommunications. Ms. Terry obtained her BS in accounting from San Diego State
University, her public accounting experience with KPMG-Peat Marwick, and is a
certified public accountant.
Michael W. Joe - Mr. Joe was elected as a director in December
1996. Since 1994, Mr. Joe has been a Managing Director of Klein Investment
Group, L.P. (formerly Iacocca Capital Partners, L.P.) and a Vice President of
ICG, Inc., the General Partner of Klein Investment Group, L.P., Klein Investment
Group, L.P. is an investment and merchant bank originally formed by Lee Iacocca,
retired Chairman of Chrysler Corporation, two other partners and the Jeffries
Group, Inc. Prior to joining Klein Investment Group, L.P., Mr. Joe was a Manager
of Strategic Planning for the Walt Disney Company from 1991 to 1994, where he
specialized in new business development and acquisitions for the Company's film
entertainment division, and from 1987 to 1989 was an investment banker with
Salomon Brothers Inc. Mr. Joe holds a Master of Business Administration from the
Wharton School at the University of Pennsylvania and a Bachelor of Commerce from
Queen's University in Canada.
R. Gordon Root - Mr. Root was appointed a director of the
Company in October 1995. From October 1995 to January 1997, Mr. Root was
President and Chief Executive Officer of the Company. From 1993 to October 1995,
he was President and Chief Executive Officer of Maxoptix Corporation, a
subsidiary of Kubota, a Japanese conglomerate. From 1990 to 1993 he was founder
and Chief Executive Officer of Brookhaven Business Development, Inc., an interim
management company, where he was active in six turnaround companies and
consulted on corporate image and brand identity programs. He served as President
and Chief Operating Officer of Emerald Systems Corporation, a computer network
peripheral and software company from 1989 to 1990. Previous positions included
executive positions with Carlisle Corporation, Cipher Data Products, Inc. and
Polaroid. Mr. Root obtained his MBA in marketing from the University of Southern
California and his BA in business from American University in 1972.
Executive Compensation. The following table sets forth for the
fiscal years ended March 31, 1996, 1995 and 1994, 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").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term All Other
Compensation Compensation Compensation
------------ ------------ ------------
Options
Name and Fiscal (# of Shares)
Principal Position Year Salary Bonus -------------
- ------------------ ---- ------ -----
<S> <C> <C> <C> <C> <C>
R. Gordon Root, President & 1996 $85,615 $20,000(1) 150,000 -0-
Chief Executive Officer 1995 $-0- -0- -0- -0-
1994 $-0- -0- -0- -0-
Elwood G. Norris, Chairman 1996 $163,500 -0- 400,000 -0-
and Chief Technology 1995 $120,384 -0- -0- -0-
Officer 1994 $ 47,944 -0- 300,000(2) -0-
</TABLE>
(1) Amount stated reflects fair market value of 13,333 common shares as of
the date of grant.
(2) During the fiscal year ended March 31, 1994, options on a total of
192,500 common shares granted in 1993 were repriced and 107,500 new
options were granted to Mr. Norris.
29
<PAGE> 33
The following table sets forth information with respect to options to
purchase shares of the Company's Common Stock granted in the fiscal year ended
March 31, 1996 to the Chief Executive Officer and the Named Executive Officer.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------------------------------------
% of Total
Options
Granted to Exercise
Options Employees Price (per Expiration
Name Granted(#) in Fiscal 1996 share Date
---- ---------- -------------- ---------- --------
<S> <C> <C> <C> <C>
R. Gordon Root 150,000 15.6% $1.50 10/09/1999
Elwood G. Norris 400,000 41.5% $3.38 4/03/2000
</TABLE>
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, 1996. The following table provides information
on unexercised options at March 31, 1996:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options At In-the-Money Options At
March 31, 1996 March 31, 1996
-------------- --------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
R. Gordon Root 50,000 100,000 $-0- $-0-
Elwood G. Norris 700,000 -0- $-0- $-0-
</TABLE>
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.
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, 1996.
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,
30
<PAGE> 34
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 Corporation's bonus pool and health insurance plan.
CERTAIN TRANSACTIONS
Elwood Norris, Chairman and Chief Technology Officer of the Company, is
also a director of ATC. He is the beneficial owner of 3,281,475 shares of ATC
(representing approximately 38% of its issued and outstanding capital) and
Robert Putnam, the Vice President/Secretary and a director of the Company is
also a director, President and Chief Executive Officer of ATC. He is the
beneficial owner of 620,000 shares of ATC (representing approximately 8% of its
issued and outstanding shares).
During the fiscal year ended March 31, 1996, the Company sublet its
former operating facility comprising approximately 10,800 square feet at 12800
Brookprinter Place, Poway, California to ATC on a month to month basis. During
the fiscal year ended March 31, 1996, ATC paid the Company $60,000 in rent. As
of July 31, 1996, the Brookprinter property was leased to an independent third
party, and the existing lease was terminated. Commencing on April 1, 1996, the
Company commenced providing approximately 2,407 square feet of space at the
Company's 12725 Stowe Drive facility and certain support services to ATC at the
rate of $3,095 per month. The Company believes that the terms of these
arrangements are no less favorable than could be obtained from an independent
and unaffiliated party.
The Company also performs certain contract manufacturing for ATC from
time to time on terms the Company believes are comparable to other contract
manufacturing customers. During the fiscal year ended March 31, 1996,
approximately $68,000 of services were provided by the Company to ATC.
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 President, Chief Executive Officer and a
director 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 and partly because Mr. Norris and
Mr. Putnam do not represent a majority of the Board of Directors of the Company
and do not control the other directors. Mr. Norris and Mr. Putnam are obligated
to perform their duties in good faith and to act in the best interest of the
Company and its shareholders, and any failure on their part to do so may
constitute a breach of their fiduciary duties and expose them to damages and
other liability under applicable law. While the directors and officers are
excluded from liability for certain actions, 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 the date of this Prospectus,
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>
Number of Percent
Name Shares Owned of Class
---- ------------ --------
<S> <C> <C>
Elwood G. Norris 1,409,838(1) 6.1%
Robert Putnam 200,658(2) *
Alfred H. Falk 18,000(3) *
Michael W. Joe Nil (4) *
R. Gordon Root 173,000(5) *
Kathleen E. Terry 10,000 *
BKP Partners, L.P. (6) 1,987,048 8.9%
All officers and directors
as a group (7 persons) 1,811,496(7) 8.4%
</TABLE>
* Less than 1%
(1) Includes 225,000 shares owned by ATC as a result of Mr. Norris'
38% beneficial ownership and presently exercisable options to
purchase 700,000 shares.
(2) Includes presently exercisable options to purchase 169,658
shares.
(3) Consists entirely of presently exercisable options.
(4) Excludes presently exercisable warrants to purchase 907,824
shares owned by Klein Investment Group, L.P., of which Mr. Joe is
a managing director.
(5) Includes presently exercisable options to purchase 150,000
shares.
(6) Voting and dispositive powers with respect to these shares are
held by Robert K. Pryt, the managing general partner of BKP
Partners, L.P.
(7) Includes presently exercisable options to purchase 1,037,658
shares and the 225,000 shares owned by ATC and attributable to
Mr. Norris.
32
<PAGE> 36
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>
- -----------------------------------------------------------------------------------------------------------------------------
Beneficial
Ownership and
Percentage of
Beneficial Maximum Number Common Stock
Ownership of of Shares of After Giving
Common Stock at Common Stock Effect to
Name August 29, 1996(1) Offered for Sale Proposed Sale (2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dina Partners, L.P. 400,000 400,000 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Porter Capital Management 300,000 300,000 0.00
- -----------------------------------------------------------------------------------------------------------------------------
EDJ Ltd. 100,000 100,000 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Irwin Roberts 143,000 143,000 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Stu Zimmerman 75,000 75,000 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Sanwa Bank Trustee for Joe Wizan IRA 71,429 71,429 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Kamren Ghiasi 45,000 45,000 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Privatim Finanz AG 714,286 714,286 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Jerome Moss 357,143 357,143 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Michael Klein 245,931 245,931 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Michael Klein Trustee Under 71,429 71,429 0.00
Agreement dated 12/22/80 Joyce Faye
Klein Trust FBO Michael Klein Issue
Trust
- -----------------------------------------------------------------------------------------------------------------------------
Gregory Hookstratten 142,857 142,857 0.00
- -----------------------------------------------------------------------------------------------------------------------------
St. Claire Options Trading, L.P. (3) 384,615 384,615 0.00
- -----------------------------------------------------------------------------------------------------------------------------
JMG Management, Inc. (3) 384,615 384,615 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Iacocca Capital Partners, L.P. (3) 135,768 135,768 0.00
- -----------------------------------------------------------------------------------------------------------------------------
William Elkus (3) 64,103 64,103 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Richard Bertagna (3) 64,103 64,103 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Kolel Zera Kodesh (4) 153,398 153,398 0.00
</TABLE>
33
<PAGE> 37
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross Foundation, Inc. (4) 2,300,966 2,300,966 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Morgen Christiano & Co., LLC (4) 766,989 766,989 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Milton Klein (4) 92,039 92,039 0.00
- -----------------------------------------------------------------------------------------------------------------------------
U.C. Financial Ltd. (4) 383,494 383,494 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Steve Katznelson (4) 383,494 383,494 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Madison Trading, Inc. (4) 521,553 521,553 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Klein Investment Group, L.P. (5) 401,924 401,924 0.00
=============================================================================================================================
</TABLE>
- -------------------------
(1) Based solely upon the review of a shareholder transcript prepared by the
Transfer Agent for the Company as of such date.
(2) Assumes the sale of all shares 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 by them hereunder.
(3) Beneficial ownership represents the number of shares of Common Stock
issuable upon exercise of warrants beneficially owned by such person,
assuming that a 30% discount to the average sales price per share of
Common Stock for the five trading days preceding July 3, 1996 was used to
determine the number of shares of Common Stock into which the warrants
may be exercised. The actual number of shares of Common Stock offered is
subject to adjustment and could be less or more than the indicated amount
depending upon factors which cannot be predicted by the Company at this
time including, among others, application of exercise provisions based,
in part, on market prices of the Common Stock prevailing during the five
trading days immediately preceding the actual day of exercise.
(4) Beneficial ownership represents the number of shares of Common Stock
issuable upon exercise of warrants beneficially owned by such person,
assuming that a 30% discount to the average sales price per share of
Common Stock for the five trading days preceding August 29, 1996 was used
to determine the number of shares of Common Stock into which the warrants
may be exercised. The actual number of shares of Common Stock offered is
subject to adjustment and could be less or more than the indicated amount
depending upon factors which cannot be predicted by the Company at this
time including, among others, application of exercise provisions based,
in part, on market prices of the Common Stock prevailing during the five
trading days immediately preceding the actual day of exercise.
(5) Beneficial ownership represents the number of shares of common stock
issuable upon exercise of warrants beneficially owned by such person.
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 September 30, 1996,
there were 22,308,611 shares of Common Stock issued and outstanding. No 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
34
<PAGE> 38
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.
Other Outstanding Options and Warrants. At August 29, 1996, there were
options and warrants outstanding under which 8,947,118 shares of Common Stock
(subject to adjustment) were issuable. Of this amount, 1,488,658 shares are
issuable on exercise of various options and warrants issued to employees and
directors of the Company pursuant to compensatory arrangements, 1,620,071 shares
are issuable pursuant to warrants issued as compensation for prior investment
banking, lending and other services, and 5,838,389 shares of Common Stock
(subject to adjustment) are issuable to holders of the Warrants.
Outstanding Registration Rights. The Company has entered into agreements
with several of its security holders under which it has granted them rights
under certain circumstances to require the registration under the Securities Act
of shares of Common Stock held by them. Under such agreements, the holders of
certain options and warrants, including the Warrants, have "demand" rights, to
require the Company to file a registration statement on one occasion, and also
have "piggyback" rights, to require inclusion of the holder's shares in any
registration statement filed by the Company. Under such agreements, the Company
typically has the right to reject the piggyback registration request under
certain circumstances, including if the managing underwriter of the Offering
which is the subject of the request so requires.
Delaware Anti-Takeover Law. The Company and its shareholders are subject
to Section 203 of the General Corporation Law of the State of Delaware, an
anti-takeover law. In general, the law prohibits a public Delaware corporation
(such as the Company) from engaging in a "business combination" within an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in the prescribed manner. "Business
combination" includes merger, asset sales and other transactions resulting in a
financing benefit to the interested stockholder. An "interested stockholder" is
a person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock.
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.
35
<PAGE> 39
Transfer Agent. The transfer agent and registrar for the Common Stock is
Interwest Transfer Co., Salt Lake City, Utah.
LEGAL MATTERS
THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEARS ENDED
MARCH 31, 1996 AND MARCH 31, 1995, 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.
EXPERTS
The Consolidated Financial Statements of the Company for the years ended
March 31, 1996 and March 31, 1995, 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 statement 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.
36
<PAGE> 40
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF THE COMPANY PAGE
Report of Independent Auditors F-1
Comments by Auditors for U.S. Readers on Canada-U.S.
Reporting Conflict F-1
Consolidated Balance Sheets as of March 31, 1996
and 1995 F-2
Consolidated Statements of Operations for the years
ended March 31, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity (Deficiency)
for the years ended March 31, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years
ended March 31, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
Unaudited Interim Consolidated Balance Sheets as of September 30,
1996 and March 31, 1996 (unaudited) F-23
Unaudited Interim Consolidated Statements of Operations for the three
and six months ended September 30, 1996 and 1995 F-24
Unaudited Interim Consolidated Statements of Cash Flows for the
six months ended September 30,1996 and 1995 F-25
Notes to Unaudited Interim Consolidated Financial Statements F-26
1
<PAGE> 41
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
NORRIS COMMUNICATIONS CORP.
We have audited the consolidated balance sheets of NORRIS COMMUNICATIONS CORP.
as at March 31, 1996 and 1995 and the 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 generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at March 31, 1996
and 1995 and the results of its operations and the changes in its financial
position for the years then ended in accordance with accounting principles
generally accepted in the United States.
VANCOUVER, CANADA,
May 24, 1996 (except as to Note 16[b] /s/ ERNST & YOUNG
which is as of June 7, 1996). CHARTERED ACCOUNTANTS
COMMENTS BY AUDITORS FOR U.S. READERS ON
CANADA - U.S. REPORTING CONFLICT
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by a significant uncertainty such as that referred to in
the attached consolidated balance sheets as at March 31, 1996 and 1995 and as
described in Note 1 to the consolidated financial statements. Our report to the
shareholders dated May 24, 1996 (except as to Note 16[b] which is as of June 7,
1996) is expressed in accordance with Canadian reporting standards which do not
permit a reference to such an uncertainty in the auditors' report when the
uncertainty is adequately disclosed in the consolidated financial statements.
VANCOUVER, CANADA,
May 24, 1996 (except as to Note 16[b] /s/ ERNST & YOUNG
which is as of June 7, 1996). CHARTERED ACCOUNTANTS
F-1
<PAGE> 42
NORRIS COMMUNICATIONS CORP.
Continued under the laws of the Yukon Territory, Canada
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
As at March 31
<TABLE>
<CAPTION>
1996 1995
$ $
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS [note 9]
CURRENT
Cash and temporary cash investments 2,843,540 3,291,203
Accounts receivable, less allowance for doubtful
accounts of $11,647 and $210,000, respectively 94,619 152,673
Inventory [note 6] 3,243,245 2,663,403
Prepaid expenses and other 226,436 396,644
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 6,407,840 6,503,923
- ---------------------------------------------------------------------------------------------------------------------
Property and equipment [note 7] 1,359,791 1,742,796
Purchased goodwill, net of accumulated amortization of
$427,965 and $309,646, respectively -- 354,955
Other intangible assets, net of accumulated amortization
of $24,896 and $17,451, respectively 49,513 56,958
- ---------------------------------------------------------------------------------------------------------------------
7,817,144 8,658,632
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Demand loan payable [note 9] 2,185,546 3,000,000
Accounts payable, trade 2,554,209 1,234,574
Other accounts payable and accrued liabilities 443,225 410,539
Current portion of capital lease obligations [note 12] 168,831 193,229
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,351,811 4,838,342
- ---------------------------------------------------------------------------------------------------------------------
Convertible notes payable [note 13] 3,000,000 --
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,351,811 4,838,342
- ---------------------------------------------------------------------------------------------------------------------
Commitments and contingencies [notes 1 and 12] STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, no par value, authorized 30,000,000 and
20,000,000 shares, respectively; 15,103,703 and 11,616,814
shares outstanding, respectively [notes 11, 13 and 16] 21,762,337 17,849,751
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (23,889,320) (15,621,777)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (534,667) 3,820,290
- ---------------------------------------------------------------------------------------------------------------------
7,817,144 8,658,632
=====================================================================================================================
</TABLE>
See accompanying notes
On behalf of the Board:
Director Director
F-2
<PAGE> 43
NORRIS COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
Year ended March 31
<TABLE>
<CAPTION>
1996 1995
$ $
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES [note 14] 1,328,502 5,593,081
Cost of sales [note 14] 4,413,814 6,729,320
- -------------------------------------------------------------------------------
Gross profit (loss) (3,085,312) (1,136,239)
- -------------------------------------------------------------------------------
OPERATING EXPENSE (INCOME)
Selling and administrative 3,574,597 3,737,704
Research and related expenditures 1,048,540 1,896,809
Interest expense 356,429 320,257
Interest income (33,971) (17,203)
Write-down of purchased goodwill 236,636 --
Write-down of intangible assets [note 15] -- 68,550
- -------------------------------------------------------------------------------
5,182,231 6,006,117
- -------------------------------------------------------------------------------
Operating loss (8,267,543) (7,142,356)
Provision for income taxes [note 10] -- --
- -------------------------------------------------------------------------------
LOSS FOR THE YEAR (8,267,543) (7,142,356)
===============================================================================
LOSS PER SHARE (.63) (.88)
===============================================================================
</TABLE>
See accompanying notes
F-3
<PAGE> 44
NORRIS COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIENCY)
(EXPRESSED IN U.S. DOLLARS)
Year ended March 31
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------- CONTRIBUTED ACCUMULATED
SHARES AMOUNT SURPLUS DEFICIT
# $ $ $
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994 7,696,814 10,781,155 1,592,316 (8,479,421)
Stock issued under stock option plan 20,000 40,900 -- --
Issuance of common stock 3,900,000 7,027,696 -- --
Loss for the year -- -- -- (7,142,356)
- ----------------------------------------------------------------------------------------------------------------
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 3,167,714 3,441,535 -- --
Loss for the year -- -- -- (8,267,543)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 15,103,703 21,762,337 1,592,316 (23,889,320)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-4
<PAGE> 45
NORRIS COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
Year ended March 31
<TABLE>
<CAPTION>
1996 1995
$ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the year (8,267,543) (7,142,356)
Adjustments to reconcile loss to net cash used by
operating activities:
Depreciation and amortization 524,399 596,327
Loss on disposal of property and equipment 38,550 126,032
Write-down of intangible assets -- 68,550
Write-down of purchased goodwill 236,636 --
Professional services paid by issuance of common stock 319,498 --
Refinancing fee paid by issuance of common stock 101,250 --
Compensation paid by issuance of common stock 20,000 --
Changes in assets and liabilities:
Accounts receivable 58,054 431,895
Inventory (579,842) (2,077,320)
Prepaid expenses and other 170,208 (328,579)
Accounts payable, trade 1,319,635 338,931
Other accounts payable and accrued liabilities 32,686 194,038
- --------------------------------------------------------------------------------------------
CASH (USED IN) OPERATING ACTIVITIES (6,026,469) (7,792,482)
- --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (84,932) (247,888)
Proceeds on disposal of property and equipment 30,752 180,645
- --------------------------------------------------------------------------------------------
CASH (USED IN) INVESTING ACTIVITIES (54,180) (67,243)
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances (repayments) under demand loan payable (814,454) 2,720,000
Principal payments on capital lease obligations (24,398) (65,944)
Issuance of convertible notes payable 3,000,000 --
Repayment of note payable -- (31,250)
Proceeds from issuance of shares 3,471,838 7,068,596
- --------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 5,632,986 9,691,402
- --------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS DURING THE YEAR (447,663) 1,831,677
Cash and temporary cash investments, beginning of year 3,291,203 1,459,526
- --------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF YEAR 2,843,540 3,291,203
============================================================================================
</TABLE>
See accompanying notes
F-5
<PAGE> 46
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Norris Communications Corp. (the "Company") was incorporated in the Province of
British Columbia, Canada on February 11, 1988 and is engaged, through its
wholly-owned U.S. subsidiary, in the development, manufacture and marketing of
electronic products. On November 22, 1994, the Company continued its
jurisdiction to the Yukon Territory, Canada.
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
$23,889,320 at March 31, 1996 [1995 - $15,621,777]. The Company's operational
plan for fiscal year 1997 contemplates developing markets for its proprietary
products and continued investment in research and related expenditures. 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 as part of a plan to improve the
financial position and operations with the goal of sustaining Company operations
for the next twelve months and beyond. These steps include (i) seeking
additional equity through private placements and attempting to arrange lines of
credit; (ii) 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; (iii) 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;
(iv) repositioning the core retail product, the FLASHBACK recorder, at the
computer peripheral and telephony markets; (v) building a sales and marketing
infrastructure to focus on the computer retail and Original Equipment
Manufacturer markets; and (vi) upgrading and expanding the management team.
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> 47
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. 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
reporting period. Actual results could differ from those estimates.
Differences between accounting principles generally accepted in the United
States and Canada are summarized below.
Under accounting principles generally accepted in Canada, costs relating to debt
financing are deferred and amortized over the term of the related debt.
Accounting principles generally accepted in the United States provide that costs
relating to debt financing may be treated as a charge to operations in the
period incurred.
Under accounting principles generally accepted in Canada, the release of escrow
shares by the Vancouver Stock Exchange is not considered compensatory. To
conform to accounting principles generally accepted in the United States,
compensation expense of $3,445,750 related to the release of escrow shares was
recorded in 1993. Compensation expense was determined based on the difference
between the fair value of the shares at the time they were placed in escrow and
their fair value, determined to be the average share price in the year the
criteria were met, at the time the criteria triggering the release were met. The
final release of 1,350,000 shares on December 8, 1992 was valued at $3,445,750
as a non-cash compensation expense transaction.
Under accounting principles generally accepted in Canada, the sale of shares of
a subsidiary, and the issuance of shares by the subsidiary, to parties outside
the consolidated group, results in a credit (charge) to operations equal to the
difference between proceeds and the change in the parent company's interest in
the underlying equity of the shares of the subsidiary. Accounting principles
generally accepted in the United States require such amounts to be treated as
contributed surplus where there is not reasonable assurance of realization of
the gain.
Under accounting principles generally accepted in Canada, common share issue
costs are presented as a charge to accumulated deficit. Accounting principles
generally accepted in the United States require that common share issue costs be
deducted from the proceeds of issue.
F-7
<PAGE> 48
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
Loss for the year and basic loss per share under accounting principles generally
accepted in Canada would be:
<TABLE>
<CAPTION>
1996 1995
$ $
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Loss for the year, as reported (8,267,543) (7,142,356)
Adjustments:
Costs of debt financing 321,629 61,110
- -----------------------------------------------------------------------------------------
Loss for the year, as adjusted (7,945,914) (7,081,246)
=========================================================================================
Weighted average number of common shares outstanding 13,065,095 8,097,624
=========================================================================================
Basic loss per share .61 .87
=========================================================================================
</TABLE>
Consolidated balance sheet items under accounting principles generally accepted
in Canada would be:
<TABLE>
<CAPTION>
1996 1995
$ $
- -------------------------------------------------------------------------------
<S> <C> <C>
Common stock 19,005,688 14,905,737
Contributed surplus -- --
Accumulated deficit (19,157,616) (11,024,337)
===============================================================================
</TABLE>
Other differences between accounting principles generally accepted in the United
States and Canada relate to presentation of certain financial information. In
addition, for all years presented, non-cash investing and financing activities
would be presented in the consolidated statements of cash flows [see Note 5].
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company and
its wholly-owned U.S. subsidiaries, Norris Communications, Inc. in 1996 and
American Surface Mounted Devices, Inc. ("ASMD") and Comp General Corporation
("CGC") in 1995, all based in San Diego County, California. On April 1, 1995,
ASMD was merged into CGC, which changed its name to Norris Communications,
Inc., under the laws of the State of California. All significant intercompany
accounts and transactions have been eliminated.
F-8
<PAGE> 49
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
RECLASSIFICATIONS
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform with the 1996 presentation.
TEMPORARY CASH INVESTMENTS
Temporary cash investments, 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
These consolidated financial statements are presented in United States dollars.
The Canadian parent is considered to have the United States dollar as the
functional currency. 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 1,800,000 shares or 23.1% investment in JABRA Corporation
("JABRA") 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 RELATED EXPENDITURES
Research and related expenditures are charged to operations as incurred.
F-9
<PAGE> 50
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
INVENTORY
Inventory of raw materials is recorded at the lower of cost and replacement
cost. Inventory of 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
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.
OTHER INTANGIBLE ASSETS
Other 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.
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.
F-10
<PAGE> 51
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets" and SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reported at the lower of their carrying amount or
their estimated recoverable amount. The adoption of this statement by the
Company is not expected to have an impact on the financial statements. SFAS No.
123 encourages the accounting for stock-based employee compensation programs to
be reported within the financial statements on a fair value based method. If the
fair value based method is not adopted, then the statement requires pro-forma
disclosure of net income and earnings per share as if the fair value based
method had been adopted. It is not expected that the Company will adopt the fair
value based method of accounting for stock options, which is encouraged by SFAS
No. 123, but rather will continue to account for such stock options utilizing
the intrinsic value based method as is allowed by the statement. Both statements
are effective for fiscal years beginning after December 15, 1995.
3. CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade receivables. The Company has
$2.2 million in a money market fund at Merrill Lynch, Pierce, Fenner & Smith
Inc.
Concentration of credit risk with respect to trade receivables exists at year
end as approximately $27,000 or 26% of the outstanding accounts receivable
related to three customers. 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
The Company operates in one major line of business, the development, manufacture
and marketing of electronic products. Sales to three major customers comprise
10%, 10% and 9%, respectively, of revenues in 1996. Sales to two major customers
comprise 31% and 9%, respectively, of revenues in 1995.
F-11
<PAGE> 52
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
5. STATEMENT OF CASH FLOWS
The Company had non-cash operating and financing activities and made cash
payments as follows:
<TABLE>
<CAPTION>
1996 1995
$ $
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Non-cash financing activities
Professional services paid by issuance of common stock 319,498 --
Refinancing fee paid by issuance of common stock 101,250 --
Compensation paid by issuance of common stock 20,000 --
Cash payments for interest and income taxes were as follows:
Interest 356,429 320,257
Income taxes -- --
========================================================================================
</TABLE>
6. INVENTORY
<TABLE>
<CAPTION>
1996 1995
$ $
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials 1,569,812 1,312,935
Work in process 194,437 462,602
Finished goods 1,478,996 887,866
- --------------------------------------------------------------------------------
3,243,245 2,663,403
================================================================================
</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, 1996,
inventory of the Company is substantially all comprised of four 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, 1996 and inventory as at March 31, 1996. 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> 53
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
$ $ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 1,308,116 675,904 632,212
Machinery and equipment under capital
leases 452,960 321,867 131,093
- -----------------------------------------------------------------------------------------------------
2,885,604 1,525,813 1,359,791
=====================================================================================================
1995
Computer hardware and software 362,986 157,539 205,447
Furniture and equipment 130,902 71,800 59,102
Leasehold improvements 584,550 141,374 443,176
Machinery and equipment 1,277,378 501,303 776,075
Machinery and equipment under capital
leases 636,008 377,012 258,996
- -----------------------------------------------------------------------------------------------------
2,991,824 1,249,028 1,742,796
=====================================================================================================
</TABLE>
8. INVESTMENT IN JABRA
The Company owns 1,800,000 common shares of JABRA or 23.1% of JABRA's common
shares with a carrying value of $Nil on the Company's consolidated balance
sheet. The Company has granted an option to the 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]. Due to the fact that
the Company has no direct involvement in the operations of JABRA, is not active
at the Board of Directors level and owns, on a fully diluted basis,
approximately 20.1% of JABRA with additional dilution possible and beyond its
control, management is of the opinion that the Company does not exert
significant influence over the operations of JABRA, and therefore accounts for
its investment in JABRA under the cost method effective July 15, 1993.
F-13
<PAGE> 54
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
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 is collateralized by a first security interest covering
accounts recoverable, inventory, property and equipment, and other assets, and a
specific pledge of the Company's shares in NCI and JABRA.
F-14
<PAGE> 55
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
10. INCOME TAXES
The Company accounts for income taxes under the liability method required by
FASB Statement 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 $2,632,000 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>
1996 1995
$ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Tax over book depreciation 85,000 39,000
- -----------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 85,000 39,000
- -----------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Bad debt reserve 5,000 86,000
Inventory capitalization 108,000 92,000
Inventory reserve 20,000 103,000
Net operating loss carryforwards 5,912,000 3,047,000
Warranty reserve 8,000 78,000
Other 83,000 52,000
- -----------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 6,136,000 3,458,000
Valuation allowance for deferred tax assets (6,051,000) (3,419,000)
- -----------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS 85,000 39,000
- -----------------------------------------------------------------------------------------------------
NET DEFERRED TAX -- --
=====================================================================================================
</TABLE>
The net provision for income taxes in 1996 and 1995 is $Nil as the Company
incurred losses in those years. Pre-tax income (loss) from Canadian operations
was approximately $1,035,000 in 1996 and $1,424,000 in 1995.
F-15
<PAGE> 56
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
10. 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
- -----------------------------------------------------------------------------------------------------
1996 1995
% %
- -----------------------------------------------------------------------------------------------------
<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 44.1 45.1
Canadian non-capital loss rate (44.1) (45.1)
- -----------------------------------------------------------------------------------------------------
Effective rate on operating loss -- --
=====================================================================================================
</TABLE>
The Company has U.S. net operating loss carryforwards available at March 31,
1996 of approximately $9,462,000 and $4,991,000 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.
The Company has non-capital losses available for Canadian income tax purposes
aggregating approximately $2,081,500. The non-capital losses expire as follows:
<TABLE>
<CAPTION>
$
- -----------------------------------------------------------------------------------------------------
<S> <C>
1998 9,300
2002 1,102,900
2003 969,300
- -----------------------------------------------------------------------------------------------------
2,081,500
=====================================================================================================
</TABLE>
No provision has been made in the accounts for the future tax benefits that may
result from the utilization of these losses as their realization is not certain.
F-16
<PAGE> 57
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
11. SHARE CAPITAL
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 was
approved by the shareholders on September 29, 1994 and 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 500,000
shares. The 1994 Plan provides for the granting of options which either qualify
for treatment as incentive stock options or non-statutory stock options.
Options granted during 1996 were under the 1994 and 1992 Stock Option Plan.
Options granted during 1995 were under the 1992 Stock Option Plan.
The following table summarizes stock option transactions:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, beginning of year 694,658 564,318
Granted 843,000 185,840
Exercised (15,000) (20,000)
Expired (23,000) --
Cancelled (6,000) (35,500)
- -----------------------------------------------------------------------------------------------------
Outstanding, end of year 1,493,658 694,658
=====================================================================================================
</TABLE>
Options covering 843,000 common shares were granted in 1996 at a per share price
ranging from US $1.50 to US $3.375. Options covering 185,840 common shares were
granted in 1995 at a per share price of US $3.65.
All outstanding options were exercisable at March 31, 1996, except for 292,000
options which vest over varying periods of up to two years. The options are
exercisable at prices ranging from US $2.09 to US $3.65 and expire over the
period to April 2000.
Options covering 15,000 common shares were exercised in 1996 at a per share
price of $2.02 ($2.84 Cdn.). Options covering 20,000 common shares were
exercised in 1995 at a per share price of $2.05 ($2.84 Cdn.).
F-17
<PAGE> 58
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
11. SHARE CAPITAL (CONT'D.)
SHARE WARRANTS
The Company has outstanding share warrants as of March 31, 1996, 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 2.01** February 2000
88,014 2.01** March 2000
128,067 1.25** October 2005
- -----------------------------------------------------------------------------------------------------
1,088,917
=====================================================================================================
</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, 1996.
All warrants are denominated in U.S. dollars.
F-18
<PAGE> 59
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
12. COMMITMENTS
The Company has two leases for office space in Poway, California which are
subject to annual increases based on the CPI index. The leases expire in 1998
and 2002. The minimum operating lease commitments include future rent payments
for the office lease which expires in 1998, a portion of which has been sublet
on a month-to-month basis to a related company at cost. Office rent expense for
the years ended March 31, 1996 and 1995 was $271,620 and $307,735, respectively.
In addition, the Company leases certain equipment under capital leases. The cost
of the assets under capital lease is recorded with machinery and equipment. All
assets under capital lease are subject to lien by the lessor. The capital lease
bears interest at 18% per annum.
Subsequent to the transfer of one of its lease obligations to the Federal
Deposit Insurance Corporation, the Company has had difficulty in making payments
to the appropriate party. As such, the Company is not current on its lease
payments and, in accordance with the terms of the lease, has classified the
entire remaining obligation as a current liability.
<TABLE>
<CAPTION>
Minimum commitments are as follows: OPERATING CAPITAL
LEASES LEASES
$ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
YEAR ENDING MARCH 31
1997 809,000 166,621
1998 593,000 2,954
1999 318,000 1,231
2000 221,000 --
2001 221,000 --
Thereafter 166,000 --
- -----------------------------------------------------------------------------------------------------
Total minimum lease payments 2,328,000 170,806
- ------------------------------------------------------------------------------
Less amounts representing interest 1,975
- -----------------------------------------------------------------------------------------------------
Obligations under capital leases 168,831
Less current portion 168,831
- -----------------------------------------------------------------------------------------------------
--
=====================================================================================================
</TABLE>
F-19
<PAGE> 60
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
13. CONVERTIBLE NOTES PAYABLE
<TABLE>
<CAPTION>
1996 1995
$ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
7% convertible notes payable, due March 1999 3,000,000 --
=====================================================================================================
</TABLE>
The convertible notes payable are convertible at the option of the holder into
common shares of the Company at any time after May 4, 1996. The convertible
notes payable are 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 4,336,167 common shares of
the Company at conversion prices per share ranging from US $0.981 to US $1.269.
Proforma convertible notes payable, total liabilities, common stock and total
stockholders' equity (deficiency) as at March 31, 1996 after giving effect to
the above conversion would be:
<TABLE>
<CAPTION>
1996 1995
$ $
- -----------------------------------------------------------------------------------------------------
(Proforma) (Audited)
<S> <C> <C>
Convertible notes payable -- 3,000,000
Total liabilities 5,351,811 8,351,811
Common stock 24,762,337 21,762,337
Total stockholders' equity (deficiency) 2,465,333 (534,667)
=====================================================================================================
</TABLE>
F-20
<PAGE> 61
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
14. 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.
15. WRITE-DOWN OF INTANGIBLE ASSETS
During 1994, the Company acquired certain proprietary electronic data
compression technology for an aggregate purchase price of $101,743, consisting
of $30,000 and 27,000 shares of common stock of the Company with an assigned
value of $71,743. Although the acquisition contemplated payment of consideration
for additional technology, none has been delivered by the inventor and
accordingly the Company is not obligated to make any purchases or pay any
additional consideration. The acquired technology is unproven and is not used in
the Company's proprietary products and the Company has no present plans to
attempt to develop this technology. Accordingly, during 1995, the unamortized
balance of the acquired technology was written down to a nominal value.
F-21
<PAGE> 62
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
16. SUBSEQUENT EVENTS
[a] On April 23, 1996, the Company issued 85,000 common shares at an assigned
value of $1.50 per share in settlement of accounts payable and accrued
liabilities of $127,500 and 48,000 common shares at an assigned value of
$1.50 per share for marketing services of $72,000.
[b] On June 7, 1996, the Company completed a private placement of $2,500,000,
consisting of 2,420,143 common shares of the Company issued at a price of
$0.70 per share and warrants with a face value of $805,900. The warrants
are exercisable into common shares of the Company at the lesser of: $0.70
per common share or a 30% discount to the 5 day moving average 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 until the warrants are
exercised. The Company is committed to filing a Registration Statement with
the Securities and Exchange Commission by July 7, 1996 in connection with
the private placement. In the event the Company is unable to file a
Registration Statement prior to July 7, 1996 and/or the Registration
Statement is not declared effective before September 5, 1996, the Company
agrees to issue 3% more common shares and warrants for each successive 30
day period for the first four months and 1% more common shares and warrants
for each successive 30 day period thereafter, until the Registration
Statement is filed and/or declared effective.
F-22
<PAGE> 63
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORRIS COMMUNICATIONS, INC
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 MARCH 31, 1996
$ $
------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash 991,109 2,843,540
Accounts receivable, less allowance for doubtful
accounts of $11,647 and $11,647, respectively 113,235 94,619
Inventory (note 3) 3,246,086 3,243,245
Prepaid expenses and other 164,799 226,436
------------------------------------------
Total current assets 4,515,229 6,407,840
Property and equipment, net 1,309,318 1,359,791
Other intangible assets, net of accumulated amortization of
$28,618 and $24,896 respectively 45,791 49,513
------------------------------------------
TOTAL ASSETS 5,870,338 7,817,144
==========================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Demand loan payable (note 4) -- 2,185,546
Accounts payable, trade 1,338,730 2,554,209
Other accounts payable and accrued liabilities 227,069 443,225
Current portion of capital lease obligations 167,836 168,831
------------------------------------------
TOTAL CURRENT LIABILITIES 1,733,635 5,351,811
------------------------------------------
Convertible notes payables -- 3,000,000
------------------------------------------
TOTAL LIABILITIES 1,733,635 8,351,811
------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $.001 par value, 5,000,000 shares authorized;
none issued. -- --
Common stock, no par value, authorized 60,000,000 and
30,000,000 respectively; 22,268,828 and 15,103,703 shares
outstanding, respectively (note 5) 26,695,054 21,762,337
Pre-paid Warrants (note 6) 3,396,505 --
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (27,547,172) (23,889,320)
------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 4,136,703 (534,667)
------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 5,870,338 7,817,144
==========================================
</TABLE>
See notes to interim consolidated financial statements
F-23
<PAGE> 64
NORRIS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
$ $ $ $
-------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
REVENUES 147,817 327,871 301,543 806,603
Cost of sales 790,061 725,440 1,049,318 2,192,405
-------------------------------- ----------------------------------
Gross profit (loss) (642,244) (397,569) (747,775) (1,385,802)
-------------------------------- ----------------------------------
OPERATING EXPENSE (INCOME)
Selling and Administration 1,376,351 912,264 2,449,651 1,695,733
Research and related expenditures 196,101 126,365 407,685 604,090
Interest expense 1,042 57,406 77,522 181,940
Interest income (13,589) (4,224) (24,781) (20,409)
-------------------------------- ----------------------------------
1,559,905 1,091,811 2,910,077 2,461,354
-------------------------------- ----------------------------------
Operating loss (2,202,149) (1,489,380) (3,657,852) (3,847,156)
Provision for income taxes (note 8) -- -- -- --
-------------------------------- ----------------------------------
NET LOSS (2,202,149) (1,489,380) (3,657,852) (3,847,156)
================================ ==================================
Net loss per share (note 9) (0.10) (0.13) (0.19) (0.33)
================================ ==================================
Weighted average shares 22,287,418 11,710,529 19,641,347 11,697,517
================================ ==================================
</TABLE>
See notes to interim consolidated financial statements
F-24
<PAGE> 65
NORRIS COMMUNICATIONS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
SEPTEMBER 30
1996 1995
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss (3,657,852) (3,847,156)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 202,998 255,229
Gain from sale of asset - 38,550
Interest 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 (18,616) 12,807
Inventory (2,841) (1,349,753)
Prepaid expenses and other 61,637 88,950
Accounts payable, trade (1,215,479) 1,476,168
Other accounts payable and accrued liabilities (216,156) (390,686)
----------------- -----------------
Cash used in operating activities (4,613,036) (3,715,891)
----------------- -----------------
INVESTING ACTIVITIES
Purchase of property and equipment (148,803) (35,263)
Proceeds on sale of assets - 28,300
Investment in patents and intangibles - (3,965)
----------------- -----------------
Cash used in investing activities (148,803) (10,928)
----------------- -----------------
FINANCING ACTIVITIES
Repayments under demand loan payable (2,185,546) 132,646
Principal payments on capital lease obligations (995) (27,333)
Convertible note payable - -
Proceeds from issuance of shares and warrants 5,095,949 330,303
----------------- -----------------
Cash provided by financing activities 2,909,408 435,616
----------------- -----------------
Net decrease in cash (1,852,431) (3,291,203)
Cash, beginning of period 2,843,540 3,291,203
----------------- -----------------
Cash, end of period 991,109 0
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest 77,521 181,940
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
A note holder converted a long-term convertible
note plus accrued interest into common stock 3,033,773 -
</TABLE>
See notes to interim consolidated financial statements
F-25
<PAGE> 66
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
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 the development, manufacture and marketing of
electronic products and exploiting proprietary technology.
2. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Norris Communications, Inc.
("NCT"), a California corporation, based in San Diego County, California.
The interim consolidated financial statements have been prepared on a going
concern basic, 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 cash of the last three fiscal years and for the three and six month periods
ended September 30, 1996 and has an accumulated deficit of $27,547,172 at
September 30, 1996. The Company's operational plan for fiscal 1997 contemplates
developing markets for its proprietary products and continued investment in
research and related expenditures. 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.
The interim consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States 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 year ended
March 31, 1996.
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, 1996 are not necessarily indicative of
the results that may be expected for the year ending March 31, 1997. The interim
consolidated financial statements and notes thereto are stated in U.S. dollars.
3. INVENTORY
Inventory of raw material is recorded at the lower of cost and replacement cost.
inventory of 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, 1996 March 31, 1996
------------------ --------------
<S> <C> <C>
Raw materials $1,398,656 $1,569,812
Work in process 171,179 194,437
Finished goods 1,676,251 1,478,996
---------- ----------
$3,246,086 $3,243,245
========== ==========
</TABLE>
F-26
<PAGE> 67
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
4. DEMAND LOAN PAYABLE
The demand loan payable to CVD Financial Corporation plus accrued interest was
retired on July 31, 1996.
5. COMMON STOCK
The following table summarizes shares issued during the period ended September
30, 1996:
<TABLE>
<CAPTION>
Shares Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, March 31, 1996 15,103,703 $21,762,337
Convertible notes and accrued interest
at prices ranging from $0.981 to $1.269 per share 4,366,051 3,033,773
Stock issued for accounts payable at $1.50 per share 85,000 127,500
Stock issued for services at $1.50 per share 48,000 72,000
Stock issued for cash at $0.70 per share net of
offering costs of $159,283 2,420,143 1,534,817
Stock issued for cash at $0.69125 per share net of
offering costs of $5,373 245,931 164,627
- -------------------------------------------------------------------------------------------
Balance, September 30, 1996 22,268,828 $26,695,054
===========================================================================================
</TABLE>
6. PRE-PAID WARRANTS
Represents proceeds from warrants pre-paid for cash net of offering costs of
$884,227. The face amount of the warrants or $3,805,900 is 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 $3,000,000 of warrants) or a 30% discount to the 5 day
moving average bid price of the common shares on the day prior to exercise. The
exercise price of the warrants will be further discounted by 7% per year and
for other events until the warrants are exercised. At September 30, 1996 these
warrants were exercisable into approximately 5.5 million common shares.
7. OPTIONS AND WARRANTS
At September 30, 1996 warrants were outstanding/exercisable into the following
listed shares:
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ Expiration Date
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Warrants 200,000 2.00 September 1998
Warrants 450,000 1.75 June 1999
Warrants 33,750 4.00 June 1999
Warrants 82,100 4.00 August 1999
Warrants(a) 106,986 2.01 February 2000
Warrants(a) 88,014 2.01 March 2000
Warrants 129,230 1.625 March 2001
Warrants 401,924 9.9875 July 2001
Warrants(a) 128,067 1.25 October 2005
- ---------------------------------------------------------------------------------------
Total 1,620,071
=======================================================================================
</TABLE>
(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 March
31, 1996.
F-27
<PAGE> 68
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
7. OPTIONS AND WARRANTS (Continued)
The following table summarizes stock option activity for the period:
<TABLE>
<S> <C>
Outstanding at March 31, 1996 1,493,658
Granted -
Exercised -
Expired (66,000)
Canceled (5,000)
---------
Outstanding at September 30, 1996 1,422,658
=========
</TABLE>
Options outstanding are exercisable at prices ranging from $0.90 to $6.01 and
expire over a period from 1996 to 2000.
8. 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 $9,462,000 and $4,991,000 for federal and state tax purposes,
respectively, subject to certain limitations.
9. NET LOSS PER SHARE
The net loss per share is calculated using a weighted average number of common
shares and common stock equivalents outstanding for the period. Common
equivalent shares consisting of outstanding pre-paid warrants, stock options
and stock purchase warrants have been excluded because their effect would be
antidilutive.
F-28
<PAGE> 69
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 offices 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 $ 3,102
Blue Sky Fees and Expenses $ 3,500
Legal Fees and Expenses $ 70,000
Accounting Fees and Expenses $ 12,000
Miscellaneous Expenses $ 8,500
---------
Total $ 97,102
=========
II-1
<PAGE> 70
Item 26. Recent Sales of Unregistered Securities.
The Company has sold the following securities within the last
three years:
1. In March 1994, the Company issued 1,150,000 shares of Common
Stock for $2,300,000 cash to accredited investors. The issuance of such
securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
2. In connection with the March 1994 private placement, the
Company issued to the placement agent in consideration of the efforts of the
placement agent, warrants to purchase 115,850 shares of Common Stock at a price
(subject to adjustment) of $4.00 per share.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
II-2
<PAGE> 71
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
17. 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.
18. 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.
19. 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
20. 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.
21. 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.
22. 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.
II-3
<PAGE> 72
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) 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> 73
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 January 14, 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, Robert Putnam and Kathleen E. Terry, 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 deemed
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>
Elwood G. Norris Chairman of the Board, Chief January 14, 1997
- ----------------
Elwood G. Norris Executive Officer and Director
(principal executive officer)
/s/ Fred Falk President and Director January 14, 1997
- -------------
Fred Falk
/s/ Kathleen E. Terry Chief Financial Officer and Director January 14, 1997
- --------------------- (principal financial and accounting officer)
Kathleen E. Terry
/s/ Robert Putnam Vice President and Director January 14, 1997
- -----------------
Robert Putnam
/s/ R. Gordon Root Director January 14, 1997
- ------------------
R. Gordon Root
/s/ Michael W. Joe Director January 14, 1997
- ------------------
Michael W. Joe
</TABLE>
II-5
<PAGE> 74
EXHIBIT INDEX
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
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.
II-6
<PAGE> 75
4.2 Bylaws of Norris Communications, Inc., filed as
Exhibit C to the Company's July 3, 1996 Proxy
Statement.
4.3 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.
4.4 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.
4.4.1 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.
4.5 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.
4.5.1 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.
4.6 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.
4.7 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.
4.7.1 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.
4.7.2 Warrant Agreement No. 3 for 714 Common Shares
between the Company and Pennsylvania Merchant
Group Ltd. dated March 20, 1995 and filed as
Exhibit 4.7.2 to the Company's 1995 Form
10-KSB.
4.8 Warrant Agreement for 115,000 Common Shares
between the Company and Cruttenden & Co., Inc.
dated February 10, 1994 and filed as Exhibit
4.8 to the Company's 1995 Form 10-KSB.
4.9 Form of 7% Convertible Note dated March 25,
1996 and due March 25, 1999 for an aggregate of
$3,000,000 issued to a total of six investors
and filed as Exhibit 4.9 to the Company's Form
8-K dated April 5, 1996.
II-7
<PAGE> 76
4.10 Warrant Agreement for 129,230 Common Shares
between the Company and First Bermuda
Securities Ltd. dated March 25, 1996 and filed
as Exhibit 4.10 to the Company's 1995 Form 8-K
dated April 5, 1996.
4.11 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.
4.12 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.
5.1 Opinion of Higham, McConnell & Dunning.*
10.1 Share Exchange Agreement among the Company,
Norcom Communications Corporation, and American
Technology Corporation, dated for reference
March 23, 1988, and filed as Exhibit 2.1 to the
Company's Registration Statement on Form 10, as
amended.
10.1.1 Amendment of Agreement among the Company,
Norcom Communications Corporation, and American
Technology Corporation, dated for reference
March 23, 1988 and filed as Exhibit 2.1.1 to
the Company's Registration Statement on Form
10, as amended.
10.2 Plan and Agreement of Reorganization among the
Company, American Surface Mounted Devices, Inc.
and ASMD, Inc., dated August 11, 1989 and filed
as Exhibit 2.2 to the Company's Registration
Statement on Form 10, as amended.
10.3 Plan and Agreement of Reorganization among the
Company, Sage Microsystems, Inc. and Sage
Micro, Inc. dated November 7, 1991 and filed as
Exhibit 2.3 to the Company's Registration
Statement on Form 10, as amended.
10.4 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 Exhibit 2.4 to the Company's
Registration Statement on Form 10, as amended.
10.5 Loan Agreement between CVD Financial
Corporation and the Company and its
Subsidiaries dated July 15, 1994 and filed as
Exhibit 10.5 to the Company's 1995 Form 10-KSB.
10.5.1 Loan Modification Agreement between CVD
Financial Corporation and the Company and its
Subsidiaries dated November 14, 1994 and filed
as Exhibit 10.5.1 to the Company's 1995 Form
10-KSB.
II-8
<PAGE> 77
10.5.2 Loan Modification Agreement, dated as of August
1, 1995 and filed as Exhibit 10.5.2 to the
Company's 1995 Form 8-K.
10.5.3 Amended and Restated Promissory Note, dated
August 1, 1995 and filed as Exhibit 10.5.3 to
the Company's Form 8-K dated October 27, 1995.
10.5.4 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.
10.5.5 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.
10.5.6 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.
10.5.7 Amended and Restated Stock Pledge and Option
Agreement (for 300,000 shares of JABRA), dated
August 1, 1995 and filed as Exhibit 10.5.7 to
the Company's 8-K dated October 27, 1995.
10.5.8 Loan Modification Agreement between the Company
and CVD Financial Corporation dated February 1,
1996 and filed as Exhibit 10.5.8 to the
Company's 1995 Form 10-QSB.
10.5.9 Amended and Restated Promissory Note between
the Company and CVD Financial Corporation dated
February 1, 1996 and filed as Exhibit 10.5.9 to
the Company's 1995 Form 10-QSB.
10.5.10 Loan Modification Agreement between CVD
Financial Corporation and the Company and its
subsidiary dated as of April 1, 1996 and filed
as Exhibit 10.5.10 to the Company's Form 8-K
dated April 11, 1996.
10.6 Technology Transfer Agreement among the
Company, American Technology Corporation,
Elwood G. Norris and Norcom Electronics
Corporation dated January 25, 1988 and filed as
Exhibit 10.8 to the Company's Registration
Statement on Form 10, as amended.
10.6.1 Assignment Agreement among American Technology
Corporation, Norcom Electronics Corporation,
Norcom Communications Corporation and Elwood G.
Norris dated March 22, 1988 and filed as
Exhibit 10.8.1 to the Company's Registration
Statement on Form 10, as amended.
10.7 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.
10.8 Agreement and Plan of Reorganization by and
among the Company, Norcom Communications
Corporation and JABRA Corporation dated January
15, 1993 and filed as Exhibit 10.8 to the
Company's 1993 Form 10-K.
II-9
<PAGE> 78
10.8.2 Amendment No. 1 to Agreement and Plan of
Reorganization by and among the Company, Norcom
Communications Corporation and JABRA
Corporation dated May 28, 1993 and filed as
Exhibit 10.8.2 to the Company's 1993 Form 10-K.
10.9 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.
10.10 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.
10.11 Plan and Agreement of Reorganization by merger
of American Surface Mounted Devices, Inc. with
and into Comp General Corporation under the
name of Norris Communications, Inc. dated April
1, 1995 and filed as Exhibit 10.11 to the
Company's 1995 10-KSB.
10.12 Lease Agreement between the Company and
Pomerado Properties dated August 17, 1989 and
filed as Exhibit 10.12 to the Company's
Registration Statement on Form 10, as amended.
10.13 Lease Agreement between the Company and
Pomerado Properties dated July 2, 1992 and
filed as Exhibit 10.13 to the Company's
Registration Statement on Form 10, as amended.
10.14 Letter Agreement between the Company and Homer
H. Lesihau, dated February 3, 1993 and filed as
Exhibit 10.17 to the Company's 1993 Form 10-K.
10.14.1 Amending Agreement to Letter Agreement Dated
February 3, 1993 between the Company and Homer
H. Lesihau, dated April 29, 1993 and filed as
Exhibit 10.17.1 to the Company's 1993 Form
10-K.
10.16 Financial Advisory Agreement dated August 21,
1995 between Auerbach, Pollack & Richardson,
Inc. and the Company, filed as Exhibit 10.16 to
the Company's Form 8-K dated November 13, 1995.
10.17 Norris Communications Corp. and Auerback,
Pollack & Richardson, Inc. Placement Agent's
Warrant Agreement, filed as Exhibit 10.17 to
the Company's Form 8-K dated November 13, 1995.
10.18 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.
10.18.1 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.
II-10
<PAGE> 79
10.19 Registration Rights Agreement between Auerbach,
Pollak & Richardson, Inc. and the Company,
filed as Exhibit 10.19 to the Company's Form
8-K dated November 13, 1995.
10.20 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.
10.21 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.
10.22 Employment Agreement dated August 1, 1995
between the Company and R. Gordon Root, filed
as an Exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31,
1996.
10.23 Employment Agreement dated January 11, 1996
between the Company and Peter W. Gorrie, filed
as an Exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31,
1996.
10.24 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.
10.25 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.
10.26 First Amendment to Placement Agreement dated
May 20, 1996 between the Company and Iacocca
Capital Partners, L.P.*
10.27 Agreement dated July 30, 1996 between the
Company and Greystone Capital, Ltd.*
10.28 OEM Purchase Agreement dated October 18, 1996
between the Company and Sanyo Information
Systems (U.K.) Ltd.*
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, 1996.
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, 1996.
23.1 Consent of Higham, McConnell & Dunning,
included in Exhibit 5.1.*
23.2 Consent of Ernst & Young.*
- ---------------------------------------------
* Each exhibit marked with an asterisk is filed with the Registration
Statement. Each exhibit not marked with an asterisk is incorporated by
reference to an exhibit previously filed by the Company as indicated
above.
II-11
<PAGE> 1
Exhibit 5.1
January 14, 1997 (714) 365-5516
Norris Communications, Inc.
12725 Stowe Drive
Poway, California 92064
Re: Registration on Form SB-2 of
8,703,136 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 8,703,136 shares
("Shares") of its Common Stock, no 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 to original documents of all documents submitted to us as
<PAGE> 2
Norris Communications Corp.
August 29, 1996
Page 2
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 judgment, 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
CCB:mhc
<PAGE> 1
EXHIBIT 10.26
FIRST AMENDMENT TO PLACEMENT AGREEMENT
This First Amendment to Placement Agreement (this "Amendment") dated as
of the 20th day of May, 1996 is entered into between Iacocca Capital Partners,
L.P., a Delaware limited partnership ("Placement Agent") and Norris
Communications Corp., a corporation organized under the laws of the Yukon
Territory, Canada (the "Company").
RECITALS
A. The Placement Agent and the Company entered into a Placement
Agreement dated as of April 16, 1996 (the "Placement Agreement"), pursuant to
which the Company engaged Placement Agent and Placement Agent agreed to act as
agent for the Company in connection with a private placement of securities
through the sale of shares of common stock of the Company and warrants
exercisable into shares of common stock of the Company.
B. The Placement Agent and the Company desire to amend the Placement
Agreement upon the terms and conditions set forth in this Amendment.
In consideration of the above recitals and for other good and valuable
consideration, the receipt and sufficiency of which hereby are acknowledged by
each party, the Placement Agent and the Company agree as follows:
1. Defined Terms. Unless otherwise specified herein, any
capitalized terms defined in the Placement Agreement shall have the respective
meanings ascribed to such terms in the Placement Agreement.
2. Termination. With respect to Section 10 in the Placement
Agreement, if any of the conditions specified in Section 8 have not been
fulfilled or a consummation of the sale of the shares of common stock of the
Company and/or warrants exercisable into shares of common stock of the Company
has not occurred by the later of (a) 14 days after the upcoming shareholder
meeting is held and (b) 120 days from the date of the Placement Agreement,
either party may terminate the Placement Agreement upon 30 days prior written
notice to the other party.
3. Placement Agent Fee. Any issuances of Common Stock of the
Company to certain pre-existing creditors and/or to counsel of the Company in
exchange for no more than $600,000 in debt shall not constitute a sale of
Investor Units or other securities in a private transaction for purposes of
determining both the cash portion and the warrant amount constituting the
Placement Agent's fee.
4. Placement Agent Expenses. With respect to the reimbursement
of Placement Agent's expenses, the Company shall pay (a) all out-of-pocket
expenses reasonably incurred by Placement Agent in connection with its
performance under the Placement Agreement, but not to exceed $50,000 without the
written consent of the Company and (b) an
<PAGE> 2
advance of an additional $20,000 concurrent with the execution of this Amendment
against such expenses.
5. Representations and Warranties. The Company reaffirms that
the representations and warranties made to Placement Agent in the Placement
Agreement are true and correct in all material respects as of the date of this
Amendment as though made on the date hereof.
6. Regulation D. Placement Agent acknowledges and agrees that
the offer and sale of the Investor Units is being made in reliance upon the
exemption from the registration requirements of Section 5 of the Securities Act
of 1933 provided by Regulation D and other administrative rules and regulations
interpreting Section 4(2) of the Securities Act of 1933 and the exemptive
provisions of applicable securities laws. Placement Agent agrees not to violate
Rule 502(c) prohibiting the use of general solicitation or general advertising
in connection herewith.
7. Continuing Effect. Other than as set forth in this
Amendment, the Placement Agreement remains in full force and effect and is
hereby ratified and confirmed.
8. References. Upon the execution of this Amendment by both of
the parties hereto, all references in any document executed in connection with
the Financing to the "Placement Agreement", "hereunder", "thereunder", "hereof",
"thereof" or other similar reference to the Placement Agreement shall mean and
be a reference to the Placement Agreement, as amended by this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first written above.
IACOCCA CAPITAL PARTNERS, L.P., A DELAWARE
LIMITED PARTNERSHIP
BY: IACOCCA CAPITAL GROUP, INC., A MICHIGAN
CORPORATION, ITS GENERAL PARTNER
BY: /S/ WILLIAM S. ELKUS
----------------------------------------
NAME: WILLIAM S. ELKUS
----------------------------------------
ITS: PRESIDENT
----------------------------------------
NORRIS COMMUNICATIONS CORP., A CORPORATION
ORGANIZED UNDER THE LAWS OF THE YUKON TERRITORY,
CANADA
BY: /S/ ROBERT PUTNAM
--------------------------------------------
NAME: ROBERT PUTNAM
--------------------------------------------
ITS: CORPORATE SECRETARY
--------------------------------------------
-2-
<PAGE> 1
EXHIBIT 10.27
GREYSTONE CAPITAL, LTD.
9465 Wilshire Boulevard, Suite 625
Beverly Hills, California 90212
July 30, 1996
Ms. Kathleen E. Terry
Norris Communications Corporation
12725 Stowe Drive
Poway, California 92064
Dear Kathy:
This letter shall set forth the agreement by and between Norris
Communications Corporation ("Norris") and Greystone Capital, Ltd. ("Greystone")
with respect to the private placement of Norris Securities.
1. Fee. In consideration of Greystone's efforts as a finder in this
transaction, Norris agrees to pay Greystone a fee in cash at the close, which
Greystone agrees to accept as its complete and final compensation for this
transaction, as follows:
(a) The fee shall be an amount equal to 3.5% of the "Gross
Funds" provided by the investors represented by Barry Globerman, Esq., which
funds were transferred from the Barry Globerman escrow to the escrow account at
City National Bank. The "Gross Funds" shall mean the amounts actually invested
by the investors before the deduction of the 3% fee paid to Venture Guarantee or
its affiliate, Select Capital Advisors, Inc. (For example, as of the date of
this letter, the City National Bank escrow has received funds from the Barry
Globerman, Esq. escrow account in the amount of $2,580,200. This amount
reflected an actual investment by the investors of $2,660,000 before the
deduction of the 3.5% fee paid to Venture Guarantee. Therefore, under this
example, Greystone would be entitled to receive a finder's fee equal to 3.5% of
$2,660,000 or $93,100.) The parties agree that the final figure will be
calculated before the date of the close.
<PAGE> 2
Ms. Kathleen E. Terry
July 30, 1996
Page 2
(b) Norris agrees that said fees will be paid to Greystone at
the close of the transaction directly from the escrow account at City National
Bank. In this regard, Norris agrees to provide to City National Bank at least
one day prior to the close an irrevocable instruction that the fee shall be paid
directly from the escrow account at closing to Greystone's account at City
National Bank (Acct #001121014).
2. Representations and Warranties of Greystone.
(a) Greystone hereby represents and warrants to Norris that:
(i) it is a corporation duly formed and validly existing under the laws of the
State of California, with full power and authority to enter into this letter
agreement and perform its obligations hereunder, (ii) all corporate action of
Greystone necessary to be taken with respect to the entering into of this letter
agreement and the performance of its obligations hereunder has been take, (iii)
when fully executed by all parties, this letter agreement will constitute a
legal, valid and binding instrument enforceable against Greystone in accordance
with its terms, subject to bankruptcy, insolvency and other similar laws
relating to the enforcement of creditors' rights generally.
(b) Neither the sale of the securities, nor the execution,
delivery or performance of this letter agreement will result in a breach,
violation or acceleration of, or constitute a default under, the terms of any
indenture or other agreement or instrument to which Greystone is a party or by
which it or its properties is bound or may be affected, that would materially
and adversely affect its ability to perform its obligations under this letter
agreement, or its ability to conduct its business as currently conducted.
(c) Any information provided in connection with the offering
and any amendment thereof or supplement thereto, delivered by Greystone or its
directors, officers, employees and agents in connection with the private
placement to Norris, as of their respective dates and as of the closing date,
did not and will not, include any untrue statement or a material fact or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(d) Greystone acknowledges and agrees that the offer and sale
of the securities is being made in reliance upon the exemption from the
registration requirements of Section 5 of the Securities Act of 1933 provided by
Regulation D and other administrative rules and regulations interpreting Section
4(2) of the Securities Act of 1933 and the exemptive provisions of applicable
securities laws. Greystone agrees not to violate Rule 502(c) prohibiting the use
of general solicitation or general advertising in connection herewith.
<PAGE> 3
Ms. Kathleen E. Terry
July 30, 1996
Page 3
3. Indemnification. Greystone agrees to indemnify and hold harmless
Norris and any of its officers, directors, counsel, employees and agents
(collectively, "Indemnified Persons"), to the fullest extent lawful, from and
against all claims, liabilities, losses, damages and expenses (or actions in
respect thereto) to which such Indemnified Person may become subject related to
or arising out of a breach by Greystone of the terms of this letter agreement
(including its representations and warranties therein).
4. Confidentiality.
(a) Except with respect to prospective investors in the
financing after the execution hereof, each party agrees that, without the prior
written consent of the other party hereto, it and its officers, employees and
agents will not disclose to any other person that the evaluation material or the
financing documents have been made available hereunder or that discussions or
negotiations are taking place concerning a transaction between the parties
unless such disclosure is required by law, in which case the disclosing party or
its representatives shall give the other prior reasonable notice of such
disclosure. The term "Person" as used in this letter agreement shall be broadly
interpreted to include, without limitation, any corporation, company,
partnership, individual or other entity.
(b) All written or other information of any kind or type,
disclosed, supplied or revealed by or received from Norris to or by Greystone
relating to the products, business plans, financial condition or business
relationships shall be considered the Norris' proprietary information (the
"Proprietary Information"), except to the extent that such information is within
the public domain at the time of Norris' disclosure to Greystone or subsequently
becomes in the public domain through no action or fault of Greystone.
(c) Greystone covenants and agrees that it shall not, at any
time during the term of this letter agreement and thereafter: (i) make any use
whatsoever of any of the Proprietary Information except as may be necessary to
perform this letter agreement, (ii) reproduce any of the Proprietary Information
in any manner except as may be necessary to perform this letter agreement, or
(iii) disclose any of the Proprietary Information except as may be necessary to
perform this letter agreement to any person or entity, all except as permitted
by Norris in writing.
5. Noncircumvention. Norris agrees that it will not circumvent
Greystone's relationship with Venture Guarantee, Select Capital Advisors, Inc.
or the investors provided by either of said parties (collectively, the
"Greystone Parties") for the purpose of arranging future equity of debt funding
for Norris for a period of one year. Norris agrees that the Greystone Parties
are proprietary to Greystone.
<PAGE> 4
Ms. Kathleen E. Terry
July 30, 1996
Page 4
6. Governing Law; Attorney's Fees. This agreement shall be governed
under California law and in the event of a breach of this agreement, the
prevailing party shall be entitled to recover reasonable attorney's fees and
costs.
Please confirm your agreement to the terms of this letter agreement by
signing a copy of this letter where indicated below and returning it to us by
fax.
Sincerely,
/s/ Nicholas Camilleri
Nicholas Camilleri
President
Agreed to and accepted this 31st day of July, 1996:
NORRIS COMMUNICATIONS CORPORATION
By: /s/ Kathleen E. Terry
---------------------------------------
Kathleen E. Terry, Chief Financial
Officer
<PAGE> 1
Exhibit 10.28
OEM PURCHASE AGREEMENT
THIS INTERNATIONAL OEM AGREEMENT (the "Agreement") is made as of the 18th
day of October, 1996, by and between Norris Communications Inc.
("Manufacturer"), a Delaware corporation, and SANYO Information Systems (U.K.)
Ltd., a __________________ corporation ("OEM").
The parties agree as follows:
1. Definitions. As used herein, the following terms have the indicated
meanings:
1.1 OEM. "OEM" shall mean the party specified in the first paragraph
of this agreement and all its sales and service personnel, if any.
1.2 Products. "Products" shall mean those products sold under the
"TRC" or Sanyo trademark described in Exhibit "A" hereto.
1.3 Territory. "Territory" shall mean the geographical area in which
OEM is entitled to market and sell Products, as more particularly described in
Exhibit "B" hereto.
2. Engagement.
2.1 Appointment. Subject to Section 2.4 ("Initial Order and Minimum
Quantity Requirements"), Manufacturer hereby appoints OEM to act on an
exclusive basis as Manufacturer's OEM for the Products in the Territory for the
term of this Agreement, and OEM hereby accepts such appointment. OEM agrees
that it shall not, directly or indirectly, (i) purchase the Products from any
party other than Manufacturer; or (ii) offer to sell or sell the Products
outside of the Territory without the express prior written consent of
Manufacturer.
2.2 Orders. OEM shall place with Manufacturer orders for Products on
Manufacturer's form of purchase order or such other form of purchase order as
Manufacturer may approve. All orders are subject to acceptance by
Manufacturer. Notwithstanding the provisions hereof, all orders which are not
accepted by Manufacturer in writing within five (5) business days of order
placement, shall be deemed accepted by Manufacturer.
2.3 Price, Payment and Delivery. Manufacturer shall sell to OEM, and
OEM shall purchase from Manufacturer, the Products under the terms and
conditions set forth herein. The initial prices and schedules of discount,
payment terms and shipping terms are set forth on Exhibit "C" attached hereto
and are subject to change upon sixty (60) days' written notice from
Manufacturer. All shipping and insurance costs shall be paid by OEM;
Manufacturer may prepay shipping and insurance costs and add the cost thereof
to OEM's invoice. The provisions set forth herein shall prevail over any
contrary provisions or statements set forth in printed forms or otherwise of
either party, including without limitation, purchase order and acceptance note
issued by one party to the other hereof. For importation purposes, Manufacturer
will provide the following documents:
*One original invoice and one invoice copy, 2) two copies of the packing list
will be sent to Sanyo Buro Electronic Europa.
*One copy of the packing list together with the goods will go directly to Sanyo
Information Systems (U.K.) Ltd.
2.4 Initial and Minimum Order Requirements. Within thirty (30) days
after the date of execution of this Agreement, OEM shall submit a written
purchase order in accordance with the initial order requirements set forth on
Exhibit E ("Initial Order and Minimum Order Requirements"). OEM shall also
comply with the minimum quantity and annual purchase requirements set forth on
Exhibit E ("Initial Order and Minimum
-1-
<PAGE> 2
Order Requirements") for the duration of this Agreement. In the event that OEM
fails to purchase Product according to the stated annual minimum requirements,
Manufacturer may, at its option, convert OEM's exclusive appointment to a
nonexclusive appointment in the Territory; and/or terminate this Agreement
pursuant to Section 7.2 ("Termination for Cause").
3. Duties of OEM.
3.1 Best Efforts. OEM shall use its best reasonable efforts to
promote demand for and sale of the Products within the Territory and shall
maintain adequate facilities and personnel for such purpose.
3.2 Service. OEM shall give prompt and satisfactory after-sales
service for the maintenance and replacement of Products within the Territory.
3.3 Customer Service Charges. After the expiration of any
warranty by Manufacturer, OEM may charge customers for servicing or repair of
Products at OEM's then current standard charge for equipment, service and
repair and for Manufacturer's or Manufacturer approved parts, components, and
materials at OEM's standard price markup rate for Manufacturer's Products;
provided, that such rates and charges are competitive in the Territory.
3.4 Products Inventory. OEM shall make best efforts to carry on
hand at all times an inventory of Products which enables OEM to carry out its
normal business activities in the Territory in accordance with the terms and
conditions of this Agreement.
3.5 Customer Relations. OEM hereby acknowledges that prompt,
courteous and professional service to all customers and the fostering and
maintenance of good relations with customers is of paramount importance to
Manufacturer in this Agreement, and OEM hereby agrees to use best efforts to so
serve customers. OEM shall call upon customers regularly, and provide
assistance and information to customers as requested.
3.6 OEM's Expertise. OEM shall take all necessary steps to
insure that all of its sales and service personnel are fully familiar with the
Products.
3.7 Customer Training. Upon initial installation and from time
to time as thereafter requested by customers, OEM shall provide customers with
training in the proper use, care, and maintenance of Products.
3.8 Government Approvals. Except as set forth on Exhibit "D"
attached hereto and made a part hereof, OEM shall obtain and maintain at OEM's
cost and expense all government licenses, permits and approvals which are
necessary or advisable for the implementation of this Agreement in the
Territory and shall comply with all applicable governmental laws and
regulations in the Territory. Without in any way limiting the foregoing, OEM
agrees to abide by the Export Control Regulations of the United States
Department of Commerce and the Foreign Assets Regulations and Transaction
Control Regulation of the United States Department of Treasury to the extent
said regulations apply to performance by OEM under this Agreement. OEM shall
also promptly report to Manufacturer full information necessary to enable
Manufacture to ensure that the Products meet all statutes, rules and
regulations in the Territory including but not limited to safety and labeling
statutes, rules and regulations.
3.9 Competing Lines. OEM shall not without providing prior
notice to Manufacturer manufacture, sell or offer for sale, directly or
indirectly, either as principal or agent, within the Territory any item not
manufactured by Manufacturer which is of the same description as any Product,
or which performs a similar function to any Product, or which in any way
competes with any Product.
4. Warranties.
-2-
<PAGE> 3
4.1 OEM Warranty to Customer. In connection with the Products,
OEM shall be entitled to give to customers such warranty or warranties as OEM
deems appropriate. In the event OEM makes any warranties to customers greater
than or in addition to those made by Manufacturer hereunder, OEM shall be
responsible for the costs incurred in providing such extended or additional
warranty period.
4.2 Manufacturer's Warranty. Without in any way limiting or
expanding, and without being liable for, any warranty OEM may provide,
Manufacturer warrants each Product to be free from defects in material and
workmanship under normal use and service for a period equal to twenty-four (24)
months from the date of shipment to OEM of each new Product, as evidenced by a
bill of lading for such Product.
4.2.1 Limitation of Remedies. If any Product fails to
conform to the warranty by Manufacturer herein, Manufacturer shall correct such
defect by, in Manufacturer's discretion, providing OEM with a replacement
Product or refunding the purchase price thereof. OEM shall, as part of the
after-sales service provided to customers, respond to all customer calls and
handle all customer service and complaints, including without limitation, any
field replacement. OEM shall promptly return each defective Product properly
packaged and postage or shipping costs collect to Manufacturer at its place of
business. Loss or damage in shipment shall be at OEM's expense.
4.2.2 Disclaimer of Additional Warranties. The
warranties set forth in this Section 4.2 shall be of no force and effect with
respect to any Product that (i) has had the serial or lot number made
indiscernible, (ii) has been repaired by anyone other than an authorized
Manufacturer service representative, (iii) has been altered or subjected to
misuse, negligence or accident, or (iv) has been used in any manner other than
in accordance with instructions provided by Manufacturer. Notwithstanding the
foregoing, Manufacturer acknowledges that OEM may utilize one or more third
parties to provide technical telephone support to customers in the Territory,
and the parties agree that the foregoing warranty disclaimer shall not apply
to said technical support as long as such support does not involve the
provision of Product repair services.
THE WARRANTIES SET FORTH IN THIS SECTION 4.2 AND THE REMEDIES THEREFOR ARE
EXCLUSIVE AND IN LIEU OF ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR
PARTICULAR PURPOSE OR OTHER WARRANTY OF QUALITY WHETHER EXPRESS OR IMPLIED.
MANUFACTURER SHALL NOT BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES.
5. Proprietary Interest and Confidentiality.
5.1 Trademarks and Trade Names. Nothing contained herein shall
be construed to authorize OEM (a) to use any trademark or trade name of
Manufacturer as a style or name, or as part of the style or name, of any firm,
partnership, or corporation; (b) to apply the same to any goods other than the
Products; or (c) at any time after the expiration or sooner termination of this
Agreement, to apply the same to goods or to any other use whatsoever. OEM may,
but shall not be obligated to, use its own trade name, mark or style to
identify Products other than the trademark or trade name used by Manufacturer,
so long as OEM shall have first submitted such name and style for Manufacturer's
approval, which shall not be unreasonably withheld. Manufacturer acknowledges
and accepts that the OEM trademark ("TRC" brand) is the registered trademark of
Sanyo Information Systems (U.K.) Ltd., and no rights of usage hereof is given
to manufacturer for any purpose other than to fulfill the manufacturer
obligations under this agreement.
5.2 Proprietary Interest. In this agreement the term
"Proprietary Information" means any techniques, design, specifications,
drawings, texts, procedures and other technical data relating to the Products
and other technical and/or commercial information disclosed by one party to the
other from time to time, conspicuously marked "Confidential" or "Propriety" in
red stamp or similar manner, provided however that, Proprietary Information
shall not include any information which the receiving party can show:
(i) is in or comes into the public domain otherwise than through a breach of
this Agreement or the fault of the receiving party; or
-3-
<PAGE> 4
(ii) has been lawfully received from a third party without restriction as to
its use or disclosure; or
(iii) was already in its possession free of any such restriction prior to
receipt from the disclosing party; or
(iv) was independently developed by the receiving party without making use
of the Proprietary Information; or
(v) has been approved for release or use (in either case without
restriction) by written authorization of the disclosing party.
The receiving party acknowledges and agrees that Proprietary Information
constitutes trade secrets ("Trade Secrets") of the disclosing party and that
all such Proprietary Information shall be and is the property of the disclosing
party. The receiving party hereby waives any and all rights, title or interest
in and to such Proprietary Information.
5.3 Confidentiality. The receiving party acknowledges
and agrees that the disclosing party is entitled to prevent its competitors
from obtaining and utilizing its trade secrets. The receiving party agrees to
hold the disclosing party's trade secrets in strictest confidence and not to
disclose them or allow them to be disclosed directly or indirectly to any other
person or entity, other than to persons engaged by the receiving party for the
purpose of performance hereunder without disclosing party's prior written
consent. The receiving party acknowledges its fiduciary obligation to the
disclosing party and the confidential nature of its relationship with the
disclosing party and of any proprietary information or trade secrets which the
receiving party may obtain during the term of this Agreement. The receiving
party shall not, either during the term of this Agreement or at any time after
expiration or sooner termination of this Agreement or during any extension
hereof, disclose to anyone other than persons engaged by it for the purpose of
performance hereunder any confidential or proprietary information or trade
secrets of the disclosing party obtained by the receiving party. The receiving
party also agrees to place any persons to whom said information is disclosed
for the purpose of performance under legal obligation to treat such information
as strictly confidential.
6. Indemnification and Hold Harmless. Each party shall
indemnify, defend and hold other party harmless against and in respect of any
and all claims, demands, losses, costs, expenses, obligations, liabilities,
damages, recoveries and deficiencies including interests, penalties, and
reasonable attorneys' fees that it shall incur or suffer which arise, result
from, or relate to any breach of or failure by either party to perform any of
its representations, warranties, covenants or agreements in this Agreement or
which arise, result from, or relate to actions by others or for any loss
occasioned thereby.
7. Term and Termination.
7.1 Term. The initial term of this Agreement shall be a
period of three (3) years commencing on the date set forth above, and purchase
orders received by Manufacturer within said period, to be filled thereafter,
are included within the term hereof.
7.2 Termination for Cause. Either party shall have the
right to terminate this Agreement in its entirety upon the occurrence of any of
the following, and the expiration of any applicable period of cure; (a) failure
of the other party to make any payment when due and the expiration of ten (10)
business days from receipt of notice thereof; (b) the failure of the other
party to comply with any term or condition of this Agreement, and the
expiration of thirty (30) days from written notice thereof, specifying the
nature of such default, without cure; (c) the dissolution or liquidation of the
other party; (d) the insolvency or bankruptcy of the other party; (e) the
institution of any proceeding by or against the other party under the
provisions of any insolvency or bankruptcy law; (f) the appointment of a
receiver of any of the assets or property of the other party; (g) the issuance
of an order for an execution on the property of the other party pursuant to a
judgment; and (h) any attempt by OEM to assign or otherwise transfer its rights
under this Agreement.
8. Relationship of the Parties. The parties expressly intend
and agree that OEM is acting as an independent contractor and not as an
employee or agent of Manufacturer. OEM shall retain sole and absolute
discretion, control and judgment in the manner and means of carrying out OEM's
selling, marketing and service
-4-
<PAGE> 5
activities except as to the policies and procedures set forth herein. OEM has
no power expressed or implied to make any promise, warranty or representation
on behalf of Manufacturer or to bind Manufacturer in any manner.
9. General Provisions.
9.1 Intellectual Property Rights. Manufacturer shall
represent that the products do not violate any of the intellectual property
rights of any other third party (or the necessary payment for patents etc. are
made to the patent holder ...etc.), and shall indemnify and hold OEM harmless
against any and all claims, liabilities, legal fees, all costs, etc...
associated with the intellectual property rights of the products. Manufacturer
shall defend or settle any suit or proceeding brought against OEM so far as
such suit or proceeding is based on a claim that the products furnished
hereunder or part thereof constitute an infringement of any USA or EU patent or
copyright. Manufacturer shall in its sole discretion and it's own expense
procure for the OEM the right to continue using the products, replace the same
with non-infringing products or modify them so that they become non-infringing,
or if manufacturer is unable to reasonably do any of the above manufacturer
shall refund the purchase price of the products plus freight and insurance
actually paid by OEM.
9.2 Product Training. Manufacturer shall provide OEM (at
Manufacturer's facility) with a reasonable amount of product training at no
charge. However, OEM shall be responsible for all travel expenses including
Transportation, Lodging and Meals. Training classes shall be limited to a
maximum of five (5) individuals. Upon reasonable notice, Manufacturer shall also
provide Product Training at OEM's facility in the U.K., at an interval of not
more than once a year, free of cost to OEM.
9.3 Causes Beyond Control. Manufacturer and OEM shall not be
responsible for any loss or breach due to delay in delivery or performance
hereunder caused by other parties, governmental regulations, controls or
directions, outbreak of a state of emergency, acts of God or hostilities, civil
commotion, riots, epidemics, perils of the sea or other natural casualties,
fires, strikes, walkouts or other similar cause or causes beyond the control of
the parties.
9.4 Arbitration. Any controversy or claim arising out of
this Agreement or any modification or extension hereof, including any breach,
claim for damages or rescission, shall be settled by arbitration in San Diego,
California if initiated by OEM or in London, United Kingdom if initiated by
Manufacturer, in accordance with the rules of the American Arbitration
Association, and judgment upon the award rendered by the arbitrators shall be
final and may be entered in any court having jurisdiction thereof. All of the
provisions of Section 1283.05 of the Code of Civil Procedure are hereby
expressly made applicable to any such arbitration.
9.5 Governing Law. This Agreement shall be governed as to
all matters including validity, construction and performance by and under the
laws of the State of California. The trade terms under this Agreement shall be
governed and interpreted in accordance with the International Rules for the
interpretation of Trade Terms (Inco Terms) of the International Chamber of
Commerce in force on the date first set forth above.
9.6 No Waiver. Failure by either party hereto to enforce at
any time any term or condition under this Agreement shall not be a waiver of
the right to act on the failure of such term or condition and shall not impair
or waive that party's right thereafter to enforce each and every term and
condition of this Agreement.
9.7 Assignment. The rights conferred upon OEM hereunder are
personal and may not be transferred or assigned without prior written consent
of Manufacturer, and any assignment in violation of this section shall be void.
9.8 Notice. Notice shall be given by prepaid certified or
registered air mail, return receipt requested, by overnight carrier, or by
telecopy (but only if confirmed by hard copy given by another method
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<PAGE> 6
described herein) at the addresses set forth below, or such addresses as
either party shall furnish to the other in writing in accordance with this
Section.
Manufacturer:
Norris Communications Corporation
12725 Stowe Drive
Poway, California 92064
OEM:
Sanyo Information Systems (U.K.) Ltd.
Sanyo House
Otterspool Way, Watford
Herts WD2 8JX. United Kingdom
9.9 Modification. No modification in the terms of this
Agreement shall be binding on either party unless in writing and executed by
the duly authorized representatives of each party.
9.10 Attorneys' Fees. In the event of any litigation to
enforce the provisions of this Agreement, the prevailing party in such
litigation shall be entitled to reasonable attorneys' fees as fixed by the
arbitrator or court.
9.11 Entire Agreement. This Agreement and the documents
referenced herein constitute the entire agreement between the parties in
connection with the subject matter hereof and shall supersede all prior
agreements, whether oral or in writing, whether explicit or implicit, which
have been entered into prior to the execution hereof.
9.12 Separability and Survival. No provisions of this
Agreement found illegal, against public policy or otherwise unenforceable shall
in any way invalidate or render unenforceable any other provision or provisions
of this Agreement, and each such provision hereunder shall be considered
separate and severable. The provisions under 2.3, 4, 5, 6, and 9.1 shall
survive the termination of this Agreement.
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<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
Manufacturer: OEM:
By: /s/ Peter Gorrie By: /s/ Graham Davis
-------------------------------- ---------------------------------
Name: Peter Gorrie Name: Graham Davis
Title: Chief Operating Officer Title: General Manager
In witness of:
/s/ Toshiyuki Todo
- ------------------------------------
Name: Toshiyuki Todo
Title: Managing Director,
Sanyo Buro-Electronic Europa
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<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 May 24, 1996 (except as to Note 16[b] which is as of
June 7, 1996) relating to the consolidated financial statements of Norris
Communications Corp. for the years ended March 31, 1996 and March 31, 1995, in
Amendment No. 2 on Form SB-2 to the Form S-3 Registration Statement (No.
333-7709) and related Prospectus of Norris Communications, Inc. (formerly
Norris Communications Corp.) for the registration of 8,703,136 shares of its
Common Stock.
/s/ Ernst & Young
--------------------------------------
Ernst & Young
Chartered Accountants
Vancouver, Canada,
January 13, 1997.
