<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
Commission file number 0-20734
NORRIS COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
Delaware None
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12725 Stowe Drive
Poway, California 92064
(619) 679-1504
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes No X
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $653,700
The aggregate market value of the issue's Common Stock held by non-affiliates as
of June 24, 1997 (assuming for this purpose that only directors and officers of
registrant are affiliates of registrant), based on the average of the closing
bid and asked prices on that date, was approximately $5,120,000.
As of June 24, 1997 there were 30,540,143 shares of Norris Communications, Inc.
Common Stock, par value $.001, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I
ITEM 1. Description of Business 2
ITEM 2. Description of Property 9
ITEM 3. Legal Proceedings 10
ITEM 4. Submission of Matters to a Vote of Security Holders 10
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters 10
ITEM 6. Management's Discussion and Analysis or Plan of Operation 10
ITEM 7. Financial Statements 17
ITEM 8. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure 17
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; 17
Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation 18
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 19
ITEM 12. Certain Relationships and Related Transactions 20
ITEM 13. Exhibits and Reports on Form 8-K 20
SIGNATURES 51
</TABLE>
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE
"SAFE HARBOR" PROVISIONS THEREOF. THEREFORE THE COMPANY IS INCLUDING THIS
STATEMENT FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH
SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE COMPANY'S CURRENT VIEWS
WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE
DISCUSSED HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS REPORT, THE WORDS
"ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND SIMILAR
EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED TO
CONSIDER THE SPECIFIC RISK FACTORS DESCRIBED BELOW AND NOT TO PLACE UNDUE
RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY
ARISE AFTER THE DATE HEREOF.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Norris Communications, Inc., a Delaware corporation (the "Company") is a holding
company which, through its wholly owned California subsidiary, Norris
Communications, Inc. ("NCI"), is an innovator in developing and marketing
advanced electronic product designs and technologies employing a rapidly growing
non-volatile storage media (flash memory) for the portable computing, digital
recording, mobile office and telecommunication markets. The Company is engaged
in a single industry segment: the development, manufacture and marketing of
electronic products and technologies.
2
<PAGE> 3
The Company is involved in (i) researching, developing and manufacturing
products sold to major OEM (Original Equipment Manufacturer) customers of
digital voice recording and processing technology using flash storage media and
(ii) marketing its MicroOS(TM) operating system technology, a proprietary method
for information storage, manipulation and retrieval.
The address of the Company's principal executive office is 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. Its Internet
site is located at WWW.NORRISCOMM.COM. The Company presents its consolidated
financial statements in United States dollars.
HISTORY
The Company was started in 1988 based on technology that its founder, Elwood G.
Norris, developed while researching and developing headset/microphone
alternatives for NASA. The successful combination of a speaker and microphone
was developed into the EarPHONE(TM) product line, now owned by JABRA Corporation
("JABRA") in which the Company holds an equity investment. The Company was
incorporated under the Company Act (British Columbia), Canada on February 11,
1988 under the name 340520 B.C. Ltd. The Company changed its name to Norris
Communications Corp. on April 7, 1988 and on November 22, 1994 the Company
continued its jurisdiction of incorporation from British Columbia to the Yukon
Territory. The Company further continued its jurisdiction of incorporation to
Wyoming on August 30, 1996 and on September 4, 1996 reincorporated into Delaware
under the name Norris Communications, Inc.
In August 1989, the Company acquired ASMD, subsequently merged into NCI,
establishing the Company as a regional full-service independent supplier of
turnkey manufacturing of circuit board assemblies, systems and subsystems, to
OEM's in the computer, defense, telecommunications and medical industries. The
Company invested over $2.5 million in equipping a 31,000 square foot
manufacturing and administrative facility. Prior to the late fiscal 1995 launch
of the Company's first information storage and retrieval technology product, a
personal digital recorder, ASMD's contract manufacturing services accounted for
substantially all of the Company's revenues. In January 1996, due to the startup
of the manufacturing of the Company's proprietary Flashback recorder in the
facility, the Company scaled back outside contract manufacturing services.
During fiscal 1997 the Company substantially reduced Flashback production and
terminated contract manufacturing taking a $2.2 million restructuring charge.
The Company during the same period also discontinued retail marketing of
Flashback products in favor of private labeling for OEM customers to sell.
As of the date of this report the Company has substantially completed its
restructuring by selling most of its contract manufacturing equipment, moving to
a smaller facility more suited for its operations and disposing of or making
allowances for excess and obsolete inventory. The Company has dramatically
reduced its monthly operating expenditures from an average of $540,000 during
fiscal 1997 to approximately $120,000 currently. In November 1996, the Company
entered into an OEM contract with Sanyo Information Systems U.K. Ltd. (extended
into the rest of Europe with Sanyo Bro-Electronic Europa) (collectively "Sanyo")
and in January 1997 entered into an OEM and development contract with Lanier
Worldwide, Inc. ("Lanier"). Management believes its has substantially completed
the transition from a manufacturing and sales organization to an OEM provider of
technology, product development services, and technology licensing. The Company,
as a consequence, anticipates that the majority of its future revenues will be
from license and royalty fees, private label agreements for the Company's
Flashback family of products and from contract development services for custom
digital products.
The Company also holds as an investment 940,734 common shares (approximately
12.1%) of JABRA. JABRA is a former wholly-owned subsidiary of which control was
sold in 1993. JABRA is a developer and manufacturer of communication products
for desktop, mobile and wireless applications.
FLASH MEMORY INDUSTRY
The Company's technology employs flash ("Flash") memory as the storage media.
The traditional data storage market encompasses several types of memory and
storage devices designed primarily for specific components of computer systems.
Dynamic random access memory ("DRAM") provides main system memory; static random
access memory ("SRAM") provides specialized and high speed memory; hard disk
drives provide high capacity data storage; and floppy disk drives permit low
capacity removable data storage.
In recent years, digital computing and processing have expanded beyond the
boundaries of desktop computer systems to include an array of electronic
systems. These new devices include handheld data collection terminals, medical
monitors, mobile communication systems, highly portable computers, digital
cameras, cellular telephones, communications switches, wireless base stations,
network computers, pay telephones, digital audio recorders and other electronic
systems. These emerging applications have storage requirements that are not well
addressed by traditional storage solutions. Important
3
<PAGE> 4
requirements include small form factor, high reliability, low power consumption
and the capability to withstand high levels of shock and vibration and extreme
temperature fluctuations. In the late 1980s, a new memory technology, known as
Flash memory, was developed as an extension of ultraviolet erasable programmable
read-only memory ("EPROM"). Flash memory is non-volatile, unlike DRAM and SRAM,
requiring no power to retain data and is electrically reprogrammable, unlike
EPROM.
Flash memory-based products are solid-state devices, making them very reliable.
Flash products are non-volatile, meaning that no on-going source of power is
required in order for the products to retain data, images or audio indefinitely.
Flash is noiseless, considerably lighter, more rugged and consumes less than 10
percent of the power required by a rotating disk drive. The use of Flash memory
is seen by the Company as the most practical solution for storing data on
removable and interchangeable modules, given that other memory technologies
either require battery back-up, draw too much power, are physically too large,
or are mechanically or magnetically sensitive.
Flash products are produced by a large number of firms including Intel Corp.,
SanDisk Corporation, AMD, M-Systems, Samsung, TDK, Toshiba and others. Industry
estimates indicate Flash cartridge shipments exceeded 859,000 units in 1995 and
are projected to exceed 10.7 million units in 1999 according to Disk/Trend, Inc.
Recent product applications by the Company have focused on CompactFlash a
product of SanDisk Corporation. CompactFlash products provide full PC Card ATA
functionality but are only one-fourth the size of a standard Type II PCMCIA card
(a CompactFlash cartridge is approximately 1.7" x 1.4" x 0.13"). CompactFlash is
compact, rugged and has low-power requirements. CompactFlash is available in
capacities ranging from 2 megabyte to 24 megabyte with higher capacities
expected to be available during calendar 1997 and at reduced unit costs over
time.
CompactFlash is being promoted as a standard form factor by the 70+
corporations, including the Company, who are members of the CompactFlash
Association ("CFA"). The CFA is actively promoting the development of products
using CompactFlash. Founding members of the CFA were SanDisk Corporation, Apple
Computer, Inc., Canon Inc., Eastman Kodak Co., Hewlett-Packard Company, LG
Semicon, Matsushita Electric Industrial Co. (Panasonic), Motorola, NEC
Corporation ("NEC"), Polaroid Corp., Seagate Technology, Inc. ("Seagate") and
Seiko Epson Corp.
The Company's technology also supports the Intel Miniature Card format offering
customers design flexibility and choices among Flash memory.
As a developer of advanced electronic products and technologies employing Flash
memory the Company's success is in part dependent upon the continued growth and
use of various forms of Flash memory. New product applications are also premised
on continued reductions in the per-megabyte cost of Flash memory of which there
can be no assurance.
EXISTING OEM CONSUMER PRODUCTS
The Company has developed a line of consumer products, including the
Flashback(R), the Flashback VoiceLink(TM), SoundClips(R), and bundles of these
products as the Flashback Mobile Office(TM) family all based on the Company's
proprietary Flashback technology. The technology developed for the Flashback
product line integrates a sophisticated micro-processor based control system,
digital signal processing ("DSP"), sophisticated digital/analog and
analog/digital conversion along with advanced data compression and non-volatile
storage media (Flash memory) to produce a no-moving-parts recording scheme with
advanced features and capabilities. The Company's unique patent-pending approach
eliminates the need for a high powered CPU thereby reducing cost and improving
efficiency of Flash memory utilization.
The Company was unsuccessful in its efforts to directly distribute the products
and incurred significant expenditures and operating losses. In late 1996 the
Company, as a part of its restructuring, discontinued direct sales and elected
to private label the products. In November 1996, under the terms of the Sanyo
agreement, Sanyo commenced private labeling the products under an exclusive
arrangement in the United Kingdom. In March 1997, the Sanyo agreement was
expanded to provide for sales to the rest of Europe. The agreement, which
terminates in October 1999, provides that Sanyo must purchase at least 500
product units per month (plus or minus 20%) in order to maintain exclusivity. As
of June 1997, the Company had received approximately $500,000 in orders from
Sanyo, of which approximately $225,000 had been shipped. Management believes
Sanyo has the established infrastructure, brand recognition, and marketing
expertise required to be successful in retail channels. The product is currently
shipping in the U.K., Germany, France, with the rest of Europe scheduled for
calendar 1997. There can be no assurance that Sanyo will be successful in
distributing Flashback products in Europe or continue to order from the Company.
The Company is seeking additional OEM private label relationships for existing
Flashback products in other markets.
4
<PAGE> 5
A description of each of the Company's proprietary products follows:
FLASHBACK: The Flashback digital hand-held voice recorder is a 3 ounce,
palm-sized unit that is used to record ideas, conversations, and voice
memos. The Company believes it is the first and leading digital
recorder to feature removable, reusable Flash memory cartridges for
long recording times. The Company holds the US patent #5,491,774 for
the product. A two-button control pad lets users record, playback, fast
forward, and reverse as well as rapid search, instant rewind and
variable speed playback without altering pitch. On-board editing
functions include insert and delete of words, sentences or even whole
paragraphs.
FLASHBACK VOICELINK: The Flashback VoiceLink not only turns a PC
(personal computer) into a long-length audio recorder, it also allows
users to download voice messages from SoundClip cartridges directly
onto a computer hard drive. The VoiceLink plugs directly into the PC
card slot of a notebook or a desktop computer and permits connection of
either a wired or wireless microphone for recording directly to the
hard disk at a compressed rate of 18 minutes per megabyte of storage.
Users can send compressed files over the Internet saving time and
money. With a headset, keyboard and the VoiceLink software, users can
manipulate sound files for controlled record, play, fast forward,
reverse and edit functions. The VoiceLink product was selected as an
Innovations '97 award winner at the 1997 International Winter Consumer
Electronics Show.
SOUNDCLIP: Interchangeable SoundClip Flash cartridges are compatible
with both the Flashback and the VoiceLink. Users can remove SoundClips
and add new ones thereby extending recording time. SoundClips store
digitally recorded Flashback voice messages and transfer them to the
VoiceLink for downloading into a computer. Available in 18- or
36-minute capacities or longer capacities on special order, they
feature a write-protect switch to protect important recordings. Users
can store SoundClip cartridges indefinitely, and use them repeatedly.
They're not affected by magnets, X-rays, heat or cold.
FLASHBACK MOBILE OFFICE: The Flashback Mobile Office includes a
Flashback, SoundClip cartridge, VoiceLink and Software. The Flashback
Mobile Office Professional includes two VoiceLink cards for sending
compressed e-mail messages back and forth.
The technology developed for the Flashback products provide an alternative to
cassette sound recorders. VoiceLink also permits users to interface with
notebook and PC computers to record, edit and transmit highly compressed sound
files over networks and the Internet. The Company's voice recording technology
enables business travelers to carry a voice recorder and use it anywhere to
create voice memos or E-Mail. The digital recorder or a notebook or portable
computer become the transport and storage mediums for sound files which are
transmitted over existing networks to remote users. The direct benefits of the
Company's voice recording approach include:
o Digital recorders can be smaller, more compact and have no
moving parts as compared to cassette recorders.
o Digital voice recording technology permits users to compose
messages with editing, insertion and deletion capabilities.
Analog tape can only be appended and has no editing
capabilities
o Unlike analog tape digital voice recording technology
interfaces directly with computers, networks and the Internet.
o Digital voice recording provides the convenience of voice
communication instead of keyboard entry for messages.
The Company and its OEM customers are seeking additional markets to benefit from
the advantages of digital recording.
OEM TECHNOLOGY COMPONENTS
The Company owns intellectual property and expertise in the use of Flash media
for storing data, such as sound, pictures, and video. The development of the
proprietary MicroOS(TM) for both of the industry standard Flash memory
formats---Intel's Miniature Card and CompactFlash---establishes the Company with
experience developing for both. The Norris Flash File System 8:1 compression
technology---which allows 18 minutes of voice recordings in 1 megabyte of
memory---is efficient when compared to competing compression algorithms. In
addition, the Company holds a patent on the use of removable Flash media as
storage for a hand-held digital voice recording device.
A key feature of the Company's Flashback technology is the ease of computer
compatibility. The Company's approach to managing digital sound information
allows information to be manipulated, saved and transferred over any number of
digital
5
<PAGE> 6
communication paths including the Internet and corporate Intranets. Information
may also be compressed or saved in traditional sound formats on hard drives or
other media. Management believes the rapid growth of the Internet and corporate
Intranets and the growing use of electronic mail will provide a growing market
for an efficient method to transmit voice messages, sound and other data over
these networks. Management believes the Company's technology provides an
efficient method to link this information between networks, personal, portable
and network computers and an array of miniature electronic devices.
The Company believes its expertise and technology offers OEMs a rapid path to
develop digital recording products using Flash memory. These products may
integrate the Company's technology as a primary or secondary feature set. In
most cases, the Company believes it offers less costly development and a faster
time to market for companies who would otherwise have to develop expertise in
the following technology areas available for licensing:
MICRO OS: The MicroOScf is a compact operating system with logic
specifically designed to interface with CompactFlash, a Flash memory
card about the size of a matchbook that was originally developed by
SanDisk and is now supported by a number of manufacturers. MicroOSi was
designed with logic specifically for the Intel Miniature Card, a
competing Flash technology to the CompactFlash. Management believes
MicroOS is the only operating system for Flash memory that has a data
transfer rate limited only by the Flash memory write speed. The
operating system therefore supports the recording speeds required to
write directly to primary memory without intermediary memory. This
reduces overall hardware costs, especially for imaging applications.
Written in highly compact and optimized C computer language code, the
MicroOS operates in 14K of ROM and requires only 300 bytes of RAM.
NORRIS FLASH FILE SYSTEM: The Norris Flash File System (.nfs) is a
software module that speeds up and simplifies the integration of Flash
memory into embedded systems by transparently managing the
peculiarities of different types of Flash memory and by offering a
sophisticated and feature rich API (Advanced Protocol Interface, a file
protocol) and advanced fault tolerance.
MULTICHIP MODULE (MCM): The MCM is a single, highly compact chip that
contains a DSP and micro controller. With the MicroOS operating system
and the Norris Flash File System, the unit is designed to reduce the
hardware and software development time for products such as digital
voice recorders, telephone answering devices, and cellular phone
answering machines. It can also be integrated as a voice processing
feature into products such as digital cameras.
OEM STRATEGY AND CURRENT CUSTOMERS
The Company's recent restructuring focuses the Company as a leading provider to
OEM customers of digital sound recording and processing technology for Flash
memory and related media. The Company's strategy is to:
1. Private label the Company's existing consumer products (Flashback, VoiceLink
and Mobile Office System).
The Sanyo private label relationship described above is the Company's first
contract for in-house developed consumer products. The Company will similarly
private label its consumer products and proprietary technology to selected
name-brand companies in the dictation, personal computer, consumer electronics,
telecommunications, paging, and other industries.
2. Develop products for OEMs under contract.
In January 1997 the Company entered into an OEM and development contract with
Lanier. Under the terms of the agreement, the Company is receiving non-recurring
engineering expenses ("NRE"), upon the satisfaction of certain milestones, to
develop a new portable digital voice recorder and related accessory products.
The Lanier agreement contemplates that the product to be developed will be
completed in early 1998, with the Company to provide Lanier with manufactured
product thereafter to be sold by Lanier's sales force worldwide. The Company, as
of March 31, 1997, in connection therewith, recognized NRE revenue of
approximately $40,000. The agreement is for an initial term of three years,
terminating January 6, 2000. The agreement provides for NCI to manufacture or
arrange for manufacture of the product. The Company's strategy is to arrange for
outside custom manufacturing of this product on a turnkey basis. There can be no
assurance a successful product can be produced or that Lanier will elect to
distribute the product or can distribute the product such that sufficient
margins can inure to NCI.
In June, 1997 the Company announced that it was working to integrate elements of
its Flashback recorder into a handheld tactical signal homing system being
developed by VisiCom Laboratories, Inc. for evaluation by the United States
Marine
6
<PAGE> 7
Corps. Management believes this is an example of the diverse applications of the
Company's core technology. The Company is seeking to develop other products to
meet other OEM customer needs.
3. Develop products for licensing to or private labeling by OEM customers.
The Company is continuing to develop in-house proprietary products that may be
private labeled or licensed to one or more OEMs. The Company is currently
developing a new generation digital recorder, the PVP-2000. In addition to the
digital recording features showcased in the original Flashback, the PVP-2000
intends to incorporate a liquid crystal display (LCD) screen to display
functions such as the number and length of messages and a calendar/clock
function to set alarms and reminders. The PVP-2000 will also link with PCs and
allow downloading of recorded and received material, along with the transmission
and receipt of voice memos in compressed form without the use of a VoiceLink.
The Company has devoted significant effort to design and develop the PVP-2000.
There can be no assurance the Company will successfully complete development,
that OEMs will be attracted to the product or that a commercial product can be
produced by any such OEMs.
4. Expand the technology base through continued enhancements of the Flashback
technology and new inventions.
The Company's engineering team continues to enhance and update the Flashback
technology, specifically the OEM technology components described above. The
Company also devotes resources to expanding the technology to new applications.
In addition to improved voice recorders, management believes the Company's
proprietary technology may have applications in a wide range of products
including voice pagers, answering machines, cellular phones, computers, compact
disc quality sound devices and for the storage of pictures and video images.
NEW TECHNOLOGY IN DEVELOPMENT
In June 1997 the Company prepared additional patent applications on its
technology as applied to high-bandwidth music fidelity applications. The Company
has developed a prototype device (the Flashback Audio(TM) player) capable of
replaying music stored on CompactFlash and other Flash media. This technology is
in the early stage of development and the Company intends to continue product
development and thereafter produce designs and products for OEMs. There can be
no assurance this technology can be successfully commercialized or marketed.
MANUFACTURING, PRODUCTION AND DISTRIBUTION
During fiscal 1997 the Company ceased contract manufacturing services and also
substantially reduced in-house manufacturing of Flashback products. Flashback
products accounted for 47% of consolidated revenues during fiscal 1997.
Current product sales are being made from inventory.
The Company is reviewing alternatives for contracting with other manufacturing
facilities to produce products for its OEM customers (including the existing
consumer products and newly developed products) and will select, when warranted,
organizations who will provide a secondary source of supply, and/or additional
capacity. The Company's strategy is to arrange for the production of products
for its OEM customers on a turn-key basis, when possible. In other instances the
Company may enter into licensing and royalty agreements with OEM customers who
have existing manufacturing abilities or arrangements.
The Company believes, but there is no assurance, that it can provide
manufacturing for its customers through contract manufacturing relationships on
terms that will not require substantial financial risk or the provision of
working capital by the Company.
MAJOR CUSTOMERS AND EXPORT SALES
For the fiscal year ended March 31, 1996, two customers The Sharper Image and
The Good Guys accounted for 10% each of total revenues. During the fiscal year
ended March 31, 1997 three customers, Martin Decker, Sanyo and Alan Marketing
accounted for 31%, 17% and 12%, respectively each of total revenues. No other
customer accounted for more than 10% of revenues. For the fiscal year ended
March 31, 1997 export sales aggregated $155,000. There were no material export
sales in the prior fiscal year. At March 31, 1997 the Company had no material
backlog.
7
<PAGE> 8
COMPETITION
Management believes there is no direct competition with regard to a hand held
digital voice recorder that offers the ability to download recorded sound and
data information to a computer in compressed format. However, without the
VoiceLink device, the Flashback recorder is frequently compared to the "note
taker" type of products which offer limited recording capabilities and feature
sets. The Mobile Office package competes with companies that sell traditional
dictation/transcription devices. The success of Flashback products will depend
greatly on how the end user plans to utilize the product or technology and the
distribution strengths of the Company's OEM customers. The Company believes it
has a technical advantage in its solid state removable recording technology.
Management is not aware of any competing portable product that can be utilized
for sending sound messages across the Internet or corporate Intranets.
The primary competition, in general, for the Company's current products are
analog tape products and traditional dictation equipment. The Company and its
OEM customers therefore will compete with a wide range of consumer and business
product suppliers producing a wide variety of products and solutions. The
electronics product market is highly competitive with many large international
companies competing for the consumer and business market.
The Company further believes its existing know-how, contracts, pending patent
applications, customized components, existing copyrights, trade secrets and
potential future patents and copyrights, will be significant in enabling it to
compete successfully in the field of digital sound recording and processing
technology for Flash memory and related media. There are other methods of
managing Flash memory in digital sound applications, and although management
believes they are less efficient, there is no assurance the Company can compete
against other providers of digital recording solutions many of which have
substantially greater resources than that of the Company.
Barriers to entry by new competitors are not significant and new competitors in
consumer electronics are continually commencing operations. The technology of
electronics and electronic components, features and capabilities is also rapidly
changing, in many cases causing rapid obsolescence of existing products and
technologies. Although the Company believes it has a technological advantage at
the present time, there can be no assurance that it can successfully exploit or
maintain this technological advantage in the future.
PATENTS, TRADENAMES AND COPYRIGHTS
The Company owns one patent protecting its products. The Company has made
multiple additional patent applications with multiple claims which are pending
on innovations in audio and other forms of recording. The Company's software is
subject to copyrights and pending patent applications. The patent position of
any item for which the Company has filed a patent application is uncertain and
may involve complex legal and factual issues. Although the Company is currently
prosecuting multiple patent and trademark applications with the U.S. Patent and
Trademark Office and also has filed certain international patent applications
corresponding to its U.S. patent applications, the Company does not know whether
any of its applications will result in the issuance of patents, or, for any
patents issued, whether they will provide significant proprietary protection or
will be circumvented or invalidated. Additionally, since an issued patent does
not guarantee the right to practice the claimed invention, there can be no
assurance others will not obtain patents that the Company would need to license
or design around in order to practice its patented technologies, or that
licenses that might be required would be available on reasonable terms. Further
there can be no assurance that any unpatented manufacture, use, or sale of the
Company's technology or products will not infringe on patents or proprietary
rights of others. The Company however has made reasonable efforts in the design
and development of its products not to infringe on other known patents.
The Company also relies on trade secret laws for protection of its intellectual
property, but there can be no assurance others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can protect its rights to unpatented trade secrets.
The Company also has filed a number of trademark applications with the U.S.
Patent and Trademark Office. The Company has received notification of allowance
from the United States Patent Office for use of Flashback as a registered trade
name. The Company believes the trademark on Flashback to be significant to its
operations and the loss or infringement of the name could have an adverse impact
on operations.
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.
8
<PAGE> 9
EMPLOYEES
As of June 15, 1997, the Company, employed approximately 20 employees of which 5
were production, 3 were sales/customer service, 5 were research and development,
4 were accounting/administrative and 3 were executive officers. None of the
Company's employees are represented by a labor union, and the Company is not
aware of any current efforts to unionize the employees. Management of the
Company considers the relationship between the Company and its employees to be
good.
GOVERNMENT REGULATION
The Company's manufacturing operations are subject to certain federal, state and
local regulatory requirements relating to environmental, waste management,
health and safety matters and there can be no assurance that material costs and
liabilities will not be incurred or that past or future operations will not
result in exposure or injury or claims of injury by employees or the public.
Some risk of costs and liabilities related to these matters are inherent in the
Company's business, as with many similar businesses. Management believes its
business is operated in substantial compliance with applicable environmental,
waste management, health and safety regulations, the violation of which could
have a material adverse effect on the Company. In the event of violation, these
requirements provide for civil and criminal fines, injunctions and other
sanctions and, in certain instances, allow third parties to sue to enforce
compliance. In addition, new, modified or more stringent requirements or
enforcement policies could be adopted which could adversely affect the Company.
RESEARCH AND DEVELOPMENT COSTS
For the years ended March 31, 1997 and 1996, the Company spent $991,487 and
$1,048,500, respectively, on research and development. The Company anticipates
it will continue to devote substantial resources to research and development
activities. During fiscal 1997 approximately $40,000 of research and development
was borne by a contract development customer.
INVESTMENT IN JABRA
Between January 15, 1993 and March 31, 1996 the Company sold an aggregate of
800,000 common shares of JABRA stock for $2,375,000 and owned 1,800,000 JABRA
shares with a zero cost basis. On or about December 31, 1996 and January 2,
1997, the Company sold an additional 859,266 common shares of JABRA stock for
$276,300. As a result of these transactions, the Company's ownership in JABRA at
March 31, 1997, represented by 940,734 common shares was 12.1%. Accordingly, the
Company exercises no control over the shares of JABRA. JABRA is a private
company engaged in developing, manufacturing and marketing cellular, desktop,
mobile and wireless communications products. JABRA's principal technology is the
patented "all-in-the-ear" EarPHONE technology originally conceived and developed
by the Company when JABRA was a wholly owned subsidiary. As a minority
shareholder in JABRA, which has reported operating losses since its inception,
there can be no assurance as to when or if the Company's remaining shares can
produce any financial return to the Company. The Company's investment in JABRA
shares is carried on its balance sheet at a cost of nil. CVD Financial
Corporation has an option (until July 31, 1997) to purchase 300,000 of the
Company's JABRA shares at a price of $1.50 per share granted in connection with
a prior loan financing.
MISCELLANEOUS
No material portion of the Company's business is subject, at the election of the
United States government, to renegotiation or termination of contracts or
subcontracts.
Compliance with federal, state and local provisions enacted or adopted
regulating the discharge of materials into the environment, or otherwise related
to the protection of the environment, has not had and is not expected to have
material effect on the Company's capital expenditures, earnings and competitive
position.
ITEM 2. 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 monthly lease rate is currently $18,900. The lease expires
in 2002. The Company is currently negotiating for a new facility which would be
pursuant to new lease to be entered into jointly with American Technology
Corporation (ATC), a Company controlled by Elwood G. Norris, Chairman of the
Company. See "Certain Relationships and Related Transactions." The proposed new
facility would encompass an aggregate of 12,925 square feet of engineering and
office space of which the Company would occupy approximately 4,525 square feet.
In connection with these negotiations the Company believes its current facility
can be subleased and the Company is attempting to negotiate a release from its
remaining lease obligation. There can be no assurance the Company's existing
facility can be sublet or the lease obligation terminated on acceptable terms.
9
<PAGE> 10
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth fiscal
quarter ended March 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 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.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal year ended March 31, 1996
First quarter 3 5/8 1 9/16
Second quarter 2 3/8 1 1/4
Third quarter 2 3/32 7/8
Fourth quarter 1 15/16 1
Fiscal year ended March 31, 1997
First quarter 1 13/16 1
Second quarter 1 3/16 3/4
Third quarter 29/32 3/8
Fourth quarter 1 13/32
</TABLE>
At June 24, 1997, there were 30,540,143 shares of Common Stock outstanding,
which were held by approximately 392 shareholders of record.
The Company has never paid any dividends to its common stock shareholders.
Future cash dividends or special payments of cash, stock or other distributions,
if any, will be dependent upon the Company's earnings, financial condition and
other relevant factors. The Board of Directors does not intend to pay or declare
any dividends in the foreseeable future, but instead intends to have the Company
retain all earnings, if any, for use in the Company's business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The Company has substantially completed the transition from a manufacturing and
sales organization to an OEM provider of technology, product development
services, and technology licensing. The Company, as a consequence, anticipates
that the majority of its future revenues will be from license and royalty fees,
private label agreements for the Company's Flashback family of products and from
contract development services for custom digital products. The Company currently
has contracts with Lanier and Sanyo and is pursuing OEM contracts with other
companies seeking to penetrate the digital sound recording and playback market.
As a result of the recent restructuring and change in the source of revenues,
comparisons to prior results are less meaningful and prior results are not
necessarily indicative of future results.
The Company has incurred operating losses in six of its past seven years and
these losses have been material. The Company incurred an operating loss of $7.9
million in fiscal 1996 and $8.7 million in fiscal 1997 (including a
restructuring charge of $2.2 million). As a result of the restructuring of the
Company to discontinue its contract manufacturing operations and focus on
licensing and contract development, the Company has reduced its monthly cash
operating costs from an average of approximately $540,000 per month in fiscal
1997 to approximately $120,000 per month at the current time. However, the
10
<PAGE> 11
Company intends to increase expenditure levels to support its new Flashback
Audio technology and support OEM customers. Accordingly, the Company's losses
are expected to continue until such time as the Company is able to increase
sales of Flashback proprietary products and/or obtain licensing, royalty and
development revenues sufficient to cover fixed costs of operations. Should the
Company be unable to accomplish the foregoing and operate profitably, the
Company may be forced to reduce or curtail operations. The Company continues to
be subject to the risks normally associated with any new business activity,
including unforeseeable expenses, delays and complications. Accordingly, there
is no assurance the Company can or will report operating profits in the future.
Sales of and demand for the Company's Flashback recorder and Mobile Office
products (including VoiceLink) introduced into the domestic retail channel in
September 1996 never met management's expectations due to a variety of factors
including competitive pressure in the portable recording industry and
insufficient financial resources to meet the demands of the retail distribution
market. However, management believes initial shipments of the foregoing to the
Company's OEM customer, Sanyo, for distribution on an international basis have
been positively received. Management is focused on OEM licensing with respect to
the Micro OS Imbedded Operating System and MultiChip modules and contract
development of private label and custom-designed products for computers,
dictation systems, computer peripherals and telecommunication equipment.
Revenues from licensing, royalties and development services, as well as
continuing sales of the Company's private labeled Flashback and related products
are expected to be subject to significant month to month variability resulting
from the limited market penetration and license activity to date, the timing and
delays associated with OEM new product introductions and the seasonal nature of
demand for consumer electronic products. Development and OEM contracts may be
delayed or terminated by customers and are subject to a number of factors beyond
the Company's control. The markets for consumer electronic products are subject
to rapidly changing customer tastes and a high level of competition. Demand for
the Company's products is expected to be influenced by OEM market success,
technological developments and general economic conditions. Because these
factors can change rapidly, customer demand for the Company's technology can
also shift quickly. The Company may not be able to respond to technical
developments by competitors because of the time required and risks involved in
the development or introduction of new or improved technology and due to limited
financial resources.
RESULTS OF OPERATIONS
For the fiscal year ended March 31, 1997, the Company reported revenues of
$653,700, 51% less than revenues of $1,328,502 for fiscal 1996. Fiscal 1996
revenues are primarily from sales of Flashback products. Fiscal 1997 revenues
consisted of $307,296 in Flashback product sales, $250,882 in contract
manufacturing revenues and $95,522 in contract development and other revenues. A
substantial portion of the Company's revenues have been derived from a limited
number of customers. The loss of certain large customers or a decline in the
economic prospects of such customers would have a further adverse effect on the
Company. The Company expects that its revenues in fiscal 1998 will be derived
primarily from sales of Flashback products to OEM customers and from contract
development revenues.
For fiscal 1997, the Company reported a gross loss of $1,458,299 or 223% of
revenues, as compared to a gross loss of $3,085,312 or 232% for fiscal 1996. The
material gross losses in each year resulted from low sales volumes of Flashback
products and limited contract manufacturing revenues accompanied by high fixed
manufacturing costs, material costs and direct labor costs. Fiscal 1996 cost of
sales of $4.4 million included $980,000 expensed in the first quarter
representing the cost of 7,000 discontinued Flashback units sold to Active Media
Services, Inc., an independent media trading firm. These units were sold in
exchange for $1,172,500 of media trade credits and 50% of the cash proceeds
realized on the ultimate sale of the units. The Company recognized no prepaid
asset nor any revenue in connection with the trade credits since their use
requires certain matching cash payments. The Company believes no revenues will
be realized nor any trade credits used in the future in connection with this
arrangement. Fiscal 1997 cost of sales of $2.1 million included $756,000 of
equipment and facility costs, $630,000 of direct labor charges and approximately
$726,000 of materials and other charges. In connection with the Company's
restructuring, it disposed of first generation Flashback materials and inventory
to OEM customers and wrote-down obsolete and excess inventory aggregating $1.3
million (included in the restructuring charge described below).
During fiscal 1997 the Company ceased contract manufacturing and production of
Flashback products for the retail market and as a part of its restructuring
dramatically changed the nature of its operations and reduced its cost
structure. The Company's plans for fiscal 1998 include selling existing finished
goods inventory (approximately $800,000) to OEM customers and thereafter
contract for outside manufacturing of Flashback products using existing
inventory of materials to the extent possible. The Company also intends to
provide contract development services under the Lanier contract and seek other
development arrangements. The Company believes, but there can be no assurance,
that it will report a gross profit in the first fiscal quarter ending June 30,
1997 and for fiscal 1998 based on existing sales, contracts and plans. It is
unlikely that such gross profit, if obtained, will be sufficient to cover
operating expenses and the Company expects to report operating losses
11
<PAGE> 12
until sufficient margins can be achieved. There can be no assurance the Company
can achieve or maintain positive gross margins or that any such margins will
contribute materially to other operating costs.
Total operating expenses were $7.3 million for the fiscal year ended March 31,
1997 as compared to $4.9 million for fiscal 1996. Operating expenses in fiscal
1997 included a $2.2 million restructuring charge which included a $1.4 million
write-down of inventory and related purchase commitment losses and a $742,000
write-down and loss on equipment. At March 31, 1997 a total of $162,000 was
accrued relating to the $2.2 million restructuring charge which is expected to
be completed in the first fiscal 1998 quarter. Fiscal 1996 operating expenses
included a $236,000 write-off of goodwill.
Selling and administrative expenses totaled $4.0 million in fiscal 1997 compared
to $3.6 million in fiscal 1996. In both periods the Company incurred significant
expenses attempting to direct market the Flashback line of products. Late in
fiscal 1997 the Company terminated these efforts in favor of selling products to
OEMs for their private label selling. As a result of the Company's
restructuring, selling and administrative costs have been dramatically reduced
and management believes a comparison between prior years and future periods is
not meaningful and prior results are not indicative of future results. Major
selling and administrative expenditures in fiscal 1997 included $1.2 million of
selling and marketing expenditures (including personnel and consulting costs of
$548,000 and advertising and promotions of $557,000) associated primarily with
direct marketing of Flashback products, $905,000 of legal, filing and accounting
costs (including $186,000 of litigation settlement costs) associated primarily
with redomiciling the Company to the U.S., corporate financings and filing and
registration costs during the year, $763,000 of administrative personnel and
consulting costs and $486,000 of occupancy costs.
Research and related expenditures were $991,487 for fiscal 1997 compared to
$1,048,540 for fiscal 1996 which included $370,000 of Flashback pre-production
development costs. Excluding this item, the $313,000 increase in the current
period resulted primarily from a $176,000 increase in personnel and consulting
costs due to increased staffing and a $130,000 increase in outside design and
consulting cost. The Company recognized $40,000 of contract development revenues
for sponsored research incurring approximately $69,000 in direct costs in
initial development work. The Company has reduced its base research and
development expenditures but anticipates future increases due to new projects
such as the Flashback Audio technology. Research and related expenditures are
subject to significant quarterly variations depending on the use of outside
services and the availability of financial resources.
As a result of the restructuring and reduction in personnel, the Company has
reduced monthly cash operating costs from approximately $540,000 per month to
approximately $120,000 per month. Monthly operating costs can vary significantly
from month to month and quarter to quarter based on management decisions
regarding OEM marketing and support, research and development projects and from
continued efforts to control expenses. Although the Company presently has
approximately 20 full-time employees, management anticipates hiring additional
engineering and technical personnel to support OEM customers and develop new
products and technologies. The timing and extent of any growth in personnel and
operating costs cannot presently be determined by management.
The Company reported an operating loss of $8.7 million for fiscal 1997, as
compared to an operating loss of $7.9 million for fiscal 1996. The Company has
dramatically reduced operating costs and management anticipates that operating
losses in fiscal 1998 will be substantially less but there is no assurance that
positive operating results can be achieved in the future.
Other income and expenses in fiscal 1997 included $1.1 million of embedded
non-cash interest on convertible notes based on the difference between the
conversion price and the market price at the first conversion date of the notes.
A like amount was recorded as paid in capital. Interest expense (excluding the
$1.1 million of non-cash embedded interest) for the year ended March 31, 1997
was $79,518 inclusive of $33,772 of interest paid in common stock. The $79,518
of interest was a reduction from $356,429 (excluding non-cash embedded interest
of $188,153) for the prior period resulting from the retirement of demand loans
and other interest bearing debt outstanding during fiscal 1996 and more reliance
on equity to finance operations in fiscal 1997. During fiscal 1997 the Company
sold shares of JABRA common stock held as an investment for proceeds of and a
gain of $276,300. This stock has a carrying value of nil. At March 31, 1997 the
Company owned 940,734 shares of JABRA which has no market value and therefore
there is no assurance these shares will provide any future source of liquidity
for the Company.
The Company reported a net loss of $9.6 million in fiscal 1997 and a net loss of
$8.5 million in fiscal 1996.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had a working capital deficit of $564,503,
compared to working capital of $1,056,029 at March 31, 1996. The Company had
approximately $1.6 million of working capital invested in inventories at March
31, 1997, compared to approximately $3.2 million at March 31, 1996 with the
decrease due to reduction of Flashback components and products resulting from
termination of production, finished good sales to OEM customers and writedowns
of obsolete and excess inventory. The decrease in working capital was a result
of the Company's continuing losses which consumed working capital during the
period. Approximately $5.8 million in cash was used in operating activities by
the Company for the year ended March 31, 1997.
In March 1996, the Company obtained $3 million from a convertible debt financing
(by June 30, 1996 all the debt had been converted to Common Stock), and in June
1996, the Company obtained net proceeds of $2.4 million in funds from a private
placement of securities and in July and August 1996, the Company obtained
additional equity from the private placement of securities for cash of
approximately $3.1 million. During fiscal 1997 the Company retired the $2.2
million obligation related to the demand loan payable to CVD Financial
Corporation ("CVD"). The balance of funds were used to reduce debt and for
working capital. As a result of these transactions, as of March 31, 1997, the
Company had no long-term debt nor any bank lines of credit or related financing
facilities. During fiscal 1997 the Company also financed operations from the
sales of equipment for $98,175 and inventory and from the sale of JABRA stock
for $276,300. The Company also paid legal, litigation and other expenses
aggregating $581,000 through the issuance of common stock.
For the fiscal year ended March 31, 1997, net cash decreased by $2.7 million.
Cash used in operating activities was $5.8 million. Major components using cash
were a net loss of $9.6 million reduced by $2.6 million of aggregate
depreciation and amortization, write-downs and non-cash expenses and investment
gains to a net cash operating loss of $7.0 million prior to changes in assets
and liabilities. The major changes in assets and liabilities providing net cash
used in operating activities was a reduction in inventory of $1.6 million, a
reduction in prepaid expenses of $226,000, an increase in other liabilities of
$438,000 and an increase in advances on research and development contract of
$174,000. The major change in assets and liabilities using operating cash was a
reduction in accounts payable of $1.3 million.
In June 1997 the Company sold $500,000 of long-term 12% secured notes due
September 30, 1999 with limited common stock conversion rights and stock
purchase warrants issuable on conversion to nine investors. The proceeds are
being applied to reduce debt and for working capital.
Based on the Company's cash position as supplemented by the $500,000 of secured
long-term debt and assuming the completion of backlog at June 15, 1997 of
approximately $275,000 and continuation of existing OEM development arrangements
and currently planned expenditures and level of operations, the Company
estimates it will require additional capital within the next twelve months to
meet its debts as they become due and to continue as a going concern. Given such
assumptions, the Company estimates that at current expenditure levels and
projected working capital requirements it will require a minimum of an
additional $500,000 to continue operating for the next twelve months. The
Company's OEM and licensing business may be able to generate the additional
funding required depending on the ability of OEM and licensing activities to
generate additional revenues, however there can be no assurance thereof. The
Company is currently pursuing various alternatives to meet its needs for
capital. There can be no assurance the Company will be successful and any such
financing may be dilutive to current shareholders. The failure to raise
additional funds could have a material adverse effect on the Company and could
force the Company to further reduce or curtail operations.
The Company may, from time to time, seek additional funds through lines of
credit, public or private debt or equity financing. The Company estimates that
it will require additional capital to finance future developments and
improvements to its technology. There can be no assurances that additional
capital will be available when needed.
MANAGEMENT'S PLANS FOR IMPROVING OPERATIONS
Management has taken steps to improve operations with the goal of sustaining the
Company operations for the next twelve months and beyond. These steps include
(i) re-focusing the Company on a family of products, technology components and
software and not having the Company be reliant on a single recorder product;
(ii) expanding the Company's private label product offering by introducing
VoiceLink and Mobile Office products; (iii) focusing sales and marketing on the
OEM markets; and (iv) reducing overhead and operating expenses by discontinuing
its contract manufacturing services and direct sales. There can be no assurance
the Company can attain profitable operations in the future.
13
<PAGE> 14
FUTURE COMMITMENTS AND FINANCIAL RESOURCES
The Company's future commitments are related to its operating leases (see
footnote 13 to the financial statements). Estimated remaining commitments are
included in the cash requirements discussed above. The Company was in arrears on
an operating equipment lease obligation to Comdisco, Inc. during fiscal 1997 but
has negotiated a settlement providing for future payments of approximately
$550,000 at times to be further negotiated.
If in the future, operations of the Company increase significantly, the Company
may require additional funds. The Company might also require additional capital
to finance future developments, acquisitions or expansion of facilities. The
Company currently has no plans, arrangements or understandings regarding any
acquisitions.
INFLATION
Inflation has not had any significant impact on the Company's business.
NEW ACCOUNTING PRONOUNCEMENT
On March 3, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128").
This pronouncement provides a different method of calculating earnings per share
than previously provided under Accounting Principles Board Opinion No. 15,
"Earnings Per Share." SFAS No. 128 provides for the calculation of "Basic" and
"Diluted" earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. The Company
will adopt SFAS No. 128 in fiscal 1998 and its implementation is not expected to
have a material effect on the financial statements.
BUSINESS AND OTHER RISKS
This report contains a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed below, that could cause actual results to differ
materially from historical results or those anticipated. In this report, the
words "anticipates," "believes," "expects," "intends," "future" and similar
expressions identify forward-looking statements. Readers are cautioned to
consider the specific risk factors described below and not to place undue
reliance on the forward-looking statements contained herein, which speak only as
of the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements, to reflect events or circumstances that may
arise after the date hereof.
SIGNIFICANT LOSSES FROM OPERATIONS - The Company has incurred
significant operating losses in six of its past seven fiscal years with
operating losses of $8,725,000 and $7,945,000 for the fiscal years
ended March 31, 1997 and 1996, respectively. The Company's losses are
expected to continue until such time as the Company is able to
manufacture and sell the Flashback family of products in commercial
quantities and/or increase license and royalty fees from OEM contracts
and development services. No assurance can be given as to the Company's
ability to accomplish the foregoing. The Company's inability to
accomplish the foregoing would have a material adverse effect upon the
Company's ability to operate profitably, and may force the Company to
reduce or curtail operations. The Company is also subject to the risks
normally associated with any new business activity, including
unforeseeable expenses, delays and complications. Accordingly, no
assurance can be given that the Company can or will report operating
profits in the future.
POSSIBLE INABILITY TO CONTINUE AS A GOING CONCERN - The Company has
suffered recurring losses from operations. This factor, in combination
with (i) reliance upon debt and new equity financing to fund losses
from operations and cash flow deficits, (ii) substantial inventory and
slow inventory turnover, (iii) material net losses and cash flow
deficits from operations during fiscal 1996 and in fiscal 1997 and (iv)
the possibility that the Company may be unable to meet its debts as
they come due, raise substantial doubt about the Company's ability to
continue as a going concern. The Company's ability to continue as a
going concern is dependent upon its ability to obtain adequate
financing and achieve a level of revenues, adequate to support the
Company's capital requirements, as to which no assurance can be given.
In the event the Company is unable to continue as a going concern, it
may elect or be required to seek protection from its creditors by
filing a voluntary petition in bankruptcy or may be subject to an
involuntary petition in bankruptcy. To date, management has not
considered this alternative, nor does management view it as a likely
occurrence.
DEPENDENCE UPON NEW PRODUCTS - The scale and scope of the Company's
business is changing. Historically, a majority of the Company's
revenues were derived from its contract manufacturing business. The
Company's future
14
<PAGE> 15
growth is greatly dependent upon the OEM relationships already in place
and new relationships yet to be established. 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, future events and developments, and changes in the
Company's policies and methods of operations in the future.
UNPREDICTABLE PRODUCT ACCEPTANCE - The Company's sales and marketing
strategy contemplates sales of its existing private label Flashback
product and related companion products (upon completion of their
development), to the electronics and computer software markets,
including sales to markets through its OEM customers yet to be
established. The failure of the Company's OEM customers to penetrate
its projected markets would have a material adverse effect upon the
Company's operations and prospects. Market acceptance of the Company's
private label products will depend in part upon the ability of the
Company to demonstrate the advantages of its products over competing
products.
TECHNOLOGICAL OBSOLESCENCE - The electronics and technologies 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.
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.
RELIANCE ON MAJOR CUSTOMERS - In the past the Company has relied on a
limited number of major customers and is currently reliant upon Sanyo
and Lanier for a majority of its revenues. The loss of any one customer
could have a material adverse effect on the Company.
POSSIBLE CONTINGENT LIABILITY UNDER FEDERAL AND STATE SECURITIES LAW -
The Company may have a liability to certain security holders who
acquired securities in fiscal 1997 due to a possible violation of
federal and state securities laws prohibiting an issuer from selling
securities in a private placement by any form of general solicitation
or advertising. Such violation, if deemed to occur, could give rise to
a private right of action by the security holders against the Company
for rescission and/or damages. If all of the affected security holders
were to exercise their rights, assuming a violation, and seek to
rescind their purchases of securities, the Company would have to return
approximately $5.67 million to such security holders, plus interest.
Such liability, if it occurs, could require the Company to seek
protection from its creditors by filing a voluntary petition in
bankruptcy. Selling Shareholders with aggregate purchases of securities
equal to $5.42 million, without payment or other monetary inducement,
have executed written releases and waivers with respect thereto,
effectively reducing the possible liability to approximately $250,000.
Although the Company has no present reason to believe that the release
and waiver agreements are not enforceable, a contrary finding by a
federal or state court may result in a continuing risk of potential
liability to the affected security holders.
15
<PAGE> 16
DEPENDENCE UPON MAJOR SUPPLIERS - In the past the Company has
"box-built" its Flashback product from parts and electronic components
purchased from regular distribution channels. The Company owns the
tooling and although plastic cases have been produced by one supplier,
other suppliers exist to supply plastic parts. Delays could occur,
however, as the Company changes to contract manufacturing. 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.
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.
PATENTS, PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY - The Company
relies on a combination of patents, mask work protection, trademarks,
copyright and trade secret laws, confidentiality procedures and
licensing arrangements to protect its intellectual property rights.
There can be no assurance that there will not be any disputes regarding
the Company's intellectual property rights. Specifically, there can be
no assurance that any patents held by the Company will not be
invalidated, that patents will be issued for any of the Company's
pending applications or that any claims allowed from existing or
pending patents will be of sufficient scope or strength or be issued in
the primary countries where the Company's products can be sold to
provide meaningful protection or any commercial advantage to the
Company. Additionally, competitors of the Company may be able to design
around the Company's patents.
UNCERTAINTY AS TO OUTSTANDING SHARES; FUTURE DILUTION - At June 24,
1997 the Company had 30,540,143 common shares outstanding. In addition
to stock options and stock purchase warrants as described in the
footnotes to the Company's financial statements, at June 24, 1997 the
Company had $2.9 million face amount of prepaid warrants outstanding
convertible into common shares at a 30% discount to the market price of
common shares plus penalties and other adjustments. These prepaid
warrants are convertible into common shares at any time and in any
amount through August 1999, however the holders of the warrants have
entered into a lockup agreement limiting converted share sales to the
greater of 10% of holdings or 50,000 shares in any month until February
1998. If the balance of the prepaid warrants were converted on June 24,
1997 on a pro forma basis an additional 37.2 million shares would be
outstanding. Changes in the market price of the Company's shares has a
dramatic impact on the number of shares that could be outstanding
pursuant to these prepaid warrants and if the price of the Company's
common shares should decrease then the additional dilution to existing
shareholders could be substantial. The Company may be required to
register and authorize additional shares to meet the conversions of the
prepaid warrantholders. In addition on June 13, 1997 the Company
completed a placement of $500,000 of secured notes that are convertible
at the lowest conversion price of the prepaid warrantholders, but only
become convertible when and if allowable under certain terms of the
prepaid warrants. This financing also provides for the issuance of
stock purchase warrants upon conversion. The conversion of this debt
could also be dilutive and the potential dilution to existing
shareholders could be material.
IMPACT OF POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM; PENNY
STOCK REGULATIONS - The Company's Common Stock is currently quoted on
the NASDAQ SmallCap market. 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
or $2 million in equity, two market-makers and certain other
requirements, some of which the Company currently does not satisfy. If
the Company is unable to maintain the listing criteria, its securities
are subject to delisting from NASDAQ. The Company has been advised by
NASDAQ that its shares will be delisted but has appealed this decision.
Trading, if any, in the Company's securities after any delisting would
be conducted in the over-the-counter
16
<PAGE> 17
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 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.
VOLATILITY OF STOCK PRICE - To date, the price of the Company's Common
Stock on the NASDAQ SmallCap Market has been extremely volatile. The
Company believes that future announcements concerning the Company, its
competitors or its principal customers, including technological
innovations, new product introductions, governmental regulations,
litigation or changes in operating results, may cause the market price
of the Common Stock to fluctuate substantially in the future. Sales of
substantial amounts of the Company's outstanding Common Stock in the
public market could materially adversely affect the market price of the
Common Stock. In May, 1997 the Company registered for resale by certain
Selling Shareholders 18.3 million shares which could adversely affect
the market for the Common Stock. Further, in recent years the stock
market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many
high technology companies and that often have been unrelated or
disproportionate to the operating performance of such companies. These
fluctuations as well as general economic, political and market
conditions such as recessions or international currency fluctuations,
may materially adversely affect the market price of the Common Stock.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company required to be included in
this Item 7 are set forth in a separate section of this report and commence on
Page F-1 immediately following page 26.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Elwood G. Norris 58 Chairman of the Board, Chief Executive
Officer and Director
Alfred H. Falk 42 President and Director
Robert Putnam 38 Vice President, Secretary and Director
Renee Warden 33 Controller
</TABLE>
ELWOOD G. NORRIS - Mr. Norris has been Chairman of the Board of Directors of the
Company since 1988. From 1988 to October 1995, he was President and Chief
Executive Officer. In October 1995 he was appointed Chief Technology Officer and
in January 1997 was reappointed as Chief Executive Officer. Since 1980, Mr.
Norris has also been a Director of American Technology Corporation ("ATC") and
served as its President and Chief Executive Officer until February 1994. ATC is
a publicly held consumer electronic products company, from which the Company
acquired JABRA. Since August 1989, he has served as director of Patriot
Scientific Corporation ("Patriot") and served as Chairman and Chief Executive
Officer until June 1994. From June 1995 until June 1996 when he was reappointed
Chairman, Mr. Norris served as temporary President and Chief Executive Officer
of Patriot, upon the illness and subsequent death of its Chairman, President and
Chief Executive Officer. Patriot is a public company engaged in the development
of microprocessor technology, digital modem products and radar and antenna
engineering. He invented the patented EarPHONE technology owned by JABRA and is
the primary inventor of the Company's digital recording technology. Mr. Norris
devotes only part-time services to the Company, approximately twenty hours per
week.
ALFRED H. FALK - Mr. Falk was appointed President and a director of the Company
in January 1997. 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
17
<PAGE> 18
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.
RENEE WARDEN - Ms. Warden was appointed Controller of the Company in June 1997.
From November 1991 to June 1997 she was Accounting Manager for the Company.
Since 1993 she has attended Palomar College and most recently the accounting
program at the University of Phoenix, San Diego.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Act") requires the
Company's officers, directors and persons who own more than 10% of a class of
the Company's securities registered under Section 12(g) of the Act to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors and greater than 10% shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on a review of copies of such reports furnished to the Company and
written representations that no other reports were required during the fiscal
year ended March 31, 1997, the Company believes that all persons subject to the
reporting requirements pursuant to Section 16(a) filed the required reports on a
timely basis with the SEC, except as follows: (1) to the Company's knowledge,
former executive officer Kathleen Terry's Form 3 for May 1996 and former
director's Michael W. Joe's Form 3 for December 1996 were not filed and Fred
Falk's Form 3 for January 1997 was filed late in June 1997; and (2) Robert
Putnam's Form 4 and Elwood G. Norris' Form 4 for December 1996 each reporting
one transaction were filed one day late.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended March 31, 1997, 1996
and 1995, the cash compensation of each Chief Executive Officer and the four
most highly compensated executive officers of the Company who received cash
compensation in excess of $100,000 in that year (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LongTerm Compensation
Annual Compensation ---------------------
------------------------------------------------- Securities
Other Underlying All Other
Name and Principal Position Year Salary ($) Bonus($) Annual($) Options(#) Compensation($)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Elwood G. Norris, Chairman 1997 $105,788 5,940(1) -0- -0- -0-
and Chief Executive Officer 1996 $163,500 -0- -0- 400,000 -0-
1995 $120,384 -0- -0- -0- -0-
R. Gordon Root, President & 1997 $150,900 35,940(2) -0- -0- -0-
Chief Executive Officer (5) 1996 $ 85,615 $20,000(3) -0- 150,000 -0-
1995 $ -0- -0- -0- -0- -0-
Peter Gorrie, Chief Operating 1997 $86,742 31,990(2) 53,726(4) -0- -0-
Officer (6) 1996 $29,262 -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0-
</TABLE>
(1) Represents bonus paid by issuance of 10,000 common shares valued at $5,940.
(2) Includes bonus paid by issuance of 10,000 common shares valued at $5,940,
with the balance paid in cash.
(3) Amount stated reflects fair market value of 13,333 common shares as of the
date of grant.
(4) Includes a severance payment of $40,000 and automobile expenses of $13,726.
(5) Chief Executive Officer from October 1995 to December 1996.
(6) Chief Operating Officer from February 1996 to January 1997.
18
<PAGE> 19
There were no options to purchase shares of the Company's Common Stock granted
in the fiscal year ended March 31, 1997 to the Chief Executive Officers or any
of the Named Executive Officers.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
There were no options exercised by the Named Executive Officers during
the fiscal year ended March 31, 1997. The following table provides information
on unexercised options at March 31, 1997:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options At In-the-Money Options At
March 31, 1997 March 31, 1997
-------------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Elwood G. Norris 700,000 -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 SEC
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, 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 24, 1997, information regarding
ownership of the Company's Common Stock, par value $.001, 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) 4.5%
Robert Putnam 209,658(2) *
Alfred H. Falk 18,000(3) *
All officers and directors
as a group (4 persons) 1,639,496(4) 5.2%
</TABLE>
* Less than 1%
(1) Includes 225,300 shares owned by ATC as a result of Mr. Norris' 34%
beneficial ownership and presently exercisable options to purchase 700,000
shares. Excludes unvested options to purchase 700,000 shares.
(2) Includes presently exercisable options to purchase 169,658 shares. Excludes
unvested options to purchase 150,000 shares.
(3) Consists entirely of presently exercisable options. Excludes unvested
options to purchase 500,000 shares.
(4) Includes presently exercisable options to purchase 889,658 shares and the
225,300 shares owned by ATC and attributable to Mr. Norris.
19
<PAGE> 20
The above table does not include ownership of over 5% of the Company's
outstanding Common Stock that may beneficially exist by holders of pre-paid
warrants exercisable into Common Stock at a discount to market. The Company has
no current information regarding the beneficial holdings of pre-paid warrant
holders but has not been advised by any holders that they beneficially own more
than 5% of the Company's Common Stock. See "Uncertainty as to Outstanding
Shares; Future Dilution" on page 16 and Note 17 to the notes to the Company's
consolidated financial statements.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Elwood Norris, Chairman and Chief Technology Officer of the Company, is also a
director of ATC. He is the beneficial owner of 3,224,438 shares of ATC
(representing approximately 34% 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 6% of its
issued and outstanding shares).
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 this arrangement are no less favorable than could be obtained
from an independent and unaffiliated party. The Company is currently negotiating
for a new facility which would be pursuant to new lease to be entered into
jointly with ATC. The proposed new facility would encompass an aggregate of
12,925 square feet of engineering and office space of which the Company would
occupy approximately 4,525 square feet.
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. 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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Each exhibit marked with an asterisk is filed with this Annual Report on Form
10-KSB. Each exhibit not marked with an asterisk is incorporated by reference to
the exhibit of the same number (unless otherwise indicated) previously filed by
the Company as indicated below.
Exhibit
Number Description of Exhibit
- ------- ----------------------
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.
20
<PAGE> 21
2.1.1 Amendment of Agreement among the Company, Norcom Communications
Corporation, and American Technology Corporation, dated for
reference March 23, 1988 and filed as an Exhibit to the Company's
Registration Statement on Form 10, as amended.
2.2 Plan and Agreement of Reorganization among the Company, American
Surface Mounted Devices, Inc. and ASMD, Inc., dated August 11, 1989
and filed as an Exhibit to the Company's Registration Statement on
Form 10, as amended.
2.3 Plan and Agreement of Reorganization among the Company, Sage
Microsystems, Inc., and Sage Micro, Inc., dated November 7, 1991 and
filed as an Exhibit to the Company's Registration Statement on Form
10, as amended.
2.4 Plan and Agreement of Reorganization among the Company, C.A.D. Co.
Engineering, Inc. and CADCO Design Group, Inc., dated June 1, 1992
and filed as an Exhibit to the Company's Registration Statement on
Form 10, as amended.
2.5 Plan and Agreement of Reorganization between American Surface
Mounted Devices, Inc. and Comp General Corporation, Inc., dated
March 31 1995 and filed previously as an Exhibit to Registration
Statement No. 33-92978.
2.6 Plan of Reorganization and Agreement of Merger, dated July , 1996
and filed as Exhibit A to the Company's July 3, 1996 Proxy
Statement.
3.1 Certificate of Incorporation of Norris Communications, Inc. (as
amended through May 28, 1996) and filed as Exhibit B to the
Company's July 3, 1996 Proxy Statement.
3.2 Bylaws of Norris Communications, Inc., filed as Exhibit C to the
Company's July 3, 1996 Proxy Statement.
4.1 Certificate of Incorporation of Norris Communications, Inc. (as
amended through May 28, 1996),filed as Exhibit B to the Company's
July 3, 1996 Proxy Statement.
4.2 Bylaws of Norris Communications, Inc., filed as Exhibit C to the
Company's July 3, 1996 Proxy Statement.
4.3 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.
21
<PAGE> 22
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.
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.
4.13 Warrant Agreement for 150,000 Common Shares between the Company and
Higham, McConnell & Dunning dated October 10, 1996 and filed
previously as an Exhibit to Registration Statement No. 333-13779.
10.1 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.
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.
22
<PAGE> 23
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.
10.8.1 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.
23
<PAGE> 24
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.
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., filed as an Exhibit
to the Registration Statement No. 333-7709.
10.27 Agreement dated July 30, 1996 between the Company and Greystone
Capital, Ltd., filed as an Exhibit to the Registration Statement No.
333-7709.
10.28 OEM Purchase Agreement dated October 18, 1996 between the Company
and Sanyo Information Systems (U.K.) Ltd., filed as an Exhibit to
the Registration Statement No. 333-7709.
10.29 Release and Waiver Agreement between the Company and certain Selling
Shareholders, filed as an Exhibit to the Registration Statement No.
333-7709.
24
<PAGE> 25
10.30 Agreement dated January 6, 1997 between the Company and Lanier
Worldwide, Inc.* [Portions of this Exhibit have been omitted (based
upon a request for confidential treatment) and have been filed
separately with the Securities & Exchange Commission pursuant to
Rule 406], filed as an Exhibit to the Registration Statement No.
333-7709.
10.31 Controlled Liquidation and Lock Up Agreement dated March 1997
between the Company and certain Selling Shareholders filed as
Exhibit 10.31 to Registration Statement No. 333-7709.
*10.32 Consulting Agreement (with Warrants) between the Company and Klein
Investment Group, L.P. dated August 23, 1996.
*10.32.1 Amendment to the Consulting Agreement (with Warrants) between the
Company and Klein Investment Group, L.P. dated January 7, 1997.
*10.33 Note Agreement and form of Note between the Company and nine
investors dated June 13, 1997 for an aggregate of $500,000.
*10.33.1 Collateral Patent Assignment between the Company and nine investors
dated June 13, 1997 related to Exhibit 10.33
*21.1 List of subsidiaries.
*23.2 Consent of Ernst & Young.
*27.1 Financial Data Schedule.
- ----------
* Filed concurrently herewith.
(B) REPORTS ON FORM 8-K.
The Company filed the following report on Form 8-K during the last fiscal
quarter ended March 31, 1997: NONE
25
<PAGE> 26
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(formerly Norris Communications Corp.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1996
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
Report of Independent Auditors F-1
Consolidated Balance Sheets as at March 31, 1997 F-2
and 1996
Consolidated Statements of Operations for the years F-3
ended March 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity (Deficiency) for F-4
the years ended March 31, 1997 and 1996
Consolidated Statements of Cash Flows for the years F-5
ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements F-6
</TABLE>
26
<PAGE> 27
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
We have audited the accompanying consolidated balance sheets of NORRIS
COMMUNICATIONS, INC. AND SUBSIDIARY (FORMERLY NORRIS COMMUNICATIONS CORP.) as of
March 31, 1997 and 1996 and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Norris
Communications, Inc. and subsidiary at March 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the company has suffered recurring losses
from operations and has an accumulated deficit that raise substantial doubt
about the company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 2, the company's consolidated financial statements for the
year ended March 31, 1996, have been restated to reflect a change in their
method of accounting for convertible notes payable.
Vancouver, Canada, /s/ ERNST & YOUNG
June 13, 1997. Chartered Accountants
F-1
<PAGE> 28
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
CONSOLIDATED BALANCE SHEETS
As at March 31
<TABLE>
<CAPTION>
1997 1996
$ $
- ----------------------------------------------------------------------------------------------------------
(Restated
note 2)
<S> <C> <C>
ASSETS [note 9]
CURRENT
Cash and cash equivalents 176,158 2,843,540
Accounts receivable, less allowance for doubtful
accounts of $36,330 and $11,647, respectively 30,097 94,619
Inventory [note 6] 1,648,863 3,243,245
Prepaid expenses and other -- 226,436
Property and equipment held for sale [notes 2 and 18] 68,567 --
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,923,685 6,407,840
- ----------------------------------------------------------------------------------------------------------
Property and equipment [note 7] 199,320 1,359,791
Unearned discount [note 2] -- 1,097,561
Intangible assets, net of accumulated amortization
of $32,341 and $24,896, respectively 42,068 49,513
- ----------------------------------------------------------------------------------------------------------
2,165,073 8,914,705
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Demand loan payable [note 9] -- 2,185,546
Accounts payable, trade 1,264,150 2,554,209
Other accounts payable and accrued liabilities [note 18] 1,049,697 612,056
Advances on research and development contract [note 10] 174,341 --
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,488,188 5,351,811
- ----------------------------------------------------------------------------------------------------------
Convertible notes payable [note 13] -- 4,285,714
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,488,188 9,637,525
- ----------------------------------------------------------------------------------------------------------
Commitments and contingencies [notes 1, 13 and 16]
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, $.001 par value, authorized 60,000,000 and
30,000,000 shares, respectively; 23,370,008 and 15,103,703
shares outstanding, respectively [notes 12, 14 and 19] 23,370 21,762,337
Additional paid-in capital [note 12] 28,459,269 --
Prepaid warrants [note 17] 3,276,505 --
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (33,674,575) (24,077,473)
- ----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (323,115) (722,820)
- ----------------------------------------------------------------------------------------------------------
2,165,073 8,914,705
==========================================================================================================
</TABLE>
See accompanying notes
F-2
<PAGE> 29
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31
<TABLE>
<CAPTION>
1997 1996
$ $
- -----------------------------------------------------------------------
(Restated-
note 2)
<S> <C> <C> <C>
REVENUES [note 15] 653,700 1,328,502
Cost of sales [note 15] 2,111,999 4,413,814
- -----------------------------------------------------------------------
Gross profit (loss) (1,458,299) (3,085,312)
- -----------------------------------------------------------------------
OPERATING EXPENSE
Selling and administrative 4,047,227 3,574,597
Research and related expenditures 991,487 1,048,540
Restructuring charge [note 18] 2,228,001 --
Write-down of purchased goodwill -- 236,636
- -----------------------------------------------------------------------
7,266,715 4,859,773
- -----------------------------------------------------------------------
Operating loss (8,725,014) (7,945,085)
- -----------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (79,518) (356,429)
Non-cash interest expense [note 2] (1,097,561) (188,153)
Interest income 28,691 33,971
Gain on sale of investment [note 8] 276,300 --
- -----------------------------------------------------------------------
(872,088) (510,611)
- -----------------------------------------------------------------------
Loss before provision for income taxes (9,597,102) (8,455,696)
Provision for income taxes [note 11] -- --
- -----------------------------------------------------------------------
LOSS FOR THE YEAR (9,597,102) (8,455,696)
- -----------------------------------------------------------------------
LOSS PER SHARE (0.44) (0.64)
========================================================================
</TABLE>
See accompanying notes
F-3
<PAGE> 30
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIENCY)
Year ended March 31
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- PAID-IN CONTRIBUTED ACCUMULATED
SHARES AMOUNT CAPITAL SURPLUS DEFICIT
# $ $ $ $
- -------------------------------------------------------------------------------------------------------------------------------
(Restated - (Restated -
note 2) note 2)
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995 11,616,814 17,849,751 -- 1,592,316 (15,621,777)
Stock issued as compensation expense 13,333 20,000 -- -- --
Stock issued under stock option plan 15,000 30,303 -- -- --
Stock issued as payment for
refinancing fee [note 9] 75,000 101,250 -- -- --
Stock issued as payment for professional
services rendered 215,842 319,498 -- -- --
Issuance of common stock for cash 3,167,714 3,441,535 -- -- --
Loss for the year -- -- -- -- (8,455,696)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 15,103,703 21,762,337 -- 1,592,316 (24,077,473)
Stock issued on legal settlement 85,000 127,500 -- -- --
Stock issued on conversion of convertible
notes payable 4,366,050 4,319,486 -- -- --
Issuance of common stock for cash 2,666,075 1,699,444 -- -- --
Transfer from common stock to additional
paid-in capital resulting from change to
$.001 par value shares from no par value
shares [note 12] -- (27,886,546) 27,886,546 -- --
Stock issued as directors' fees 60,000 60 35,580 -- --
Stock issued on exercise of prepaid warrants 392,702 393 119,607 -- --
Stock issued as payment for professional
services rendered 696,478 696 417,536 -- --
Loss for the year -- -- -- -- (9,597,102)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 23,370,008 23,370 28,459,269 1,592,316 (33,674,575)
===============================================================================================================================
</TABLE>
See accompanying notes
F-4
<PAGE> 31
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31
<TABLE>
<CAPTION>
1997 1996
$ $
- --------------------------------------------------------------------------------------------------
(Restated -
note 2)
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the year (9,597,102) (8,455,696)
Adjustments to reconcile loss to net cash used by
operating activities:
Depreciation and amortization 412,416 524,399
Loss on disposal of property and equipment 365,864 38,550
Write-down of property and equipment 376,538 --
Write-down of purchased goodwill -- 236,636
Professional services paid by issuance of common stock 418,232 319,498
Directors' fees paid by issuance of common stock 35,640 --
Refinancing fee paid by issuance of common stock -- 101,250
Compensation paid by issuance of common stock -- 20,000
Legal settlement paid by issuance of common stock 127,500 --
Interest charges on convertible notes payable paid by issuance
of common stock 33,772 --
Non-cash interest expense 1,097,561 188,153
Gain on sale of investment (276,300) --
Changes in assets and liabilities:
Accounts receivable 64,522 58,054
Inventory 1,594,382 (579,842)
Prepaid expenses and other 226,436 170,208
Accounts payable, trade (1,290,059) 1,319,635
Other accounts payable and accrued liabilities 437,641 8,288
Advances on research and development contract 174,341 --
- --------------------------------------------------------------------------------------------------
CASH (USED IN) OPERATING ACTIVITIES (5,798,616) (6,050,867)
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (153,644) (84,932)
Proceeds on disposal of property and equipment 98,175 30,752
Proceeds on sale of investment 276,300 --
- --------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 220,831 (54,180)
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments under demand loan payable (2,185,546) (814,454)
Issuance of convertible notes payable -- 3,000,000
Proceeds from issuance of prepaid warrants 3,396,505 --
Proceeds from issuance of shares 1,699,444 3,471,838
- --------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 2,910,403 5,657,384
- --------------------------------------------------------------------------------------------------
DECREASE IN CASH DURING THE YEAR (2,667,382) (447,663)
Cash and cash equivalents, beginning of year 2,843,540 3,291,203
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 176,158 2,843,540
==================================================================================================
</TABLE>
See accompanying notes
F-5
<PAGE> 32
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The Company operates in one major line of business, the development, manufacture
and marketing of electronic products.
On August 30, 1996, Norris Communications Corp. continued its jurisdiction to
the State of Wyoming, then on September 4, 1996, to the State of Delaware.
During the continuation process, Norris Communications Corp. changed its name to
Norris Communications, Inc. (the "Company").
The consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States on
a going concern basis, which contemplates the realization of assets and the
discharge of liabilities in the normal course of business for the foreseeable
future.
The Company has incurred significant losses and negative cash flow from
operations in each of the last three years and has an accumulated deficit of
$33,674,575 at March 31, 1997 [1996 - $24,077,473]. The Company's ability to
continue as a going concern is in substantial doubt and is dependent upon
achieving a profitable level of operations and, if necessary, obtaining
additional financing.
Management of the Company has undertaken steps to improve operations with the
goal of sustaining Company operations for the next twelve months and beyond.
These steps include (i) re-focusing the Company on a family of products,
technology components and software and not having the Company be reliant on a
single recorder product; (ii) expanding the Company's private label product
offering by introducing VoiceLink and Mobile Office products; (iii) focusing
sales and marketing on the Original Equipment Manufacturing markets; and (iv)
reducing overhead and operating expenses by discontinuing its contract
manufacturing services and direct sales.
These consolidated financial statements do not give effect to any adjustments
which would be necessary should the Company be unable to continue as a going
concern and therefore be required to realize its assets and discharge its
liabilities in other than the normal course of business and at amounts different
from those reflected in the accompanying consolidated financial statements.
F-6
<PAGE> 33
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
2. SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENTS
The Company has restated their March 31, 1996 consolidated financial statements
to recognize a recently announced position by the staff of the Securities and
Exchange Commission regarding the accounting for the issuance of debt that can
be converted at a discount to the market price of the Company's common stock. In
this regard, the implicit return provided by the conversion terms of the debt is
accounted for as additional interest expense and accreted over the period
between the date of issuance of the debt and the date the debt first become
convertible. This restatement has resulted in additional non-cash interest
expense of $188,153 in the year ended March 31, 1996 or $0.014 per share and an
unearned discount of $1,097,561 at March 31, 1996.
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Norris Communications, Inc. ("NCI") (a company
incorporated in the State of California). All significant intercompany accounts
and transactions have been eliminated.
RECLASSIFICATIONS
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the 1997 presentation.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable trade, other
accounts payable and accrued liabilities, capital lease obligations and
convertible notes payable approximate their fair values.
F-7
<PAGE> 34
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
CASH EQUIVALENTS
Cash equivalents, consisting of commercial paper with maturities of less than 90
days, certificates of deposit and money market funds, are recorded at cost,
which approximates market value.
TRANSLATION OF FOREIGN CURRENCIES
Monetary assets and liabilities are translated at the rate in effect at the
balance sheet date. Other balance sheet items and revenues and expenses are
translated at the rates prevailing on the respective transaction dates. Gains
and losses on foreign currency transactions, which have not been material, are
reflected in the consolidated statements of operations.
EARNINGS PER SHARE
Primary and fully diluted earnings per share amounts are based on the weighted
average number of common shares and common stock equivalents outstanding for
each year.
INVESTMENT
The Company's 940,734 [1996 - 1,800,000] shares or 12.1% [1996 - 23.1%]
investment in JABRA Corporation ("JABRA"), a private corporation, is accounted
for using the cost method [see Note 8].
REVENUE RECOGNITION
Revenue is recognized on the basis of shipment of products or delivery of
services. Research and development contract revenue is recognized in the period
the related research and development expenditures are incurred. Funds received
in advance of meeting the criteria for revenue recognition are deferred and are
recorded as revenue as they are earned.
RESEARCH AND RELATED EXPENDITURES
Research and related expenditures are charged to operations as incurred.
F-8
<PAGE> 35
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
INVENTORY
Inventory of raw materials, work in process and finished goods is recorded at
the lower of cost and net realizable value. Cost is determined on a first-in,
first-out basis.
PROPERTY AND EQUIPMENT HELD FOR SALE
Property and equipment held for sale are recorded at their net realizable
amount.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization are
provided on the straight-line method over the estimated useful lives of the
related assets, ranging from 3 to 7 years or, in the case of leasehold
improvements, over the lesser of the useful life of the related asset or the
lease term. When assets are sold or retired, the cost and accumulated
depreciation are removed from the respective accounts and any gain or loss on
the disposition is credited or charged to income. Maintenance and repair costs
are charged to operations when incurred.
GOODWILL
Purchased goodwill was created upon acquisition of subsidiaries. The goodwill
pursuant to the acquisition of subsidiaries is amortized over a four year
period. Goodwill is written down to fair value when declines in value are
considered to be other than temporary based upon undiscounted cash flows of the
respective subsidiary.
INTANGIBLE ASSETS
Intangible assets include government bidding rights and rights to technology,
which are amortized over a 10 year period, and costs relating to obtaining
patents, which are deferred when management is reasonably certain the patent
will be granted. Upon granting of the patent, such costs will be amortized to
operations over the life of the patent. If management determines that
development of products to which patent costs relate is not reasonably certain,
or that deferred patent costs exceed net recoverable value, such costs are
charged to operations.
F-9
<PAGE> 36
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
LEASES
Leases entered into are classified as either capital or operating leases. Leases
which substantially transfer all benefits and risks of ownership of property to
the Company are accounted for as capital leases. At the time a capital lease is
entered into, an asset is recorded together with its related long-term
obligation to reflect the purchase and financing.
Rental payments under operating leases are expensed as incurred.
STOCK OPTIONS GRANTED
The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), Accounting for Stock-Based Compensation, which encourages
companies to recognize expense for stock-based awards based on their estimated
fair value on the date of the grant. SFAS 123, effective for the period ended
March 31, 1997, does not require companies to change their existing accounting
for stock-based awards, but if the new fair value method is not adopted, pro
forma income and earnings per share data must be provided in the footnotes to
the consolidated financial statements. The Company supplementally discloses the
required pro forma information as if the fair value method had been adopted
effective April 1, 1995 [see Note 12].
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share. SFAS
128 eliminates the requirement for primary earnings per share previously
required under APB Opinion No. 15, Earnings Per Share, which showed the amount
of income attributable to each share of common stock if every common stock
equivalent were converted into common stock. SFAS 128 provides for the
calculation and disclosure of basic and diluted earnings per share. Basic
earnings per share is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution to common
shareholders on the exercise of options, warrants or convertible instruments.
SFAS 128 is effective for fiscal periods ending after December 15, 1997. Loss
per share for the year ended March 31, 1997 under the provisions of SFAS 128
would have been $0.45.
F-10
<PAGE> 37
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
3. CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and trade
receivables. At March 31, 1997, the Company was not subject to any material
credit risk. The Company performs ongoing credit evaluations of its customers
and maintains allowances for potential credit losses which, when realized, have
been within the range of management's expectations.
4. MAJOR CUSTOMERS AND EXPORT SALES
The Company operates in one major line of business, the development, manufacture
and marketing of electronic products. Sales to three major customers comprise
31%, 17% and 12%, respectively, of revenues in 1997. Sales to three major
customers comprise 10%, 10% and 9%, respectively, of revenues in 1996. During
1997, the Company had export sales of approximately $155,000 [1996 - $Nil].
5. STATEMENT OF CASH FLOWS
The Company had non-cash operating and financing activities and made cash
payments as follows:
<TABLE>
<CAPTION>
1997 1996
$ $
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Non-cash financing activities:
Professional services paid by issuance of common stock 418,232 319,498
Refinancing fee paid by issuance of common stock -- 101,250
Compensation paid by issuance of common stock -- 20,000
Directors' fees paid by issuance of common stock 35,640 --
Legal settlement paid by issuance of common stock 127,500 --
Interest charges on convertible notes payable paid by
issuance of common stock 33,772 --
Common stock issued on conversion of convertible notes
payable 4,285,714 --
Common stock issued on exercise of prepaid warrants 120,000 --
Cash payments for interest and income taxes were as follows:
Interest 45,746 356,429
Income taxes -- --
==========================================================================================
</TABLE>
F-11
<PAGE> 38
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
6. INVENTORY
<TABLE>
<CAPTION>
1997 1996
$ $
- -------------------------------------------------------------------------
<S> <C> <C>
Raw materials 666,634 1,569,812
Work in process 179,967 194,437
Finished goods 802,262 1,478,996
- -------------------------------------------------------------------------
1,648,863 3,243,245
=========================================================================
</TABLE>
During 1995, the Company introduced a new electronic product for sale in the
retail market. The amount of revenues to date from the sale of the electronic
product have not been significant. In addition, the Company's experience with
sales returns and warranty provisions has been limited. At March 31, 1997,
inventory of the Company is substantially all comprised of three successive
models of the electronic product.
Management of the Company has established, in the normal course of business,
provisions for sales returns, warranty and obsolescence in respect of sales to
March 31, 1997 and inventory as at March 31, 1997. In addition, management of
the Company has developed programs for the sale of earlier models of the
electronic product which are expected to result in the sale of this inventory in
the near term. No estimate can be made of the range of amounts of loss that are
reasonably possible should actual experience exceed estimates for sales returns
or warranty or should the programs to sell inventory not be successful.
F-12
<PAGE> 39
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
$ $ $
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Computer hardware and software 187,645 64,962 122,683
Furniture and equipment 55,758 46,738 9,020
Machinery and equipment 177,883 110,266 67,617
- ---------------------------------------------------------------------------
421,286 221,966 199,320
- ---------------------------------------------------------------------------
1996
Computer hardware and software 402,794 231,196 171,598
Furniture and equipment 131,755 93,643 38,112
Leasehold improvements 589,979 203,203 386,776
Machinery and equipment 1,761,076 997,771 763,305
- ---------------------------------------------------------------------------
2,885,604 1,525,813 1,359,791
===========================================================================
</TABLE>
8. INVESTMENT IN JABRA
The Company owns 940,734 [1996 - 1,800,000] common shares of JABRA or 12.1%
[1996 - 23.1%] of JABRA's common shares with a carrying value of $Nil on the
Company's consolidated balance sheets. The Company has granted an option to a
prior lender, expiring July 31, 1997, to purchase 300,000 of JABRA's common
shares at a price of $1.50 per share pursuant to the Company's demand loan
payable [see Note 9]. During 1997, the Company sold 859,266 common shares of
JABRA for cash proceeds of $276,300 and recorded a gain on sale of investment of
$276,300.
F-13
<PAGE> 40
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
9. DEMAND LOAN PAYABLE
During 1995, the Company negotiated a demand loan payable, as amended, of $3.5
million, bearing interest at prime plus 2%, repayable on demand and expiring on
July 31, 1995. In connection with the demand loan payable, as amended, share
warrants providing the right to acquire 450,000 common shares of the Company on
or before June 20, 1999 at a price of $4.00 per share were issued. During 1996
and in the period subsequent thereto, the demand loan payable was amended on
August 1, 1995, February 1, 1996 and April 1, 1996. Pursuant to the various
amendments: the expiry date was extended to October 31, 1996; the Company
granted an additional share warrant providing the right to acquire 200,000
common shares of the Company on or before September 1, 1998 at a price of $2.00
per share; the existing share warrants providing the right to acquire 450,000
common shares of the Company on or before June 20, 1999 were repriced to $1.75
per share from $4.00 per share; 75,000 common shares of the Company were issued
at an agreed price of $1.35 per share; the Company granted an option to acquire
up to 300,000 common shares of JABRA on or before July 31, 1997 at a price of
$1.50 per share; 33% of the net proceeds from any equity financing prior to
April 1, 1996 and 50% of the net proceeds from any equity financing thereafter
must be used to pre-pay the demand loan payable; and the lender may convert at
any time prior to repayment all or any portion of the outstanding principal
balance of the demand loan payable, including accrued interest thereon, into
common shares of the Company at the lesser of $1.50 per share or following the
occurrence of an event of default, the higher of $1.00 per share and the average
closing price for the 20 days preceding the date of notice of an event of
default.
The demand loan payable was collateralized by a first security interest covering
accounts receivable, inventory, property and equipment, and other assets, and a
specific pledge of the Company's shares in NCI and JABRA.
The demand loan payable plus accrued interest was retired on July 31, 1996.
10. RESEARCH AND DEVELOPMENT CONTRACT
The Company has entered into a long-term contract with an independent company to
provide research and development services. The Company will receive cash of up
to $860,000 for engineering services. Costs not specified in the contract are
the responsibility of the independent company. The contract requires the Company
to produce a working prototype by February 1998 which conforms to the product
specifications defined in the contract. To date, the Company has incurred
approximately $69,000 in direct costs of initial development work and has
recorded $39,909 of revenue related to the contract. Total payments received to
date on the contract are $214,250.
F-14
<PAGE> 41
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
11. INCOME TAXES
The Company accounts for income taxes under the liability method required by
FASB Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. For financial
statement purposes, a change in valuation allowance of $2,619,000 has been
recognized to offset certain deferred tax assets for which realization is
uncertain. Significant components of the Company's deferred tax liabilities and
assets as of March 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
$ $
- ----------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Tax over book depreciation 301,000 85,000
- ----------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 301,000 85,000
- ----------------------------------------------------------------------------
DEFERRED TAX ASSETS
Bad debt reserve 15,000 5,000
Interest expense 450,000 --
Inventory capitalization 70,000 108,000
Inventory reserve 210,000 20,000
Net operating loss carryforwards 8,169,000 5,912,000
Warranty reserve 14,000 8,000
Other 43,000 83,000
- ----------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 8,971,000 6,136,000
Valuation allowance for deferred tax assets (8,670,000) (6,051,000)
- ----------------------------------------------------------------------------
NET DEFERRED TAX ASSETS 301,000 85,000
- ----------------------------------------------------------------------------
NET DEFERRED TAX -- --
============================================================================
</TABLE>
The net provision for income taxes in 1997 and 1996 is $Nil as the Company
incurred losses in those years. Pre-tax income (loss) from Canadian operations
was approximately $681,000 in 1997 and $969,000 in 1996.
F-15
<PAGE> 42
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
11. INCOME TAXES (CONT'D.)
A reconciliation between federal statutory income tax rates and the effective
tax rate of the Company at March 31 is as follows:
<TABLE>
<CAPTION>
LIABILITY METHOD
----------------
1997 1996
% %
- ------------------------------------------------------------------
<S> <C> <C>
U.S. federal statutory rate 35.0 35.0
U.S. federal net operating loss rate (35.0) (35.0)
U.S. state tax rate -- --
Canadian statutory rate 45.6 44.1
Canadian non-capital loss rate (45.6) (44.1)
- ------------------------------------------------------------------
Effective rate on operating loss -- --
==================================================================
</TABLE>
The Company has U.S. net operating loss carryforwards available at March 31,
1997 of approximately $15,682,000 and $11,213,000 for federal and state tax
purposes, respectively, to offset income in future years. These carryforwards
will begin to expire in the years 2005 and 1998, respectively, unless previously
utilized.
The tax attributes of the Company identified above may be subject to limitation
arising from changes of ownership over the three year statutory testing period.
F-16
<PAGE> 43
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
12. CAPITAL STOCK
AUTHORIZED CAPITAL
The authorized capital of the Company consists of 60,000,000 common shares [1996
- - 30,000,000 common shares] with a par value of $.001 per share [1996 - no par
value] and 5,000,000 preferred shares [1996 - nil preferred shares] with a par
value of $.001 per share.
COMMON STOCK
The issued common stock of the Company consisted of 23,370,008 and 15,103,703
common shares as of March 31, 1997 and 1996, respectively.
During 1997, convertible notes payable and accrued interest therein and prepaid
warrants were converted into 4,758,752 shares of common stock. In addition,
subsequent to March 31, 1997, prepaid warrants of $875,591 were converted into
5,453,685 shares of common stock. If these conversions had occurred on April 1,
1996, the reported loss per share for the year ended March 31, 1997 would have
decreased $0.10 to $0.34.
PREFERRED STOCK
The Company has no issued preferred stock at March 31, 1997 and 1996.
STOCK OPTIONS
The Company maintains two stock option plans. The 1992 Stock Option Plan is a
non-qualified stock option plan which entitles certain directors and key
employees to purchase common shares of the Company. A maximum of 10% of
outstanding common shares are authorized for grant under the Plan. Options are
granted at a price not less than fair market value at the date of grant, and are
subject to approval of the Board of Directors. The 1994 Stock Option Plan
entitles certain directors, key employees and consultants of the Company to
purchase common shares of the Company. The 1994 Plan covers a maximum aggregate
of 4,000,000 shares, as amended and approved by shareholders on July 25, 1996.
The 1994 Plan provides for the granting of options which either qualify for
treatment as incentive stock options or non-statutory stock options.
No options were granted during 1997. Options granted during 1996 were under the
1994 and 1992 Stock Option Plan.
F-17
<PAGE> 44
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
12. CAPITAL STOCK (CONT'D.)
The following table summarizes stock option transactions:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
# $
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995 694,658 2.15
Granted 843,000 2.85
Exercised (15,000) 2.02
Expired (23,000) 3.30
Cancelled (6,000) 3.38
- ------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 1,493,658 2.71
Granted -- --
Exercised -- --
Expired (73,000) 3.08
Cancelled (250,000) 1.70
- ------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 1,170,658 2.89
==============================================================================
</TABLE>
All outstanding options were exercisable at March 31, 1997. The options are
exercisable at prices ranging from U.S. $2.09 to U.S. $3.65 [1996 - U.S. $1.50
to U.S. $3.65] and expire over the period to April 2000.
F-18
<PAGE> 45
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
12. CAPITAL STOCK (CONT'D.)
The Company adopted Statement of Financial Accounting Standard No. 123 entitled
Accounting for Stock-Based Compensation ("SFAS 123") as of April 1, 1995. The
provisions of SFAS 123 allow companies to either expense the estimated fair
value of stock options or to continue their current practice but disclose the
pro forma effects on net income and earnings per share had the value of the
options been expensed. The Company has elected to continue its practice of
recognizing compensation expense for its stock option and warrant incentive
plans using the intrinsic value based method of accounting [see Note 2] and to
provide the required pro forma information for stock options and warrants
granted after April 1, 1995. Under the terms of the intrinsic value method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date, or other measurement date, over the amount an employee must
pay to acquire stock. Had compensation expense for the Company's stock options
and warrants granted after April 1, 1995 been determined based on the fair value
at the grant dates for awards under those plans, the Company's pro forma loss
for the year and loss per share for the reported years would have been as
follows:
<TABLE>
<CAPTION>
1997 1996
$ $
- ----------------------------------------------------------------------------
<S> <C> <C>
Loss for the year (9,597,102) (8,455,696)
Compensation expense 107,377 1,458,330
- ----------------------------------------------------------------------------
Pro forma net loss (9,704,479) (9,914,026)
- ----------------------------------------------------------------------------
Pro forma loss per share (0.45) (0.75)
============================================================================
</TABLE>
The effects on pro forma loss per share of expensing the estimated fair value of
stock options and warrants are not necessarily representative of the effects on
reported net income for future years due to such things as the potential for
issuance of additional stock options and warrants in future years.
The fair value of options and warrants granted after April 1, 1995, used as a
basis for the above pro forma disclosures, was estimated at the date of grant
using the Black-Scholes option pricing model. The option and warrant pricing
assumptions include a dividend yield of 0%; and expected volatility of 1.390; a
risk free interest rate of 6.17%; and an expected life of half the period from
grant to expiration.
F-19
<PAGE> 46
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
12. CAPITAL STOCK (CONT'D.)
SHARE WARRANTS
The Company has outstanding share warrants as of March 31, 1997, in connection
with private placements, convertible debentures, equipment leasing and
establishing and amending the demand loan payable, entitling the holders to
purchase one common share for each warrant held as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
WARRANTS $ EXPIRATION DATE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
200,000 2.00 September 1998
33,750 4.00 June 1999
450,000 1.75* July 1999
82,100 4.00 August 1999
106,986 1.61** February 2000
88,014 1.61** March 2000
129,230 1.625 March 2001
401,924 0.469*** July 2001
400,000 0.469*** August 2001
150,000 0.65625** October 2001
146,866 1.09** October 2005
- ---------------------------------------------------------------------------------------------
2,188,870
=============================================================================================
</TABLE>
* Repriced to $1.75 per share from $4.00 per share pursuant to amendments
to demand loan payable [see Note 9].
** These warrants contain provisions for adjustment for dilutive events.
The exercise prices and where applicable, the number of warrants, have
been adjusted to reflect any such events or agreements through March 31,
1997.
*** Repriced to $0.469 per share from $0.9875 and $0.9375, respectively,
pursuant to amendments to a consulting agreement.
F-20
<PAGE> 47
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
13. COMMITMENTS
The Company has a lease for office space in Poway, California which is subject
to annual increases based on the CPI index. The lease expires in 2002. Office
rent expense for the years ended March 31, 1997 and 1996 was $312,422 and
$271,620, respectively.
Minimum commitments under the operating lease are as follows:
<TABLE>
<CAPTION>
$
- -------------------------------------------------------------------
<S> <C>
1998 221,000
1999 221,000
2000 221,000
2001 221,000
2002 166,000
- -------------------------------------------------------------------
1,050,000
===================================================================
</TABLE>
14. CONVERTIBLE NOTES PAYABLE
<TABLE>
<CAPTION>
1997 1996
$ $
- ----------------------------------------------------------------------------
<S> <C> <C>
7% convertible notes payable, due March 1999 -- 4,285,714
- ----------------------------------------------------------------------------
</TABLE>
The convertible notes payable were convertible at the option of the holder into
common shares of the Company at any time after May 4, 1996. The convertible
notes payable were convertible at the lesser of: $1.765 for each common share;
or a 30% discount to the 5 day moving average price of the common shares on the
day prior to conversion.
During the period May 13, 1996 to May 24, 1996, the holders of the convertible
notes payable exercised their options and converted all of the convertible notes
payable, together with accrued interest thereon, into 4,366,050 common shares of
the Company at conversion prices per share ranging from US $0.981 to US $1.269.
F-21
<PAGE> 48
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
15. BARTER TRANSACTION
During 1996, the Company sold 7,000 units of product to an independent media
trading firm in exchange for $1,172,500 of media trade credits and 50% of the
cash proceeds realized on the ultimate sale of the units. The costs of the 7,000
units, amounting to $980,000, has been charged to cost of sales. The Company
recognized no prepaid asset or any revenue in connection with the trade credits
since their use requires matching cash payments and the Company's ability to
continue as a going concern is in substantial doubt. In addition, the amount of
cash to be received on the ultimate sale of the units cannot be reasonably
estimated. Accordingly, the Company intends to recognize future revenue from the
trade credits only when ascertainable economic value is realized from their use
or cash proceeds are received from the ultimate sale of the units.
During 1996, the Company recorded revenue on the utilization of approximately
$37,000 of trade credits.
16. CONTINGENT LIABILITY
The Company may have a liability to certain security holders due to a possible
violation of federal and state securities laws prohibiting an issuer from
selling securities in a private placement by any form of general solicitation or
advertising. Section 5 of the Securities Act of 1933 prohibits the sale of
securities pursuant to a prospectus that does not satisfy the requirements of
the Securities Act. Such violation, if deemed to have occurred, could give rise
to a private right of action by the affected security holders for rescission of
recently issued securities in the amount of $5.67 million and for damages.
Management of the Company has provided notice to each of the affected security
holders of the possible violation and has obtained from affected security
holders, representing $5.42 million of the above shares, written release and
waivers with respect thereto. It is possible that the release and waiver
agreements could be challenged at some later date by an affected security holder
on grounds of enforceability. Although management of the Company has no present
reason to believe that the release and waiver agreements are not enforceable, a
contrary finding by a federal or state court may result in a continuing risk of
potential liability. Management of the Company believes the likelihood of a
future event occurring to confirm the contingent liability is remote.
F-22
<PAGE> 49
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
17. PREPAID WARRANTS
During 1997, the Company received cash from prepaid warrants of $3,396,505, net
of offering costs of $409,395. The face amount of the warrants of $3,805,900 is
exercisable, without further cash payment, into common shares of the Company at
the lesser of $0.70 per common share (with respect to $805,900 of warrants) and
$0.69125 per common share (with respect to $3,000,000 of warrants) or a 30%
discount to the 5 day moving average bid price of the common shares on the day
prior to exercise. The exercise price of the warrants will be further discounted
by 7% per year and for other events until the warrants are exercised. During
1997, the holders of prepaid warrants exercised this option and converted
$120,000 of prepaid warrants into 392,702 common shares of the Company at a
conversion price of U.S. $0.305. At March 31, 1997, the outstanding prepaid
warrants were exercisable into approximately 14.9 million common shares.
18. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $2,228,001 as follows:
<TABLE>
<CAPTION>
1997
$
- ----------------------------------------------------------------------------
<S> <C>
Write-down of inventory 1,290,039
Losses on cancellation of purchase commitments 98,295
Severance costs 47,265
Write-down of property and equipment to net realizable amount 376,538
Loss on disposal of property and equipment 365,864
Facility reduction and other 50,000
- ----------------------------------------------------------------------------
2,228,001
============================================================================
</TABLE>
At March 31, 1997, a total of $162,423 was included in other accounts payable
and accrued liabilities relating to the restructuring, which is expected to be
substantially completed by June 1997. The restructuring charge is as a result of
the change in the Company's operations due to the discontinuation of contract
manufacturing services arising from a decision to focus on Original Equipment
Manufacturing and licensing activities related to the Company's FLASHBACK
technology.
F-23
<PAGE> 50
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY NORRIS COMMUNICATIONS CORP.)
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1997 and 1996
19. SUBSEQUENT EVENT
On June 13, 1997, the Company completed the sale of $500,000 of 12% secured
notes due September 30, 1999 ("Notes") to nine investors ("Noteholders"). The
Notes are collateralized by the Company's issued and pending patents and the
FLASHBACK technology. The Notes may become convertible only when and if
allowable under the terms of the prepaid warrants (see Note 18) and are then
convertible at the lowest warrant conversion price used by the prepaid
warrantholders, subject to certain future adjustments. Upon conversion, the
Noteholders will receive a stock purchase warrant exercisable at the conversion
price for a period of three years.
F-24
<PAGE> 51
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORRIS COMMUNICATIONS, INC.
By: /s/ ELWOOD G. NORRIS
-------------------------------------
Elwood G. Norris
Chairman and Chief Executive Officer
Date: June 26, 1997
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Position Date
---- -------- ----
<S> <C> <C>
/s/ ELWOOD G. NORRIS Chairman of the Board, Chief June 26, 1997
- ----------------------- Executive Officer and Director
Elwood G. Norris (principal executive officer)
/s/ ALFRED H. FALK President and Director June 26, 1997
- -----------------------
Fred Falk
/s/ RENEE WARDEN Controller June 26, 1997
- ----------------------- (principal financial officer)
Renee Warden
/s/ ROBERT PUTNAM Vice President, Secretary and Director June 26, 1997
- -----------------------
Robert Putnam
</TABLE>
51
<PAGE> 1
EXHIBIT 10.32
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is made as of the 23rd day
of August, 1996, by and among NORRIS COMMUNICATIONS, CORP., a corporation
organized under the laws of the Yukon Territory, Canada, having its principal
place of business at 12725 Stowe Drive, Poway, California 92064 (the "Company"),
and KLEIN INVESTMENT GROUP, L.P., a Delaware limited partnership ("Consultant").
RECITALS
A. Consultant has previously assisted the Company in a Regulation D
private placement of securities in the Company (the "Offering "), and has
developed experience and knowledge about the operation of the Company's
business, its strategy and its stockholders (collectively, the "Business"). In
addition, through the experiences of its staff and partners, Consultant has
developed valuable knowledge and contacts in the securities and the
telecommunications industries.
B. The Company desires to obtain the benefits of Consultant's
experience, knowledge and contacts, and accordingly, the Company has offered to
retain and engage Consultant to render consulting and advisory services to the
Company on the terms and conditions hereinafter set forth. The Consultant
desires to accept such retention and engagement upon such terms and conditions.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Consulting Term and Duties.
The Company hereby agrees to retain and engage the Consultant and the
Consultant hereby accepts such retention and engagement, to render Consulting
Services (as hereinafter defined) to the Company.
For purposes of this Agreement, the term "Consulting Services" shall
mean:
(a) Providing limited strategic, financial and managerial
advice to the Company with respect to, among other things, its
operations, business development activities and capital structure.
(b) Providing limited assistance in the Company's interface
with the institutional financial community, including advice on
communications with the investment community.
(c) Introductions, where Consultant has existing
relationships, with potential licensing sources for the Company's
products and technology.
(d) Subject to the agreement of the parties with respect to
compensation to be paid in accordance with the provisions of Section 3
hereof, as requested, providing investment banking services, including
but not limited to, valuation, deal structure and negotiation in merger
and acquisition activities, and introduction of investors who provide
additional private or public equity financing.
It is expressly agreed and understood that the Consultant shall devote
an amount of working time, and keep such business hours, as are necessary,
sufficient and appropriate to the fulfillment of the Consulting Services
hereunder.
The Consultant agrees to use its best efforts and to serve the Company
diligently and faithfully in the performance of the Consulting Services.
The Consultant, in the performance of the Consulting Services, shall be
deemed an independent contractor and not an employee of the Company. The
Consultant shall have no right or authority to assume or create any obligations
on behalf of the Company or to make any representations on its behalf, except
with the prior written consent of the Company. The Consultant hereby
acknowledges that the Company has sole discretion in determining the terms of
any future debt or equity financing.
2. Term of Engagement.
52
<PAGE> 2
The term of the Consultant's engagement hereunder shall commence on
August 23, 1996 and continue for three years. The Initial Term may be extended
upon the parties' mutual written agreement (any such period, the "Renewal
Term"). The Initial Term and any Renewal Term shall be collectively referred to
as the "Consulting Period."
3. Compensation.
In consideration for the Consulting Services rendered by the Consultant
under Section 1 hereof, the Company shall pay to the Consultant a monthly fee
during the Consulting Period in an amount equal to $10,000. As additional
consideration, the Company agrees to grant warrants to purchase 800,000 shares
of the common stock of the Company, as follows:
(a) A warrant to purchase 400,000 shares of the common stock
of the Company shall be granted as of the date of this Agreement. The
strike price of the warrant shall be $.9375 per share (the closing bid
price on August 23rd). The warrant shall expire on August 23, 2001. All
other terms and conditions of the warrant (including registration
rights) shall be identical to the warrant (the "Original Warrant") for
401,924 shares which was issued to Consultant on August 7, 1996 in
connection with the Offering, copies of which are attached hereto as
Exhibits A (warrant) and B (registration rights).
(b) A warrant to purchase 133,333 shares of the common stock
of the Company shall be granted if the closing bid price of the common
stock of the Company shall equal or exceed $3.00 per share for ten
consecutive trading days during the Consulting Period. The strike price
of the warrant shall be $3.00 per share. The warrant shall expire five
years from the date that the warrant was first eligible to be issued
(the "Date of Eligibility"). All other terms and conditions of the
warrant (including the separate registration rights agreement) shall be
identical to the Original Warrant.
(c) A warrant to purchase 133,333 shares of the common stock
of the Company shall be granted if the closing bid price of the common
stock of the Company shall equal or exceed $5.00 per share for ten
consecutive trading days during the Consulting Period. The strike price
of the warrant shall be $5.00 per share. The warrant shall expire five
years from the Date of Eligibility. All other terms and conditions of
the warrant (including the separate registration rights agreement)
shall be identical to the Original Warrant.
(d) A warrant to purchase 133,334 shares of the common stock
of the Company shall be granted if the closing bid price of the common
stock of the Company shall equal or exceed $7.00 per share for ten
consecutive trading days during the Consulting Period. The strike price
of the warrant shall be $7.00 per share. The warrant shall expire five
years from the Date of Eligibility. All other terms and conditions of
the warrant (including the separate registration rights agreement)
shall be identical to the Original Warrant.
(e) The number of shares, the closing bid prices and the
strike prices in subsections (a)-(d) of this Section 3 shall be
automatically adjusted for any stock splits, recapitalizations or
similar events, all in accordance with the provisions of Section 7 of
the Original Warrant. For purposes of subsections (a) - (d) of this
Section 3, the price at which a warrant shall be issued hereunder shall
be adjusted to equal the strike price of such warrant as adjusted in
accordance with the provisions of Section 7 of the Original Warrant.
In addition, the Company shall promptly reimburse Consultant for all
reasonable direct out-of-pocket expenses incident to the performance of its
obligations under this Agreement and the fulfillment of the conditions imposed
hereunder. Consultant shall submit customary documentation of such expenses. The
compensation for any investment banking requested under Section 1(d) above shall
be negotiated in good faith between the parties within investment banking
industry standards.
All federal, state and local income taxes and associated taxation on
amounts paid to Consultant hereunder shall be the sole responsibility of
Consultant and Consultant hereby indemnifies the Company against any taxes owed
by Consultant in respect of the payments made hereunder.
4. Confidentiality.
53
<PAGE> 3
During the term of this Agreement and thereafter, Consultant shall keep
secret and retain in strictest confidence, and shall not, without the prior
written consent of the Board of Directors of the Company, furnish, make
available or disclose to any third party or use for the benefit of Consultant or
any third party, any Confidential Information. As used in this Agreement,
"Confidential Information" shall mean any information relating to the business
or affairs of the Company or the Business, including but not limited to
information relating to financial statements, customer identities, potential
customers, employees, suppliers, servicing methods, equipment, programs,
strategies and information, analyses, profit margins, intellectual property,
trade secrets, computer programs, methods of operation, procedures,
improvements, systems, or other proprietary information owned, used by or
related to the Company in connection with the Business; provided, however, that
Confidential Information shall not include any information which is in the
public domain or becomes known in the industry through no wrongful act on the
part of Consultant. Consultant acknowledges that the Confidential Information is
vital, sensitive, confidential and proprietary to the Company. Consultant
acknowledges that the remedy at law for any breach of this section is
inadequate, and that it consents and agrees that in the event of any violation
of this section, a restraining order and/or injunction may be issued against it
in addition to any other remedy that the Company may have.
5. Press Releases; Use of Name.
For the term of this Agreement, each party agrees to obtain the consent
of the other party prior to the dissemination of any press release, written
communication, or other written materials which contains the name and/or logo of
any such party. The Company also agrees not to use the name "Iacocca" in any
press release, written communication or other written materials without first
obtaining the written consent of Consultant.
6. Termination.
The engagement may be terminated by either party at any time after
August 23, 1997 without Cause upon 30 days written notice to the other party;
provided that if the Company terminates without Cause, Consultant shall still be
entitled to all warrant rights set forth in Section 3 hereof and any
compensation earned through the date of actual termination and that if
Consultant terminates without Cause, Consultant shall still be entitled to all
warrants which it is eligible to receive as of the date of actual termination
(as set forth in Section 3 hereof) and any compensation already earned through
the date of actual termination. The Company may immediately terminate
Consultant's engagement hereunder for "Cause" (as defined below). On termination
for Cause, Consultant shall not be entitled to receive any further compensation.
"Cause" for purposes of this Section 6 shall mean (a) Consultant's failure or
refusal to perform the Consulting Services, which refusal or failure continues
for a period of thirty (30) business days after written notice by the Company;
(b) material breach by Consultant of this Agreement which continues beyond
thirty (30) days after written notice thereof has been received by Consultant
from the Company; (c) Consultant's bankruptcy or insolvency; or (d) "gross
misconduct" of Consultant or its principals or its employees, which gross
misconduct causes or results in material injury to the Company, whether direct
or indirect. "Gross misconduct" shall include, by the way of description and not
limitation, embezzlement of any of the Company's funds, theft of the Company's
property, use of Confidential Information in violation of the provisions of
Section 4 hereof, breach (by Consultant or its Director nominee) of any
fiduciary duty or duty of loyalty, both with respect to the Company, the
conviction of any employee or principal of Consultant for a felony class crime
or a violation by Consultant or any of its employees or principals of any
federal, state or other regulatory (including NASD) laws, rules or guidelines to
which either the Company or Consultant are subject, including, without
limitation, securities laws and the NASD rules of fair practice.
Notwithstanding anything to the contrary contained herein, the
expiration of the Consulting Period or other termination of this Agreement shall
not release the Company from any obligation to satisfy any outstanding
obligations due to Consultant hereunder, including any unpaid Consulting Fees or
otherwise.
7. Board Seat.
After the execution of this Agreement, Consultant shall designate a
nominee, and Company agrees to nominate and support such nominee for its Board
of Directors. Company agrees to schedule an election for the Board of Directors
within ninety (90) days of the date hereof. Prior to such election, Company
shall provide Consultant with the same information transmitted to current
members of its Board of Directors, and shall invite nominee to attend all board
meetings.
8. Indemnity.
54
<PAGE> 4
The Indemnification Agreement dated of even date herewith and attached
hereto as Exhibit C, by and between Company and Consultant (the "Indemnification
Agreement"), by this reference hereby is incorporated into this Agreement and
made a part hereof as if fully set forth herein.
9. Use of Advice.
No advice rendered by Consultant in connection with the services
performed pursuant to this Agreement will be quoted by the Company or any of its
subsidiaries or affiliates of any of their respective successors or assigns, nor
will any such advise be referred to, in any report, document, release or other
communication, whether written or oral, prepared, issued or transmitted by the
Company or any of its subsidiaries or affiliates or any of their respective
successors or assigns, or any person or corporation controlling, controlled by
or under common control with the Company, any subsidiaries or any affiliates or
any director, officer, employee, agent or representative of any such entity,
without the prior written authorization of Consultant, except to the extent
required by law (in which case the Company or any of its subsidiaries or
affiliates or any of their respective successors or assigns shall so advise
Consultant in writing prior to such use and shall consult with Consultant with
respect to the form and timing of such disclosure) provided the foregoing shall
not prohibit appropriate internal communication within the Company or any of its
subsidiaries or affiliates.
10. Miscellaneous.
Authority. The Company hereby represents and warrants that it, and any
of its subsidiaries and affiliates (i) has been duly organized under the general
corporate law of the jurisdiction of its incorporation, is current in the
payment of any fees due to the Secretary of State or other governmental body of
such jurisdiction, and its status is active, (ii) has qualified to do business
as a foreign corporation and is in good standing in each jurisdiction in which
such qualification is required, and (iii) has full power, authority and legal
right to own its property, to carry on its business as presently conducted, and
to enter into and perform its obligations under this Agreement.
Assignment. No party hereto may assign or delegate any of its rights or
obligations hereunder without the prior written consent of the other party
hereto; provided, however, that the Company shall have the right to assign all
or any part of its rights and obligations under this Agreement to (i) any
affiliate of the Company to which the Business is assigned at any time or (ii)
the purchaser of substantially all or all of the assets of the Company; provided
further that such assignment will not release the Company from any of its
obligations hereunder. Except as otherwise expressly provided herein, all
covenants and agreements contained in this Agreement by or on behalf of any of
the parties hereto shall bind and inure to the benefit of the respective legal
representatives, heirs, successors and assigns of the parties hereto whether so
expressed or not.
Governing Law. The parties agree that this Agreement shall be construed
and governed in accordance with the laws of California, without regard to its
principles of conflicts of law.
Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
executors, administrators, successors and assigns.
Counterparts. This Agreement may be executed simultaneously in one or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
Entire Agreement. This Agreement represents the entire agreement and
understanding of the parties hereto with respect to the matters set forth
herein. This Agreement supersedes all prior negotiations, discussions,
correspondence, communications, understandings and agreements between the
parties relating to the subject matter of this Agreement.
Waivers and Amendments. This Agreement may be amended, superseded,
canceled, renewed or extended, and the terms and conditions hereof may be
waived, only by a written instrument signed by the parties or, in the case of a
waiver, by the party waiving compliance. No delay on the part of any party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof; nor shall any waiver on the part of any party of any such right, power
or privilege hereunder, nor
55
<PAGE> 5
any single or partial exercise of any right, power or privilege hereunder,
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege hereunder.
Severability. If any term or provision of this Agreement shall be held
to be invalid or unenforceable, the remaining terms and provisions hereof shall
not be affected thereby.
IN WITNESS WHEREOF, the Company and consultant have each caused this
Agreement to be duly signed as of the day and year first written above.
NORRIS COMMUNICATIONS, CORP. a
corporation organized under the laws of the
Yukon Territory, Canada
By: /s/ KATHLEEN TERRY
Kathleen Terry
Chief Financial Officer
KLEIN INVESTMENT GROUP, L.P. a Delaware
limited partnership
By: ICG, Inc., its general partner
By: /s/ WILLIAM S. ELKUS
William S. Elkus
President
56
<PAGE> 1
EXHIBIT 10.32.1
KLEIN INVESTMENT GROUP, L.P.
11100 Santa Monica Boulevard, Suite 970
Los Angeles, California 90025
Telephone: (310) 444-5600 - Fax (310) 444-5601
January 7, 1996(sp7)
Elwood G. Norris
Chief Executive Officer
Norris Communications, Inc.
12725 Stowe Drive
Poway, CA 92064
Dear Woody:
This letter is to confirm our agreement made today.
(1) Notwithstanding Section 3 of our August 23, 1996 consulting agreement (the
"Agreement"), Klein Investment Group, LP ("KIG") hereby agrees to defer payment
of its $10,000 per month consulting fee, beginning as of the payment which was
due December 23, 1996 (covering services from November 23 to December 23). This
deferral shall continue until the earlier of January 1, 1999 or until paying
some or all of the deferred payments would not jeopardize the ability of Norris
Communications, Inc. ("Norris") to meet its near term obligations. Should Norris
file for bankruptcy, (or become the subject of an involuntary filing), all
unpaid consulting fees shall become immediately due and payable, and no new
deferrals shall be required of KIG.
(2) In exchange for the above, Norris hereby resets the Exercise Price for KIG's
warrants to purchase Norris common stock, for both the warrant to purchase
401,924 shares issued on August 7, 1996 in connection with the 1996 Regulation D
offering, and the warrant to purchase 400,000 shares granted in Section 3(a) of
the Agreement, in each case to $0.469 per share (today's actual closing price).
(3) All other terms of the Agreement and the warrants shall remain unchanged.
Sincerely,
/s/ WILLIAM S. ELKUS
William S. Elkus,
Managing Director
Agreed on behalf of Norris Communications, Inc.
/s/ ELWOOD G. NORRIS
Elwood G. Norris,
Chief Executive Officer
/s/ ALFRED H. FALK
Alfred H. Falk,
President
57
<PAGE> 1
EXHIBIT 10.33
NOTE AGREEMENT
THIS NOTE AGREEMENT (the "Agreement") is made and entered into
as of this 13th day of June, 1997, by and among Norris Communications, Inc., a
Delaware corporation (the "Company") and the individuals and entities listed on
Schedule A hereto (individually, a "Purchaser" and collectively, the
"Purchasers") who are a signatory to this Agreement.
In consideration of the mutual promises and covenants
contained in this Agreement, the parties hereto agree as follows:
1. AUTHORIZATION AND SALE OF NOTES.
a. AUTHORIZATION. The Company has, or before the
Closing (as defined in Section 2) will have, duly authorized the sale and
issuance of up to Five Hundred Thousand Dollars ($500,000) aggregate principal
amount of its 12% Secured Promissory Note with Limited Conversion Rights (the
"Notes") to be dated the date of issue, to bear interest from such date at the
rate of twelve percent (12%) per annum until the principal amount is paid in
full, to provide for payment of principal and accrued interest on or before
September 30, 1999, to be convertible into shares of the Company's Common Stock
and warrants ("Warrants") to purchase additional shares of Common Stock in the
manner described in Section 8, and to be substantially in the form attached
hereto as EXHIBIT A. Interest on the Notes shall be computed on the basis of a
365-day year. The Notes are not subject to prepayment or redemption at the
option of the Company prior to their expressed maturity dates. The term "Notes"
as used herein shall include each Note delivered pursuant to this Agreement and
the separate agreements with the Purchasers listed on Schedule A hereto. You and
the other Purchasers listed on Schedule A hereto are hereinafter sometimes
referred to as the "Purchasers."
b. SALE OF NOTES. The Company's agreement with each
of the Purchasers is a separate agreement, and the sale of Notes to each of the
Purchasers is a separate sale. Subject to the terms and conditions of this
Agreement, the Company will sell and issue to you, and you will purchase from
the Company, the Notes of the Company at a price of one hundred percent (100%)
of the principal amount thereof set forth opposite your name on Schedule A.
2. THE CLOSING.
The closing ("Closing") of the sale and purchase of the Notes under
this Agreement shall take place at the offices of the Company, 12725 Stowe
Drive, Poway, California 92064, at 2:00 p.m. local time, on June 13, 1997. At
the Closing, the Company will deliver to you a Note for the full amount of your
purchase against payment to the Company of the purchase price therefor, by wire
transfer, check, or other method acceptable to the Company. The date of the
Closing is hereinafter referred to as the "Closing Date."
3. REPRESENTATIONS OF THE COMPANY. Subject to and except as disclosed
by the Company in EXHIBIT B hereto, the Company hereby represents and warrants
to you as follows:
a. ORGANIZATION AND STANDING. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has full corporate power and authority to conduct
its business as presently conducted and as proposed to be conducted by it, and
to enter into and perform this Agreement, to sell and issue the Notes hereunder
and to carry out the transactions contemplated by this Agreement. The Company is
duly qualified to do business as a foreign corporation and is in good standing
in the State of California and in every other jurisdiction in which the failure
to so qualify would have a material adverse effect on the operations or
financial condition of the Company.
b. CAPITALIZATION. As of June 9, 1997, the authorized
capital stock of the Company consisted of Sixty Million (60,000,000) shares of
common stock, $.001 par value per share (the "Common Stock"), of which
26,570,767 shares are issued and outstanding and Five Million One (5,000,000)
shares of preferred stock, $.001 par value per share (the "Preferred Stock"), of
which no shares are issued and outstanding. All of the issued and outstanding
shares of Common Stocks have been duly authorized and validly issued and are
fully paid and nonassessable.
c. ISSUANCE OF NOTES. The issuance, sale and delivery
of the Notes in accordance with
58
<PAGE> 2
this Agreement have been duly authorized by all necessary corporate action on
the part of the Company, and the Notes when so issued, sold and delivered
against payment therefor in accordance with the provisions of this Agreement,
will constitute the legal, valid and binding obligations of the Company
enforceable in accordance with their terms.
d. AUTHORITY FOR AGREEMENT. The execution, delivery
and performance by the Company of this Agreement, the issuance of the Common
Stock and the Warrants and the performance of all of the Company's obligations
hereunder and thereunder have been duly authorized by all necessary corporate
action, and this Agreement has been duly executed and delivered by the Company.
This Agreement and the Common Stock and the Warrants, when issued, constitute
the valid and binding obligations of the Company enforceable in accordance with
their terms. The execution of and performance of the transactions contemplated
by this Agreement and compliance with its provisions by the Company will not
violate any provision of law and will not conflict with or result in any breach
of any of the terms, conditions or provisions of, or constitute a default under,
its Certificate of Incorporation or Bylaws or any indenture, lease, agreement or
other instrument to which the Company is a party or by which it or any of its
properties is bound, or any decree, judgment, order, statute, rule or regulation
applicable to the Company. e. GOVERNMENTAL CONSENTS. No consent, approval, order
or authorization of, or registration, qualification, designation, declaration or
filing with, any federal or state governmental authority is required on the part
of the Company in connection with the execution and delivery of this Agreement,
the offer, issue, sale and delivery of the Notes, or the other transactions to
be consummated at the Closing, as contemplated by this Agreement, except such
filings as shall have been made prior to and shall be effective on and as of the
Closing. Based on the representations made by you in Section 4 of this
Agreement, the offer and sale of the Notes to you will be in compliance with
applicable federal securities laws.
f. LITIGATION. There is no action, suit, proceeding
or investigation pending, or, to the best of the Company's knowledge, any threat
thereof, against the Company, which questions the validity of this Agreement or
the right of the Company to enter into it.
g. FINANCIAL STATEMENTS. The Company has furnished to
you a complete and correct copy of the audited consolidated balance sheet of the
Company as at March 30, 1996, and the related audited consolidated statement of
operations, statement of shareholders' equity and statement of cash flows for
the two (2) years then ended, and the Company's unaudited interim consolidated
financial statements and balance sheet at and for the nine (9) months ended
December 31, 1996 (the "Balance Sheet Date"). The balance sheet at December 31,
1996 is hereinafter referred to as the "Balance Sheet" and all such financial
statements are hereinafter referred to collectively as the "Financial
Statements." The Financial Statements have been prepared in accordance with
generally accepted accounting principles consistently applied, are in accordance
with the books and records of the Company, and present fairly the financial
condition and results of operations of the Company, as at the dates and for the
periods indicated, subject in the case of the unaudited portion of the Financial
Statements to normal year-end audit adjustments which will not be material and
the absence of certain footnote disclosures.
h. ABSENCE OF LIABILITIES. Except as disclosed in
EXHIBIT B, the Company did not have, at the Balance Sheet Date, any liabilities
or obligations of any type, whether absolute or contingent, which were not fully
reflected on the Balance Sheet or any footnotes thereto, and, since the Balance
Sheet Date, the Company has not incurred or otherwise become subject to any such
liabilities or obligations except for liabilities or obligations incurred in the
ordinary course of business which have not been, in the aggregate, materially
adverse.
i. TAXES. The amount shown on the Balance Sheet as
provision for taxes is sufficient in all material respects for payment of all
accrued and unpaid Federal, state, county, local and foreign taxes for the
period then ended and all prior periods. The Company has filed or has obtained
presently effective extensions with respect to all Federal, state, county, local
and foreign tax returns which are required to be filed by it, such returns are
true and correct and all taxes shown thereon to be due have been timely paid
with exceptions not material to the Company. Federal income tax returns of the
Company have not been audited by the Internal Revenue Service, and no
controversy with respect to taxes of any type is pending or, to the knowledge of
the Company, threatened.
j. PROPERTY AND ASSETS. The Company has good and
marketable title to all of its material properties and assets, including those
reflected on the Balance Sheet, except properties and assets disposed of since
the date thereof in the ordinary course of business, and none of such properties
or assets is subject to any mortgage, pledge, lien, security interest, charge or
encumbrance, except (a) liens for current taxes not yet delinquent, or (b) as
set forth in EXHIBIT B. The Company enjoys peaceful and undisturbed possession
under all significant leases under which it is operating and all of said leases
are valid, binding and enforceable in accordance with their terms and are in
full force and effect.
59
<PAGE> 3
k. NO DEFAULT ON MATERIAL CONTRACTS AND AGREEMENTS.
(i) To the actual knowledge of the Company, no
party with whom the Company has a material agreement or contract is in default
thereunder or has breached any terms or provisions thereof which is material to
the conduct of the business of the Company. As used in this Agreement, the terms
"contracts" and "agreement" include every contract, agreement, commitment,
understanding and promise, whether written or oral.
(ii) Except as set forth in EXHIBIT B, the Company
in all material respects has performed, or is now performing, the obligations
of, and is not in material default (or would by the lapse of time and/or the
giving of notice be in material default) in respect of, any contract or
agreement binding upon it or its assets or properties and material to the
conduct of its business. Except for those matters which, individually or in the
aggregate, do not and will not materially adversely affect the business of the
Company, or except as set forth in EXHIBIT B, no third party has raised any
claim, dispute or controversy with respect to any of the contracts or agreements
of the Company, nor has the Company received notice or warning of alleged
nonperformance, delay in delivery or other noncompliance by the Company with
respect to its obligations under any of its contracts or agreements, nor, to the
actual knowledge of the Company, are there any facts which exist indicating that
any of its contracts or agreements may be totally or partially terminated or
suspended by the other parties thereto.
l. COMPLIANCE. The Company is not in violation of any
provision of its Certificate of Incorporation or Bylaws. The Company has, in all
material respects, complied with all laws, regulations and orders applicable to
its present and proposed business and has all material permits and licenses
required thereby. There is no term or provision of any mortgage, indenture,
contract, agreement or instrument to which the Company is a party or by which it
is bound, or, to the knowledge of the Company, of any provision of any state or
federal judgment, decree, order, statute, rule or regulation applicable to or
binding upon the Company, which materially adversely affects or, so far as the
Company may now foresee, in the future is reasonably likely to materially
adversely affect, the business, prospects, condition, affairs or operations of
the Company or any of its properties or assets. To the best of the knowledge of
the Company, no employee of the Company is in violation of any term of any
employment contract, patent or other proprietary information disclosure
agreement or any other contract or agreement relating to the employment of such
employee by the Company.
m. ABSENCE OF CERTAIN CHANGES. Except as set forth in
EXHIBIT B, since the Balance Sheet Date, there has not been:
(i) Any change in the assets, liabilities,
obligations, financial condition, or operations of the Company, except changes
in the ordinary course of business that have not been, either individually or in
the aggregate, materially adverse;
(ii) Any change (individually or in the
aggregate), except in the ordinary course of business, in the contingent
obligations of the Company by way of guaranty, endorsement, indemnity, warranty,
or otherwise;
(iii) Any damage, destruction, or loss, whether or
not covered by insurance, materially and adversely affecting the properties or
business of the Company;
(iv) Any waiver or compromise by the Company of a
valuable right or of a material debt owed to it;
(v) Any loans made by the Company to its
employees, officers, or directors other than travel advances made in the
ordinary course of business;
(vi) Any extraordinary increases in the
compensation of any of the Company's employees, officers, or directors;
(vii) Any declaration or payment of any dividend
or other distribution of the assets of the Company;
(viii) Any issuance or sale by the Company of any
shares of its Common Stock or other securities;
60
<PAGE> 4
(ix) To the best of the Company's knowledge, any
other event or condition of any character that has materially and adversely
affected the Company's business or prospects; or
(x) Any agreement or commitment by the Company to
do any of the things described in this subsection 3(n).
n. Disclosures. Neither this Agreement nor any
exhibit hereto, nor any report, certificate or instrument furnished to any of
the Purchasers in connection with the transactions contemplated by this
Agreement, when read together, contains any material misstatement of fact or
omits to state a material fact necessary to make the statements contained herein
or therein not misleading. The Company knows of no information or fact which has
or would have a material adverse effect on the financial condition, business or
prospects of the Company which has not been disclosed to the Purchasers.
4. REPRESENTATIONS OF THE PURCHASER. You represent and warrant to the
Company as follows:
a. INVESTMENT. You are acquiring the Note for your
own account for investment and not with a view to, or for sale in connection
with, any distribution thereof, nor with any present intention of distributing
or selling the same; and, except as contemplated by this Agreement and the
Exhibits hereto, you have no present or contemplated agreement, undertaking,
arrangement, obligation, indebtedness or commitment providing for the
disposition thereof.
b. AUTHORITY. You have full power and authority to
enter into and to perform this Agreement in accordance with its terms.
c. EXPERIENCE. You have carefully reviewed (i) the
representations concerning the Company contained in this Agreement, (ii) the
Company's Annual Report to Shareholders on Form 10-KSB for the fiscal year ended
March 31, 1996, (iii) the Quarterly Report to Shareholders on Form 10-QSB for
the quarterly period ended December 31, 1996 and (iv) the Company's Prospectus,
dated May 15, 1997; the officers of the Company have made available to you any
and all written information which you have requested and have answered to your
satisfaction all inquiries made by you; you have adequate net worth and means of
providing for your current needs and personal contingencies to sustain a
complete loss of your investment in the Company; and your overall commitment to
investments which are not readily marketable is not disproportionate to your net
worth and your investment in the Notes will not cause such overall commitment to
become excessive.
d. NATURE OF INVESTOR. You are either (i) an
Accredited Investor within the definition set forth in Securities Act Rule
501(a) who was not formed for the specific purpose of acquiring the Notes or
(ii) not a U.S. Person within the definition set forth in Regulation S and not
an affiliate of the Company.
5. CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS. Your obligation to
purchase Notes at the Closing is subject to the fulfillment on or prior to the
Closing Date of each of the following conditions:
a. ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each
representation and warranty contained in Section 3 shall be true and correct on
and as of the Closing Date with the same effect as though such representation
and warranty had been made on and as of the Closing Date, and you shall have
received a certificate to such effect dated the Closing Date signed by the
President and Secretary of the Company. b. PERFORMANCE. The Company shall have
performed and complied with all agreements and conditions contained in this
Agreement required to be performed or complied with by the Company on or prior
to the Closing Date, and you shall have received a certificate to such effect
dated the Closing Date signed by the President and Secretary of the Company.
c. COLLATERAL PATENT ASSIGNMENT. The Company shall
have entered into a Collateral Patent Assignment for the benefit of each
Purchaser and an Intercreditor Agreement setting forth the rights of each
Purchaser as pari passu.
d. CONSENTS AND APPROVALS. All consents, approvals
and authorizations of and filings
61
<PAGE> 5
with any federal or state governmental authority required on the part of the
Company, if any, in connection with the valid execution and delivery of the
Agreement, issuance and sale of the Notes hereunder and the consummation of the
transactions contemplated hereby have been obtained or made, except, if
required, filings to be made under the Securities Act of 1933, as amended, and
applicable state securities laws after the sale of the Notes and issuance of the
Common Stock and Warrants.
6. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations of the
Company under subsection 1.2 of this Agreement are subject to fulfillment, on or
before the Closing Date, of each of the following conditions:
a. ACCURACY OF REPRESENTATIONS AND WARRANTIES. Each
of the representations and warranties of the Purchaser contained in Section 4
shall be true on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of that date.
7. COVENANTS OF THE COMPANY. The Company covenants as follows:
a. INSPECTION. The Company shall permit you, or your
authorized representative, to visit and inspect the properties of the Company,
including its corporate and financial records, and to discuss its business and
finances with officers of the Company, during normal business hours following
reasonable notice and as often as may be reasonably requested.
b. FINANCIAL STATEMENTS AND OTHER INFORMATION. The
Company will deliver to you:
(i) within one hundred (100) days after the end of
each fiscal year of the Company, an audited balance sheet of the Company as at
the end of such year and related statements of operations, shareholders' equity
and cash flows for such year, certified by certified public accountants selected
by the Company, and prepared in accordance with generally accepted accounting
principles; and
(ii) Within Fifty (50) days after the end of each
fiscal quarter of the Company, an unaudited balance sheet of the Company as at
the end of such quarter, and unaudited statements of operations and cash flows
for such fiscal quarter and for the current fiscal year to the end of such
fiscal quarter.
(iii) Within ten (10) days after the discovery or
notification that the Company is not in compliance with this Agreement or any
other material agreement to which the Company is a party, a detailed statement
outlining such noncompliance or default; and
(iv) within ten (10) days of delivery, such other
notices, information and data with respect to the Company as the Company
delivers to the holders of its Common Stock, the Securities and Exchange
Commission or any securities exchange on which capital stock of the Company may
be listed, and such other information and data as such Purchasers may from time
to time reasonably request.
c. TERMINATION OF COVENANTS. The covenants of the
Company contained in subsections 7(a) and 7(b) of this Section 7 shall
terminate, and be of no further force or effect, upon payment of the Notes in
full.
8. CONVERSION OF NOTES.
a. Subject to and upon compliance with the provisions
hereof, the holder of any Note shall have the right, at such holder's option, at
any time after the date occurrence of the events set forth in subsection (f), to
convert of the unpaid principal amount of the Note into shares of Common Stock
of the Company at the Conversion Price (as defined in subsection (d) below) in
effect at the time of conversion together with a Warrant to purchase additional
shares of Common Stock. Interest shall accrue on the principal amount of the
Note converted pursuant to this Section 8 up to and including the date of
conversion, and the Company shall promptly pay all such accrued and unpaid
interest. For purposes hereof, the term "Common Stock" shall mean the capital
stock of the Company of the class authorized and designated as Common Stock, par
value $.001 per share, at the date hereof or as such stock may, by change or
classification, be constituted from time to time.
b. In order to exercise the conversion privilege, the
holder shall surrender the Note to
62
<PAGE> 6
the Company at its principal office duly endorsed or accompanied by a written
instrument of transfer duly executed by the holder of the Note, accompanied by
written notice to the Company stating that the holder elects to convert the Note
subject to the provisions of this Section 8 setting forth the name(s) in which
the certificate for shares of Common Stock and Warrant issuable upon such
conversion shall be issued. As promptly as practicable after the receipt of such
notice and the surrender of the Note aforesaid, the Company shall issue and
deliver to such holder (i) a certificate for the number of full shares of Common
Stock issuable upon such conversion (ii) cash, as provided in subsection (c) in
respect of any fraction of a share of Common Stock issuable upon conversion and
(iii) cash in payment of interest accrued thereon to the date of conversion and
any prepayment fee which the Company is obligated to pay in accordance with the
terms of the Note. Such conversion shall be deemed to be effected at the time at
which such notice shall have been received by the Company and the Note shall
have been surrendered aforesaid, and the person in whose name any certificate
for shares of Common Stock and Warrants shall be issuable upon such conversion
shall be deemed to become on said date the holder of record of the shares and
Warrants represented thereby.
c. The Company shall not be required to issue
fractions of shares of Common Stock upon conversion of the Note. If any
fractional interest in a share of Common Stock would otherwise be deliverable
upon conversion, the Company shall purchase such fractional interest for an
amount in cash equal to the Conversion Price then in effect, calculated to the
nearest cent.
d. The price at which shares of Common Stock shall be
delivered upon conversion (the "Conversion Price") shall be equal to the lesser
of (i) the lowest Exercise Price, as defined in Section 4(b) of the Common Stock
Purchase Warrant issued by the Company in or about June - August 1996 (the "1996
Warrants"), at which any of the 1996 Warrant are exercisable or (ii) seventy
percent (70%) of the average closing bid price of the Common Stock for the
twenty (20) trading days immediately following any and each distribution in
shares, subdivision, splitup, combination, reclassification or other change in
the Common Stock.
e. The Conversion Price in effect at any time shall
be subject to adjustment from time to time as hereinafter provided:
(i) If the Company shall at any time subdivide the
outstanding shares of Common Stock, or shall issue a stock dividend on its
outstanding Common Stock, the Conversion Price in effect immediately prior to
such subdivision or the issuance of such dividend shall be proportionately
decreased, and in case the Company shall at any time combine the outstanding
shares of Common Stock, the Conversion Price in effect immediately prior to such
combination shall be proportionately increased, effective at the close of
business on the date of such subdivision, dividend or combination, as the case
may be.
(ii) Upon each adjustment of the Conversion Price
pursuant to the provisions of this Section 8, the number of shares issuable upon
conversion of the Note shall be adjusted to the nearest full share by
multiplying the Conversion Price in effect immediately prior to such adjustment
by the number of shares issuable upon conversion of the Note immediately prior
to such adjustment and dividing the product so obtained by the adjusted
Conversion Price.
(iii) If the Company shall at any time consolidate
with or merge into or sell or convey all or substantially all of its assets to
any other corporation, the Note shall thereafter be convertible into such number
and kind of securities and property as would have been issuable or distributable
on account of such consolidation, merger, sale or conveyance upon or with
respect to the securities into which the Note was convertible immediately prior
to such consolidation, merger, sale or conveyance. f. The principal amount of
each Note will not be convertible unless and until allowable under the term of
the 1996 Warrants. Should the Notes not be convertible at maturity for any
reason not the fault of the holder, then the Company shall pay in cash as a
maturity premium and not as interest, an amount equal to the amount realizable
by the holder assuming conversion of the Notes and exercise of the Warrants had
occurred during the term at the most favorable Conversion Price and the sale of
calculated shares at the highest thirty (30) day average closing bid price after
such computed conversion date. The holders also shall have the option to
exercise this "Benefit of the Bargain" computation and payment upon any merger,
acquisition, more than fifty percent (50%) change in control, or sale of
substantially all of the assets of the Company.
g. If the closing bid price of Common Stock is
greater than $0.75 per share for ten (10) consecutive trading days, and the
Notes are convertible (as provided above) the Company shall have the rights to
force all
63
<PAGE> 7
holders of Notes to convert all sums owed under the Notes into Common Stock;
provided, that in the event the forced conversion is issued prior to December
31, 1998 a registration statement under the Securities Act of 1933 covering the
Conversion Shares so issuable shall then be in effect and current.
h. Upon Conversion of Notes, the Company shall issue
each holder a Warrant exercisable into that number of shares of Common Stock
("Warrant Shares") equal to the principal of the Note divided by the Conversion
Price. The Warrants shall be exercisable into shares of Common Stock for a
period of three (3) years from issuance. The Warrants shall provide for cashless
exercise by the holder and shall have piggy back registration rights.
i. Each certificate representing shares of the
Company's Common Stock and/or Warrants issued upon conversion of the Note should
bear a legend substantially in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED UNLESS AND UNTIL SUCH SECURITIES ARE
REGISTERED UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT
THAT SUCH REGISTRATION IS NOT REQUIRED.
9. EVENTS OF DEFAULT AND REMEDIES THEREFOR. a. EVENTS OF DEFAULT.
(i) Any one or more of the following shall
constitute an "Event of Default" as the term is used herein:
(ii) if the Company shall default in the payment
of any part of the principal of the Note when the same shall have become due and
payable; or
(iii) if the Company shall default in the payment
of any installment of interest on the Note when the same shall have become due
and payable; or
(iv) if any material representation or warranty
made by the Company herein shall be false in any material respect when made; or
(v) if the Company breaches any agreement,
covenant or condition contained herein; or
(vi) if the Company shall make an assignment for
the benefit of creditors, or shall admit in writing its inability to pay its
debts as they become due, or shall file a voluntary petition in bankruptcy, or
shall be adjudicated a bankrupt or insolvent, or shall file any petition or
answer seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, or shall file any answer admitting or not
contesting the material allegations of a petition filed against the Company in
any such proceeding, or shall seek or consent to or acquiesce in the appointment
of any trustee, receiver or liquidator of the Company or of all or any
substantial part of the property of the Company, or the Company or its directors
or majority stockholders shall take any action looking to the dissolution or
liquidation of the Company; or
(vii) If, within thirty (30) days after the
commencement of an action against the Company seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future statute, law or regulation, such action shall
not have been dismissed or all orders or proceedings thereunder affecting the
operations or the business of Company stayed, or if the stay of any such order
or proceeding shall thereafter be set aside; or if, within sixty (60) days after
the appointment without the consent or acquiescence of the Company of any
trustee, receiver or liquidator of the Company or of all or any substantial part
of the properties of Company, such appointment shall not have been vacated.
b. NOTICE TO HOLDERS. When an Event of Default
described in the foregoing subsection
64
<PAGE> 8
9(a) has occurred, or if the holder of any Note gives any notice or takes any
other action with respect to a claimed default, the Company agrees to give
written notice within three (3) days of such event to all holders of the Notes
then outstanding.
c. ACCELERATION OF MATURITIES. When any Event of
Default described in subsection 9(a) has occurred and is continuing, any holder
of any Note may, by notice in writing to the Company, declare the entire
principal and all interest accrued on the Notes to be, and all Notes shall
thereupon become, forthwith due and payable, without any presentment, demand,
protest or other notice of any kind, all of which are hereby expressly waived.
Upon the Notes becoming due and payable as a result of any Event of Default as
aforesaid, the Company will forthwith pay to the holders of the Notes the entire
principal and interest accrued on the Notes. The Company further agrees to pay
to the holders of the Notes all costs and expenses incurred by them in the
collection of any Notes upon any default hereunder or thereon, including
reasonable compensation to such holders' attorneys for all services rendered in
connection therewith.
10. NOTICES. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be delivered by hand or
mailed by first class certified or registered mail, return receipt requested,
postage prepaid:
If to the Company, at 12725 Stowe Drive, Poway,
California 92064, Attention: President, or at such other address or addresses as
may have been furnished in writing by the Company to the Purchaser; or
If to the Purchaser, at his or its address set forth
in Schedule A, or at such other address or addresses as may have been furnished
to the Company in writing by such Purchaser.
Notices provided in accordance with this Section 10
shall be deemed delivered upon personal delivery or 48 hours after deposit in
the mail.
11. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter.
12. AMENDMENTS AND WAIVERS. Except as otherwise expressly set forth in
this Agreement, any term of this Agreement may be amended and the observance of
any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), with the written consent of
the Company and the holders of all of the Notes. No waivers of or exceptions to
any term, condition or provision of this Agreement, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, condition or provision.
13. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14. HEADINGS. The headings of the sections, subsections, and paragraphs
of this Agreement have been added for convenience only and shall not be deemed
to be a part of this Agreement.
15. SEVERABILITY. The invalidity or unenforceability of any provisions
of this Agreement shall not affect the validity or enforceability of any other
provision.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, excluding that body of laws
pertaining to conflicts of laws.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of
the day and year first above written.
"COMPANY"
NORRIS COMMUNICATIONS, INC.,
a Delaware Corporation
By: /s/ ALFRED H. FALK
---------------------------------
Alfred H. Falk
President
65
<PAGE> 9
SCHEDULE A(1)
(IDENTICAL FOR EACH OF NINE PURCHASERS EXCEPT FOR NAME, ADDRESS AND AMOUNT)
PURCHASER'S SIGNATURE PAGE TO NOTE AGREEMENT
DATED AS OF JUNE 13, 1997
PURCHASER:
-----------------------------------------
(Name of Purchasing Entity or Person)
By: _____________________________________
Name: ___________________________________
Title:___________________________________
Principal amount of Note
purchased pursuant to the
foregoing Agreement: $_____________
66
<PAGE> 10
EXHIBIT B
THE FOLLOWING SECTIONS ARE TO SUPPLEMENT THE NOTE AGREEMENT,
OF WHICH THIS EXHIBIT B IS AN INTEGRAL PART. THE COMPANY HEREBY MAKES THE
FOLLOWING DISCLOSURES:
3. h. - Absence of Liabilities
No disclosure
3. j. - Property and Assets
No disclosure
3. k. - Material Contracts and Agreements
The Company was in arrears on a capital lease obligation on production equipment
that has been sold. the Company has reached an agreement with the lessor (part
of the proceeds of the Note offering are being applied to the obligation) to pay
the balance of the obligation of approximately $550,000 over time.
The Company is in arrears on its current facility lease by approximately $85,000
and is moving in June 1997 to a less expensive facility. The Company intends to
negotiate a termination of the lease and believes in lieu thereof that the
facility can be sublet, however there is no assurance. Part of the proceeds of
the Note offering will be applied to the debt.
The Company has been in litigation on an old equipment lease and has reached a
settlement thereto of which part of the proceeds of the Note offering will be
applied.
3. m. - Certain Changes
No disclosure.
67
<PAGE> 11
FORM OF PROMISSORY NOTE - IDENTICAL FOR EACH OF NINE
NOTEHOLDERS EXCEPT FOR NAME AND AMOUNT)
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED UNLESS AND UNTIL SUCH NOTE IS REGISTERED UNDER SUCH
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS
OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.
NORRIS COMMUNICATIONS, INC.
12% CONVERTIBLE NOTE
$_______________ June 13, 1997
FOR VALUE RECEIVED, Norris Communications, Inc., a Delaware
corporation (the "Company"), hereby promises to pay to
_____________________________, or order, the principal amount of
_________________________ Dollars ($_________), together with interest on the
unpaid portion of said principal amount from the date hereof until paid at the
rate of twelve percent (12%) per annum. Principal shall be due and payable in
one (1) installment on or before September 30, 1999 with interest payable in
cash quarterly on September 30, December 31, March 31 and June 30 of each year.
This Note is one of the 12% Convertible Notes issued under and
pursuant to the terms and provisions of the Note Agreement dated as of June 13,
1997 (the "Note Agreement") among the Company and the original purchasers listed
on Schedule A thereto, and this Note and the holder hereof are entitled equally
and ratably with the holder of all other Notes outstanding under the Note
Agreement to all of the benefits provided for thereby or referred to therein, to
which Note Agreement reference is hereby made for the statement thereof.
This Note may, at the option of the holder, be converted into
shares of Common Stock and Warrants of the Company pursuant to and in accordance
with the terms of the Note Agreement. This Note shall, at the option of the
Company and upon notice to the holder, be converted automatically into shares of
Common Stock and Warrants of the Company pursuant to and in accordance with the
terms of the Note Agreement.
This Note and the other Notes outstanding under the Note
Agreement may be declared due prior to their expressed maturity dates, all in
the events, on the terms and in the manner as provided in the Note Agreement.
This Note shall be secured by a Collateral Patent Assignment
of even date and relationships between the holder and the holders of other Notes
outstanding shall be determined pursuant to an Intercreditor Agreement of even
date on a pari passu basis.
This Note shall be governed by and construed in accordance
with the laws of the State of California.
NORRIS COMMUNICATIONS, INC.
By: /s/ ALFRED H. FALK
-------------------------------------
Alfred H. Falk
President
68
<PAGE> 1
EXHIBIT 10.33.1
COLLATERAL PATENT ASSIGNMENT
THIS COLLATERAL PATENT ASSIGNMENT (the "Assignment") is made and
entered into this 13th day of June, 1997, by and among Norris Communications,
Inc., a Delaware corporation and Norris Communications, Inc., a California
corporation (collectively, "Assignor") and the individuals and entities listed
on Schedule A hereto (individually, an "Assignee" and collectively, the
"Assignees") who are a signatory to this Assignment.
RECITALS
A. Assignor and Assignee are parties to a certain Note Agreement of
even date (together with any and all amendments now or hereafter made thereto,
the "Note Agreement"), which provides for (i) Assignee to purchase one or more
Secured Promissory Notes ("Notes") from Assignor and (ii) the grant by Assignor
to Assignee of a security interest in Assignor's FLASHBACK technology including,
without limitation, its U.S. patents and pending patent applications and any
licensing, manufacturing and/or royalty agreements related thereto; and
B. Assignee has required, as a condition to purchase of the Notes from
Assignor under the Note Agreement, that Assignor execute and deliver to Assignee
this Assignment.
NOW, THEREFORE, in consideration of the premises set forth herein and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Assignor agrees as follows:
1. INCORPORATION OF NOTE AGREEMENT. The Note Agreement and the
terms and provisions thereof are hereby incorporated herein in their entirety by
this reference. Terms used herein that are not defined in this Agreement shall
have the meanings ascribed to them in the Note Agreement.
2. COLLATERAL ASSIGNMENT OF PATENTS. To secure the complete
and timely satisfaction of all of the Obligations (as defined in the Note
Agreement and hereinafter called the "Obligations"), Assignor hereby grants,
conveys, and assigns to Assignee, as and by way of a first security interest
having priority over all other security interests, with power of sale, to the
extent permitted by law, upon the occurrence and during the continuation of an
Event of Default (as defined in the Note Agreement and hereinafter called an
"Event of Default") all of Assignor's right, title, and interest in and to all
of its now owned or existing and filed and hereafter acquired or arising and
filed:
a. Patents and patent applications related to
Assignor's FLASHBACK technology (including, without limitation, the inventions
and improvements described and claims therein) listed on Schedule B attached
hereto (collectively, "Patents");
b. The reissues, divisions, continuations, renewals,
extensions, continuations-in-part, and improvements thereof; c. All income,
royalties, damages, and payments now and hereafter due and/or payable under and
with respect thereto, including (without limitation) damages and payments for
past or future infringements thereof;
d. The right to sue and recover for past, present,
and future infringements thereof;
e. All rights corresponding thereto and throughout
the world; and
f. All other proceeds and products of the foregoing,
including (without limitation) any rights pursuant to its licensing,
manufacturing and/or royalty agreements with any other party relating thereto.
The items referred to in items a. through f. are hereinafter
collectively referred to as the "Patent Rights."
3. COVENANTS AND WARRANTIES. Assignor represents, warrants,
and covenants that:
a. The Patents are subsisting, have not been adjudged
invalid or unenforceable in whole or in part;
b. None of the Patents has lapsed or expired;
69
<PAGE> 2
c. No claim has been made that the use of any of the
Patents in the conduct of Assignor's business constitutes an infringement of any
senior or dominant U.S. patent or other intellectual property right;
d. Assignor owns the entire right, title, and
interest in and to each of the Patents free and clear of any liens and
encumbrances of every kind and nature, except for the rights granted by Assignor
pursuant to this Agreement; and
e. Assignor shall continue to use, until the
obligations shall have been satisfied in full and the Note Agreement shall have
been terminated, proper statutory notice in connection with its exercise of the
Patents.
Notwithstanding the foregoing, Assignee expressly acknowledges that
Assignor can provide no assurance that (i) any additional patents may be
awarded, (ii) others will not independently develop products or technology that
are equivalent or superior to those of the Company, (iii) the Company will be
able to identify and successfully prosecute infringement of its patents, (iv)
claims will not be made in the future from third parties asserting that the
Company's products infringe the proprietary rights of third parties and (iv) any
particular aspect of the Company's technology will not be found to infringe the
products of other companies.
4. NEW PATENTS AND LICENSES. If, before the Obligations are
satisfied in full, Assignor obtains rights to any new patentable inventions,
patents, or patent applications, or any reissue, division, continuation,
renewal, extension, or continuation-in-part of any Patent or any improvement on
any Patent, the provisions of Section 2 above shall automatically apply thereto
and Assignor shall give to Assignee written notice thereof. Assignor hereby
authorizes Assignee to modify this Assignment by amending Schedule B to include
such rights.
5. ROYALTIES; TERMS. Assignor hereby agrees that the use by
Assignee of the Patent Rights shall be worldwide and without any liability for
royalties or other related charges from Assignee to Assignor. The term of the
assignments granted herein shall extend until the earlier of (i) the expiration
of all Patent Rights or (ii) payment in full of the Obligations and termination
of the Note Agreement.
6. GRANT OF LICENSE TO ASSIGNOR. Assignee hereby grants to
Assignor the royalty-free, exclusive, nontransferable right and license to make,
have made, use, and sell the inventions disclosed and claimed in the Patents for
Assignor's own benefit and account and for none other. Such right and license
shall be exercisable by Assignor only until the occurrence of an Event of
Default.
7. ASSIGNEE'S RIGHT TO INSPECT. Subject to existing agreements
with respect to the confidentiality of certain aspects of the Patent Rights,
Assignee shall have the right, at any reasonable time and from time to time, to
inspect Assignor's premises and to examine Assignor's books, records, and
operations.
8. TERMINATION OF ASSIGNEE'S SECURITY INTEREST. This
Assignment is made for collateral purposes only. Upon payment in full of the
Obligations and/or conversion of all amounts due into common stock and warrants
pursuant to the Note Agreement and termination of the Note Agreement, all
remaining right, title, and interest in and to the Patent Rights shall
automatically revert to Assignor. In such event, Assignee shall execute and
deliver to Assignor all termination statements and other instruments as may be
necessary or proper to terminate Assignee's security interest in and to revest
in Assignor all right, title, and interest in and to the Patent Rights, subject
to any prior disposition thereof that may have been made by Assignee pursuant
hereto or pursuant to the Note Agreement.
9. DUTIES OF ASSIGNOR. Until the Obligations are satisfied in
full (through payment or conversion) and the Note Agreement is terminated,
Assignor shall
a. Prosecute diligently any patent application
included in the Patent Rights pending as of the date hereof or hereafter filed;
b. Make application on unpatented but patentable
inventions, as appropriate, giving due consideration to value, importance, cost,
and opinion of counsel as to patentability; and
c. Preserve, maintain, and enforce against
infringement all Patent Rights (other than nonpayment of maintenance fees on
patents which are not necessary or useful in the conduct of Assignor's business
or
70
<PAGE> 3
operations).
Any expenses incurred in connection with such applications
shall be borne by Assignor. Assignor shall not abandon any pending patent
application or patent without the written consent of Assignee, which consent
shall not be unreasonably withheld.
10. ASSIGNEE'S RIGHT TO SUE. After the occurrence of an Event
of Default and so long as such Event of Default has not been waived, and after
the provision by Assignee of written notice to Assignor of Assignee's intention
to enforce its rights and claims in the Patent Rights, Assignee shall have the
right, but shall in no way be obligated, to bring suit and take other action in
its own name to enforce or otherwise protect, preserve, or realize upon the
Patent Rights. If Assignee shall commence any such suit or take any such action,
Assignor shall, at the request of Assignee, do any and all lawful acts and
execute any and all proper documents required by Assignee in aid of such action.
Assignor shall, upon demand, reimburse and indemnify Assignee for all costs and
expenses incurred by Assignee in the exercise of its rights under this Section
10.
11. WAIVERS. No course of dealing between Assignor and
Assignee, nor any failure to exercise or delay in exercising, on the part of the
Assignee, any right, power, or privilege hereunder or under the Note Agreement
shall operate as a waiver thereof. No single or partial exercise of any right,
power, or privilege hereunder or under the Note Agreement shall preclude any
other or further exercise thereof or the exercise of any other right, power, or
privilege.
12. SEVERABILITY. The provisions of this Assignment are
severable, and if any clause or provision shall be held invalid or unenforceable
in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect only such clause or provision, or part thereof, in
such jurisdiction, and shall not in any manner affect such clause or provision
in any other jurisdiction, or any other clause or provision of this Assignment.
13. MODIFICATION. This Assignment cannot be altered, amended,
or modified in any way, except as specifically provided with respect to the
additions referred to in Section 4 hereof or by a writing signed by the parties
hereto.
14. CUMULATIVE REMEDIES. All of Assignee's rights and remedies
with respect to the Patent Rights, whether established hereby or by the Note
Agreement, or by any other agreements or by law, shall be cumulative and may be
exercised individually or concurrently. Assignee shall have, in addition to all
other rights and remedies given it by the terms of this Assignment, all rights
and remedies allowed by law and the rights and remedies of a secured party under
the Uniform Commercial Code as enacted in any jurisdiction in which the Patent
Rights may be enforced.
15. POWER OF ATTORNEY. Assignor hereby authorizes Assignee to:
a. Make, constitute, and appoint any representative
of Assignee as Assignee may select, in its sole discretion, as Assignor's true
and lawful attorney-in-fact, with power to endorse Assignor's name on all
applications, documents, papers, and instruments necessary or desirable for
Assignee to give effect to the provisions of this Assignment and the intent of
the parties hereto;
b. Take any other actions with respect to the Patent
Rights, consistent with this Assignment, as Assignee deems in the best interest
of Assignee;
c. Following the occurrence of an Event of Default,
grant or issue any exclusive or nonexclusive license under the Patent Rights to
anyone; or
d. Following the occurrence of an Event of Default,
subject to the terms of any existing license agreement, assign, pledge, convey,
or otherwise transfer title in or dispose of the Patent Rights to anyone.
Assignee hereby ratifies all that such attorney shall lawfully do or
cause to be done by virtue hereof. This power of attorney shall be irrevocable
until the Obligations are satisfied in full and the Note Agreement is
terminated.
16. EFFECT ON NOTE AGREEMENT. Assignor acknowledges and agrees
that this Assignment is not intended to limit or restrict in any way the rights
and remedies of Assignee under the Note Agreement but rather is intended to
facilitate the exercise of such rights and remedies.
71
<PAGE> 4
17. BINDING EFFECT; BENEFITS. This Assignment shall be binding
upon Assignor and its respective successors and assigns and shall inure to the
benefit of Assignee, its nominees, successors, and assigns.
18. GOVERNING LAW. This Assignment shall be deemed to have
been executed and delivered in California and shall be governed by and construed
in accordance with the internal laws (as opposed to conflicts of law provisions)
of California. IN WITNESS WHEREOF, the undersigned have hereunto set their hands
as of the day and year first above written.
"ASSIGNOR"
NORRIS COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ ALFRED H. FALK
-------------------------------------
Alfred H. Falk
President
NORRIS COMMUNICATIONS, INC.,
a California corporation
By: /s/ ALFRED H. FALK
-------------------------------------
Alfred H. Falk
President
72
<PAGE> 5
SCHEDULE A(1)
(IDENTICAL FOR EACH OF NINE PURCHASERS EXCEPT FOR NAME AND AMOUNT)
ASSIGNEE'S SIGNATURE PAGE
TO COLLATERAL PATENT ASSIGNMENT
DATED AS OF JUNE 13, 1997
ASSIGNEE:
(Name of Entity or Person)
By: _____________________________________
Name: ___________________________________
Title: __________________________________
Secured Amount: $_______________________
73
<PAGE> 6
SCHEDULE B
PATENTS AND PATENT APPLICATIONS
<TABLE>
<CAPTION>
APPLICATION OR
TITLE PATENT NO. ISSUE DATE INVENTORS
- ----- -------------- ---------- ---------
<S> <C> <C> <C>
Hand-held Record and 5,491,774 February 13, 1996 Elwood G. Norris,
Playback Device with Norbert P. Daberko
Flash Memory and Steven T. Brightbill
</TABLE>
Five Confidential Pending Patent Applications
74
<PAGE> 1
EXHIBIT 21.1
NORRIS COMMUNICATIONS, INC.
LIST OF SUBSIDIARIES
Norris Communications Inc.
12725 Stowe Drive
Poway, CA 92064
619.679.1504
(A California Corporation)
75
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-81212, Form S-3 No. 33-92032, Form S-3 No. 33-92978, Form S-3
No. 333-4880, Form S-8 No. 333-13779, Form S-8 No. 333-17959, Form S-8 No.
333-24405 and Form S-8 No. 333-26561) of Norris Communications, Inc. and in the
related Prospectuses of our Independent Auditor's Report dated June 13, 1997,
with respect to the consolidated financial statements of Norris Communications,
Inc. and subsidiary included in the Annual Report (Form 10-KSB) for the year
ended March 31, 1997.
Vancouver, Canada,
June 25, 1997 /s/ ERNST & YOUNG
Chartered Accountants
76
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR
ENDED MARCH 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 176,158
<SECURITIES> 0
<RECEIVABLES> 66,427
<ALLOWANCES> 36,330
<INVENTORY> 1,648,863
<CURRENT-ASSETS> 1,923,685
<PP&E> 421,286
<DEPRECIATION> 221,966
<TOTAL-ASSETS> 2,165,073
<CURRENT-LIABILITIES> 2,488,188
<BONDS> 0
0
0
<COMMON> 23,370
<OTHER-SE> (346,485)
<TOTAL-LIABILITY-AND-EQUITY> 2,165,073
<SALES> 558,178
<TOTAL-REVENUES> 653,700
<CGS> 2,111,999
<TOTAL-COSTS> 2,111,999
<OTHER-EXPENSES> 7,266,715
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,177,079
<INCOME-PRETAX> (9,597,102)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,597,102)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,597,102)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
