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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FEBRUARY 13, 1997
================================================================================
REGISTRATION NO. 333-7709
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
ON FORM SB-2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NORRIS COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
---------------
DELAWARE 3651 NONE
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification
organization) organization)
---------------
12725 STOWE DRIVE
POWAY, CALIFORNIA 92064
(619) 679-1504
(Address and telephone number of principal executive offices and
principal place of business)
---------------
ELWOOD G. NORRIS, CHAIRMAN
NORRIS COMMUNICATIONS, INC.
12725 STOWE DRIVE
POWAY, CALIFORNIA 92064
(619) 679-1504
(Name, address and telephone number of agent for service)
Copy to:
CURT C. BARWICK, ESQ.
HIGHAM, MCCONNELL & DUNNING
28202 CABOT ROAD, SUITE 450
LAGUNA NIGUEL, CA 92677
---------------
COUNSEL FOR THE COMPANY
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
IF THE ONLY SECURITIES REGISTERED ON THIS FORM ARE BEING OFFERED PURSUANT
TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING
BOX: [ ]
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED
ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT
OF 1933, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND OR
INTEREST REINVESTMENT PLANS, CHECK THE FOLLOWING BOX: [x]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE FEE
- --------------------------- -------------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Common Stock, no par value 3,699,279 Shares (1) $1.16 (4) $4,291,164 (4) $1,480
Common Stock, no par value 5,003,857 Shares (2) $0.94 (4) $4,703,626 (4) $1,622
Common Stock, no par value 6,872,421 Shares (3) $0.55 (4) $3,779,832 (4) $1,145
Total Registration Fee $4,172
Previously Paid $3,102
Total Due $1,145
</TABLE>
(1) Includes the registration for resale of the following: (i) 2,666,074 shares
of Common Stock issued in a private placement in June 1996, and (ii)
1,033,205 shares of Common Stock (subject to adjustment) issuable upon the
exercise of warrants issued in the foregoing private placement. Estimated
solely for purposes of calculating the registration fee in connection with
this Registration Statement.
(2) Includes the registration for resale of 5,003,857 shares of Common Stock
(subject to adjustment) issuable upon the exercise of warrants issued in
private placements in July and August, 1996. Estimated solely for purposes
of calculating the registration fee in connection with the Registration
Statement.
(3) Includes the registration for resale of 3,461,171 additional shares of
Common Stock issuable upon the exercise of warrants issued in the foregoing
private placements due to a decline in the price of the Common Stock and
2,657,326 shares of Common Stock issuable to purchasers of warrants and
Common Stock in such private placements due to delays in the registration
process. Estimated solely for purposes of calculating the registration fee
in connection with the Registration Statement.
(4) These figures are estimates made solely for the purpose of calculating the
registration fee pursuant to Rule 457(c). The average of the bid and asked
prices for the Common Stock on July 3, 1996, August 27, 1996 and on
February 7, 1997, as reported by NASDAQ, was $1.16, $0.94 and $0.55,
respectively.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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NORRIS COMMUNICATIONS, INC.
CROSS REFERENCE SHEET
Between Items of Form SB-2 and Prospectus
<TABLE>
<CAPTION>
Registration Statement Item and Heading Prospectus Caption
- --------------------------------------- ------------------
<S> <C> <C>
1. Forepart of the Registration Statement Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk Factors Prospectus Summary, Risk Factors
4. Use of Proceeds Not Applicable
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Shareholders
8. Plan of Distribution Cover Page; Selling Shareholders
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Certain Beneficial Principal Shareholders
Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on Management
Indemnification of Securities Act Liabilities
15. Organization Within Last 5 Years Not Applicable
16. Description of Business Business
17. Management's Discussion and Analysis or Management's Discussion and Analysis of
Plan of Operations Financial Condition and Results of Operations
</TABLE>
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<TABLE>
<S> <C> <C>
18. Description of Property Business
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market Price for Common Equity and Market Price for Common Stock and
Related Shareholder Matters Related Shareholder Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Not Applicable
Accountants on Accounting and Financial
Disclosure
</TABLE>
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PROSPECTUS
15,575,557 SHARES OF COMMON STOCK (NO PAR VALUE)
NORRIS COMMUNICATIONS, INC.
This Prospectus relates to 15,575,557 shares of Common Stock, $.001 par
value ("Common Stock") of Norris Communications, Inc., a Delaware corporation
(the "Company"), heretofore issued to the persons listed as the Selling
Shareholders. Such shares of Common Stock are being offered for the respective
accounts of the Selling Shareholders, and will be sold from time to time by the
Selling Shareholders in the national over-the-counter market or otherwise at
their prevailing prices, or in negotiated transactions. The Company will
receive no proceeds from the sale of such shares of Common Stock by the Selling
Shareholders. The expenses of preparing and filing the Registration Statement
of which this Prospectus forms a part are being paid by the Company.
The shares of Common Stock offered hereby includes the resale of such
presently indeterminate number of shares of Common Stock as shall be issued in
respect of (i) 2,666,074 shares of Common Stock (subject to adjustment) issued
in private placements in or about June 1996, (ii) 9,498,233 shares of Common
Stock (subject to adjustment) issuable upon the exercise of warrants
("Warrants") issued in connection with the June 1996 private placement, as well
as, additional private placements in July and August 1996 and (iii) 2,657,326
shares of Common Stock issuable to the Selling Shareholders due to delays in
the registration process. The number of shares of Common Stock issuable in
connection with such transactions is subject to adjustment and could be less or
more than the estimated amount depending upon factors which cannot be predicted
by the Company at this time, including, among others, the future market price
of the Common Stock.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGE 7 OF THIS PROSPECTUS. THESE SECURITIES HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS
THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered hereby were acquired by the Selling Shareholders
from the Company in private transactions and are "restricted securities" under
the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus
has been prepared for the purpose of registering the shares under the Act to
allow for future sales by the Selling Shareholders to the public without
restriction. To the knowledge of the Company, the Selling Shareholders have
made no arrangement with any brokerage firm for the sale of the shares. The
Selling Shareholders may be deemed to be "underwriters" within the meaning of
the Securities Act. Any commissions received by a broker or dealer in
connection with resales of the shares may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Plan of Distribution."
The shares offered hereby may have been acquired by the Selling
Shareholders from the Company in a transaction deemed to involve general
solicitation. Such a transaction may have created a contingent liability to
the Selling Shareholders. See "Risk Factors."
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The Common Stock is traded on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") under the NASDAQ symbol
"NCII." On February 7, 1997, the bid and asked prices per share, as reported
by NASDAQ, were $0.53 and $0.56 respectively.
_____________________________________
The date of this Prospectus is February 13, 1997
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities
and Exchange Commission. Reports, proxy statements and other information filed
by the Company with the Securities and Exchange Commission may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: 75 Park Place, New York, New York 10007; and the
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60621; and copies of such material may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W. Judiciary Plaza,
Washington, D.C. 20549 at prescribed rates.
The Company intends to distribute to its stockholders annual reports
containing audited financial statements with a report thereon by independent
certified public accountants after the end of each fiscal year. In addition,
the Company will furnish to its shareholders quarterly reports for the first
three quarters of each fiscal year containing unaudited financial and other
information after the end of each fiscal quarter, upon written request to the
secretary of the Company.
The Company has filed with the Commission a registration statement on
Form SB-2 (herein, together with all amendments and exhibits, referred to as
the "Registration Statement") under the Securities Act. This Prospectus does
not contain all the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information, reference is hereby made to the
Registration Statement.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS, IN CONNECTION WITH THE OFFERING CONTEMPLATED HEREBY, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING SHAREHOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Market For Common Stock and Related Shareholder Matters . . . . . . . . . . 14
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 16
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Description of Securities . . . . . . . . . . . . . . . . . . . . . . . . . 34
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Further Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>
3
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. See "Risk Factors" for a discussion of important
factors that should be considered by prospective investors related to
forward-looking statements included in this Summary.
THE COMPANY
The Company is a holding company which, through its wholly-owned United
States subsidiary, is engaged in the development, manufacture and marketing of
electronic products. The Company was incorporated in Canada under the British
Columbia Company Act on February 11, 1988 under the name 340520 B.C. Ltd. The
Company changed its name to Norris Communications Corp. on April 7, 1988 and on
November 22, 1994 continued its jurisdiction of incorporation to the Yukon
Territory, Canada. The Company further continued its jurisdiction of
incorporation to Wyoming on August 30, 1996 and on September 4, 1996
reincorporated into Delaware.
As described more fully below, through a series of transactions, the
Company has evolved to its present structure as a holding company for its
principal, wholly-owned subsidiary, Norris Communications, Inc., a California
corporation ("NCI"). Through NCI, the Company is principally involved in
manufacturing and marketing the FLASHBACK recording device, a newly developed
proprietary technology for information storage and retrieval. In addition, the
Company, through Primus Contract Manufacturing Services, Inc. ("Primus"),
provides contract manufacturing services for circuit board assemblies, systems,
and subsystems. The Company also holds as an investment, subject to a third
party option, 1,033,334 common shares of JABRA Corporation ("JABRA"). Prior to
January 15, 1993, JABRA was a wholly-owned subsidiary of the Company. JABRA is
a developer and manufacturer of communication products for desktop, mobile and
wireless applications.
During 1993, the Company invented and commenced development of advanced
digital recording technology that does not involve mechanical moving parts.
Although various digital techniques have been adapted to sound recording and
reproduction, such as compact disc players and digital tape recorders, these
devices still utilize mechanical techniques for moving the storage media as
well as positioning the read/write head in the case of compact discs. The
Company's technology is designed to substitute all solid state electronic
control for traditional mechanical functions and magnetic media. The Company's
technology combines a micro-processor based control system with data
compression and a non-volatile storage media to produce a no-moving-parts
recording scheme with advanced features and capabilities.
Management believes the Company's newly developed proprietary
technology for information storage lends itself to a broad array of product
applications. Through a technique of combining digital signal processing with
state-of-the-art compression algorithms and a non- volatile storage array all
managed by a microcontroller, it is possible to store data without the need for
magnetic media such as is presently used in audio/video tape recording
equipment as well as computer hard drives and diskettes. Since there are no
moving parts, there are correspondingly no motors, belts, or other control
devices required. All functions associated with devices designed around this
new technology can be operated by existing microprocessor control devices.
Should the prices of various forms of storage arrays, such as flash memory
chips, continue to decline as is generally predicted, more applications
utilizing these techniques will become cost effective.
The Company has utilized this proprietary technology to develop its
FLASHBACK recording device. The Company believes the FLASHBACK fits into the
Company's strategy of developing practical electronic products with broad
applications. The FLASHBACK is being marketed by the Company's subsidiary,
NCI.
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The address of the Company's principal executive office is 12725 Stowe
Drive, Poway, California 92064 and its telephone number is (619) 679-1504. The
Company's primary operating facilities are located at that address.
THE SELLING SHAREHOLDER OFFERING
<TABLE>
<S> <C>
Common Stock outstanding as
of September 30, 1996 (1) 22,308,611 shares
Common Stock offered by
Selling Shareholders (2) 15,575,557 shares
NASDAQ Symbol NCII
Risk Factors The securities offered
hereby involve a high
degree of risk. See
"Risk Factors" and
"Selling Shareholders."
</TABLE>
_______________________________
(1) Does not include 12,690,962 shares (subject to adjustment) issuable upon
the exercise of presently outstanding options and warrants, including
the Warrants.
(2) Includes the resale of such presently indeterminate number of shares of
Common Stock as shall be issued in respect to (i) 2,666,074 shares of
Common Stock (subject to adjustment) issued in private placements in or
about June 1996, (ii) 9,498,233 shares of Common Stock (subject to
adjustment) issuable upon the exercise of Warrants issued in connection
with the June 1996 private placement, as well as, additional private
placements in July and August 1996 and (iii) 2,657,326 shares of Common
Stock issuable to the Selling shareholders due to delays in the
registration process.
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SUMMARY FINANCIAL INFORMATION
(In thousands, except share data)
The summary financial information which is set forth below should be
read in conjunction with the Consolidated Financial Statements and related
Notes thereto appearing elsewhere in this Prospectus. The selected
consolidated statements of operations and balance sheets data for the fiscal
years ended March 31, 1996 and 1995, have been derived from Consolidated
Financial Statements of the Company which have been audited by Ernst & Young,
independent auditors, and included herein. The unaudited consolidated balance
sheets data as of September 30, 1996, and the unaudited consolidated statements
of operations information for the six months ended September 30, 1996 and 1995,
have been derived from unaudited financial information prepared on the same
basis as the audited Consolidated Financial Statements. In the opinion of
management, such unaudited financial information includes all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
information presented.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, Six Months Ended September 30,
--------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATIONS DATA:
Revenues $1,328,502 $ 5,593,081 $ 301,543 $ 806,603
Cost of sales 4,413,814 6,729,320 1,049,318 2,192,401
Operating expense 5,182,231 6,006,117 2,910,077 2,461,354
Loss for the period (8,267,543) (7,142,356) (3,687,852) (3,847,156)
Loss per share (0.63) (0.88) (0.19) (0.33)
Weighted average
number of common
shares outstanding 13,065,095 8,097,624 19,641,347 11,697,510
</TABLE>
<TABLE>
<CAPTION>
March 31, September 30, 1996
--------- ------------------
1996 1995
---- ----
<S> <C> <C> <C>
BALANCE SHEETS DATA:
Total assets $7,817,144 $8,658,632 $5,870,338
Working capital 1,056,029 1,665,581 2,781,594
Current liabilities 5,351,811 4,838,342 1,733,635
Long term liabilities 3,000,000 --- ---
Stockholders' equity
(deficiency) (534,667) 3,820,290 4,136,703
</TABLE>
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RISK FACTORS
THE SECURITIES WHICH ARE OFFERED HEREBY ARE SPECULATIVE IN NATURE,
INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE PURCHASED BY PERSONS WHO CAN AFFORD
TO LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CONSIDER
CAREFULLY THE FOLLOWING FACTORS INHERENT IN AND AFFECTING THE BUSINESS OF THE
COMPANY, IN ADDITION TO THE INFORMATION CONCERNING THE COMPANY AND ITS BUSINESS
CONTAINED IN THIS PROSPECTUS, BEFORE PURCHASING THE SECURITIES OFFERED HEREBY.
Dependence Upon New Products. An investment in the securities offered
hereby must be considered an investment risk due to the nature of the Company's
business, the industry in which it is operating, and the present stage of its
development. The scale and scope of the Company's business is changing.
Historically, a majority of the Company's revenues have been derived from its
contract manufacturing business. The Company's future growth is greatly
dependent upon the successful marketing of the FLASHBACK family of products.
The Company's performance will be dependent upon the risks that are inherent in
any business venture that is undergoing a major change in the scope of its
operations, certain specific risks that are discussed below, future events and
developments, and changes in the Company's policies and methods of operations
in the future.
No Established Market for New Products. The Company has developed a
proprietary technology which is used in its MOBILE OFFICE PACKAGE. The MOBILE
OFFICE PACKAGE is currently in production and as of December 31, 1996,
relatively few sales have occurred, a limited number of written purchase orders
have been received and no established market for the Company's products exists.
The Company commenced its initial production of the product during the
quarterly period ended December 31, 1994 and commenced full commercial scale
production during the quarterly period ended September 30, 1995, but there can
be no assurance that such product will be favorably accepted by the marketplace
or that significant sales of such product will occur.
Significant Losses From Operations. The Company has incurred operating
losses in five of its past six fiscal years with operating losses from
continuing operations of $8,268,000, $7,142,000, $2,442,000, $4,427,000 and
$236,000 for the fiscal years ended March 31, 1996, March 31, 1995, March 31,
1994, March 31, 1993 and March 31, 1991, respectively. The Company,
additionally, has reported a loss for the period ended September 30, 1996 of
$3,657,852. The losses for fiscal 1996 and the first six months of fiscal 1997
resulted primarily from the higher costs associated with bringing the Company's
new FLASHBACK product to market and the decline in revenues and increased
operating losses from NCI's contract manufacturing operations. See "Product
Line; Reliance on Major Customers." In this regard, management anticipates
research, development and marketing costs associated with the FLASHBACK and new
FLASHBACK products for fiscal 1997 to continue at levels equivalent to prior
years. The Company's losses have increased and are expected to continue and/or
increase until such time as the Company is able to manufacture and sell the
FLASHBACK family of products in commercial quantities and/or reestablish the
Company's contract manufacturing business and increase its historical operating
margins. No assurance can be given as to the Company's ability to accomplish
the foregoing. The Company's inability to accomplish the foregoing would have
a material adverse effect upon the Company's ability to operate profitably, and
may force the Company to reduce or curtail operations. The Company is also
subject to the risks normally associated with any new business activity,
including unforeseeable expenses, delays and complications. Accordingly, no
assurance can be given that the Company can or will report operating profits in
the future.
Possible Inability to Continue as a Going Concern. The Company has
suffered recurring losses from operations. This factor, in combination with
(i) reliance upon debt and new equity financing to fund the continuing,
increasing losses from operations and cash flow deficits, (ii) substantial
inventory buildup during fiscal 1995 and fiscal 1996 consisting of raw
materials, components and finished product to be utilized in the manufacture
and sale of its FLASHBACK product and material decline in inventory turnover,
(iii) materially increased net losses and cash flow deficits from operations
during fiscal 1996 and (iv) the likelihood that the Company may be unable to
meet its debts as they come due, raise
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substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon its
ability to obtain adequate financing and achieve a level of revenues adequate
to support the Company's capital requirements, as to which no assurance can be
given. In the event the Company is unable to continue as a going concern, it
may elect or be required to seek protection from its creditors by filing a
voluntary petition in bankruptcy or may be subject to an involuntary petition
in bankruptcy. To date, management has not considered this alternative, nor
does management view it as a likely occurrence.
Management's Plans for Improving Operations. Management has undertaken
steps as part of a plan to improve operations with the goal of sustaining
Company operations for the next twelve months and beyond. These steps include
increasing volume of existing products and adding new products, improving
pricing, reducing manufacturing costs and obtaining new revenues from the OEM
and licensing division. There can be no assurance the Company can successfully
implement its plan to improve operations and/or achieve positive gross margins
in the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Management's Plans For Improving Operations."
Substantial Working Capital Requirements. At September 30, 1996, the
Company had working capital of $2.8 million, compared to working capital of
$1.1 million at March 31, 1996. The Company had approximately $3.2 million of
working capital invested in inventories at September 30, 1996 comparable to the
balance at March 31, 1996. The increase in working capital is a result of the
Company's financing activities offset by continuing losses which consumed
working capital during the period. Approximately $4.6 million in cash was used
in operating activities by the Company in the six months ended September 30,
1996 which included a $1.4 million reduction in accounts payable and accrued
liabilities. During the quarter ended September 30, 1996, the Company retired
the remaining $307,416 obligation related to the demand loan payable to CVD
Financial Corporation ("CVD"). During the period, $3 million of long-term
convertible notes, plus accrued interest, were converted into Common Stock. At
December 31, 1996, the Company had no long-term debt nor any bank lines of
credit or related financing facilities. In June, July and August, 1996, the
Company obtained equity from the sale of Common Stock and the Warrants for cash
of approximately $5.6 million. The Company estimates that its cash position,
adjusted for the above-described items and assuming no increase in revenues,
can provide the Company with sufficient working capital for the next three
months. If there is no increase in revenues, expenditures and level of
operations remain at prior levels and there is no contribution from operations,
the Company estimates it would require a minimum of $2.4 million in the fourth
quarter of fiscal 1997 to continue operating for the next twelve months. The
Company currently estimates that additional funding could be obtained through
increased sales of existing and new products through new retail and OEM
channels, success in obtaining additional contract manufacturing business and
the ability of the licensing division to generate revenue, however there can be
no assurances thereof. The Company may, from time to time, seek additional
funds through lines of credit, public or private debt or equity financing. The
Company might require additional capital to finance future developments, new
products, production, marketing, acquisitions or extraordinary expansion of
facilities in accordance with its business strategy. There can be no
assurances that additional capital will be available when needed. In order to
fund its working capital requirements, the Company must achieve a profitable
level of operations, obtain lines of credit and raise additional funds through
various financing methods, including equity offerings, which may result in
dilution to shareholders. No assurance can be given that additional financing,
including new lines of credit, can be obtained or obtained under acceptable
terms. The failure to raise additional funds would have a material adverse
effect on the Company's ability to operate profitably, and would force the
Company to reduce or curtail operations.
Possible Contingent Liability-Under Federal and State Securities Law.
The Company may have a liability to the Selling Shareholders due to a possible
violation of Securities and Exchange Commission Rule 502(c) and comparable
state securities rules and regulations which prohibit an issuer from selling
securities in a private placement by any form of general solicitation or
general advertising. This violation, in turn, could cause the Company to be in
violation of Section 5 of the Securities Act which prohibits the sale of
securities pursuant to a prospectus that does not satisfy the requirements of
the Securities Act. Such violations, if deemed to occur, could give rise to a
private right of action by the Selling Shareholders against the Company for
rescission and/or damages.
Potential Detrimental Effect on the Company. If all of the Selling
Shareholders were to exercise their rights, assuming a violation, and
seek to rescind their purchases, the
8
<PAGE> 13
Company would have to return approximately $5,670,000 to such shareholders,
plus interest. If the Company did not have sufficient working capital to
satisfy its obligation to repurchase such securities, the Company would
have to borrow the necessary funds. If it is unable to borrow funds, the
Company would have to sell assets to satisfy its obligation. Given the
Company's historic reliance upon debt and new equity to fund the
continuing, increasing losses from operations and cash flow deficits and
its possible present inability to continue as a going concern, such
liability, if it occurs, could require the Company to seek protection from
its creditors by filing a voluntary petition in bankruptcy.
Release and Waiver Agreements. The Company has provided each of the
Selling Shareholders with agreements providing notice of the possible
violation of federal and state securities laws prohibiting an issuer from
selling securities in a private placement by any form of general
solicitation or general advertising and has requested that each Selling
Shareholder forego any private right of action that such Selling
Shareholder may have as a result of such possible violation. In connection
therewith, Selling Shareholders with aggregate purchases of Common Stock
and Warrants equal to $5,420,000 upon request, without payment or other
monetary inducement, have executed written releases and waivers with
respect thereto, effectively reducing the possible liability to
approximately $250,000. While the Company believes that other exemptions
and defenses may be available in the event of violation of Rule 502(c),
there can be no assurance that the Selling Shareholder who has elected not
to release the Company will not commence litigation against the Company or
that an unfavorable decision in such litigation will not materially
adversely affect the Company.
Enforceability. It is possible that the release and waiver agreements
could be challenged at some later date by a Selling Shareholder on grounds
of enforceability (i.e., that such agreements are unenforceable under
federal or state law) or because individual state securities laws were not
specific references. Although the Company has no present reason to believe
that the release and waiver agreements are not enforceable, a contrary
finding by a federal or state court may result in a continuing risk of
potential liability to other Selling Shareholders.
Limited Release. The releases and waivers provided by the Selling
Shareholders were limited to any private right of action which such
shareholders may have had as a result of any violation of federal and state
securities laws prohibiting an issuer from selling securities in a private
placement by any form of general solicitation. Such releases and waivers,
as a result, will not be applicable as a defense to other claims under the
securities laws which, at a later date, may be asserted, including fraud
liability for false and misleading statements in the Prospectus.
Disruption of Contract Manufacturing Business; Historical Dependence
Upon Renewal of Short-Term Contracts. The Company is currently utilizing its
contract manufacturing operations to build the Company's new FLASHBACK product.
In so doing, the Company de-emphasized its contract manufacturing business,
upon which it has historically been dependent for revenue. This occurrence
disturbed the long-standing relationships which the Company has had with
certain of its contract manufacturing customers; such relationships have
historically been predicated upon one-year contracts, which in the past have
been renewed for subsequent years. During fiscal 1997, the Company has been
attempting to reestablish its contract manufacturing business. Notwithstanding
goodwill and pre-existing relationships, no assurance can be given that such
relationships and contracts will continue to be in place or renewed in the
future, that the Company will acquire new contracts or that the Company will
elect to maintain contract manufacturing as a separate line of business. In
addition, the Company's contract manufacturing operations are subject to
intense competition from significantly larger domestic competitors, from
overseas assemblers with far lower costs and from other intermediate-size
assemblers and many smaller shops. The contract manufacturing services
provided by the Company are available from many independent sources as well as
in-house manufacturing capabilities of current and potential customers. Some
of the Company's larger competitors, including SCI Systems, Inc., Avex
Electronics, Inc., Solectron Corporation, Comptronix Corporation, and Benchmark
Electronics, Inc. have greater financial, manufacturing and marketing resources
than the Company and each have annual sales in excess of $50 million. These
competitors generally operate regionally from multiple plant locations. Such
competitors and others continue to expand regionally and although none of the
named competitors have a regional manufacturing facility in San Diego County,
the establishment of such a facility by a competitor could have an adverse
effect on the Company's contract manufacturing operations, should it elect to
maintain this line of business in the future.
Competition. The market for electronics products is intensely
competitive and has been affected by foreign competition. The Company competes
and expects to compete with a number of large foreign companies with U.S.
operations and a number of domestic companies, many of which have substantially
greater financial, marketing, personnel and other resources than the Company.
In addition, the industry in which the Company competes has been characterized
in recent years by rapid and significant technological changes and frequent new
product introductions. Current competitors or new market entrants could
introduce new or enhanced products with features which render the Company's
technology
9
<PAGE> 14
or products obsolete or less marketable, or could develop means of producing
competitive products at a lower cost. The ability of the Company to compete
successfully will depend in large measure on its ability to maintain its
capabilities in connection with upgrading its products and quality control
procedures and to adapt to technological changes and advances in the industry.
In addition, the Company's FLASHBACK product competes with a number of
conventional tape recording devices, and has to compete in an established
market with a technology that is not compatible with the present standard in
such market. The major manufacturers of micro cassette recorders which are the
most competitive include Thomson (GE), Olympus, Panasonic, Sanyo and Sony.
There can be no assurance that the Company will be able to keep pace with the
technological demands of the marketplace or successfully enhance its products
or develop new products which are compatible with the products of the
electronics industry.
Product Line; Reliance on Major Customers. Prior to the introduction
of the FLASHBACK in December 1994, substantially all of the Company's revenues
had been derived from its contract manufacturing operations. Contract
manufacturing accounted for over 90% of total revenues in fiscal 1995.
However, as a result of the termination of certain contract manufacturing
services, the reconfiguration of manufacturing to accommodate FLASHBACK
production and other changes, sales of the FLASHBACK accounted for
approximately 82% of revenues in fiscal 1996. As a result of these changes and
the introduction of FLASHBACK prior operating results are not indicative of
future results. Moreover, demand for the Company's FLASHBACK recorder is
uncertain as the Company is in the early stages of entering various marketing
channels. Sales are expected to be subject to significant month to month
variability resulting from the limited market penetration achieved to date and
the seasonal nature of demand for consumer electronic products. The markets
for consumer electronic products are subject to rapidly changing customer
tastes and a high level of competition. Demand for FLASHBACK is expected to be
influenced by marketing and advertising expenditures, product positioning in
retail outlets, technological developments and general economic conditions.
Because these factors can change rapidly, customer demand can also shift
quickly. The Company may not be able to respond to changes in customer demand
because of the time required to change or introduce products, production
limitations and limited financial resources. Any failure to manufacture and
sell the FLASHBACK in commercial quantities will have a material adverse effect
on the Company and jeopardize its ability to continue as a going concern. See
"Possible Inability to Continue as a Going Concern." Moreover, a substantial
portion of the Company's revenues have been derived primarily from a limited
number of customers. For fiscal 1996, sales of the Company's FLASHBACK product
to its three largest customers accounted for approximately 29% of its revenues.
There can be no assurance that any such customers will continue to purchase the
FLASHBACK from the Company in the future. The loss of certain large customers
or a decline in the economic prospects of such customers would have a material
adverse effect on the Company.
Dependence Upon Major Suppliers. The Company "box-builds" its
FLASHBACK product from parts and electronic components purchased from regular
distribution channels. The Company owns its own tooling and although plastic
cases have been produced by one supplier, other suppliers exist to supply
plastic parts. Delays could occur, however, should the Company be required to
change suppliers. The Company is currently reliant on DSP Group, Inc., a sole
source supplier, for one key electronic component produced to the Company's
specifications. Although other suppliers of the basic component exist,
additional time would be required to modify components to meet the Company's
specifications, and any delays could have an adverse impact on the Company's
results of operations. The Company believes there are secondary suppliers of
components such that it is not otherwise reliant on one supplier, although
delays could result should the Company be required to change suppliers of
longer lead time components. Delays could also result from component
shortages, which are common to the electronics industry. The occurrence of any
such events could have a material adverse impact on the Company's operations.
The Company's business is subject to the risk of price fluctuations and
periodic shortages of components. The Company has no supply agreements with
its suppliers and, accordingly, purchases components pursuant to purchase
orders placed from time to time in the ordinary course of business. Failure or
delay by such suppliers in supplying necessary components to the Company could
adversely affect the Company's ability to manufacture and deliver products on a
timely and competitive basis.
Government Regulation. Management believes that the Company's
activities conform to present Federal, state and local environmental and other
regulations. There can be no assurance that current laws and regulations will
not be changed
10
<PAGE> 15
or interpreted in such a manner as to require the Company to obtain licenses or
approvals to conduct its business or otherwise restrict its activities.
Although the Company has not experienced any materially adverse effects on its
operations from governmental regulations, there can be no assurance that such
regulations will not adversely effect the Company in one or more ways,
including, but not limited to, the need for additional capital equipment and/or
potential liability if it is determined that the Company improperly discharged
or disposed of a hazardous substance.
Limited Marketing Capability. The Company has limited marketing
capabilities and resources and is primarily dependent upon in-house employees
for the marketing and sale of its contract manufacturing business and its
FLASHBACK product. Attracting new customers requires substantial marketing and
sales efforts and expenditure of significant funds to create awareness of and
demand for the Company's products. While the Company has recently hired and
put into place a sales and marketing structure for its FLASHBACK product which
includes an emphasis in telemarketing, computer retail channel, OEM, private
labeling and strategic alliances, there can be no assurance that the Company's
expanded marketing efforts in new areas will be successful or result in
significantly increased levels of revenues.
Reliance on Key Employees. The Company is currently dependent upon the
continued support and involvement of existing management, some of whom do not
have employment contracts. The loss of members of existing management would
severely curtail the Company's ability to operate and implement its business
plan. Elwood Norris serves as a director of two other companies. As such, he
currently devotes only part-time services to the Company (approximately 20
hours per week). The Company may need to hire additional skilled personnel,
including additional senior management, to support the anticipated growth in
its business. The inability to attract and retain additional qualified
employees or the loss of current key employees could materially and adversely
affect the Company's business.
Certain Transactions/Conflict of Interest. Elwood Norris, the Chairman
of the Board and a Director of the Company, is also a director of American
Technology Corporation ("ATC"). He is the beneficial owner of approximately
38% of the issued and outstanding shares of ATC. Robert Putnam, the Secretary
and a Director of the Company, is also the President and Chief Executive
Officer of ATC. Mr. Putnam is the beneficial owner of approximately 8% of the
issued and outstanding shares of ATC. As a result of their ownership and
involvement with ATC, Mr. Norris and Mr. Putnam have in the past, and may in
the future, devote a substantial portion of their time to their other
endeavors. See "Certain Transactions."
Unpredictable Product Acceptance. The Company's sales and marketing
strategy contemplates sales of its existing FLASHBACK product and related
companion products (upon completion of their development), to the electronics
and computer software markets, including sales to markets yet to be
established. There can be no assurance that the Company's marketing strategy
will be effective and that consumers will buy the Company's FLASHBACK product.
The failure of the Company to penetrate its projected markets would have a
material adverse effect upon the Company's operations and prospects. Market
acceptance of the Company's proposed products will depend in part upon the
ability of the Company to demonstrate the advantages of its products over
competing products.
Technological Obsolescence. The electronics, contract manufacturing
and computer software markets are characterized by extensive research and
development and rapid technological change resulting in very short product life
cycles. Development of new or improved products, processes or technologies may
render the Company's proposed products obsolete or less competitive. The
Company will be required to devote substantial efforts and financial resources
to enhance its existing products and methods of manufacture and to develop new
products and methods. There can be no assurance that the Company will succeed
with these efforts. Moreover, there can be no assurance that the Company will
be able to overcome the obstacles necessary to complete its proposed products
or that other products will not be developed which would render the Company's
proposed products obsolete.
Protection of Proprietary Information. The Company owns one patent
protecting its products. The Company has applied for additional multiple
patents for its FLASHBACK product, but there is no assurance that any
additional patents will be awarded. The Company has received notification of
allowance from the United States Patent and Trademark Office for use of
FLASHBACK as a registered trade name. Other trade names are owned by the
Company and applications for
11
<PAGE> 16
registration of additional trade names are pending. The Company does not own
any copyrights. The Company treats its technical data as confidential and
relies on internal nondisclosure safeguards, including confidentiality
agreements with employees, and on laws protecting trade secrets, to protect its
proprietary information. There can be no assurance that these measures will
adequately protect the confidentiality of the Company's proprietary information
or that others will not independently develop products or technology that are
equivalent or superior to those of the Company. With respect to patented
products, there can be no assurance that the Company will be able to identify,
and successfully prosecute, infringements of such patents. The Company may
receive in the future communications from third parties asserting that the
Company's products infringe the proprietary rights of third parties. There can
be no assurance that any such claims would not result in protracted and costly
litigation. There can be no assurance that any particular aspect of the
Company's technology will not be found to infringe the products of other
companies. Other companies may hold or obtain patents on inventions or may
otherwise claim proprietary rights to technology useful or necessary to the
Company's business. The extent to which the Company may be required to seek
licenses under such proprietary rights of third parties and the cost or
availability of such license, cannot be predicted. While it may be necessary
or desirable in the future to obtain licenses relating to one or more of its
proposed products or relating to current or future technologies, there can be
no assurance that the Company will be able to do so on commercially reasonable
terms.
Lack of Dividends. The Company has never paid any cash dividends on
its Common Stock and does not anticipate paying any cash dividends in the
future. The Company currently intends to retain any future earnings to fund
the development and growth of its business. See "MARKET FOR COMMON STOCK AND
RELATED SHAREHOLDER MATTERS."
Reliance on Small Number of Customers. The Company has relied on a
small number of customers for a large percentage of its FLASHBACK sales. Loss
of any major customer could have a material adverse effect on the Company's
financial condition.
Impact of Possible Delisting of Securities from NASDAQ System; Penny
Stock Regulations. The Company's Common Stock is currently quoted on NASDAQ.
In order to maintain the Company's NASDAQ listing, the Company must have at
least $2 million in assets, $1 million in capital and surplus, a minimum bid
price of $1.00 per share and two market-makers. If the Company is unable to
maintain the listing criteria, its securities will be subject to delisting from
NASDAQ. Trading, if any, in the Company's securities would thereafter be
conducted in the over-the-counter market on the NASD Electronic Bulletin Board
or in what are commonly referred to as the "pink sheets." As a result, an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Company's securities. In addition, if the
Company's securities are delisted from NASDAQ, the securities would be subject
to a rule that imposes additional sales practice requirements on broker-dealers
who sell such securities.
Shares Eligible for Future Sales. In addition to the shares of Common
Stock to be sold hereunder, 2,637,808 shares of the Company's Common Stock were
registered pursuant to a registration statement filed with the Securities and
Exchange Commission on December 16, 1994, an additional 3,854,041 shares of the
Company's Common Stock were registered pursuant to a registration statement
filed with the Securities and Exchange Commission on May 8, 1995, an additional
1,461,143 shares of the Company's Common Stock were registered pursuant to a
Registration Statement filed with the Securities and Exchange Commission on
December 12, 1995 and an additional 379,059 and 1,280,666 shares of the
Company's Common Stock were purchased in transactions closing on or about March
21, 1995 and October 26, 1995, respectively, by certain investors who were not
"U.S. Persons," as such term is defined in Regulation S adopted under the
Securities Act. An additional 4,336,167 shares of Common Stock were issued
upon the conversion of an aggregate of $3 million of 7% notes which were
converted into shares of Common Stock of the Company in or about May 1996.
Future sales of these shares could depress the market price for the Common
Stock in any market which may exist.
Important Factors Related to Forward-Looking Statements and Associated
Risks. This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act") and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby.
These forward-looking statements include the plans and objectives of management
12
<PAGE> 17
for future operations, including plans and objectives relating to the products
and future economic performance of the Company. The forward-looking
statements and associated risks set forth in this Prospectus may include or
relate to (i) re-focusing the Company on a family of products, technology
components and software and not having the Company be reliant on a single
recorder product; (ii) expanding the retail product offering by introducing a
computer interface VOICELINK which allows the FLASHBACK recorder to interact
with a personal computer, and communicate with other computers via the
internet; (iii) repositioning the core retail product, the FLASHBACK recorder,
at the computer peripheral and telephony markets; (iv) building a sales and
marketing infrastructure to focus on the computer retail and OEM markets; and
(v) upgrading and expanding the management team; (vi) development of
appropriate technology and the ability of the Company to enforce its patent or
obtain additional patents; (vii) increasing sales through the introduction and
development of new products and product lines; (viii) success of marketing
initiatives to be undertaken by the Company; (ix) increasing distribution
through expansion of the Company's network of distributors and its customer
base; (x) success of the Company in forecasting demand for particular products
and its success in establishing production and delivery schedules and forecasts
which accurately anticipate and respond to market demand; (xi) success in
expanding the Company's market through increasing sales to large regional and
national distributor accounts; and (xii) success of the Company in achieving
increases in net sales such that cost of goods sold and selling, general and
administrative expenses may decrease as a percentage of net sales.
The forward-looking statements included herein are based upon current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based upon assumptions that the Company will
continue to design, manufacture, market and ship new products on a timely
basis, that competitive conditions within the computer peripheral and telephony
markets will not change materially or adversely, that the computer peripheral
and telephony markets will continue to experience steady growth, that demand
for the Company's products will increase, that the Company will obtain and/or
retain existing distributors and key management personnel, that inventory risks
due to shifts in market demand will be minimized, that the Company's forecast
will accurately anticipate market demand and that there will be no material
adverse change in the Company's operations or business. Assumptions relating
to the foregoing involve judgments with respect, among other things, to future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate and, therefore, there can be no
assurance that the results contemplated in forward-looking information will be
realized. In addition, as disclosed above, the business and operations of the
Company are subject to substantial risks which increase the uncertainty
inherent in such forward-looking statements. Any of the other factors
disclosed above could cause the Company's net sales or net income (or loss), or
growth in net sales or net income (or loss), to differ materially from prior
results. Growth in absolute amounts of costs of sales and selling and
administrative expenses or the occurrence of extraordinary events could cause
actual results to vary materially from the results contemplated in the
forward-looking statements. Budgeting and other management decisions are
subjective in many respects and thus susceptible to interpretations and
periodic revisions based on actual experience and business developments, the
impact of which may cause the Company to alter its marketing, capital
expenditure or other budgets, which may in turn affect the Company's results of
operations. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
13
<PAGE> 18
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock has been quoted on the National Association
of Securities Dealers Automated Quotation System (NASDAQ) (symbol NCII) since
April 6, 1993. The following table sets forth, for the periods indicated, the
high and low closing bid prices for the Common Stock, as reported by NASDAQ,
for the quarters presented. Bid prices represent inter-dealer quotations
without adjustment for markups, markdowns, and commissions.
<TABLE>
<CAPTION>
(Stated in United States dollars per share)
High Low
<S> <C> <C>
Fiscal year ended March 31, 1995
First quarter 4 1/2 3 1/8
Second quarter 3 7/8 3
Third quarter 3 1/2 2 1/8
Fourth quarter 3 3/4 2 1/2
Fiscal year ended March 31, 1996
First quarter 2 1/16 1 15/16
Second quarter 1 15/16 1 3/4
Third quarter 1 1/2 1 1/4
Fourth quarter 1 27/32 1 3/4
Fiscal year ended March 31, 1997
First quarter 1 27/32 1 3/4
Second quarter 1 1/4 1 1/8
</TABLE>
At September 30, 1996, there were 22,308,611 shares of Common Stock
outstanding, which were held by approximately 323 shareholders of record.
The Company has never paid any dividends to its Common Stock
shareholders. Future cash dividends or special payments of cash, stock or
other distributions, if any, will be dependent upon the Company's earnings,
financial condition and other relevant factors. The Board of Directors does
not intend to pay or declare any dividends in the foreseeable future, but
instead, intends to have the Company retain all earnings, if any, for use in
the Company's business.
14
<PAGE> 19
SELECTED FINANCIAL DATA
The following summary of certain financial information relating to the
Company for the fiscal years ended March 31, 1995 and March 31, 1996, has been
derived from, and is qualified by reference to, the audited Consolidated
Financial Statements of the Company included elsewhere herein and should be
read in conjunction with such audited Consolidated Financial Statements and
Notes thereto. The unaudited consolidated balance sheets information as of
September 30, 1996, and the unaudited statements of operations information for
the six months ended September 30, 1996 has been derived from unaudited
financial information prepared on the same basis as the audited financial
statements. In the opinion of management, such unaudited financial information
includes all adjustments, consisting of normal recurring adjustments, necessary
to present fairly the information presented. The results of operations for the
six months ended September 30, 1996 are not necessarily indicative of the
results of operations to be expected in any future quarter or the fiscal year
ending March 31, 1997. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and Notes related
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
March 31, September 30,
---------------------------- ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATIONS DATA:
Revenues $1,328,502 $ 5,593,081 $ 301,543 $ 806,603
Cost of sales 4,413,814 6,729,320 1,049,318 2,192,405
Operating expense 5,182,231 6,006,117 2,910,077 2,461,354
Loss for the (8,267,543) (7,142,356) (3,657,852) (3,847,156)
period
Loss per share (0.63) (0.88) (0.19) (0.33)
Weighted average
number of
common shares
outstanding 13,065,095 8,097,624 19,641,347 11,697,517
</TABLE>
<TABLE>
<CAPTION>
March 31, September 30,
--------------- ---------------------
1996 1995
---- ----
<S> <C> <C> <C>
BALANCE SHEETS DATA:
Total assets
$7,817,144 $8,658,632 $5,870,338
Working capital 1,056,029 1,665,581 2,781,594
Current liabilities 5,351,811 4,838,342 1,733,635
Long term 3,000,000 --- ---
liabilities
Stockholders' equity
(deficiency) (534,667) 3,820,290 4,136,703
</TABLE>
15
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING INFORMATION INCLUDES FORWARD-LOOKING STATEMENTS, THE
REALIZATION OF WHICH MAY BE IMPACTED BY CERTAIN IMPORTANT FACTORS DISCUSSED
UNDER "RISK FACTORS - IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS
AND ASSOCIATED RISKS."
General. Prior to the introduction of the FLASHBACK recorder in
December 1994, the revenues of the Company were generated by contract
manufacturing. Contract manufacturing accounted for over 90% of total revenues
in fiscal 1995 compared to 18% of total revenues in fiscal 1996. As a result
of the reduction of outside contract manufacturing services, the
reconfiguration of manufacturing to accommodate the production of FLASHBACK
proprietary products, i.e. FLASHBACK and accessories, the sale of FLASHBACK
products accounted for the majority of revenues for the fiscal year ended March
31, 1996. As a result of the significant change in the source of revenue,
comparisons to prior results are less meaningful and prior results are not
necessarily indicative of future results.
The Company has incurred operating losses in seven of its past eight
years and these losses have been material. The Company incurred an operating
loss of $8.3 million in fiscal 1996. This resulted from the development and
launch of the FLASHBACK and losses incurred in reducing contract manufacturing
operations in preparation of FLASHBACK production. Since future results are
primarily dependent on proprietary product (FLASHBACK and new products
scheduled for introduction) results, the Company's losses are expected to
continue until such time as the Company is able to manufacture and sell
quantities of proprietary products at sufficient margins to cover fixed costs
of operations. Should the Company be unable to accomplish the foregoing and
operate profitably, the Company may be forced to reduce or curtail operations.
The Company continues to be subject to the risks normally associated with any
new business activity, including unforeseeable expenses, delays and
complications. Accordingly, there is no assurance the Company can or will
report operating profits in the future.
Since the Company utilizes its own facility and equipment for the
manufacture of proprietary products, gross margins are especially dependent
upon sales volumes as a result of a substantial fixed manufacturing overhead.
The Company estimates that its monthly fixed cash operating costs approximate
$400,000 per month. At low sales volumes it is unlikely that positive gross
margins from proprietary products can be achieved, however at higher volumes
the allocation of fixed costs over more sales can result in increasing gross
margins. Accordingly, the Company anticipates variances in gross margins from
quarter to quarter in future quarters as production is still in the early
stages and product sales volumes can vary as the various distribution channels
are launched and as a result of seasonal and other factors associated with the
sale of consumer electronic products.
Sales of and demand for the Company's FLASHBACK recorder have not met
management's expectations due to a variety of factors including competitive
pressure in the portable recording industry and insufficient financial
resources to differentiate the product from competitors. The Company has
responded by changing distribution channel emphasis to the high end business
markets, by less reliance on outside sales representatives through the hiring
of a director of sales and marketing and by educating retailers and customers
on the differences between FLASHBACK and less expensive memo recorders. The
introduction of the Company's VOICELINK computer peripheral in the second
fiscal 1997 quarter is expected to open new channels of distribution and
further differentiate the Company's product offerings. Sales are expected to be
subject to significant month to month variability resulting from the limited
market penetration achieved to date, the impact of new product introductions
and the seasonal nature of demand for consumer electronic products. The markets
for consumer electronic products are subject to rapidly changing customer
tastes and a high level of competition. Demand for the Company's products is
expected to be influenced by marketing and advertising expenditures, product
positioning in retail outlets, technological developments and general economic
conditions. Because these factors can change rapidly, customer demand can also
shift quickly. The Company may not be able to respond to changes in customer
demand because of the time required to change or introduce products, production
limitations and limited financial resources.
On November 10, 1995, the Company announced an original equipment
manufacturer ("OEM") sales division had
16
<PAGE> 21
been created to meet the demand for the FLASHBACK technology. The three goals
of the OEM sales division are to (i) license the microprocessor and software,
(ii) design and manufacture custom products, and (iii) offer private label
branding of current Company products. Also, the Company announced the
availability of the Norris FlashFile System ("NFFS") as a development tool for
individuals and companies preparing to use flash memory in their systems and/or
products. The Company anticipates, but there can be no assurance, that OEM
revenues will become a significant component of future revenues of the Company.
Results of Operations. For the fiscal year ended March 31, 1996, the
Company reported revenues of $1.3 million, 76% less than revenues of $5.6
million for fiscal 1995. The decrease in revenues is due to FLASHBACK sales
not meeting expectations and not achieving sales levels comparable to prior
contract manufacturing revenues. Fiscal 1996 revenues are primarily from sales
of FLASHBACK. Fiscal 1995 revenues were primarily from the operations of the
contract manufacturing business. A substantial portion of the Company's
FLASHBACK revenues have been derived from a limited number of customers. The
loss of certain large customers or a decline in the economic prospects of such
customers would have a further adverse effect on the Company.
For fiscal 1996, the Company reported a gross loss of $3.1 million or
232% of revenues, as compared to a gross loss of $1.1 million or 20% for fiscal
1995. The decrease in gross profit in fiscal 1996 was due to the Company's
reduction of contract manufacturing and minimal sales of the FLASHBACK while
fixed manufacturing overhead related to cost of sales plus the cost of product
exceeded the revenues generated by sales of FLASHBACK. Also in the first
quarter of fiscal 1996 cost of sales included $980,000 representing the cost of
7,000 discontinued FLASHBACK units sold to Active Media Services, Inc., an
independent media trading firm. These units were sold in exchange for
$1,172,500 of media trade credits and 50% of the cash proceeds realized on the
ultimate sale of the units. The Company recognized no prepaid asset nor any
revenue in connection with the trade credits since their use requires certain
matching cash payments and the Company's ability to continue as a going concern
is in substantial doubt. In addition, the amount of cash to be received on the
ultimate sale of the units can not be reasonably estimated. Accordingly, the
Company intends to recognize future revenue from the trade credits only when
ascertainable economic value is realized from their use or cash proceeds are
received from the ultimate sale of the units.
During fiscal 1995, the contract manufacturing operation experienced
high manufacturing costs due to FLASHBACK startup costs, low margin turnkey and
consignment orders and an increased mix of through-hole printed circuit boards
which required more hand placement of components (which increased labor costs
with no corresponding increase in revenues). In fiscal 1996, the Company
reconfigured its operations in light of the FLASHBACK developed products and
significantly downsized its contract manufacturing business. The Company
expects to report gross losses until product sales and/or margins improve
sufficiently to cover manufacturing overhead. The Company's strategies to
produce positive margins includes increasing volume of existing products and
adding new products, improving pricing, reducing manufacturing costs, obtaining
additional contract manufacturing business, and obtaining new revenues from the
OEM division. There can be no assurance the Company can achieve positive gross
margins.
Total operating expenses (including research and related expenditures,
selling and administrative and interest expense less interest income) were $4.9
million for the fiscal year ended March 31, 1996 as compared to $5.9 million
for fiscal 1995. Operating expenses for the fiscal year 1996 decreased by $1.0
million primarily due to a concerted effort to reduce expenses, while
manufacturing and selling the FLASHBACK. The material changes and reasons for
the changes from fiscal 1996 compared to fiscal 1995 were: a decrease in legal
fees and settlements of $263,000 (the decrease was due to a reduction of
settlements and legal fees being paid in the current fiscal year), a decrease
in salaries of $100,000 (the Company reduced staffing due to financial
constraints), a decrease in finders fees of $130,000 (a large line of credit
was established in the prior year where a finders fee was paid), a decrease in
public relations of $60,000 (the Company has reduced outside public relations
internally assuming many of these duties), and a reduction of other
advertising, promotions and trade show expenses of $80,000 (associated with the
prior year new product launch), offset by an increase associated with a
$120,000 refinancing fee on the convertible note. Research and related
expenditures (associated with new product development) were $1 million for
fiscal 1996, as compared to $1.9 million for fiscal 1995 which included
intensive FLASHBACK development costs. The research and development associated
with new products, although subject to
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quarterly variations, are expected to continue at recent levels.
In August 1989, the Company acquired American Surface Mounted Devices
("ASMD") which provided the contract manufacturing operations. In light of the
Company's decision to significantly downsize manufacturing operations during
fiscal 1996, the carrying value of the remaining goodwill associated with the
purchase of ASMD was determined by the Company to be in question and the
Company subsequently wrote off the unamortized balance of $0.2 million in March
1996.
The Company reported an operating loss of $8.3 million for fiscal 1996,
as compared to an operating loss of $7.1 million for fiscal 1995.
Liquidity and Capital Resources. At March 31, 1996, the Company had
working capital of $1.1 million, compared to working capital of $1.7 million at
March 31, 1995. The Company had approximately $3.2 million of working capital
invested in inventories at March 31, 1996, compared to approximately $2.7
million at March 31, 1995 with the increase due to FLASHBACK components. The
decrease in working capital was a result of the Company's continuing losses
which had consumed working capital during the period. The Company also
exhausted its available credit under its credit line during such period which
was converted to a fixed note, as discussed below. Approximately $6 million in
cash was used in operating activities by the Company for the year ended March
31, 1996. The Company's current cash position is insufficient to enable the
Company to meet either its obligations to creditors or its on-going expenses
beyond approximately three months.
On October 17, 1995, the Company executed a Loan Modification Agreement
with CVD, regarding a line of credit. The Loan Modification Agreement, which
had an effective date of August 1, 1995, provided for (i) the extension of the
maturity date of the loan (the "Loan") to January 31, 1996, (ii) a reduction in
the interest rate charged by CVD from prime rate plus seven percent (7%) to
prime rate plus two percent (2%), (iii) the waiver by CVD of certain events of
default which had occurred, (iv) the issuance of 75,000 shares of the Company's
common stock, to CVD, (v) the issuance of a new warrant to CVD to purchase
200,000 shares of Common Stock at $2.00 per share, (vi) the repricing of
existing warrants to purchase 450,000 shares of Common Stock to $1.75 per
share, (vii) the issuance of an option to acquire up to 300,000 shares of JABRA
Corporation ("JABRA") common stock at a price of $1.50 per share, (viii) the
grant of certain conversion rights to CVD to enable CVD to convert at anytime
prior to repayment all or any portion of the outstanding principal balance of
the Loan (including accrued but unpaid interest) into shares of Common Stock at
the lesser of (a) $1.50 per share or (b) following the occurrence of an event
of default, the higher of $1.00 per share and the average closing price for the
20 days preceding the date of notice of an event of default, and (ix) in the
event CVD becomes the holder of not less than 1,000,000 shares of Common Stock,
to nominate and appoint one director to the Company's board of directors.
Substantially all of the assets of the Company and its subsidiary (including
JABRA shares) were pledged to CVD as collateral for the amounts loaned and the
Company was prohibited from incurring additional indebtedness without CVD's
prior consent. In addition, as a result of the Loan Modification Agreement,
the loan became non-revolving (i.e. no additional funds could be borrowed prior
to maturity) and 50% of the net proceeds from any equity financing had to be
used to pre-pay the loan.
On October 17, 1995, the Company paid CVD $429,000, reducing the
outstanding principal balance of the note to $2,703,646. On January 8, 1996,
the Company made an additional $518,100 principal payment on the note. On
February 1, 1996 the Company obtained an extension of the convertible note to
April 30, 1996 in consideration of an extension fee of $33,155 which was added
to the principal balance of the note.
In March 1996, the Company obtained $3 million from a convertible debt
financing (by June 30, 1996 all the debt had been converted to Common Stock),
and used the proceeds to make the April principal payment on the CVD
convertible note as well as to provide short-term working capital. In June
1996, the Company obtained $2.4 million in funds from a private placement of
securities and used the proceeds for a $1.1 million principal payment on the
CVD convertible note (reducing the outstanding balance to approximately $0.3
million) with the balance allocated for working capital. In July and August
1996, the Company obtained additional equity from the private placement of
securities for cash of
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<PAGE> 23
approximately $3.1 million. On July 31, 1996 the Company retired the remaining
$307,416 obligation related to the demand loan payable to CVD. As a result of
these transactions, as of September 30, 1996, the Company had no long-term debt
nor any bank lines of credit or related financing facilities.
On June 7, 1996, the Company closed a private placement of Common Stock
and Warrants and received gross proceeds of $2,500.000. The purchase price for
the 2,420,143 shares of Common Stock was $.70. The five warrants (sold at a
face value of $805,000) are convertible into common stock (without additional
consideration) in an amount equal to the face value of the warrant divided by
the lesser (i) $.70 per share or (ii) a 30% discount to the average closing bid
price for the shares for the five days prior to (but not including) the
conversion date. The purchases were granted certain demand and piggyback
registration rights under certain conditions. The private placement was
effected through Iaccoca Capital Partners, L.P. acting as a placement agent who
was paid a fee of 7% in cash and granted a Warrant to purchase 401,924 shares
of Common Stock at an exercise price of $.9875 per share through July 31, 2001.
On July 31, 1996 and August 7, 1996, the Company closed an additional
private placement and received gross proceeds of $3,170,000. The purchase
price for the 245,931 shares of Common Stock sold was $.69125. The seven
Warrants (sold at a face value of $3,000,000) are convertible into Common Stock
(without additional consideration) in an amount equal to the face value of the
Warrant divided by the lesser of (i) $.69125 per share or (ii) a 30% discount
to the average closing bid price for the shares for the five days prior (but
not including) the conversion date. The purchasers were granted certain demand
and piggyback registration rights under certain conditions. The private
placement was effected through Greystone Capital, Ltd., with fees (including
finders' fees) of 10% being paid in cash.
The Company will require additional capital within the next three
months to meet its debts as they become due and to continue as a going concern.
The Company will also require additional working capital to finance production
and sales of its proprietary products. Successful commercialization of
proprietary products and the introduction of the PVP-2000 will require
additional working capital. The Company estimates that at current expenditure
levels and projected working capital requirements, after reflecting the private
placements described above, it will require a minimum of an additional $3
million to continue operating for the next twelve months without any
contribution from operations. The existing business may be able to generate
some of the additional funding required depending on proprietary product
results, success in obtaining contract manufacturing business and the ability
of the OEM division to generate revenues, however there can be no assurance
thereof. The Company is currently pursuing various alternatives to meet its
needs for additional capital. There can be no assurance the Company will be
successful and any such financing may be dilutive to current shareholders. The
failure to raise additional funds could have a material adverse effect on the
Company and could force the Company to reduce or curtail operations.
Changes in Cash. For the fiscal year ended March 31, 1996, net cash
decreased $0.4 million. Cash used in operating activities was $6.0 million.
Major components using cash were a net loss of $8.3 million, and an increase in
inventory of $0.6 million. The increase in inventory resulted from a build-up
of finished goods and raw materials. Major components providing cash were an
increase in accounts payable of $1.3 million, depreciation and amortization
(including the write-off the unamortized balance of goodwill) of $0.8 million
and the reduction of trade payables, other liabilities and loans of $0.4
million through issuance of stock. The major components of cash provided by
financing activities were proceeds from issuance of shares of $3.5 million and
proceeds of $3.0 million from issuance of convertible notes payable.
Comparison of Six Months Ended September 30, 1996 and Six Months Ended
September 30, 1995. For the first six months of fiscal 1997, the Company
reported revenues of $301,543, 63% less than revenues of $806,603 for the first
six months of fiscal 1996. The decrease in revenues is due primarily to
reduced FLASHBACK sales comparable to the prior year. Sales for the prior
period included some initial stocking orders by retailers. A substantial
portion of the Company's FLASHBACK revenues have been derived from a limited
number of customers. The loss of certain large customers or a decline in the
economic prospects of such customers would have a further adverse effect on the
Company.
For the first six months of fiscal 1997, the Company reported a gross
loss of $747,775 as compared to a gross loss of $1,385,802 for the first six
months of fiscal 1996. Gross losses are due to the minimal sales of the
FLASHBACK
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product while fixed manufacturing overhead related to cost of sales plus the
cost of product continue to exceed the revenues generated by sales.
Total operating expenses (including research and related expenditures,
selling and administrative and interest expense less interest income) were $1.6
million for second quarter of fiscal 1997 as compared to $1.1 million for the
second quarter of fiscal 1996. Selling and administrative expenses increased
in the first six months of fiscal 1997 to $2.4 million compared to $1.7 million
for the comparable period of the prior year. The increase of $0.7 million in
the first six months of fiscal 1997 included an increase in personnel and
consulting of $250,000 due primarily to additional sales and marketing expense
associated with the advertising launch of the Mobile Office, $65,000 costs of a
recently established office in the United Kingdom, a $111,000 increase in legal
and related costs primarily associated with financing, registration and
regulatory activities and general increases in other administrative expenses as
compared to the prior period. Research and related expenditures were $408,000
for the first six months of fiscal 1997, as compared to $604,000 for the first
six months of fiscal 1996 which included $370,000 of FLASHBACK pre-production
development costs. The research and related expenditures associated with new
products, although subject to quarterly variations, are expected to continue at
recent quarter levels.
The Company reported an operating loss of $3.7 million for the first
six months of fiscal 1997, as compared to an operating loss of $3.8 million for
the first six months of fiscal 1996.
At September 30, 1996, the Company had working capital of $2.8 million,
compared to working capital of $1.1 million at March 31, 1996. The Company had
approximately $3.2 million of working capital invested in inventories at
September 30, 1996, comparable to the balance at March 31, 1996. The increase
in working capital is a result of the Company's financing activities offset by
continuing losses which consumed working capital during the period.
Approximately $4.6 million in cash was used in operating activities by the
Company in the six months ended September 30, 1996 which included a $1.4
million reduction in accounts payable and accrued liabilities.
During the quarter ended June 30, 1996, the Company obtained
approximately $3 million from a convertible debt financing and approximately
$2.5 million from the private placement of Common Stock and a portion of the
Warrants and made principal payments to CVD aggregating $1,878,130. On July
31, 1996, the Company retired the remaining $307,416 obligation related to the
demand loan payable to CVD. During the first fiscal quarter, the $3 million
convertible debt, plus accrued interest, was converted into Common Stock. As
of December 31, 1996, the Company had no long-term debt nor any bank lines of
credit or related financing facilities. In July and August 1996, the Company
obtained additional equity from the sale of Common Stock and Warrants for cash
of approximately $3.2 million.
For the six months ended September 30, 1996, net cash decreased by $1.9
million. Cash used in operating activities was $4.6 million. Major components
using cash were a net loss of $3.5 million after depreciation and a decrease in
other accounts payable and accruals of $1.4 million. The major component of
cash provided by financing activities was net cash proceeds (exclusive of fees
and costs) from issuance of shares of Common Stock and Warrants of $5.1 million
less $2.2 million used to reduce the obligation on the demand loan payable.
Management's Plans for Improving Operations. Management has undertaken
steps as part of a plan to improve operations with the goal of sustaining the
Company operations for the next twelve months and beyond. These steps include
(i) re-focusing the Company on a family of products, technology components and
software and not having the Company be reliant on a single recorder product;
(ii) expanding the retail product offering by introducing a computer interface
VOICELINK which allows FLASHBACK recorder to interact with a personal computer,
and communicate with other computers via the internet; (iii) repositioning the
core retail product, the FLASHBACK recorder, at the computer peripheral and
telephony markets; (iv) building a sales and marketing infrastructure to focus
on the computer retail and OEM markets; and (v) upgrading and expanding the
management team. The Company's next generation retail product, the Mobile
Office began shipping in October 1996. The Mobile Office includes the
Company's FLASHBACK recorder, 36 minute SOUNDCLIP, VOICELINK (which links the
FLASHBACK to a personal computer) and the related software.
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The Company is actively developing a number of distributions, licensing
and OEM opportunities and has signed agreements, as of October 1996, with
Mobile Planet, a US based distributor; Pocket Power, an Italian distributor,
OEM agreements with Thin Spin Holdings LLC and with Sanyo Information Systems
UK Ltd. The Company continues to progress with additional licensing and OEM
opportunities, which management believes could have a positive impact on future
operations. Due to the Company's high manufacturing overhead, the Company
expects to report gross losses until product sales and/or margins improve
sufficiently to cover the overhead. The Company's strategies to produce
positive margins includes increasing the volume of existing products and adding
new products such as Mobile Office, reducing manufacturing cost, obtaining
additional contract manufacturing business and obtaining new revenues from OEM
and licensing agreements with companies like Sanyo. The Company believes the
successful implementation of these steps will bring the Company to
profitability within the next twelve months, however, there can be no
assurances that the Company can successfully implement its plan to improve
operations and/or achieve positive gross margins in the future.
Future Commitments and Financial Resources. The Company's future
commitments are related to its capital and operating leases (see footnote 12
to the financial statements). These commitments are included in the cash
requirements discussed above. The Company is currently in arrears and in
breach of payment obligations totaling $0.5 million for a capital lease. The
Company, however, has not received notice of default from the lessor and is
discussing with the lessor various financing alternatives.
The Company is committed to purchase orders providing for the future
delivery of components in accordance with production schedules. Generally,
these orders may be canceled or extended should production schedules change,
however, purchase orders for customized components often involve vendors less
willing to cancel purchase orders although generally open to extensions or
modifications which are common to the industry. Since the Company's production
schedules have been extended, should production be further curtailed or cease,
then the Company could become liable for outstanding purchase orders and the
liability could be material.
If in the future, operations of the Company increase significantly, the
Company may require additional funds. The Company might also require additional
capital to finance future developments, acquisitions or extraordinary expansion
of facilities. The Company currently has no plans, arrangements or
understanding regarding any acquisitions.
Possible Inability To Continue As A Going Concern. The Company has
suffered recurring losses from operations. This factor, in combination with
(i) the Company's reliance upon debt and new equity financing to fund the
continuing, increasing losses from operations and cash flow deficits, (ii)
substantial inventory buildup during the fiscal 1995 and fiscal 1996 consisting
of raw material, components and finished product to be utilized in the
manufacture and sale of its FLASHBACK product and material decline in inventory
turnover, (iii) materially increased net losses and cash flow deficits from
operations during fiscal 1995 and fiscal 1996 and (iv) the likelihood that the
Company may be unable to meet its debts as they come due, raise substantial
doubt about the Company's ability to continue as a going concern. The
Company's ability to continue as a going concern is dependent upon its ability
to obtain adequate financing and achieve a level of revenues adequate to
support the Company's capital requirements, as to which no assurance can be
given. In the event the Company is unable to continue as a going concern, it
may elect or be required to seek protection from its creditors by filing a
voluntary petition in bankruptcy or may be subject to an involuntary petition
in bankruptcy. To date, management has not considered this alternative, nor
does management view it as a likely occurrence.
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BUSINESS
THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY. SEE "RISK FACTORS - IMPORTANT FACTORS
RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS."
The Company is a holding company which, through its wholly owned
California subsidiary, NCI, is engaged in a single industry segment: the
development, manufacture and marketing of electronic products. The Company was
incorporated under the Company Act (British Columbia), Canada on February 11,
1988 under the name 340520 B.C. Ltd. The Company changed its name to Norris
Communications Corp. on April 7, 1988 and on November 22, 1994 the Company
continued its jurisdiction of incorporation from British Columbia to the Yukon
Territory. The Company further continued its jurisdiction of incorporation to
Wyoming on August 30, 1996 and on September 4, 1996 reincorporated into
Delaware. Through NCI the Company is involved in (i) marketing its
FLASHBACK(TM) technology, a proprietary method for information storage and
retrieval and (ii) using its state-of-the-art electronic manufacturing facility
to manufacture its proprietary products and provide contract manufacturing
services for others. The Company also holds as an investment 1,033,334 common
shares (approximately 13.2%) of JABRA. JABRA is a developer and manufacturer
of communication products for desktop, mobile and wireless applications.
The address of the Company's principal executive office is 12725 Stowe
Drive, Poway, California 92064 and its telephone number is (619) 679-1504. The
Company's primary operating facilities are located at that address. The Company
presents its consolidated financial statements in United States dollars.
History. The Company, through a predecessor corporation, was started
in 1988 based on a new technology that its founder Elwood G. Norris had
developed while researching and developing headset/microphone alternatives for
NASA. The successful combination of a speaker and microphone was developed into
the EarPHONE(TM) product line, now owned by JABRA.
In August 1989, the Company acquired ASMD, subsequently merged into
NCI. This acquisition enabled the Company to become a regional full-service
independent supplier of turnkey manufacturing of circuit board assemblies,
systems and subsystems, to OEM's in the computer, defense, telecommunications
and medical industries. Since acquiring ASMD, the Company has invested over
$2.5 million in equipping a new 31,000 square foot manufacturing and
administrative facility. Prior to the late fiscal 1995 launch of the first
FLASHBACK technology product, a personal digital recorder, ASMD's contract
manufacturing services accounted for substantially all of the Company's
revenues. During the 1996 fiscal year, due to the startup of the manufacturing
of the FLASHBACK recorder, the Company scaled back certain contract
manufacturing services. As the Company develops and expands its FLASHBACK
technology product line and develops or acquires new technologies, it is
management's strategy to utilize its strong printed circuit board assembly
capability to produce components by combining added-value technology with
added-value manufacturing. The Company intends to aggressively pursue the
outside contract manufacturing business.
On January 15, 1993, the Company sold 300,000 common shares of JABRA
stock for $750,000, and JABRA sold 500,000 newly issued common shares with
warrants for $1.25 million. The Company retained 2,300,000 common shares or
74.2% of JABRA stock and the Company agreed to surrender operating control of
JABRA pursuant to the stock sale agreement. On July 15, 1993, the Company sold
an additional 500,000 common shares for $1.625 million and JABRA sold 1,000,000
newly issued common shares for $3.25 million. The Company's 1,800,000 common
shares represented 42.8% of the outstanding shares of JABRA and as a result of
the lack of operating control, the Company ceased consolidating JABRA's
operations and recorded its investment on the cost basis because it no longer
has significant influence over the operations of JABRA. At March 31, 1996 the
Company had a zero cost basis in its 1,800,000 JABRA common shares. During
fiscal 1995 and 1996, JABRA reported to the Company the sale of 1,154,671 newly
issued common shares for proceeds of $4.0 million. On or about December 31,
1996 and January 2, 1997, the Company sold 766,666 common shares of JABRA stock
for $230,000. As a result of these transactions, the Company's ownership in
JABRA at January 15, 1997, represented by 1,033,334 common shares is 13.2% (or
11.6% on a fully diluted basis).
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The Company's FLASHBACK Technology. During 1993 the Company invented
and commenced development of advanced digital recording technology that does
not involve mechanical moving parts. Although various digital techniques have
been adapted to sound recording and reproduction, such as compact disc players
and digital tape recorders, these devices still utilize mechanical techniques
for moving the storage media as well as positioning the read/write head in the
case of compact discs. The Company's technology is designed to substitute all
solid state electronic control for traditional mechanical functions and
magnetic media. The technology developed integrates a sophisticated micro-
processor based control system, digital signal processing ("DSP"),
sophisticated digital/analog and analog/digital conversion along with advanced
data compression and non-volatile storage media (flash memory) to produce a
no-moving-parts recording scheme with advanced features and capabilities.
Management believes the newly developed proprietary technology for
information storage lends itself to a broad array of product applications.
Through a technique of combining digital signal processing with state of the
art compression algorithms and a non-volatile storage array all managed by a
microcontroller, it is possible to store data without the need for magnetic
media such as is presently used in audio/video tape recording equipment as well
as computer hard drives and diskettes. Since there are no moving parts, there
are correspondingly no motors, belts, or other control devices required. All
functions associated with devices designed around this new technology can be
operated by existing microprocessor control devices. The prices of various
forms of storage arrays, and specifically flash memory chips, continue to
decline making more applications utilizing the Company's proprietary technology
cost effective.
In addition to improved voice recorders, the Company believes the
technology may have applications in a wide range of products including pagers,
answering machines, telephones, compact disc quality sound recordings and for
the storage of pictures and video images.
Current Product. The Company's first digital recording technology
product is the FLASHBACK portable digital voice recorder. The FLASHBACK is a
self contained miniature hand held voice recording device with features
unavailable in conventional tape recorders. In addition to standard features
such as playback, recording, fast forward and reversing functions, the
FLASHBACK recorder provides the ability to electronically insert, delete, or
edit the content of messages/recordings, to randomly access recordings
instantly and play back at high or low speed without changing voice pitch.
The FLASHBACK personal digital recorder is approximately the size of a half
deck of playing cards, weighs less than three ounces and is ergonomically
designed to fit in the palm of a user's hand. FLASHBACK has two controls (from
which all major functions are controlled) plus a volume control and two light
emitting diodes ("LED's"), one serving as a power indicator and the other as a
record indicator. The FLASHBACK runs on two AAA batteries.
All the sound information on a FLASHBACK is stored on a removable,
interchangeable, playback/recording media (SOUNDCLIP(TM)) that functions
similar to a tape cassette in a conventional cassette recorder. SOUNDCLIPs are
solid-state non-volatile storage devices developed by the Company. SOUNDCLIPs
utilize state-of-the-art flash memory chips as the storage medium and they
retain recorded information, even in the absence of applied power. This is a
major distinguishing feature of flash memory versus traditional random access
memory ("RAM") chips which require constant power to retain information. Flash
memory has been commercialized by Intel Corporation, from whom the Company is
purchasing flash memory chips, although other suppliers are available. Unlike
recordings on tape media, information stored on a SOUNDCLIP is unaffected in
the presence of magnets and magnetic fields. SOUNDCLIPs are presently available
in 18 and 36 minute capacities but longer capacity SOUNDCLIPs are both feasible
and planned for longer recording applications.
SOUNDCLIPs have been designed to be compatible with type II PCMCIA
(Personal Computer Memory Card International Association) card slots, common to
portable personal computers and personal digital assistant ("PDA") devices
allowing the future connection between voice recordings and computers.
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Additional FLASHBACK Products For Commercial Marketing in Fiscal 1997.
In October 1996 the Company completed testing and commenced initial commercial
shipments of its VOICELINK (formerly named SOUNDLINK) product. VOICELINK is
an accessory to the FLASHBACK product, a computer peripheral which plugs into
the PC card slot common to personal computers and personal digital assistant
(PDA) devices, which incorporate a port for the VOICELINK. Management
anticipates that VOICELINK will allow up to 36 minutes of recorded information
to be downloaded to the hard drive in under two seconds. This introduces the
concept of the voice memo, which can be transmitted to other PCs over existing
networks including the Internet. Recipients will hear the original recording,
including voice quality and inflection, through their computer's sound card,
and by sending voice memos, users save nine tenths of the time it would take to
type the same information. In the near future, as standards are established,
automatic 'voice to text' transcription and automatic language translation is
expected to be possible which will enhance the value of voice memos.
MOBILE OFFICE PACKAGE: In October 1996, the Company also completed
testing and commenced initial commercial shipments of its MOBILE OFFICE
PACKAGE, a bundled package consisting of FLASHBACK, SOUNDCLIP, VOICELINK and PC
(IBM compatible) computer driver software on a floppy disk. The Company is
developing a MacIntosh compatible version although no availability date has yet
been determined by Management.
NORRIS FLASH FILE SYSTEM(TM): A developmental tool that lends itself to
licensing for a broad range of technological applications. The system stores
and manipulates data using a file manager API, and supports compressed voice,
image or video as well as conventional file data. Norris' proprietary methods
compress sound or video into digital form and structure the data specifically
for flash memory. Although flash memory can be difficult to integrate, it is
preferred to other types of solid state memory because of its large capacity,
low power requirements, and internal stability. The feature-rich system was
created to painlessly overcome the intricacies of dealing with flash memory.
Unlike other flash file systems, the Norris system can support an unlimited
number of files, directories, and / or subdirectories, requiring no ATA or
portable computer (PC) Card support hardware or software. The use of flash
memory is seen by the Company as the most practical solution for storing data
on removable and interchangeable modules, given that other memory technologies
either require battery back-up, draw too much power, are physically too large,
or are mechanically or magnetically sensitive. The NFFS is particularly well
suited for use with multimedia data in a flash memory environment, but can be
adapted for use with other types of memory if desired.
MULTI-CHIP MODULE ("MCM"): As part of the development of FLASHBACK, the
Company developed a MCM which it is marketing as a resource to system
developers. The MCM contains a microprocessor, digital signal processor,
firmware and software. Available already sub-assembled in a very compact
format, the MCM integrates all the basic core processing functions needed to
implement a digital recording device. As of December 1996, the Company
estimates that the product development was 70% complete.
PVP-2000(TM): The next generation of FLASHBACK recorder, scheduled to
enter the market the second quarter of calendar 1997. In addition to the
digital recording features showcased in the FLASHBACK, the PVP-2000 will
incorporate a liquid crystal display ("LCD") screen to display the number and
length of messages, a calendar/clock function to set alarms and reminders,
longer recording capacity, and a built-in pager. The PVP-2000 is also expected
to link with PCs and allow downloading of recorded and received material.
Markets for the Company's Products and Technology . The United States
retail market for the Company's consumer products (FLASHBACK, SOUNDCLIP,
VOICELINK, and PVP-2000) includes 32 million mobile professionals, owners,
managers and entrepreneurs. Of those, 71% are computer literate, 45% use
e-mail, 27% use cellular phones, and 28% use pagers. In general, these
professionals spend at least 20% of their time away from the office. They see
portable technology as critical to their success. They drive the usage,
purchase, and acceptance of mobile information technology among their
colleagues, peers and others.
The mobile professional, along with telecommuters and professionals
conducting business out of a small office or home office, are the main markets
for Norris' FLASHBACK recorder and the MOBILE OFFICE PACKAGE comprising
24
<PAGE> 29
a FLASHBACK, SOUNDCLIP, and VOICELINK.
The OEM and licensing market for the Company's products includes
companies and individuals preparing to use flash memory in their systems and/or
products. These potential customers and partners span a number of industries
including mobile telecommunications, mobile computing, office products,
consumer electronics, etc. The MCM module and the NFFS can be incorporated
into two-way voice pagers, digital recorders, cellular in-phone answering
machines or voice mail systems, set top boxes, flight data recorders,
conference phone recorders, surveillance devices, and digital dictation
systems, among others. The common factor in many of these products will be the
need to store data in compressed format, while keeping it accessible and safe.
Another common factor will be a standard form factor such as CompactFlash,
being promoted by the 14+ major corporations, including Norris, SanDisk,
Polaroid, Eastman Kodak, Apple, Canon, Seagate, Hewlett Packard, NEC, Motorola,
Matsushita and Sony, who are members of the CompactFlash Association.
The Company will also private label its consumer products and
proprietary technology to selected name-brand companies in the dictation,
personal computer, consumer electronics, telecommunications, paging, and other
industries.
The Market and Distribution Channels. The Company's current and
planned consumer products, FLASHBACK, SOUNDCLIP, VOICELINK, the MOBILE OFFICE
PACKAGE and PVP-2000 are sold through VARs, resellers and external distributors
specializing in serving the mobile computing and computer peripheral markets.
While existing VARs, resellers and distributors are presently primarily in the
United States, the Company has signed contracts for Asian Pacific distribution,
and is seeking international distribution partners.
The Company's core technology, embodied in the NFFS and MCM, is being
sold through OEM, partnership, private label and licensing agreements
prospected internally by the OEM sales division. The Company's contract
manufacturing services are sold by the Company's management and sales staff.
Manufacturing. The Company also provides contract manufacturing
including component procurement, ICT and ASIC testing, printed circuit board
assembly using surface mount, custom wire-bonding, pin-through-hole technology
assembly, post assembly testing, and final product packaging.
In fiscal 1995 the contract manufacturing services accounted for over
90% of the Company's consolidated revenues. However in fiscal 1996, the Company
reconfigured its operations in light of the FLASHBACK developed products and
significantly downsized its contract manufacturing business which contributed
18% of total consolidated revenues for fiscal 1996. Maintaining its charter as
a revenue center for fiscal 1997, management is pursuing additional outside
contract manufacturing business.
During fiscal 1996, the Company utilized its contract manufacturing
experience to manufacture the FLASHBACK for its own account, from parts and
electronic components purchased from regular distribution channels.
With the establishment of manufacturing as a separate revenue center,
the Company plans on completing a make versus buy analysis prior to the
production of each new product. The Company will review alternatives for
contracting with other manufacturing facilities to produce its products and
will select, when warranted, organizations who will provide a lower unit
product cost than internal manufacturing, a secondary source of supply, and/or
additional capacity.
Major Customers. During the fiscal year ended March 31, 1995, IVAC
Corporation accounted for 31% of total revenues. No other customer accounted
for more than 10% of revenues in fiscal 1995. For the fiscal year ended March
31, 1996, two customers The Sharper Image and The Good Guys accounted for 10%
each of total revenues. The Company has not had enough FLASHBACK marketing
history and experience to determine if it will be reliant on a small number of
customers.
Competition. There is no known competition with regard to a hand held
digital voice recorder that offers the ability
25
<PAGE> 30
to download recorded sound and data information to a computer in compressed
format. However, without the VOICELINK device, the FLASHBACK is frequently
compared to the "note taker" type of products which offer limited recording
capabilities and feature sets. The MOBILE OFFICE PACKAGE will be competing
with companies that sell traditional dictation/transcription devices. The
success of product will depend greatly on how the end user plans to utilize the
product or technology. The Company maintains a clear advantage in its solid
state removable recording technology. If the product is to be utilized for
sending voice messages across the Internet, there is no currently competitive
product.
The Company further believes its existing know-how, issued contracts,
present pending patent applications, customized components, existing
copyrights, trade secrets and potential future patents and copyrights, will be
significant in enabling it to compete successfully.
Barriers to entry by new competitors are not significant and new
competitors in consumer electronics are continually commencing operations. The
technology of electronics and electronic components, features and capabilities
is also rapidly changing, in many cases causing rapid obsolescence of existing
products and technologies. Although the Company believes it has a technological
advantage at the present time, there can be no assurance that it can
successfully exploit or maintain this technological advantage in the future.
Patents, Trade names and Copyrights. The Company owns one patent
protecting its products. The Company has applied for additional multiple
pending patent applications with multiple claims on innovations in audio and
other forms or recording. The Company's software is subject to copyrights and
pending patent applications. The patent position of any item for which the
Company has filed a patent application is uncertain and may involve complex
legal and factual issues. Although the Company is currently prosecuting
multiple patent and trademark applications with the U.S. Patent and Trademark
Office and also has filed certain international patent applications
corresponding to its U.S. patent applications, the Company does not know
whether any of its applications will result in the issuance of patents, or, for
any patents issued, whether they will provide significant proprietary
protection or will be circumvented or invalidated. Additionally, since an
issued patent does not guarantee the right to practice the claimed invention,
there can be no assurance others will not obtain patents that the Company would
need to license or design around in order to practice its patented
technologies, or that licenses that might be required would be available on
reasonable terms. Further there can be no assurance that any unpatented
manufacture, use, or sale of the Company's technology or products will not
infringe on patents or proprietary rights of others. The Company however has
made reasonable efforts in the design and development of its products not to
infringe on other patents.
The Company also relies on trade secret laws for protection of its
intellectual property, but there can be no assurance others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can protect its rights to unpatented trade
secrets.
The Company also has filed a number of trademark applications with the
U.S. Patent and Trademark Office. The Company has received notification of
allowance from the United States Patent Office for use of FLASHBACK as a
registered trade name. The Company believes the trademark on FLASHBACK to be
significant to its operations and the loss or infringement of the name could
have an adverse impact on operations.
The Company intends to make every reasonable effort to protect its
proprietary rights to make it difficult for competitors to market equivalent
competing products without being required to conduct the same lengthy testing
and development conducted by the Company and not use any of the Company's
innovative and novel solutions to the many technical obstacles involved in
portable recording using Flash memory.
Employees. As of December 31, 1996, the Company, through its wholly
owned subsidiary NCI, employed approximately 40 employees of which 21 were
production, four were sales/customer service, five were research and
development, five were accounting/MIS and three were administrative officers.
None of the Company's employees are represented by a labor union, and the
Company is not aware of any current efforts to unionize the employees.
26
<PAGE> 31
Management of the Company considers the relationship between the Company and
its employees to be good.
Government Regulation. The Company's manufacturing operations are
subject to certain federal, state and local regulatory requirements relating to
environmental, waste management, health and safety matters and there can be no
assurance that material costs and liabilities will not be incurred or that past
or future operations will not result in exposure or injury or claims of injury
by employees or the public. Some risk of costs and liabilities related to these
matters are inherent in the Company's business, as with many similar
businesses. Management believes its business is operated in substantial
compliance with applicable environmental, waste management, health and safety
regulations, the violation of which could have a material adverse effect on the
Company. In the event of violation, these requirements provide for civil and
criminal fines, injunctions and other sanctions and, in certain instances,
allow third parties to sue to enforce compliance. In addition, new, modified or
more stringent requirements or enforcement policies could be adopted which
could adversely affect the Company.
Research and Development Costs. For the years ended March 31, 1996 and
1995, the Company spent $1,048,500 and $1,897,000, respectively, on research
and development. The Company anticipates it will continue to devote
substantial resources to research and development activities.
Investment in JABRA. The Company owns 1,033,334 common shares of JABRA
representing 13.2% ownership (11.6% on a fully diluted basis). Accordingly,
the Company exercises no control over the shares of JABRA. JABRA is a private
company engaged in developing, manufacturing and marketing cellular, desktop,
mobile and wireless communications products. JABRA's principal technology is
the patented "all-in-the-ear" EarPHONE technology originally conceived and
developed by the Company when JABRA was a wholly owned subsidiary. As a
minority shareholder in JABRA, which has reported operating losses since its
inception, there can be no assurance as to when or if the Company's remaining
shares can produce any financial return to the Company. The Company's
investment in JABRA shares is carried on its balance sheet at a cost of nil.
CVD continues to have an option (until July 31, 1997) to purchase 300,000
shares at a price of $1.50 per share.
Description of Property. The Company leases 31,000 square feet of
office and manufacturing space, located at 12725 Stowe Drive in Poway,
California. This facility was occupied in late December of 1992. The lease
expires in 2002.
Legal Proceedings. The Company is involved in routine litigation
incidental to the conduct of its business. There are currently no material
pending legal proceedings to which the Company is a party or to which any of
its property is subject.
Miscellaneous. No material portion of the Company's business is
subject, at the election of the United States government, to renegotiation or
termination of contracts of subcontracts.
Compliance with federal, state and local provisions enacted or adopted
regulating the discharge of materials into the environment, or otherwise
related to the protection of the environment, has not had and is not expected
to have material effect on the Company's capital expenditures, earnings and
competitive position.
The Company does not have, and has not had in any of its last three
fiscal years, any significant export sales or operations outside the United
States.
27
<PAGE> 32
MANAGEMENT
Directors and Executive Officers. The executive officers and directors
of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Elwood G. Norris (1) 57 Chairman of the Board, Chief Executive
Officer and Director
Alfred H. Falk 42 President and Director
Robert Putnam (2) 38 Vice President, Secretary and Director
Kathleen E. Terry 43 Chief Financial Officer and Director
Michael W. Joe 31 Director
</TABLE>
____________________________
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Elwood G. Norris - Mr. Norris has been Chairman of the Board of
Directors of the Company since 1988. From 1988 to October 1995, he was
President and Chief Executive Officer. In October 1995 he was appointed Chief
Technology Officer and in January 1997 was reappointed as Chief Executive
Officer. Since 1980, Mr. Norris has also been a Director of American
Technology Corporation ("ATC") and served as its President and Chief Executive
Officer until February 1994. ATC is a publicly held consumer electronic
products company, from which the Company acquired JABRA. Since August 1989, he
has served as director of Patriot Scientific Corporation ("Patriot") and served
as Chairman and Chief Executive Officer until June 1994. From June 1995 until
June 1996 when he was reappointed Chairman, Mr. Norris served as temporary
President and Chief Executive Officer of Patriot, upon the illness and
subsequent death of its Chairman, President and Chief Executive Officer.
Patriot is a public company engaged in the development of microprocessor
technology, digital modem products and radar and antenna engineering. He
invented the patented EarPHONE technology owned by JABRA and is the primary
inventor of the Company's digital recording technology. Mr. Norris devotes
only part-time services to the Company, approximately twenty hours per week.
Alfred H. Falk - Mr. Falk was appointed President and a director of the
Company in January 1997. Prior to his appointment as President, he served as
Vice President, Business Development and Vice President OEM and International
Sales for the Company. Before joining the Company, Mr. Falk was with Resources
Internationale where he served as Director of U.S. Sales. From 1988 to 1993,
Mr. Falk was the Manager, OEM Sales for PCPI in San Diego. Mr. Falk was also
an Account Manager at DH Technology. Mr. Falk attended Palomar College in San
Marcos and Foothill College in Los Altos, California.
Robert Putnam - Mr. Putnam was appointed Secretary of the Company in
March 1988, and Vice President in April 1993. He was appointed a director of
the Company in 1995. He has been a director of ATC since 1984 and also served
as Secretary/Treasurer until February 1994 when he was appointed president and
Chief Executive Officer of ATC. He has also served as Secretary/Treasurer and
a director of Patriot since 1989. Mr. Putnam obtained a B.A. degree in Mass
Communications/Advertising from Brigham Young University in 1983. Mr. Putnam
devotes only part-time services to the Company, approximately ten hours per
week.
28
<PAGE> 33
Kathleen E. Terry - Ms. Terry joined the Company as Chief Financial
Officer in May 1996 and was appointed a director in January 1997. From March
1995 to May 1996, she was Chief Financial Officer at BioSafety Systems Inc.
From April 1992 to March 1995, Ms. Terry held the positions of Corporate
Secretary and Chief Financial Officer at IRT Corporation. Prior to joining IRT
Corporation, Ms. Terry was a co-founder and Vice President of Finance for
Health Vu from May 1991 to March 1992. Previous positions included executive
finance positions with Emerald Systems Corporation, Carlisle Corporation and
M/A-COM Telecommunications. Ms. Terry obtained her BS in accounting from San
Diego State University, her public accounting experience with KPMG-Peat
Marwick, and is a certified public accountant.
Michael W. Joe - Mr. Joe was elected as a director in December 1996.
Since 1994, Mr. Joe has been a Managing Director of Klein Investment Group,
L.P. (formerly Iacocca Capital Partners, L.P.) and a Vice President of ICG,
Inc., the General Partner of Klein Investment Group, L.P., Klein Investment
Group, L.P. is an investment and merchant bank originally formed by Lee
Iacocca, retired Chairman of Chrysler Corporation, two other partners and the
Jeffries Group, Inc. Prior to joining Klein Investment Group, L.P., Mr. Joe
was a Manager of Strategic Planning for the Walt Disney Company from 1991 to
1994, where he specialized in new business development and acquisitions for the
Company's film entertainment division, and from 1987 to 1989 was an investment
banker with Salomon Brothers Inc. Mr. Joe holds a Master of Business
Administration from the Wharton School at the University of Pennsylvania and a
Bachelor of Commerce from Queen's University in Canada.
Executive Compensation. The following table sets forth for the fiscal
years ended March 31, 1996, 1995 and 1994, the cash compensation of the Chief
Executive Officer and the four most highly compensated executive officers of
the Company who received cash compensation in excess of $100,000 in that year
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long Term All Other
Compensation Compensation Compensation
------------ ------------ ------------
Options
(# of Shares)
Name and Fiscal -------------
Principal Position Year Salary Bonus
------------------ ---- ------ -----
<S> <C> <C> <C> <C>
R. Gordon Root, President & 1996 $85,615 $20,000(1) 150,000 -0-
Chief Executive Officer 1995 $-0- -0- -0- -0-
1994 $-0- -0- -0- -0-
Elwood G. Norris, Chairman 1996 $163,500 -0- 400,000 -0-
and Chief Technology 1995 $120,384 -0- -0- -0-
Officer 1994 $ 47,944 -0- 300,000(2) -0-
</TABLE>
(1) Amount stated reflects fair market value of 13,333 common shares as of
the date of grant.
(2) During the fiscal year ended March 31, 1994, options on a total of
192,500 common shares granted in 1993 were repriced and 107,500 new
options were granted to Mr. Norris.
The following table sets forth information with respect to options to
purchase shares of the Company's Common Stock granted in the fiscal year ended
March 31, 1996 to the Chief Executive Officer and the Named Executive Officer.
29
<PAGE> 34
STOCK OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
- -----------------------------------------------------------------------------------------
% of Total
Options
Granted to Exercise
Options Employees Price (per Expiration
Name Granted(#) in Fiscal 1996 share Date
---- ---------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
R. Gordon Root 150,000 15.6% $1.50 10/09/1999
Elwood G. Norris 400,000 41.5% $3.38 4/03/2000
</TABLE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
There were no options exercised by the Named Executive Officers during
the fiscal year ended March 31, 1996. The following table provides information
on unexercised options at March 31, 1996:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options At In-the-Money Options At
March 31, 1996 March 31, 1996
-------------- --------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
R. Gordon Root 50,000 100,000 $-0- $-0-
Elwood G. Norris 700,000 -0- $-0- $-0-
</TABLE>
The Company has not awarded stock appreciation rights to any employee
of the Company and has no long-term incentive plans, as that term is defined in
United States Securities and Exchange Commission regulations. The Company has
no defined benefit or actuarial plans covering any person.
Compensation of Directors The Company has no other arrangements to pay
any direct or indirect remuneration to any directors of the Company in their
capacity as directors other than in the form of reimbursement of expenses for
attending directors' or committee meetings. However, directors have received
in the past and may receive in the future stock or options pursuant to the
Company's stock option plans. No options were issued to non-employee directors
during the fiscal year ended March 31, 1996.
Employment Contracts. In September 1995, the Company entered into an
employment agreement with Elwood G. Norris, the Company's former President and
current Chief Executive Officer and Chief Technology Officer. The employment
agreement provides for payment of a base salary of $115,000 per year until
October 31, 1997, when the base salary shall automatically increase 10% per
year. The employment agreement, which terminates on September 30, 1999,
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.
30
<PAGE> 35
CERTAIN TRANSACTIONS
Elwood Norris, Chairman and Chief Technology Officer of the Company, is
also a director of ATC. He is the beneficial owner of 3,281,475 shares of ATC
(representing approximately 38% of its issued and outstanding capital) and
Robert Putnam, the Vice President/Secretary and a director of the Company is
also a director, President and Chief Executive Officer of ATC. He is the
beneficial owner of 620,000 shares of ATC (representing approximately 8% of its
issued and outstanding shares).
During the fiscal year ended March 31, 1996, the Company sublet its
former operating facility comprising approximately 10,800 square feet at 12800
Brookprinter Place, Poway, California to ATC on a month to month basis. During
the fiscal year ended March 31, 1996, ATC paid the Company $60,000 in rent. As
of July 31, 1996, the Brookprinter property was leased to an independent third
party, and the existing lease was terminated. Commencing on April 1, 1996, the
Company commenced providing approximately 2,407 square feet of space at the
Company's 12725 Stowe Drive facility and certain support services to ATC at the
rate of $3,095 per month. The Company believes that the terms of these
arrangements are no less favorable than could be obtained from an independent
and unaffiliated party.
The Company also performs certain contract manufacturing for ATC from
time to time on terms the Company believes are comparable to other contract
manufacturing customers. During the fiscal year ended March 31, 1996,
approximately $68,000 of services were provided by the Company to ATC.
Conflicts of Interest. Certain conflicts of interest now exist and
will continue to exist between the Company and its officers and directors due
to the fact that they have other employment or business interests to which they
devote some attention and they are expected to continue to do so. The Company
has not established policies or procedures for the resolution of current or
potential conflicts of interest between the Company and its management or
management-affiliated entities. There can be no assurance that members of
management will resolve all conflicts of interest in the Company's favor. The
officers and directors are accountable to the Company as fiduciaries, which
means that they are legally obligated to exercise good faith and integrity in
handling the Company's affairs. Failure by them to conduct the Company's
business in its best interests may result in liability to them.
Officer and director Robert Putnam also acts as Treasurer and Secretary
of Patriot where he ultimately reports to the Board of Directors of which Mr.
Norris is Chairman. Mr. Putnam is also President, Chief Executive Officer and
a director of ATC, a company effectively controlled by Mr. Norris. The
possibility exists that these other relationships could affect Mr. Putnam's
independence as a director of the Company. The Company has not provided a
method of resolving this conflict and probably will not do so, partly due to
inevitable extra expenses and delay any measures would occasion and partly
because Mr. Norris and Mr. Putnam do not represent a majority of the Board of
Directors of the Company and do not control the other directors. Mr. Norris
and Mr. Putnam are obligated to perform their duties in good faith and to act
in the best interest of the Company and its shareholders, and any failure on
their part to do so may constitute a breach of their fiduciary duties and
expose them to damages and other liability under applicable law. While the
directors and officers are excluded from liability for certain actions, there
is no assurance that Mr. Norris or Mr. Putnam would be excluded from liability
or indemnified if they breached their loyalty to the Company.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus,
information regarding ownership of Common Stock by each person known by the
Company to be the beneficial owner of more than 5% of the Company's outstanding
Common Stock, by each director and by all executive officers and directors of
the Company as a group. All persons named have sole voting and investment
power over their shares except as otherwise noted.
31
<PAGE> 36
<TABLE>
<CAPTION>
Number of Percent
Name Shares Owned of Class
- ---- ------------ --------
<S> <C> <C>
Elwood G. Norris 1,409,838(1) 6.1%
Robert Putnam 200,658(2) *
Alfred H. Falk 18,000(3) *
Michael W. Joe Nil(4) *
Kathleen E. Terry 10,000 *
All officers and directors
as a group (5 persons) 1,638,496(5) 7.3%
</TABLE>
* Less than 1%
_______________________________________
(1) Includes 225,000 shares owned by ATC as a result of Mr.
Norris' 38% beneficial ownership and presently exercisable
options to purchase 700,000 shares.
(2) Includes presently exercisable options to purchase 169,658
shares.
(3) Consists entirely of presently exercisable options.
(4) Excludes presently exercisable warrants to purchase 907,824
shares owned by Klein Investment Group, L.P., of which Mr. Joe
is a managing director.
(5) Includes presently exercisable options to purchase 1,037,658
shares and the 225,000 shares owned by ATC and attributable to
Mr. Norris.
32
<PAGE> 37
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
Selling Shareholders. Except as set forth below, none of the Selling
Shareholders is currently an affiliate of the Company, and none of them has had
a material relationship with the Company during the past three years.
<TABLE>
<CAPTION>
Beneficial
Ownership and
Percentage of
Beneficial Maximum Number of Common Stock
Ownership of Shares of Common After Giving
Common Stock at Stock Offered for Effect to
Name February 7, 1997(1) Sale Proposed Sale (2)
----------------------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C>
Dina Partners, L.P. 464,000 464,000 0.00
Porter Capital Management 348,000 348,000 0.00
EDJ Ltd. 116,000 116,000 0.00
Irwin Roberts 165,880 165,880 0.00
Stu Zimmerman 87,000 87,000 0.00
Sanwa Bank Trustee for Joe Wizan IRA 82,858 82,858 0.00
Kamren Ghiasi 52,500 52,500 0.00
Privatim Finanz AG 828,572 828,572 0.00
Jerome Moss 414,286 414,286 0.00
Michael Klein 282,821 282,821 0.00
Michael Klein Trustee Under Agreement 82,858 82,858 0.00
dated 12/22/80 Joyce Faye Klein Trust
FBO Michael Klein Issue Trust
Gregory Hookstratten 165,714 165,714 0.00
St. Claire Options Trading, L.P. (3) 941,256 941,256 0.00
JMG Management, Inc. (3) 941,256 941,256 0.00
Iacocca Capital Partners, L.P. (3) 332,263 332,263 0.00
William Elkus (3) 156,876 156,876 0.00
Richard Bertagna (3) 156,876 156,876 0.00
Kolel Zera Kodesh (3) 308,365 308,365 0.00
</TABLE>
33
<PAGE> 38
<TABLE>
<S> <C> <C> <C>
Gross Foundation, Inc. (3) 4,625,474 4,625,474 0.00
Morgen Christiano & Co., LLC (3) 1,541,825 1,541,825 0.00
Milton Klein (3) 185,019 185,019 0.00
U.C. Financial Ltd. (3) 770,912 770,912 0.00
Steve Katznelson (3) 750,560 750,560 0.00
Madison Trading, Inc. (3) 1,020,762 1,020,762 0.00
Klein Investment Group, L.P. (4) 401,924 401,924 0.00
Higham, McConnell & Dunning 150,000 150,000 0.00
Norman Finkelstein 154,000 154,000 0.00
Set Marketing On 48,000 48,000 0.00
- -------------------------
</TABLE>
(1) Based solely upon the review of a shareholder transcript prepared by
the Transfer Agent for the Company as of such date.
(2) Assumes the sale of all shares covered by this Prospectus. There can
be no assurance that any of the Selling Shareholders will sell any or
all of the shares of Common Stock offered by them hereunder.
(3) Beneficial ownership represents the number of shares of Common Stock
issuable upon exercise of warrants beneficially owned by such person,
assuming that a 30% discount to the average sales price per share of
Common Stock for the five trading days preceding February 7, 1997
was used to determine the number of shares of Common Stock into which
the warrants may be exercised. The actual number of shares of Common
Stock offered is subject to adjustment and could be less or more than
the indicated amount depending upon factors which cannot be predicted
by the Company at this time including, among others, application of
exercise provisions based, in part, on market prices of the Common
Stock prevailing during the five trading days immediately preceding
the actual day of exercise.
(4) Beneficial ownership represents the number of shares of common stock
issuable upon exercise of warrants beneficially owned by such person.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 60,000,000
shares of Common Stock $.001 per share par value, and 5,000,000 shares of
preferred stock, $.001 per share par value ("Preferred Stock"). As of
September 30, 1996, there were 22,308,611 shares of Common Stock issued and
outstanding. No shares of Preferred Stock are outstanding.
Common Stock. Holders of Common Stock are entitled to one vote per
share on matters to be voted upon by the shareholders of the Company. Holders
of Common Stock do not have cumulative voting rights; therefore, the holders of
a simple majority of the outstanding shares of Common Stock will have the right
to elect all of the Company's directors. Holders of Common Stock will be
entitled to receive dividends when, as and if declared by the Company's Board
of Directors and to share ratably in the assets of the Company legally
available for distribution to its shareholders in the event of the liquidation,
dissolution or winding up of the Company, in each case subject to the rights of
the holders of any Preferred Stock issued by the Company. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights.
Preferred Stock. The Company's Board of Directors has the authority
without further action by the stockholders of the Company to issue shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions of those shares. The issuance of Preferred Stock
could adversely affect the voting power and economic rights of holders of
Common Stock and could have the effect of delaying, deferring or preventing a
change in control of the Company.
34
<PAGE> 39
Other Outstanding Options and Warrants. At February 7, 1997, there
were options and warrants outstanding under which 12,690,962 shares of Common
Stock (subject to adjustment) were issuable. Of this amount, 1,422,658 shares
are issuable on exercise of various options and warrants issued to employees
and directors of the Company pursuant to compensatory arrangements, 1,770,071
shares are issuable pursuant to warrants issued as compensation for prior
investment banking, lending and other services, and 9,498,233 shares of
Common Stock (subject to adjustment) are issuable to holders of the Warrants.
Outstanding Registration Rights. The Company has entered into
agreements with several of its security holders under which it has granted them
rights under certain circumstances to require the registration under the
Securities Act of shares of Common Stock held by them. Under such agreements,
the holders of certain options and warrants, including the Warrants, have
"demand" rights, to require the Company to file a registration statement on one
occasion, and also have "piggyback" rights, to require inclusion of the
holder's shares in any registration statement filed by the Company. Under such
agreements, the Company typically has the right to reject the piggyback
registration request under certain circumstances, including if the managing
underwriter of the Offering which is the subject of the request so requires.
Delaware Anti-Takeover Law. The Company and its shareholders are
subject to Section 203 of the General Corporation Law of the State of Delaware,
an anti-takeover law. In general, the law prohibits a public Delaware
corporation (such as the Company) from engaging in a "business combination"
within an "interested stockholder" for a period of three years after the date
of the transaction in which the person became an interested stockholder, unless
the business combination is approved in the prescribed manner. "Business
combination" includes merger, asset sales and other transactions resulting in a
financing benefit to the interested stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock.
California Law. The Company may be a "quasi-California corporation"
within the meaning of Chapter 21 of the California Corporations Code. This
would be the case if the average of its property factor, payroll factor and
sales factor (as defined in the California Revenue and Taxation Code) is more
than fifty percent (50%), and more than one-half of its outstanding voting
securities are held of record by persons having addresses in California. If a
corporation is a quasi-California corporation, California law provides that
certain portions of the California Corporations Code shall govern it, to the
exclusion of the law of the true jurisdiction of incorporation (Delaware). One
such provision is Section 708, pertaining to cumulative voting for directors.
Under Section 708, if any shareholder gives notice at a meeting, prior
to voting for directors, of his intention to cumulate his votes, all
shareholders may cumulate their votes in the election for directors; i.e., give
one candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the shareholder's shares are
normally entitled, or distribute the shareholder's votes on the same principle
among as many candidates as the shareholder thinks fit. The candidates
receiving the highest number of affirmative votes, up to the number of
directors to be elected, are the winners.
Transfer Agent. The transfer agent and registrar for the Common Stock
is Interwest Transfer Co., Salt Lake City, Utah.
LEGAL MATTERS
The validity of the securities offered will be passed on for the
Company by Higham, McConnell & Dunning, Laguna Niguel, California. Higham,
McConnell and Dunning owns 150,000 shares of Common Stock and warrants to
acquire an additional 150,000 shares of Common Stock.
35
<PAGE> 40
EXPERTS
The Consolidated Financial Statements of the Company for the years
ended March 31, 1996 and March 31, 1995, respectively, have been audited by
Ernst & Young, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
herein in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
FURTHER INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 with respect to the securities which are
offered by this Prospectus. This Prospectus omits certain information which is
contained in the Registration Statement as permitted by the Rules and
Regulations of the Commission. For further information, reference is made to
the Registration Statement including the exhibits filed therewith, which may be
examined without charge at the Washington, D.C. offices of the Commission and
copies of all or any part thereof may be obtained upon payment of the
Commission's charge for copying. The statement contained in this Prospectus as
to the contents of any contract or other document identified as exhibits in
this Prospectus are not necessarily complete, and in each instance, reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each statement being qualified in any and all respect
by such reference.
36
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Poway, State of California on February 12,
1997.
NORRIS COMMUNICATIONS, INC.
By: /s/ Elwood G. Norris
--------------------------------------------
Elwood G. Norris, Chairman of the Board
________________________
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Position Date
---- -------- ----
<S> <C> <C>
Elwood G. Norris Chairman of the Board, Chief February 12, 1997
- -------------------------- Executive Officer and Director
Elwood G. Norris (principal executive officer)
/s/ Fred Falk President and Director February 12, 1997
- --------------------------
Fred Falk
/s/ Kathleen E. Terry Chief Financial Officer and Director February 12, 1997
- -------------------------- (principal financial and accounting
Kathleen E. Terry officer)
/s/ Robert Putnam Vice President and Director February 12, 1997
- ---------------------------
Robert Putnam
/s/ Michael W. Joe* Director February 12, 1997
- ---------------------------
Michael W. Joe
/s/ Kathleen E. Terry
- --------------------------
* By Kathleen E. Terry,
by Power of Attorney
dated January 15, 1997.
</TABLE>
37
<PAGE> 42
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF THE COMPANY PAGE
Report of Independent Auditors F-1
Comments by Auditors for U.S. Readers on Canada-U.S.
Reporting Conflict F-1
Consolidated Balance Sheets as of March 31, 1996
and 1995 F-2
Consolidated Statements of Operations for the years
ended March 31, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity (Deficiency)
for the years ended March 31, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years
ended March 31, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
Unaudited Interim Consolidated Balance Sheets as of September 30,
1996 and March 31, 1996 (unaudited) F-23
Unaudited Interim Consolidated Statements of Operations for the three
and six months ended September 30, 1996 and 1995 F-24
Unaudited Interim Consolidated Statements of Cash Flows for the
six months ended September 30,1996 and 1995 F-25
Notes to Unaudited Interim Consolidated Financial Statements F-26
1
<PAGE> 43
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
NORRIS COMMUNICATIONS CORP.
We have audited the consolidated balance sheets of NORRIS COMMUNICATIONS CORP.
as at March 31, 1996 and 1995 and the consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at March 31, 1996
and 1995 and the results of its operations and the changes in its financial
position for the years then ended in accordance with accounting principles
generally accepted in the United States.
VANCOUVER, CANADA,
May 24, 1996 (except as to Note 16[b] /s/ ERNST & YOUNG
which is as of June 7, 1996). CHARTERED ACCOUNTANTS
COMMENTS BY AUDITORS FOR U.S. READERS ON
CANADA - U.S. REPORTING CONFLICT
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by a significant uncertainty such as that referred to in
the attached consolidated balance sheets as at March 31, 1996 and 1995 and as
described in Note 1 to the consolidated financial statements. Our report to the
shareholders dated May 24, 1996 (except as to Note 16[b] which is as of June 7,
1996) is expressed in accordance with Canadian reporting standards which do not
permit a reference to such an uncertainty in the auditors' report when the
uncertainty is adequately disclosed in the consolidated financial statements.
VANCOUVER, CANADA,
May 24, 1996 (except as to Note 16[b] /s/ ERNST & YOUNG
which is as of June 7, 1996). CHARTERED ACCOUNTANTS
F-1
<PAGE> 44
NORRIS COMMUNICATIONS CORP.
Continued under the laws of the Yukon Territory, Canada
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
As at March 31
<TABLE>
<CAPTION>
1996 1995
$ $
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS [note 9]
CURRENT
Cash and temporary cash investments 2,843,540 3,291,203
Accounts receivable, less allowance for doubtful
accounts of $11,647 and $210,000, respectively 94,619 152,673
Inventory [note 6] 3,243,245 2,663,403
Prepaid expenses and other 226,436 396,644
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 6,407,840 6,503,923
- ---------------------------------------------------------------------------------------------------------------------
Property and equipment [note 7] 1,359,791 1,742,796
Purchased goodwill, net of accumulated amortization of
$427,965 and $309,646, respectively -- 354,955
Other intangible assets, net of accumulated amortization
of $24,896 and $17,451, respectively 49,513 56,958
- ---------------------------------------------------------------------------------------------------------------------
7,817,144 8,658,632
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Demand loan payable [note 9] 2,185,546 3,000,000
Accounts payable, trade 2,554,209 1,234,574
Other accounts payable and accrued liabilities 443,225 410,539
Current portion of capital lease obligations [note 12] 168,831 193,229
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,351,811 4,838,342
- ---------------------------------------------------------------------------------------------------------------------
Convertible notes payable [note 13] 3,000,000 --
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,351,811 4,838,342
- ---------------------------------------------------------------------------------------------------------------------
Commitments and contingencies [notes 1 and 12] STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, no par value, authorized 30,000,000 and
20,000,000 shares, respectively; 15,103,703 and 11,616,814
shares outstanding, respectively [notes 11, 13 and 16] 21,762,337 17,849,751
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (23,889,320) (15,621,777)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (534,667) 3,820,290
- ---------------------------------------------------------------------------------------------------------------------
7,817,144 8,658,632
=====================================================================================================================
</TABLE>
See accompanying notes
On behalf of the Board:
Director Director
F-2
<PAGE> 45
NORRIS COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
Year ended March 31
<TABLE>
<CAPTION>
1996 1995
$ $
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES [note 14] 1,328,502 5,593,081
Cost of sales [note 14] 4,413,814 6,729,320
- -------------------------------------------------------------------------------
Gross profit (loss) (3,085,312) (1,136,239)
- -------------------------------------------------------------------------------
OPERATING EXPENSE (INCOME)
Selling and administrative 3,574,597 3,737,704
Research and related expenditures 1,048,540 1,896,809
Interest expense 356,429 320,257
Interest income (33,971) (17,203)
Write-down of purchased goodwill 236,636 --
Write-down of intangible assets [note 15] -- 68,550
- -------------------------------------------------------------------------------
5,182,231 6,006,117
- -------------------------------------------------------------------------------
Operating loss (8,267,543) (7,142,356)
Provision for income taxes [note 10] -- --
- -------------------------------------------------------------------------------
LOSS FOR THE YEAR (8,267,543) (7,142,356)
===============================================================================
LOSS PER SHARE (.63) (.88)
===============================================================================
</TABLE>
See accompanying notes
F-3
<PAGE> 46
NORRIS COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIENCY)
(EXPRESSED IN U.S. DOLLARS)
Year ended March 31
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------- CONTRIBUTED ACCUMULATED
SHARES AMOUNT SURPLUS DEFICIT
# $ $ $
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994 7,696,814 10,781,155 1,592,316 (8,479,421)
Stock issued under stock option plan 20,000 40,900 -- --
Issuance of common stock 3,900,000 7,027,696 -- --
Loss for the year -- -- -- (7,142,356)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 11,616,814 17,849,751 1,592,316 (15,621,777)
Stock issued as compensation expense 13,333 20,000 -- --
Stock issued under stock option plan 15,000 30,303 -- --
Stock issued as payment for
refinancing fee [note 9] 75,000 101,250 -- --
Stock issued as payment for professional
services rendered 215,842 319,498 -- --
Issuance of common stock 3,167,714 3,441,535 -- --
Loss for the year -- -- -- (8,267,543)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 15,103,703 21,762,337 1,592,316 (23,889,320)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
F-4
<PAGE> 47
NORRIS COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
Year ended March 31
<TABLE>
<CAPTION>
1996 1995
$ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Loss for the year (8,267,543) (7,142,356)
Adjustments to reconcile loss to net cash used by
operating activities:
Depreciation and amortization 524,399 596,327
Loss on disposal of property and equipment 38,550 126,032
Write-down of intangible assets -- 68,550
Write-down of purchased goodwill 236,636 --
Professional services paid by issuance of common stock 319,498 --
Refinancing fee paid by issuance of common stock 101,250 --
Compensation paid by issuance of common stock 20,000 --
Changes in assets and liabilities:
Accounts receivable 58,054 431,895
Inventory (579,842) (2,077,320)
Prepaid expenses and other 170,208 (328,579)
Accounts payable, trade 1,319,635 338,931
Other accounts payable and accrued liabilities 32,686 194,038
- --------------------------------------------------------------------------------------------
CASH (USED IN) OPERATING ACTIVITIES (6,026,469) (7,792,482)
- --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (84,932) (247,888)
Proceeds on disposal of property and equipment 30,752 180,645
- --------------------------------------------------------------------------------------------
CASH (USED IN) INVESTING ACTIVITIES (54,180) (67,243)
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances (repayments) under demand loan payable (814,454) 2,720,000
Principal payments on capital lease obligations (24,398) (65,944)
Issuance of convertible notes payable 3,000,000 --
Repayment of note payable -- (31,250)
Proceeds from issuance of shares 3,471,838 7,068,596
- --------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 5,632,986 9,691,402
- --------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS DURING THE YEAR (447,663) 1,831,677
Cash and temporary cash investments, beginning of year 3,291,203 1,459,526
- --------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF YEAR 2,843,540 3,291,203
============================================================================================
</TABLE>
See accompanying notes
F-5
<PAGE> 48
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Norris Communications Corp. (the "Company") was incorporated in the Province of
British Columbia, Canada on February 11, 1988 and is engaged, through its
wholly-owned U.S. subsidiary, in the development, manufacture and marketing of
electronic products. On November 22, 1994, the Company continued its
jurisdiction to the Yukon Territory, Canada.
The consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States on
a going concern basis, which contemplates the realization of assets and the
discharge of liabilities in the normal course of business for the foreseeable
future.
The Company has incurred significant losses and negative cash flow from
operations in each of the last three years and has an accumulated deficit of
$23,889,320 at March 31, 1996 [1995 - $15,621,777]. The Company's operational
plan for fiscal year 1997 contemplates developing markets for its proprietary
products and continued investment in research and related expenditures. The
Company's ability to continue as a going concern is in substantial doubt and is
dependent upon achieving a profitable level of operations and, if necessary,
obtaining additional financing.
Management of the Company has undertaken steps as part of a plan to improve the
financial position and operations with the goal of sustaining Company operations
for the next twelve months and beyond. These steps include (i) seeking
additional equity through private placements and attempting to arrange lines of
credit; (ii) re-focusing the Company on a family of products, technology
components and software and not having the Company be reliant on a single
recorder product; (iii) expanding the retail product offering by introducing a
computer interface VoiceLink which allows the FLASHBACK recorder to interact
with a personal computer, and communicate with other computers via the Internet;
(iv) repositioning the core retail product, the FLASHBACK recorder, at the
computer peripheral and telephony markets; (v) building a sales and marketing
infrastructure to focus on the computer retail and Original Equipment
Manufacturer markets; and (vi) upgrading and expanding the management team.
These consolidated financial statements do not give effect to any adjustments
which would be necessary should the Company be unable to continue as a going
concern and therefore be required to realize its assets and discharge its
liabilities in other than the normal course of business and at amounts different
from those reflected in the accompanying consolidated financial statements.
F-6
<PAGE> 49
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Differences between accounting principles generally accepted in the United
States and Canada are summarized below.
Under accounting principles generally accepted in Canada, costs relating to debt
financing are deferred and amortized over the term of the related debt.
Accounting principles generally accepted in the United States provide that costs
relating to debt financing may be treated as a charge to operations in the
period incurred.
Under accounting principles generally accepted in Canada, the release of escrow
shares by the Vancouver Stock Exchange is not considered compensatory. To
conform to accounting principles generally accepted in the United States,
compensation expense of $3,445,750 related to the release of escrow shares was
recorded in 1993. Compensation expense was determined based on the difference
between the fair value of the shares at the time they were placed in escrow and
their fair value, determined to be the average share price in the year the
criteria were met, at the time the criteria triggering the release were met. The
final release of 1,350,000 shares on December 8, 1992 was valued at $3,445,750
as a non-cash compensation expense transaction.
Under accounting principles generally accepted in Canada, the sale of shares of
a subsidiary, and the issuance of shares by the subsidiary, to parties outside
the consolidated group, results in a credit (charge) to operations equal to the
difference between proceeds and the change in the parent company's interest in
the underlying equity of the shares of the subsidiary. Accounting principles
generally accepted in the United States require such amounts to be treated as
contributed surplus where there is not reasonable assurance of realization of
the gain.
Under accounting principles generally accepted in Canada, common share issue
costs are presented as a charge to accumulated deficit. Accounting principles
generally accepted in the United States require that common share issue costs be
deducted from the proceeds of issue.
F-7
<PAGE> 50
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
Loss for the year and basic loss per share under accounting principles generally
accepted in Canada would be:
<TABLE>
<CAPTION>
1996 1995
$ $
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Loss for the year, as reported (8,267,543) (7,142,356)
Adjustments:
Costs of debt financing 321,629 61,110
- -----------------------------------------------------------------------------------------
Loss for the year, as adjusted (7,945,914) (7,081,246)
=========================================================================================
Weighted average number of common shares outstanding 13,065,095 8,097,624
=========================================================================================
Basic loss per share .61 .87
=========================================================================================
</TABLE>
Consolidated balance sheet items under accounting principles generally accepted
in Canada would be:
<TABLE>
<CAPTION>
1996 1995
$ $
- -------------------------------------------------------------------------------
<S> <C> <C>
Common stock 19,005,688 14,905,737
Contributed surplus -- --
Accumulated deficit (19,157,616) (11,024,337)
===============================================================================
</TABLE>
Other differences between accounting principles generally accepted in the United
States and Canada relate to presentation of certain financial information. In
addition, for all years presented, non-cash investing and financing activities
would be presented in the consolidated statements of cash flows [see Note 5].
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company and
its wholly-owned U.S. subsidiaries, Norris Communications, Inc. in 1996 and
American Surface Mounted Devices, Inc. ("ASMD") and Comp General Corporation
("CGC") in 1995, all based in San Diego County, California. On April 1, 1995,
ASMD was merged into CGC, which changed its name to Norris Communications,
Inc., under the laws of the State of California. All significant intercompany
accounts and transactions have been eliminated.
F-8
<PAGE> 51
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
RECLASSIFICATIONS
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform with the 1996 presentation.
TEMPORARY CASH INVESTMENTS
Temporary cash investments, consisting of commercial paper with maturities of
less than 90 days, certificates of deposit and money market funds, are recorded
at cost, which approximates market value.
TRANSLATION OF FOREIGN CURRENCIES
These consolidated financial statements are presented in United States dollars.
The Canadian parent is considered to have the United States dollar as the
functional currency. Monetary assets and liabilities are translated at the rate
in effect at the balance sheet date. Other balance sheet items and revenues and
expenses are translated at the rates prevailing on the respective transaction
dates. Gains and losses on foreign currency transactions, which have not been
material, are reflected in the consolidated statements of operations.
EARNINGS PER SHARE
Primary and fully diluted earnings per share amounts are based on the weighted
average number of common shares and common stock equivalents outstanding for
each year.
INVESTMENT
The Company's 1,800,000 shares or 23.1% investment in JABRA Corporation
("JABRA") is accounted for using the cost method [see Note 8].
REVENUE RECOGNITION
Revenue is recognized on the basis of shipment of products or delivery of
services.
RESEARCH AND RELATED EXPENDITURES
Research and related expenditures are charged to operations as incurred.
F-9
<PAGE> 52
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
INVENTORY
Inventory of raw materials is recorded at the lower of cost and replacement
cost. Inventory of work in process and finished goods is recorded at the lower
of cost and net realizable value. Cost is determined on a first-in, first-out
basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization are
provided on the straight-line method over the estimated useful lives of the
related assets, ranging from 3 to 7 years or, in the case of leasehold
improvements, over the lesser of the useful life of the related asset or the
lease term. When assets are sold or retired, the cost and accumulated
depreciation are removed from the respective accounts and any gain or loss on
the disposition is credited or charged to income. Maintenance and repair costs
are charged to operations when incurred.
GOODWILL
Purchased goodwill was created upon acquisition of subsidiaries. The goodwill
pursuant to the acquisition of subsidiaries is amortized over a four year
period. Goodwill is written down to fair value when declines in value are
considered to be other than temporary based upon undiscounted cash flows of the
respective subsidiary.
OTHER INTANGIBLE ASSETS
Other intangible assets include government bidding rights and rights to
technology, which are amortized over a 10 year period, and costs relating to
obtaining patents, which are deferred when management is reasonably certain the
patent will be granted. Upon granting of the patent, such costs will be
amortized to operations over the life of the patent. If management determines
that development of products to which patent costs relate is not reasonably
certain, or that deferred patent costs exceed net recoverable value, such costs
are charged to operations.
LEASES
Leases entered into are classified as either capital or operating leases. Leases
which substantially transfer all benefits and risks of ownership of property to
the Company are accounted for as capital leases. At the time a capital lease is
entered into, an asset is recorded together with its related long-term
obligation to reflect the purchase and financing.
Rental payments under operating leases are expensed as incurred.
F-10
<PAGE> 53
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets" and SFAS No. 123, "Accounting for Stock Based
Compensation." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reported at the lower of their carrying amount or
their estimated recoverable amount. The adoption of this statement by the
Company is not expected to have an impact on the financial statements. SFAS No.
123 encourages the accounting for stock-based employee compensation programs to
be reported within the financial statements on a fair value based method. If the
fair value based method is not adopted, then the statement requires pro-forma
disclosure of net income and earnings per share as if the fair value based
method had been adopted. It is not expected that the Company will adopt the fair
value based method of accounting for stock options, which is encouraged by SFAS
No. 123, but rather will continue to account for such stock options utilizing
the intrinsic value based method as is allowed by the statement. Both statements
are effective for fiscal years beginning after December 15, 1995.
3. CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade receivables. The Company has
$2.2 million in a money market fund at Merrill Lynch, Pierce, Fenner & Smith
Inc.
Concentration of credit risk with respect to trade receivables exists at year
end as approximately $27,000 or 26% of the outstanding accounts receivable
related to three customers. The Company performs ongoing credit evaluations of
its customers and maintains allowances for potential credit losses which, when
realized, have been within the range of management's expectations.
4. MAJOR CUSTOMERS
The Company operates in one major line of business, the development, manufacture
and marketing of electronic products. Sales to three major customers comprise
10%, 10% and 9%, respectively, of revenues in 1996. Sales to two major customers
comprise 31% and 9%, respectively, of revenues in 1995.
F-11
<PAGE> 54
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
5. STATEMENT OF CASH FLOWS
The Company had non-cash operating and financing activities and made cash
payments as follows:
<TABLE>
<CAPTION>
1996 1995
$ $
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Non-cash financing activities
Professional services paid by issuance of common stock 319,498 --
Refinancing fee paid by issuance of common stock 101,250 --
Compensation paid by issuance of common stock 20,000 --
Cash payments for interest and income taxes were as follows:
Interest 356,429 320,257
Income taxes -- --
========================================================================================
</TABLE>
6. INVENTORY
<TABLE>
<CAPTION>
1996 1995
$ $
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials 1,569,812 1,312,935
Work in process 194,437 462,602
Finished goods 1,478,996 887,866
- --------------------------------------------------------------------------------
3,243,245 2,663,403
================================================================================
</TABLE>
During 1995, the Company introduced a new electronic product for sale in the
retail market. The amount of revenues to date from the sale of the electronic
product have not been significant. In addition, the Company's experience with
sales returns and warranty provisions has been limited. At March 31, 1996,
inventory of the Company is substantially all comprised of four successive
models of the electronic product.
Management of the Company has established, in the normal course of business,
provisions for sales returns, warranty and obsolescence in respect of sales to
March 31, 1996 and inventory as at March 31, 1996. In addition, management of
the Company has developed programs for the sale of earlier models of the
electronic product which are expected to result in the sale of this inventory in
the near term. No estimate can be made of the range of amounts of loss that are
reasonably possible should actual experience exceed estimates for sales
returns or warranty or should the programs to sell inventory not be successful.
F-12
<PAGE> 55
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
$ $ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996
Computer hardware and software 402,794 231,196 171,598
Furniture and equipment 131,755 93,643 38,112
Leasehold improvements 589,979 203,203 386,776
Machinery and equipment 1,308,116 675,904 632,212
Machinery and equipment under capital
leases 452,960 321,867 131,093
- -----------------------------------------------------------------------------------------------------
2,885,604 1,525,813 1,359,791
=====================================================================================================
1995
Computer hardware and software 362,986 157,539 205,447
Furniture and equipment 130,902 71,800 59,102
Leasehold improvements 584,550 141,374 443,176
Machinery and equipment 1,277,378 501,303 776,075
Machinery and equipment under capital
leases 636,008 377,012 258,996
- -----------------------------------------------------------------------------------------------------
2,991,824 1,249,028 1,742,796
=====================================================================================================
</TABLE>
8. INVESTMENT IN JABRA
The Company owns 1,800,000 common shares of JABRA or 23.1% of JABRA's common
shares with a carrying value of $Nil on the Company's consolidated balance
sheet. The Company has granted an option to the lender, expiring July 31, 1997,
to purchase 300,000 of JABRA's common shares at a price of $1.50 per share
pursuant to the Company's demand loan payable [see Note 9]. Due to the fact that
the Company has no direct involvement in the operations of JABRA, is not active
at the Board of Directors level and owns, on a fully diluted basis,
approximately 20.1% of JABRA with additional dilution possible and beyond its
control, management is of the opinion that the Company does not exert
significant influence over the operations of JABRA, and therefore accounts for
its investment in JABRA under the cost method effective July 15, 1993.
F-13
<PAGE> 56
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
9. DEMAND LOAN PAYABLE
During 1995, the Company negotiated a demand loan payable, as amended, of $3.5
million, bearing interest at prime plus 2%, repayable on demand and expiring on
July 31, 1995. In connection with the demand loan payable, as amended, share
warrants providing the right to acquire 450,000 common shares of the Company on
or before June 20, 1999 at a price of $4.00 per share were issued. During 1996
and in the period subsequent thereto, the demand loan payable was amended on
August 1, 1995, February 1, 1996 and April 1, 1996. Pursuant to the various
amendments: the expiry date was extended to October 31, 1996; the Company
granted an additional share warrant providing the right to acquire 200,000
common shares of the Company on or before September 1, 1998 at a price of $2.00
per share; the existing share warrants providing the right to acquire 450,000
common shares of the Company on or before June 20, 1999 were repriced to $1.75
per share from $4.00 per share; 75,000 common shares of the Company were issued
at an agreed price of $1.35 per share; the Company granted an option to acquire
up to 300,000 common shares of JABRA on or before July 31, 1997 at a price of
$1.50 per share; 33% of the net proceeds from any equity financing prior to
April 1, 1996 and 50% of the net proceeds from any equity financing thereafter
must be used to pre-pay the demand loan payable; and the lender may convert at
any time prior to repayment all or any portion of the outstanding principal
balance of the demand loan payable, including accrued interest thereon, into
common shares of the Company at the lesser of $1.50 per share or following the
occurrence of an event of default, the higher of $1.00 per share and the average
closing price for the 20 days preceding the date of notice of an event of
default.
The demand loan payable is collateralized by a first security interest covering
accounts recoverable, inventory, property and equipment, and other assets, and a
specific pledge of the Company's shares in NCI and JABRA.
F-14
<PAGE> 57
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
10. INCOME TAXES
The Company accounts for income taxes under the liability method required by
FASB Statement No. 109, "Accounting for Income Taxes". Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. For financial statement purposes, a change
in valuation allowance of $2,632,000 has been recognized to offset certain
deferred tax assets for which realization is uncertain. Significant components
of the Company's deferred tax liabilities and assets as of March 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995
$ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Tax over book depreciation 85,000 39,000
- -----------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 85,000 39,000
- -----------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Bad debt reserve 5,000 86,000
Inventory capitalization 108,000 92,000
Inventory reserve 20,000 103,000
Net operating loss carryforwards 5,912,000 3,047,000
Warranty reserve 8,000 78,000
Other 83,000 52,000
- -----------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 6,136,000 3,458,000
Valuation allowance for deferred tax assets (6,051,000) (3,419,000)
- -----------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS 85,000 39,000
- -----------------------------------------------------------------------------------------------------
NET DEFERRED TAX -- --
=====================================================================================================
</TABLE>
The net provision for income taxes in 1996 and 1995 is $Nil as the Company
incurred losses in those years. Pre-tax income (loss) from Canadian operations
was approximately $1,035,000 in 1996 and $1,424,000 in 1995.
F-15
<PAGE> 58
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
10. INCOME TAXES (CONT'D.)
A reconciliation between federal statutory income tax rates and the effective
tax rate of the Company at March 31 is as follows:
<TABLE>
<CAPTION>
LIABILITY METHOD
- -----------------------------------------------------------------------------------------------------
1996 1995
% %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. federal statutory rate 35.0 35.0
U.S. federal net operating loss rate (35.0) (35.0)
U.S. state tax rate -- --
Canadian statutory rate 44.1 45.1
Canadian non-capital loss rate (44.1) (45.1)
- -----------------------------------------------------------------------------------------------------
Effective rate on operating loss -- --
=====================================================================================================
</TABLE>
The Company has U.S. net operating loss carryforwards available at March 31,
1996 of approximately $9,462,000 and $4,991,000 for federal and state tax
purposes, respectively, to offset income in future years. These carryforwards
will begin to expire in the years 2005 and 1998, respectively, unless previously
utilized.
The tax attributes of the Company identified above may be subject to limitation
arising from changes of ownership over the three year statutory testing period.
The Company has non-capital losses available for Canadian income tax purposes
aggregating approximately $2,081,500. The non-capital losses expire as follows:
<TABLE>
<CAPTION>
$
- -----------------------------------------------------------------------------------------------------
<S> <C>
1998 9,300
2002 1,102,900
2003 969,300
- -----------------------------------------------------------------------------------------------------
2,081,500
=====================================================================================================
</TABLE>
No provision has been made in the accounts for the future tax benefits that may
result from the utilization of these losses as their realization is not certain.
F-16
<PAGE> 59
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
11. SHARE CAPITAL
STOCK OPTIONS
The Company maintains two stock option plans. The 1992 Stock Option Plan is a
non-qualified stock option plan which entitles certain directors and key
employees to purchase common shares of the Company. A maximum of 10% of
outstanding common shares are authorized for grant under the Plan. Options are
granted at a price not less than fair market value at the date of grant, and are
subject to approval of the Board of Directors. The 1994 Stock Option Plan was
approved by the shareholders on September 29, 1994 and entitles certain
directors, key employees and consultants of the Company to purchase common
shares of the Company. The 1994 Plan covers a maximum aggregate of 500,000
shares. The 1994 Plan provides for the granting of options which either qualify
for treatment as incentive stock options or non-statutory stock options.
Options granted during 1996 were under the 1994 and 1992 Stock Option Plan.
Options granted during 1995 were under the 1992 Stock Option Plan.
The following table summarizes stock option transactions:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, beginning of year 694,658 564,318
Granted 843,000 185,840
Exercised (15,000) (20,000)
Expired (23,000) --
Cancelled (6,000) (35,500)
- -----------------------------------------------------------------------------------------------------
Outstanding, end of year 1,493,658 694,658
=====================================================================================================
</TABLE>
Options covering 843,000 common shares were granted in 1996 at a per share price
ranging from US $1.50 to US $3.375. Options covering 185,840 common shares were
granted in 1995 at a per share price of US $3.65.
All outstanding options were exercisable at March 31, 1996, except for 292,000
options which vest over varying periods of up to two years. The options are
exercisable at prices ranging from US $2.09 to US $3.65 and expire over the
period to April 2000.
Options covering 15,000 common shares were exercised in 1996 at a per share
price of $2.02 ($2.84 Cdn.). Options covering 20,000 common shares were
exercised in 1995 at a per share price of $2.05 ($2.84 Cdn.).
F-17
<PAGE> 60
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
11. SHARE CAPITAL (CONT'D.)
SHARE WARRANTS
The Company has outstanding share warrants as of March 31, 1996, in connection
with private placements, convertible debentures, equipment leasing and
establishing and amending the demand loan payable, entitling the holders to
purchase one common share for each warrant held as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
WARRANTS $ EXPIRATION DATE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
200,000 2.00 September 1998
33,750 4.00 June 1999
450,000 1.75* July 1999
82,100 4.00 August 1999
106,986 2.01** February 2000
88,014 2.01** March 2000
128,067 1.25** October 2005
- -----------------------------------------------------------------------------------------------------
1,088,917
=====================================================================================================
</TABLE>
* Repriced to $1.75 per share from $4.00 per share pursuant to amendments to
demand loan payable [see Note 9].
** These warrants contain provisions for adjustment for dilutive events. The
exercise prices and where applicable, the number of warrants, have been
adjusted to reflect any such events or agreements through March 31, 1996.
All warrants are denominated in U.S. dollars.
F-18
<PAGE> 61
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
12. COMMITMENTS
The Company has two leases for office space in Poway, California which are
subject to annual increases based on the CPI index. The leases expire in 1998
and 2002. The minimum operating lease commitments include future rent payments
for the office lease which expires in 1998, a portion of which has been sublet
on a month-to-month basis to a related company at cost. Office rent expense for
the years ended March 31, 1996 and 1995 was $271,620 and $307,735, respectively.
In addition, the Company leases certain equipment under capital leases. The cost
of the assets under capital lease is recorded with machinery and equipment. All
assets under capital lease are subject to lien by the lessor. The capital lease
bears interest at 18% per annum.
Subsequent to the transfer of one of its lease obligations to the Federal
Deposit Insurance Corporation, the Company has had difficulty in making payments
to the appropriate party. As such, the Company is not current on its lease
payments and, in accordance with the terms of the lease, has classified the
entire remaining obligation as a current liability.
<TABLE>
<CAPTION>
Minimum commitments are as follows: OPERATING CAPITAL
LEASES LEASES
$ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
YEAR ENDING MARCH 31
1997 809,000 166,621
1998 593,000 2,954
1999 318,000 1,231
2000 221,000 --
2001 221,000 --
Thereafter 166,000 --
- -----------------------------------------------------------------------------------------------------
Total minimum lease payments 2,328,000 170,806
- ------------------------------------------------------------------------------
Less amounts representing interest 1,975
- -----------------------------------------------------------------------------------------------------
Obligations under capital leases 168,831
Less current portion 168,831
- -----------------------------------------------------------------------------------------------------
--
=====================================================================================================
</TABLE>
F-19
<PAGE> 62
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
13. CONVERTIBLE NOTES PAYABLE
<TABLE>
<CAPTION>
1996 1995
$ $
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
7% convertible notes payable, due March 1999 3,000,000 --
=====================================================================================================
</TABLE>
The convertible notes payable are convertible at the option of the holder into
common shares of the Company at any time after May 4, 1996. The convertible
notes payable are convertible at the lesser of: $1.765 for each common share; or
a 30% discount to the 5 day moving average price of the common shares on the day
prior to conversion.
During the period May 13, 1996 to May 24, 1996, the holders of the convertible
notes payable exercised their options and converted all of the convertible notes
payable, together with accrued interest thereon, into 4,336,167 common shares of
the Company at conversion prices per share ranging from US $0.981 to US $1.269.
Proforma convertible notes payable, total liabilities, common stock and total
stockholders' equity (deficiency) as at March 31, 1996 after giving effect to
the above conversion would be:
<TABLE>
<CAPTION>
1996 1995
$ $
- -----------------------------------------------------------------------------------------------------
(Proforma) (Audited)
<S> <C> <C>
Convertible notes payable -- 3,000,000
Total liabilities 5,351,811 8,351,811
Common stock 24,762,337 21,762,337
Total stockholders' equity (deficiency) 2,465,333 (534,667)
=====================================================================================================
</TABLE>
F-20
<PAGE> 63
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
14. BARTER TRANSACTION
During 1996, the Company sold 7,000 units of product to an independent media
trading firm in exchange for $1,172,500 of media trade credits and 50% of the
cash proceeds realized on the ultimate sale of the units. The costs of the 7,000
units, amounting to $980,000, has been charged to cost of sales. The Company
recognized no prepaid asset or any revenue in connection with the trade credits
since their use requires matching cash payments and the Company's ability to
continue as a going concern is in substantial doubt. In addition, the amount of
cash to be received on the ultimate sale of the units cannot be reasonably
estimated. Accordingly, the Company intends to recognize future revenue from the
trade credits only when ascertainable economic value is realized from their use
or cash proceeds are received from the ultimate sale of the units.
During 1996, the Company recorded revenue on the utilization of approximately
$37,000 of trade credits.
15. WRITE-DOWN OF INTANGIBLE ASSETS
During 1994, the Company acquired certain proprietary electronic data
compression technology for an aggregate purchase price of $101,743, consisting
of $30,000 and 27,000 shares of common stock of the Company with an assigned
value of $71,743. Although the acquisition contemplated payment of consideration
for additional technology, none has been delivered by the inventor and
accordingly the Company is not obligated to make any purchases or pay any
additional consideration. The acquired technology is unproven and is not used in
the Company's proprietary products and the Company has no present plans to
attempt to develop this technology. Accordingly, during 1995, the unamortized
balance of the acquired technology was written down to a nominal value.
F-21
<PAGE> 64
NORRIS COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
March 31, 1996 and 1995
16. SUBSEQUENT EVENTS
[a] On April 23, 1996, the Company issued 85,000 common shares at an assigned
value of $1.50 per share in settlement of accounts payable and accrued
liabilities of $127,500 and 48,000 common shares at an assigned value of
$1.50 per share for marketing services of $72,000.
[b] On June 7, 1996, the Company completed a private placement of $2,500,000,
consisting of 2,420,143 common shares of the Company issued at a price of
$0.70 per share and warrants with a face value of $805,900. The warrants
are exercisable into common shares of the Company at the lesser of: $0.70
per common share or a 30% discount to the 5 day moving average price of the
common shares on the day prior to exercise. The exercise price of the
warrants will be further discounted by 7% per year until the warrants are
exercised. The Company is committed to filing a Registration Statement with
the Securities and Exchange Commission by July 7, 1996 in connection with
the private placement. In the event the Company is unable to file a
Registration Statement prior to July 7, 1996 and/or the Registration
Statement is not declared effective before September 5, 1996, the Company
agrees to issue 3% more common shares and warrants for each successive 30
day period for the first four months and 1% more common shares and warrants
for each successive 30 day period thereafter, until the Registration
Statement is filed and/or declared effective.
F-22
<PAGE> 65
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORRIS COMMUNICATIONS, INC
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 MARCH 31, 1996
$ $
------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash 991,109 2,843,540
Accounts receivable, less allowance for doubtful
accounts of $11,647 and $11,647, respectively 113,235 94,619
Inventory (note 3) 3,246,086 3,243,245
Prepaid expenses and other 164,799 226,436
------------------------------------------
Total current assets 4,515,229 6,407,840
Property and equipment, net 1,309,318 1,359,791
Other intangible assets, net of accumulated amortization of
$28,618 and $24,896 respectively 45,791 49,513
------------------------------------------
TOTAL ASSETS 5,870,338 7,817,144
==========================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Demand loan payable (note 4) -- 2,185,546
Accounts payable, trade 1,338,730 2,554,209
Other accounts payable and accrued liabilities 227,069 443,225
Current portion of capital lease obligations 167,836 168,831
------------------------------------------
TOTAL CURRENT LIABILITIES 1,733,635 5,351,811
------------------------------------------
Convertible notes payables -- 3,000,000
------------------------------------------
TOTAL LIABILITIES 1,733,635 8,351,811
------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $.001 par value, 5,000,000 shares authorized;
none issued. -- --
Common stock, no par value, authorized 60,000,000 and
30,000,000 respectively; 22,268,828 and 15,103,703 shares
outstanding, respectively (note 5) 26,695,054 21,762,337
Pre-paid Warrants (note 6) 3,396,505 --
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (27,547,172) (23,889,320)
------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 4,136,703 (534,667)
------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 5,870,338 7,817,144
==========================================
</TABLE>
See notes to interim consolidated financial statements
F-23
<PAGE> 66
NORRIS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
$ $ $ $
-------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
REVENUES 147,817 327,871 301,543 806,603
Cost of sales 790,061 725,440 1,049,318 2,192,405
-------------------------------- ----------------------------------
Gross profit (loss) (642,244) (397,569) (747,775) (1,385,802)
-------------------------------- ----------------------------------
OPERATING EXPENSE (INCOME)
Selling and Administration 1,376,351 912,264 2,449,651 1,695,733
Research and related expenditures 196,101 126,365 407,685 604,090
Interest expense 1,042 57,406 77,522 181,940
Interest income (13,589) (4,224) (24,781) (20,409)
-------------------------------- ----------------------------------
1,559,905 1,091,811 2,910,077 2,461,354
-------------------------------- ----------------------------------
Operating loss (2,202,149) (1,489,380) (3,657,852) (3,847,156)
Provision for income taxes (note 8) -- -- -- --
-------------------------------- ----------------------------------
NET LOSS (2,202,149) (1,489,380) (3,657,852) (3,847,156)
================================ ==================================
Net loss per share (note 9) (0.10) (0.13) (0.19) (0.33)
================================ ==================================
Weighted average shares 22,287,418 11,710,529 19,641,347 11,697,517
================================ ==================================
</TABLE>
See notes to interim consolidated financial statements
F-24
<PAGE> 67
NORRIS COMMUNICATIONS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
UNAUDITED
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
SEPTEMBER 30
1996 1995
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss (3,657,852) (3,847,156)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 202,998 255,229
Gain from sale of asset - 38,550
Interest paid by issuance of common stock 33,773 -
Professional services paid by issuance of common stock 72,000 -
Legal settlement paid by issuance of common stock 127,500 -
Changes in assets and liabilities:
Accounts receivable (18,616) 12,807
Inventory (2,841) (1,349,753)
Prepaid expenses and other 61,637 88,950
Accounts payable, trade (1,215,479) 1,476,168
Other accounts payable and accrued liabilities (216,156) (390,686)
----------------- -----------------
Cash used in operating activities (4,613,036) (3,715,891)
----------------- -----------------
INVESTING ACTIVITIES
Purchase of property and equipment (148,803) (35,263)
Proceeds on sale of assets - 28,300
Investment in patents and intangibles - (3,965)
----------------- -----------------
Cash used in investing activities (148,803) (10,928)
----------------- -----------------
FINANCING ACTIVITIES
Repayments under demand loan payable (2,185,546) 132,646
Principal payments on capital lease obligations (995) (27,333)
Convertible note payable - -
Proceeds from issuance of shares and warrants 5,095,949 330,303
----------------- -----------------
Cash provided by financing activities 2,909,408 435,616
----------------- -----------------
Net decrease in cash (1,852,431) (3,291,203)
Cash, beginning of period 2,843,540 3,291,203
----------------- -----------------
Cash, end of period 991,109 0
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest 77,521 181,940
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
A note holder converted a long-term convertible
note plus accrued interest into common stock 3,033,773 -
</TABLE>
See notes to interim consolidated financial statements
F-25
<PAGE> 68
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
1. OPERATIONS
Norris Communications Inc. (the "Company") was incorporated in the Province of
British Columbia, Canada on February 11, 1988 and on November 22, 1994, changed
its domicile from British Columbia to the Yukon Territory, Canada. The Company
further changed its domicile to Wyoming on August 30, 1996 and on September 4,
1996 reincorporated into Delaware. The Company is engaged through its
wholly-owned U.S. subsidiary in the development, manufacture and marketing of
electronic products and exploiting proprietary technology.
2. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Norris Communications, Inc.
("NCT"), a California corporation, based in San Diego County, California.
The interim consolidated financial statements have been prepared on a going
concern basic, which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future. The
Company has incurred significant losses and negative cash flow from operations
in cash of the last three fiscal years and for the three and six month periods
ended September 30, 1996 and has an accumulated deficit of $27,547,172 at
September 30, 1996. The Company's operational plan for fiscal 1997 contemplates
developing markets for its proprietary products and continued investment in
research and related expenditures. The Company's ability to continue as a going
concern is in substantial doubt and is dependent upon obtaining additional
financing and achieving a profitable level of operations.
These interim consolidated financial statements do not give effect to any
adjustments which would be necessary should the Company be unable to continue as
a going concern and therefore be required to realize its assets and discharge
its liabilities in other than the normal course of business and at amounts
different from those reflected in the accompanying interim consolidated
financial statements.
The interim consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and the instructions to Form 10-QSB. They do not include
all information and footnotes required by generally accepted accounting
principles for complete financial statements. The interim consolidated financial
statements and notes thereto should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
March 31, 1996.
In the opinion of management, the interim consolidated financial statements
reflect all adjustments of a normal recurring nature necessary for a fair
statement of the results for interim periods. Operating results for the three
and six month periods ended September 30, 1996 are not necessarily indicative of
the results that may be expected for the year ending March 31, 1997. The interim
consolidated financial statements and notes thereto are stated in U.S. dollars.
3. INVENTORY
Inventory of raw material is recorded at the lower of cost and replacement cost,
which is less than net realizable value. Inventory of work in process and
finished goods, is recorded at the lower of cost and net realizable value. Cost
is determined on a first-in, first-out basis. Inventories consist of the
following:
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
------------------ --------------
<S> <C> <C>
Raw materials $1,398,656 $1,569,812
Work in process 171,179 194,437
Finished goods 1,676,251 1,478,996
---------- ----------
$3,246,086 $3,243,245
========== ==========
</TABLE>
F-26
<PAGE> 69
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
4. DEMAND LOAN PAYABLE
The demand loan payable to CVD Financial Corporation plus accrued interest was
retired on July 31, 1996.
5. COMMON STOCK
The following table summarizes shares issued during the period ended September
30, 1996:
<TABLE>
<CAPTION>
Shares Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, March 31, 1996 15,103,703 $21,762,337
Convertible notes and accrued interest
at prices ranging from $0.981 to $1.269 per share 4,366,051 3,033,773
Stock issued for accounts payable at $1.50 per share 85,000 127,500
Stock issued for services at $1.50 per share 48,000 72,000
Stock issued for cash at $0.70 per share net of
offering costs of $159,283 2,420,143 1,534,817
Stock issued for cash at $0.69125 per share net of
offering costs of $5,373 245,931 164,627
- -------------------------------------------------------------------------------------------
Balance, September 30, 1996 22,268,828 $26,695,054
===========================================================================================
</TABLE>
6. PRE-PAID WARRANTS
Represents proceeds from warrants pre-paid for cash net of offering costs of
$884,227. The face amount of the warrants or $3,805,900 is exercisable, without
further cash payment, into common shares of the Company at the lessor of: $0.70
per common share (with respect to $805,900 of warrants) and $0.69125 per common
share (with respect to $3,000,000 of warrants) or a 30% discount to the 5 day
moving average bid price of the common shares on the day prior to exercise. The
exercise price of the warrants will be further discounted by 7% per year and
for other events until the warrants are exercised. At September 30, 1996 these
warrants were exercisable into approximately 5.5 million common shares.
7. OPTIONS AND WARRANTS
At September 30, 1996 warrants were outstanding/exercisable into the following
listed shares:
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ Expiration Date
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Warrants 200,000 2.00 September 1998
Warrants 450,000 1.75 June 1999
Warrants 33,750 4.00 June 1999
Warrants 82,100 4.00 August 1999
Warrants(a) 106,986 2.01 February 2000
Warrants(a) 88,014 2.01 March 2000
Warrants 129,230 1.625 March 2001
Warrants 401,924 9.9875 July 2001
Warrants(a) 128,067 1.25 October 2005
- ---------------------------------------------------------------------------------------
Total 1,620,071
=======================================================================================
</TABLE>
(a) These warrants, amongst other provisions, contain a provision for
adjustment for dilutive events. The exercise prices and where applicable, the
number of warrants, have been adjusted to reflect any such events through March
31, 1996.
F-27
<PAGE> 70
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996
7. OPTIONS AND WARRANTS (Continued)
The following table summarizes stock option activity for the period:
<TABLE>
<S> <C>
Outstanding at March 31, 1996 1,493,658
Granted -
Exercised -
Expired (66,000)
Canceled (5,000)
---------
Outstanding at September 30, 1996 1,422,658
=========
</TABLE>
Options outstanding are exercisable at prices ranging from $0.90 to $6.01 and
expire over a period from 1996 to 2000.
8. INCOME TAXES
The Company has not provided a tax provision for the current period, due to
current losses. The Company has U.S. net operating loss carryforwards of
approximately $9,462,000 and $4,991,000 for federal and state tax purposes,
respectively, subject to certain limitations.
9. NET LOSS PER SHARE
The net loss per share is calculated using a weighted average number of common
shares and common stock equivalents outstanding for the period. Common
equivalent shares consisting of outstanding pre-paid warrants, stock options
and stock purchase warrants have been excluded because their effect would be
antidilutive.
F-28
<PAGE> 71
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF THE COMPANY PAGE
<S> <C>
Report of Independent Auditors F-1
Comments by Auditors for U.S. Readers on Canada-U.S.
Reporting Conflict F-1
Consolidated Balance Sheets as of March 31, 1996
and 1995 F-2
Consolidated Statements of Operations for the years
ended March 31, 1996 and 1995 F-3
Consolidated Statements of Stockholders' Equity (Deficiency)
for the years ended March 31, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years
ended March 31, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
Unaudited Interim Consolidated Balance Sheets as
of September 30, 1996 and March 31, 1996 (unaudited) F-23
Unaudited Interim Consolidated Statements of Operations
for the three and six months ended
September 30, 1996 and 1995 F-24
Unaudited Interim Consolidated Statements of
Cash Flows for the six months
ended September 30,1996 and 1995 F-25
Notes to Unaudited Interim Consolidated Financial Statements F-26
</TABLE>
39
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Article TENTH of the Certificate of Incorporation of the Company
provides:
"TENTH: The corporation shall, to the fullest extent legally
permissible under the provisions of the Delaware General Corporation
Law, as the same may be amended and supplemented, shall indemnify and
hold harmless any and all persons whom it shall have power to indemnify
under said provisions from and against any and all liabilities
(including expenses) imposed upon or reasonably incurred by him in
connection with any action, suit or other proceeding in which he may be
involved or with which he may be threatened, or other matters referred
to in or covered by said provisions both as to action in his official
capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a
director or officer of the corporation. Such indemnification provided
shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any Bylaw, Agreement or Resolution
adopted by the shareholders entitled to vote thereon after notice."
The Company's Bylaws provide that an officer, director, employee or
agent of the Company is entitled to be indemnified for the expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred by him by
reason of any action, suit or proceeding brought against him by virtue of his
acting as such officer, director, employee or agent, provided he acted in good
faith or in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The Company has directors and offices liability insurance. The
insurance policy covers liability for claims made against directors and
officers for their wrongful acts involving errors, misstatements, misleading
statements or acts or omissions or neglect or breach of duty, while acting in
their individual or collective capacities for any matter claimed against them
solely by reason of their being directors or officers of the Company. The
coverage includes damages, judgment, settlements and costs of legal actions,
claims or proceedings and appeals therefrom but does not include fines or
penalties imposed by law for matters which may be deemed uninsurable under the
law.
If Delaware law and California law are in conflict with regard to the
Company's power or obligation to indemnify, and the issue were to be contested
in the Delaware and/or California, the legal outcome is unpredictable.
Item 25. Other Expenses of Issuance and Distribution.
Expenses payable in connection with the distribution of the securities
being registered (estimated except for the registration fee), all of which will
be borne by the Registrant, are as follows:
<TABLE>
<S> <C>
Registration Fee $ 1,145
Blue Sky Fees and Expenses $ 3,500
Legal Fees and Expenses $ 70,000
Accounting Fees and Expenses $ 12,000
Miscellaneous Expenses $ 8,500
------
Total $ 95,145
======
</TABLE>
II-1
<PAGE> 73
Item 26. Recent Sales of Unregistered Securities.
The Company has sold the following securities within the last three
years:
1. In March 1994, the Company issued 1,150,000 shares of Common
Stock for $2,300,000 cash to accredited investors. The issuance of such
securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
2. In connection with the March 1994 private placement, the
Company issued to the placement agent in consideration of the efforts of the
placement agent, warrants to purchase 115,850 shares of Common Stock at a price
(subject to adjustment) of $4.00 per share.
3. In December 1994 and in May 1995, the Company issued 887,048
shares of Common Stock for $1,700,000 cash to an accredited investor. The
issuance of such securities was exempt from registration under the Securities
Act of 1933 pursuant to Section 4(2) thereof and Regulation D promulgated
thereunder.
4. In April 1995, the Company issued 3,050,000 shares of Common
Stock for $5,814,000 cash to accredited investors in the United States and to
qualified investors outside of the United States. The securities issued to
non-United States investors were issued in accordance with Regulation S of the
Securities Act of 1933. The issuance of such securities to United States
investors was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
5. In connection with the April 1995 private placement, the
Company issued to the placement agent in consideration of the efforts of the
placement agent, warrants to purchase 195,000 shares of Common Stock at a price
(subject to adjustment) of $2.01 per share.
6. In August 1995, the Company issued 250,000 shares of Common
Stock for $300,000 cash to an accredited investor. The issuance of such
securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
7. In October 1995, the Company issued 1,280,666 shares of Common
Stock for $1,700,000 cash to qualified investors outside of the United States.
The securities were issued in accordance with Regulation S of the Securities
Act of 1933.
8. In connection with the October 1995 private placement, the
Company issued to the placement agent in consideration of the efforts of the
placement agent, warrants to purchase 128,067 shares of Common Stock at a price
(subject to adjustment) of $1.25 per share.
9. In October 1995, the Company issued 13,333 shares of Common
Stock to R. Gordon Root, President and Chief Executive Officer of the Company,
as a bonus. The issuance of such securities was exempt from registration under
the Securities Act of 1933 pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder.
10. In October 1995, the Company issued 28,436 shares of Common
Stock to the placement agent for consulting services. The issuance of such
securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D.
11. In October 1995, the Company issued 25,000 shares of Common
Stock to CVD Financial Corporation for payment of refinance fees. The issuance
of such securities was exempt from registration under the Securities Act of
1933 pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
II-2
<PAGE> 74
12. In November 1995, the Company issued 174,095 shares of Common
Stock to Day & Campbell for legal services. The issuance of such securities
was exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2) thereof and Regulation D promulgated thereunder.
13. In December 1995, the Company issued 13,312 shares of Common
Stock to the Wall Street Group for consulting services. The issuance of such
securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
14. In December 1995, the Company issued 1,000,000 shares of Common
Stock for $1,000,000 cash to accredited investors. The issuance of such
securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) and Regulation D promulgated thereunder.
15. In December 1995, the Company issued 600,000 shares of Common
Stock for $600,000 cash to qualified investors outside of the United States.
The securities were issued in accordance with Regulation S of the Securities
Act of 1933.
16. In March 1996, the Company issued convertible notes with a face
value of $3,000,000 to qualified investors outside of the United States. The
notes subsequently were converted into Common Stock in May and June 1996
without payment of additional consideration. The securities were issued in
accordance with Regulation S of the Securities Act of 1933.
17. In connection with the March 1996 private placement, the
Company issued to the placement agent in consideration of the efforts of the
placement agent, warrants to purchase 129,230 shares of Common Stock at a price
(subject to adjustment) of $1.625 per share.
18. In May 1996, the Company issued 48,000 shares of Common Stock
to Set Marketing On for consulting services. The issuance of such securities
was exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2) thereof and Regulation D promulgated thereunder.
19. In May 1996, the Company issued 85,000 shares of Common Stock
to Norm Finkelstein in settlement of certain litigation. The issuance of such
securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder
20. In June 1996, the Company issued 2,420,143 shares of Common
Stock for $1,695,000 cash and Warrants with a face value of $805,000 to
accredited investors in the United States and to qualified investors outside of
the United States. The securities issued to non- United States investors were
issued in accordance with Regulation S of the Securities Act of 1933. The
issuance of such securities to United States investors was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof
and Regulation D promulgated thereunder.
21. In connection with the June 1996 private placement, the Company
issued to the placement agent in consideration of the efforts of the placement
agent, warrants to purchase 401,924 shares of Common Stock at a price (subject
to adjustment) of $0.9875 per share.
22. In July and August 1996, the Company issued 245,931 shares of
Common Stock for $170,000 cash and Warrants with a face value of $3,000,000 to
accredited investors in the United States and to qualified investors outside of
the United States. The securities issued to non- United States investors were
issued in accordance with Regulation S of the Securities Act of 1933. The
issuance of such securities to United States investors was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof
and Regulation D promulgated thereunder.
II-3
<PAGE> 75
Item 27. Exhibits.
The exhibits are listed in the Exhibit Index commencing at page II-5
hereof.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in this
Registration Statement; and
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of post-effective
amendment to this Registration Statement any of the securities being registered
which remain unsold at the termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
issuer's Annual Report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 76
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
<S> <C>
2.1 Share Exchange Agreement among the Company, Norcom Communications
Corporation, and American Technology Corporation, dated for reference
March 23, 1988 and filed as an Exhibit to the Company's Registration
Statement on Form 10, as amended.
2.1.1 Amendment of Agreement among the Company, Norcom Communications
Corporation, and American Technology Corporation, dated for reference
March 23, 1988 and filed as an Exhibit to the Company's Registration
Statement on Form 10, as amended.
2.2 Plan and Agreement of Reorganization among the Company, American
Surface Mounted Devices, Inc. and ASMD, Inc., dated August 11, 1989
and filed as an Exhibit to the Company's Registration Statement on
Form 10, as amended.
2.3 Plan and Agreement of Reorganization among the Company, Sage
Microsystems, Inc., and Sage Micro, Inc., dated November 7, 1991
and filed as an Exhibit to the Company's Registration Statement on
Form 10, as amended.
2.4 Plan and Agreement of Reorganization among the Company, C.A.D.
Co. Engineering, Inc. and CADCO Design Group, Inc., dated
June 1, 1992 and filed as an Exhibit to the Company's Registration
Statement on Form 10, as amended.
2.5 Plan and Agreement of Reorganization between American Surface
Mounted Devices, Inc. and Comp General Corporation, Inc.,
dated March 31 1995 and filed previously as an Exhibit to
Registration Statement No. 33-92978.
2.6 Plan of Reorganization and Agreement of Merger, dated July ,
1996 and filed as Exhibit A to the Company's July 3, 1996 Proxy
Statement.
3.1 Certificate of Incorporation of Norris Communications, Inc.
(as amended through May 28, 1996) and filed as Exhibit B to the
Company's July 3, 1996 Proxy Statement.
3.2 Bylaws of Norris Communications, Inc., filed as Exhibit C to
the Company's July 3, 1996 Proxy Statement.
4.1 Certificate of Incorporation of Norris Communications, Inc.
(as amended through May 28, 1996), filed as Exhibit B to the
Company's July 3, 1996 Proxy Statement.
</TABLE>
II-5
<PAGE> 77
<TABLE>
<S> <C>
4.2 Bylaws of Norris Communications, Inc., filed as Exhibit C
to the Company's July 3, 1996 Proxy Statement.
4.3 Stock Purchase Warrant for 33,750 Common Shares between the
Company and Cruttenden & Co., Inc. dated July 15, 1994 and
filed as Exhibit 4.3 to the Company's 1995 Form 10-KSB.
4.4 Stock Purchase Warrant for 300,000 Common Shares between the
Company and CVD Financial Corporation dated July 15, 1994 and
filed as Exhibit 4.4 to the Company's 1995 Form 10-KSB.
4.4.1 First Amendment to Stock Purchase Warrant for 300,000 Common
Shares between the Company and CVD Financial Corporation dated
November 14, 1994 and filed as Exhibit 4.4.1 to the Company's
1995 Form 10-KSB.
4.5 Stock Purchase Warrant for 150,000 Common Shares between
the Company and CVD Financial Corporation dated July 15, 1994
and filed as Exhibit 4.5 to the Company's 1995 Form 10-KSB.
4.5.1 First Amendment to Stock Purchase Warrant for 150,000 Common
Shares between the Company and CVD Financial Corporation dated
November 14, 1994 and filed as Exhibit 4.5.1 to the Company's
1995 Form 10-KSB.
4.6 Warrant Agreement for 82,100 Common Shares between the Company
and Comdisco, Inc. dated as of August 15, 1994 and filed as
Exhibit 4.6 to the Company's 1995 Form 10-KSB.
4.7 Warrant Agreement No. 1 for 106,986 Common Shares between the
Company and Pennsylvania Merchant Group Ltd. dated March 1, 1995
and filed as Exhibit 4.7 to the Company's 1995 Form 10-KSB.
4.7.1 Warrant Agreement No. 2 for 87,300 Common Shares between the
Company and Pennsylvania Merchant Group Ltd. dated March 17, 1995
and filed as Exhibit 4.7.1 to the Company's 1995 Form 10-KSB.
4.7.2 Warrant Agreement No. 3 for 714 Common Shares between the Company
and Pennsylvania Merchant Group Ltd. dated March 20, 1995 and
filed as Exhibit 4.7.2 to the Company's 1995 Form 10-KSB.
4.8 Warrant Agreement for 115,000 Common Shares between the Company
and Cruttenden & Co., Inc. dated February 10, 1994 and filed as
Exhibit 4.8 to the Company's 1995 Form 10-KSB.
4.9 Form of 7% Convertible Note dated March 25, 1996 and due
March 25, 1999 for an aggregate of $3,000,000 issued to a total
of six investors and filed as Exhibit 4.9 to the Company's
Form 8-K dated April 5, 1996.
</TABLE>
II-6
<PAGE> 78
<TABLE>
<S> <C>
4.10 Warrant Agreement for 129,230 Common Shares between the Company
and First Bermuda Securities Ltd. dated March 25, 1996 and filed
as Exhibit 4.10 to the Company's 1995 Form 8-K dated April 5, 1996.
4.11 Form of Warrant Agreement dated June 7, 1996 for an aggregate
of $3,805,900 issued to a total of twelve investors and filed as
an Exhibit to the Company's Current Report on Form 8-K dated
April 5, 1996.
4.12 Warrant Agreement for 401,924 Common Shares between the Company
and Klein Investment Group, L.P. (formerly known as Iacocca
Capital Partners, L.P.) dated August 7, 1996 and filed previously
as an Exhibit to the Company's Current Report on Form 8-K dated
August 29, 1996.
5.1 Opinion of Higham, McConnell & Dunning.*
10.1 Share Exchange Agreement among the Company, Norcom Communications
Corporation, and American Technology Corporation, dated for
reference March 23, 1988, and filed as Exhibit 2.1 to the Company's
Registration Statement on Form 10, as amended.
10.1.1 Amendment of Agreement among the Company, Norcom Communications
Corporation, and American Technology Corporation, dated for
reference March 23, 1988 and filed as Exhibit 2.1.1 to the Company's
Registration Statement on Form 10, as amended.
10.2 Plan and Agreement of Reorganization among the Company, American
Surface Mounted Devices, Inc. and ASMD, Inc., dated August 11, 1989
and filed as Exhibit 2.2 to the Company's Registration Statement
on Form 10, as amended.
10.3 Plan and Agreement of Reorganization among the Company, Sage
Microsystems, Inc. and Sage Micro, Inc. dated November 7, 1991 and
filed as Exhibit 2.3 to the Company's Registration Statement on
Form 10, as amended.
10.4 Plan and Agreement of Reorganization among the Company, C.A.D. Co.
Engineering, Inc. and CADCO Design Group, Inc., dated June 1, 1992
and filed as Exhibit 2.4 to the Company's Registration Statement on
Form 10, as amended.
10.5 Loan Agreement between CVD Financial Corporation and the Company
and its Subsidiaries dated July 15, 1994 and filed as Exhibit 10.5
to the Company's 1995 Form 10-KSB.
10.5.1 Loan Modification Agreement between CVD Financial Corporation and
the Company and its Subsidiaries dated November 14, 1994 and filed
as Exhibit 10.5.1 to the Company's 1995 Form 10-KSB.
</TABLE>
II-7
<PAGE> 79
<TABLE>
<S> <C>
10.5.2 Loan Modification Agreement, dated as of August 1, 1995 and filed
as Exhibit 10.5.2 to the Company's 1995 Form 8-K.
10.5.3 Amended and Restated Promissory Note, dated August 1, 1995 and filed
as Exhibit 10.5.3 to the Company's Form 8-K dated October 27, 1995.
10.5.4 Second Amendment to Stock Purchase Warrant (for 150,000 shares),
dated August 1, 1995 and filed as Exhibit 10.5.4 to the Company's
Form 8-K dated October 27, 1995.
10.5.5 Second Amendment to Stock Purchase Warrant (for 300,000 shares), dated
August 1, 1995 and filed as Exhibit 10.5.5 to the Company's Form 8-K
dated October 27, 1995.
10.5.6 Stock Purchase Warrant (for 200,000 shares) dated August 1, 1995 and
filed as Exhibit 10.5.6 to the Company's Form 8-K dated October 27, 1995.
10.5.7 Amended and Restated Stock Pledge and Option Agreement (for 300,000
shares of JABRA), dated August 1, 1995 and filed as Exhibit 10.5.7 to the
Company's 8-K dated October 27, 1995.
10.5.8 Loan Modification Agreement between the Company and CVD Financial
Corporation dated February 1, 1996 and filed as Exhibit 10.5.8 to the
Company's 1995 Form 10-QSB.
10.5.9 Amended and Restated Promissory Note between the Company and CVD Financial
Corporation dated February 1, 1996 and filed as Exhibit 10.5.9 to the
Company's 1995 Form 10-QSB.
10.5.10 Loan Modification Agreement between CVD Financial Corporation and the
Company and its subsidiary dated as of April 1, 1996 and filed as
Exhibit 10.5.10 to the Company's Form 8-K dated April 11, 1996.
10.6 Technology Transfer Agreement among the Company, American Technology
Corporation, Elwood G. Norris and Norcom Electronics Corporation dated
January 25, 1988 and filed as Exhibit 10.8 to the Company's Registration
Statement on Form 10, as amended.
10.6.1 Assignment Agreement among American Technology Corporation, Norcom
Electronics Corporation, Norcom Communications Corporation and
Elwood G. Norris dated March 22, 1988 and filed as Exhibit 10.8.1 to the
Company's Registration Statement on Form 10, as amended.
10.7 Master Lease Agreement between Comdisco, Inc. and American Surface Mounted
Devices, Inc. dated as of August 15, 1994 and filed as Exhibit 10.7 to
the Company's 1995 Form 10-KSB.
10.8 Agreement and Plan of Reorganization by and among the Company, Norcom
Communications Corporation and JABRA Corporation dated January 15, 1993 and
filed as Exhibit 10.8 to the Company's 1993 Form 10-K.
</TABLE>
II-8
<PAGE> 80
<TABLE>
<S> <C>
10.8.2 Amendment No. 1 to Agreement and Plan of Reorganization by and among the
Company, Norcom Communications Corporation and JABRA Corporation dated
May 28, 1993 and filed as Exhibit 10.8.2 to the Company's 1993 Form 10-K.
10.9 Stock Option Plan adopted by the Company on August 21, 1992 ("1992 Plan"),
filed as Exhibit 10.10 to the Company's Registration Statement on Form 10,
as amended.
10.10 Stock Option Plan adopted by the Company on September 29, 1994 ("1994 Plan"),
filed as Exhibit 10.10 to the Company's 1995 Form 10-KSB.
10.11 Plan and Agreement of Reorganization by merger of American Surface Mounted
Devices, Inc. with and into Comp General Corporation under the name of Norris
Communications, Inc. dated April 1, 1995 and filed as Exhibit 10.11 to the
Company's 1995 10-KSB.
10.12 Lease Agreement between the Company and Pomerado Properties dated August 17,
1989 and filed as Exhibit 10.12 to the Company's Registration Statement on
Form 10, as amended.
10.13 Lease Agreement between the Company and Pomerado Properties dated July 2, 1992
and filed as Exhibit 10.13 to the Company's Registration Statement on Form 10,
as amended.
10.14 Letter Agreement between the Company and Homer H. Lesihau, dated February 3,
1993 and filed as Exhibit 10.17 to the Company's 1993 Form 10-K.
10.14.1 Amending Agreement to Letter Agreement Dated February 3, 1993 between the
Company and Homer H. Lesihau, dated April 29, 1993 and filed as Exhibit 10.17.1
to the Company's 1993 Form 10-K.
10.16 Financial Advisory Agreement dated August 21, 1995 between Auerbach, Pollack
& Richardson, Inc. and the Company, filed as Exhibit 10.16 to the Company's
Form 8-K dated November 13, 1995.
10.17 Norris Communications Corp. and Auerback, Pollack & Richardson, Inc. Placement
Agent's Warrant Agreement, filed as Exhibit 10.17 to the Company's Form 8-K
dated November 13, 1995.
10.18 Warrant Certificate Issued to Auerbach, Pollak & Richardson, Inc. and filed as
Exhibit 10.18 to the Company's Form 8-K dated November 13, 1995 and filed
previously as an Exhibit to the Company's Current Report on Form 8-K, dated
November 13, 1995.
10.18.1 Release and Termination of Right of First Refusal and Amendment to Warrant
between the Company and Auerbach, Pollak & Richardson, Inc. dated May 13,
1996 and filed previously as an Exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996.
</TABLE>
II-9
<PAGE> 81
<TABLE>
<S> <C>
10.19 Registration Rights Agreement between Auerbach, Pollak & Richardson, Inc.
and the Company, filed as Exhibit 10.19 to the Company's Form 8-K dated
November 13, 1995.
10.20 Employment Agreement dated September 12, 1995 between the Company and Elwood G.
Norris, filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1996.
10.21 Employment Agreement dated September 8, 1995 between the Company and
Robert Putnam, filed as an Exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996.
10.22 Employment Agreement dated August 1, 1995 between the Company and R. Gordon
Root, filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1996.
10.23 Employment Agreement dated January 11, 1996 between the Company and
Peter W. Gorrie, filed as an Exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended March 31, 1996.
10.24 Placement Agreement dated April 16, 1996 between the Company and Iacocca
Capital Partners, L.P., filed as an Exhibit to the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1996.
10.25 Form of Registration Rights Agreement effective June 7, 1996 between
11 investors and the Company aggregating $1,694,100, filed as an Exhibit
to the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1996.
10.26 First Amendment to Placement Agreement dated May 20, 1996 between the
Company and Iacocca Capital Partners, L.P.*
10.27 Agreement dated July 30, 1996 between the Company and Greystone Capital, Ltd.*
10.28 OEM Purchase Agreement dated October 18, 1996 between the Company and
Sanyo Information Systems (U.K.) Ltd.*
10.29 Release and Waiver Agreement between the Company and certain
Selling Shareholders.*
11.1 Statement re computation of per share earnings, filed as an Exhibit
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1996.
21.1 List of subsidiaries, filed as an Exhibit to the Company's Annual Report
on Form 10-KSB for the fiscal year ended March 31, 1996.
23.1 Consent of Higham, McConnell & Dunning, included in Exhibit 5.1.*
23.2 Consent of Ernst & Young.*
</TABLE>
_____________________________________________
* Each exhibit marked with an asterisk is filed (or has previously been
filed) with the Registration Statement. Each exhibit not marked with
an asterisk is incorporated by reference to an exhibit previously
filed by the Company as indicated above.
II-10
<PAGE> 1
EXHIBIT 10.29
Norris Communications, Inc.
12725 Stowe Drive
Poway, California 92064
Re: NORRIS COMMUNICATIONS, INC.
FORM SB-2 REGISTRATION STATEMENT
Gentlemen:
This letter is addressed to you in connection with the Registration
Statement on Form SB-2 (the "Registration Statement") filed by Norris
Communications, Inc. (the "Company") for the offering from time to time of
approximately 8,703,136 shares (the "Shares") of common stock, $.001 par value,
of the Company (the "Common Stock") to be sold from time to time by certain
shareholders of the Company (the "Selling Shareholders"). The undersigned
Selling Shareholder hereby certifies to the Company, for the purpose of
finalizing the prospectus, which is part of the Registration Statement, and
expediting the effectiveness of the Registration Statement, that the following
statements are true and correct and further acknowledges and agrees, as
appropriate, that:
1. The undersigned was not given and did not receive any
representations, warranties, written or oral communications with respect to the
Shares and/or other securities purchased other than those contained in the
Offering Materials and the SEC filings (as those terms are defined in the
Investor Unit Purchase Agreement), nor, to the best of the undersigned's
knowledge, was the offering made to the undersigned by any means of general
solicitation or general advertising.
2. The undersigned was not provided with and did not receive, a
copy of any registration statement which may have been on file with the
Securities and Exchange Commission ("SEC") prior to entering into the purchase
transaction.
3. The undersigned understands that the filing and/or use of a
registration statement may under certain circumstances constitute a general
solicitation of investors in violation of the Securities Act of 1933 (the
"Securities Act") and that the purchase and/or sale of securities pursuant to a
registration statement, a prospectus or other offering material prior to SEC
effectiveness or in absence of an available exemption may give rise to a
private action for damages and/or rescission against the seller.
<PAGE> 2
4. The undersigned continues to own the Shares and/or other
securities purchased.
5. The undersigned, in light of the foregoing, hereby, narrowly
and specifically, and only with respect to acts constituting or deemed to
constitute general solicitation, should such acts have occurred or be deemed to
have occurred, releases, discharges and acquits the Company and its officers,
directors, employees, attorneys and agents (collectively, the "Releasees") from
any and all claims, actions, causes of action, liabilities or damages of any
kind or nature, past, present or future, personal or representative, known or
unknown, arising out of or related to any act, past, present or future, by
Releasees or otherwise, which constitutes or is deemed to constitute, general
solicitation.
6. The undersigned hereby expressly acknowledges that he
understands the meaning and significance of Section 1542 of the California
Civil Code, and having such understanding, hereby waives any and all rights he
may have under such section, which provides that "[a] general release does not
extend to claims which the creditor does not know or expect to exist in his
favor at the time of executing the release, which if known by him must have
materially affected the settlement of the debtor."
The undersigned Selling Shareholder acknowledges that the foregoing
statements, acknowledgements and agreements are freely entered into and/or
given to the best of the undersigned's own judgment, belief and knowledge that
no statement made by or on behalf of the Company has in any way influenced the
execution hereof.
Date: ____________________, 1996 SELLING SHAREHOLDER
----------------------------------
Name (Please print)
----------------------------------
Name of record holder of the Shares
to be registered (if other than the
above-named Selling Shareholder)
----------------------------------
Signature
<PAGE> 1
EXHIBIT 23.2
CONSENT OF
INDEPENDENT AUDITORS
We consent to the reference to our Firm under the caption "Experts" and to the
use of our report dated May 24, 1996 (except as to Note 16[b] which is as of
June 7, 1996) relating to the consolidated financial statements of Norris
Communications Corp. for the years ended March 31, 1996 and March 31, 1995, in
Amendment No. 3 on Form SB-2 to the Form S-3 Registration Statement (No.
333-7709) and related Prospectus of Norris Communications, Inc. (formerly
Norris Communications Corp.) for the registration of 15,575,557 shares of its
Common Stock.
ERNST & YOUNG
Vancouver, Canada, Chartered Accountants
February 12, 1997.
