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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION MAY 8, 1997
================================================================================
REGISTRATION NO. 333-7709
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 5
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 9,610,807 Shares (3) $0.55 (4) $5,285,944 (4) $1,652
Total Registration Fee $4,754
Previously Paid $4,172
Total Due $ 580
</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 6,045,160 additional shares of
Common Stock estimated to be issuable upon the exercise of warrants issued
in the foregoing private placements in the event of a decline in the price
of the Common Stock to $0.45 per share and 2,811,723 shares of Common Stock
estimated to be issuable to purchasers of warrants and Common Stock in such
private placements due to delays in the registration process. Estimated
solely for purposes of calculating the registration fee in connection with
the Registration Statement.
(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
18,313,943 SHARES OF COMMON STOCK (NO PAR VALUE)
NORRIS COMMUNICATIONS, INC.
This Prospectus relates to 18,313,943 shares of Common Stock, $.001 par
value ("Common Stock") of Norris Communications, Inc., a Delaware corporation
(the "Company"), heretofore issued to the persons listed as the Selling
Shareholders. Such shares of Common Stock are being offered for the respective
accounts of the Selling Shareholders, and will be sold from time to time by the
Selling Shareholders in the national over-the-counter market or otherwise at
their prevailing prices, or in negotiated transactions. The Company will
receive no proceeds from the sale of such shares of Common Stock by the Selling
Shareholders. The expenses of preparing and filing the Registration Statement
of which this Prospectus forms a part are being paid by the Company.
The shares of Common Stock offered hereby includes the resale of such
presently indeterminate number of shares of Common Stock as shall be issued in
respect of (i) 2,666,074 shares of Common Stock (subject to adjustment) issued
in private placements in or about June 1996, (ii) 12,082,222 shares of Common
Stock (subject to adjustment) issuable upon the exercise of warrants
("Warrants") issued in connection with the June 1996 private placement, as well
as, additional private placements in July and August 1996 and (iii) 2,811,723
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 May , 1997, the bid and asked prices per share, as reported by
NASDAQ, were $0. and $0. respectively.
_____________________________________
The date of this Prospectus is May , 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 . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>
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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
proprietary electronic technology and products. The Company was incorporated in
Canada under the British Columbia Company Act on February 11, 1988 under the
name 340520 B.C. Ltd. The Company changed its name to Norris Communications
Corp. on April 7, 1988 and on November 22, 1994 continued its jurisdiction of
incorporation to the Yukon Territory, Canada. The Company further continued its
jurisdiction of incorporation to Wyoming on August 30, 1996 and on September 4,
1996 reincorporated into Delaware.
As described more fully below, through a series of transactions, the
Company has evolved to its present structure as a holding company for its
principal, wholly-owned subsidiary, Norris Communications, Inc., a California
corporation ("NCI"). Through NCI, the Company is principally involved in
developing, manufacturing and marketing the FLASHBACK recording device, a newly
developed proprietary technology for information storage and retrieval and
related electronic technology and products. 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. In November 1996 the Company entered into an OEM contract with
Sanyo Information Systems U.K. Ltd. and in January 1997 entered into an OEM
development agreement with Lanier Worldwide, Inc. The Company anticipates the
majority of its future revenues will be from license and royalty fees and from
contract development services. The FLASHBACK and related electronic technology
and products are being marketed 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 December 31, 1996 (1) 22,788,828 shares
Common Stock offered by
Selling Shareholders (2) 18,313,943 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 15,883,691 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) 12,082,222 shares of Common Stock (subject to
adjustment) issuable upon the exercise of Warrants issued in connection
with the June 1996 private placement, as well as, additional private
placements in July and August 1996 and (iii) 2,811,723 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 December 31, 1996, and the unaudited consolidated statements
of operations information for the nine months ended December 31, 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, Nine Months Ended December 31,
--------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATIONS DATA:
Revenues $1,328,502 $ 5,593,081 $ 764,710 $1,379,698
Cost of sales 4,413,814 6,729,320 1,777,124 3,266,747
Operating expense 5,182,231 6,006,117 5,620,779 3,627,644
Loss for the period (8,267,543) (7,142,356) (6,633,193) (5,514,693)
Loss per share (0.63) (0.88) (0.31) (0.45)
Weighted average
number of common
shares outstanding 13,065,095 8,097,624 21,610,362 12,381,062
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31, 1996
--------- ------------------
1996 1995
---- ----
<S> <C> <C> <C>
BALANCE SHEETS DATA:
Total assets $7,817,144 $8,658,632 $3,899,492
Working capital 1,056,029 1,665,581 189,826
Current liabilities 5,351,811 4,838,342 2,468,537
Long term liabilities 3,000,000 --- ---
Stockholders' equity
(deficiency) (534,667) 3,820,290 1,430,955
</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 and
related technology. 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 December 31, 1996 of
$6,633,193. The losses for fiscal 1996 and the first nine 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 other costs associated with the FLASHBACK and new
FLASHBACK products for fiscal 1997 to decrease in comparison to prior years, as
a result of procuring development funds from OEM customers. 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 increase license and royalty fees from
OEM contracts and development services. No assurance can be given as to the
Company's ability to accomplish the foregoing. The Company's inability to
accomplish the foregoing would have a material adverse effect upon the Company's
ability to operate profitably, and may force the Company to reduce or curtail
operations. The Company is also subject to the risks normally associated with
any new business activity, including unforeseeable expenses, delays and
complications. Accordingly, no assurance can be given that the Company can or
will report operating profits in the future.
Possible Inability to Continue as a Going Concern. The Company has
suffered recurring losses from operations. This factor, in combination with
(i) reliance upon debt and new equity financing to fund the continuing,
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 new products through private label
and OEM contracts, reducing manufacturing costs and obtaining new revenues from
licensing agreements and reducing overhead and expenses by discontinuing its
contract manufacturing services. 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 December 31, 1996, the
Company had working capital of $0.2 million, compared to working capital of $1.1
million at March 31, 1996. The Company had approximately $2.1 million of
working capital invested in inventories at December 31, 1996 compared to $3.2
million at March 31, 1996. The decrease in working capital is a result of the
Company's continuing losses which consumed working capital during the period.
Approximately $5.6 million in cash was used in operating activities by the
Company in the nine months ended December 31, 1996 which included a $0.7 million
reduction in accounts payable and accrued liabilities and a $0.3 million
increase in accounts receivable. 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. Given the Company's cash position and
assuming the rate of revenues and expenditures and level of operations after the
restructuring, the Company will require additional capital within the next two
months to meet its debts as they become due and to continue as a going concern.
The Company is currently financing its operations from the sale of equipment and
inventory and from funds received from OEM agreements. The Company estimates
that at current expenditure levels and projected working capital requirements it
will require a minimum of an additional $1 million to continue operating for the
next twelve months without any contribution from operations. The existing OEM
and licensing business may be able to generate some of the additional funding
required depending on the ability of OEM and licensing activities to generate
revenues, however there can be no assurance thereof. The Company is currently
pursuing various alternatives to meet its needs for additional capital. There
can be no assurance the Company will be successful and any such financing may be
dilutive to current shareholders. The failure to raise additional funds could
have a material adverse effect on the Company and could force the Company to
further reduce or curtail operations. The Company may, from time to time, seek
additional funds through lines of credit, public or private debt or equity
financing. The Company estimates that it will require additional capital to
finance future developments and improvements to its technology. There can be no
assurances that additional capital will be available when needed.
Possible Contingent Liability-Under Federal and State Securities Law.
The Company may have a liability to certain of the Selling Shareholders due to a
possible violation of Securities and Exchange Commission Rule 502(c) and
comparable state securities rules and regulations which prohibit an issuer from
selling securities in a private placement by any form of general solicitation or
general advertising. This violation, in turn, could cause the Company to be in
violation of Section 5 of the Securities Act which prohibits the sale of
securities pursuant to a prospectus that does not satisfy the requirements of
the Securities Act. Such violations, if deemed to occur, could give rise to a
private right of action by the Selling Shareholders against the Company for
rescission and/or damages.
Potential Detrimental Effect on the Company. If all of the Selling
Shareholders were to exercise their rights, assuming a violation, and seek
to rescind their purchases of Common Stock (sold at a per share price of
$0.69-$0.70 per share and Warrants sold at face value and exercisable into
Common Stock at a 30% discount to the average sales price per share for the
five trading days preceding the date of exercise), the
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. The closing
price for the Common Stock on May , 1997 was $0. .
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.
Discontinuation of Contract Manufacturing Business; Historical
Dependence Upon Short-Term Contracts for Revenue. The Company has been
utilizing its former contract manufacturing operations to build the Company's
new FLASHBACK product. In so doing, the Company ceased its contract
manufacturing business, upon which it has historically been dependent for
revenue. This occurrence disturbed the long-standing relationships which the
Company had with certain of its contract manufacturing customers; such
relationships had historically been predicated upon one-year contracts, which in
the past have been renewed for subsequent years. During fiscal 1997, the
Company had been attempting to reestablish its contract manufacturing business.
Notwithstanding goodwill and pre-existing relationships, the Company was largely
unable to acquire new contracts of any significance and, as a consequence, in
December 1996, the Company elected to discontinue its contract manufacturing
operations as a separate line of business.
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 by the Company of its 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 private labeled FLASHBACK recorder is uncertain as the
Company's OEM customers are in the early stages of entering various marketing
channels. Sales are expected to be subject to significant month to month
variability resulting from the limited market penetration achieved to date and
the seasonal nature of demand for consumer electronic products. The markets for
consumer electronic products are subject to rapidly changing customer tastes and
its OEM customers face a high level of competition. Demand for FLASHBACK 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 private labeled FLASHBACK product and its OEM
and licensing business. Attracting new OEM customers requires ongoing marketing
and sales efforts and expenditure of funds to create awareness of and demand for
the Company's products and technology. While the Company has recently hired and
put into place a sales and marketing structure for its private label 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 private label FLASHBACK product
and related companion products (upon completion of their development), to the
electronics and computer software markets, including sales to markets through
its OEM customers yet to be established. The failure of the Company's OEM
customers to penetrate its projected markets would have a material adverse
effect upon the Company's operations and prospects. Market acceptance of the
Company's private label products will depend in part upon the ability of the
Company to demonstrate the advantages of its products over competing products.
Technological Obsolescence. The electronics, 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, two market-makers and certain other requirements, some of which
the Company currently may not satisfy. 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
Third quarter 11/16 11/32
</TABLE>
At December 31, 1996, there were 22,788,828 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
December 31, 1996, and the unaudited statements of operations information for
the nine months ended December 31, 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
nine months ended December 31, 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 Nine Months Ended
March 31, December 31,
---------------------------- ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATIONS DATA:
Revenues $1,328,502 $ 5,593,081 $ 764,710 $1,379,698
Cost of sales 4,413,814 6,729,320 1,777,124 3,266,747
Operating expense 5,182,231 6,006,117 5,620,779 3,627,644
Loss for the (8,267,543) (7,142,356) (6,633,193) (5,514,693)
period
Loss per share (0.63) (0.88) (0.31) (0.45)
Weighted average
number of
common shares
outstanding 13,065,095 8,097,624 21,610,362 12,381,062
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
--------------- ---------------------
1996 1995
---- ----
<S> <C> <C> <C>
BALANCE SHEETS DATA:
Total assets
$7,817,144 $8,658,632 $3,899,492
Working capital 1,056,029 1,665,581 189,826
Current liabilities 5,351,811 4,838,342 2,468,537
Long term 3,000,000 --- ---
liabilities
Stockholders' equity
(deficiency) (534,667) 3,820,290 1,430,955
</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. In December,
1996, the Company discontinued its contract manufacturing operations. The
Company, as a consequence, anticipates that the majority of its future revenues
will be from license and royalty fees, private label agreements for the
Company's FLASHBACK family of products and from contract development services.
In November 1996, the Company entered into an OEM contract with Sanyo
Information Systems U.K. Ltd. and in January 1997 entered into an OEM and
development contract with Lanier Worldwide, Inc. 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. As a result of the
restructuring of the Company to discontinue its contract manufacturing
operations and focus on licensing and contract development, the Company reduced
its monthly cash operating costs from approximately $450,000 per month to
$200,000 per month. However, the Company's losses are expected to continue until
such time as the Company is able to increase sales of FLASHBACK proprietary
products and/or obtain licensing, royalty and development revenues sufficient to
cover fixed costs of operations. Should the Company be unable to accomplish the
foregoing and operate profitably, the Company may be forced to reduce or curtail
operations. The Company continues to be subject to the risks normally associated
with any new business activity, including unforeseeable expenses, delays and
complications. Accordingly, there is no assurance the Company can or will
report operating profits in the future.
Sales of and demand for the Company's FLASHBACK recorder and Mobile
Office products (including VOICELINK) introduced into the domestic retail
channel in September 1996 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 meet the demands of the retail
distribution market. However, initial shipments of the foregoing to Sanyo for
distribution on an international basis have been positively received. As a
result, management has elected to focus on OEM licensing with respect to the NCI
Micro OS Imbedded Operating System and Multichip modules and contract
development of private label and custom-designed products for computers,
dictation systems, computer peripherals and telecommunication equipment.
Revenues from licensing, royalties and development services, as well as,
continuing sales of the Company's private labeled FLASHBACK and related products
are expected to be subject to significant month to month variability resulting
from the limited market penetration and license activity to date, the timing and
delays associated with OEM new product introductions and the seasonal nature of
demand for consumer electronic products. The markets for consumer electronic
products are subject to rapidly changing customer tastes and a high level of
competition. Demand for the Company's products is expected to be influenced by
OEM market success, technological developments and general economic conditions.
Because these factors can change rapidly, customer demand for the Company's
technology can also shift quickly. The Company may not be able to respond to
technical developments by competitors because of the time required and risks
involved in the development or introduction of new or improved technology and
due to limited financial resources.
16
<PAGE> 21
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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<PAGE> 22
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 purchasers 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 Nine Months Ended December 31, 1996 and Nine Months Ended
December 31, 1995. For the first nine months of fiscal 1997, the Company
reported revenues of $764,710, 45% less than revenues of $1,379,698 for the
first nine months of fiscal 1996. For the three months ended December 31, 1996,
revenues were $463,167 compared to $573,095 for the same quarter of the prior
year. The decrease in revenues is due primarily to reduced FLASHBACK sales
compared 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. Revenue for the
third fiscal quarter of 1997 included $214,250 of OEM revenue. The Company's
future revenues are expected to consist primarily of license and royalty fees
and contract development services.
For the first nine months of fiscal 1997, the Company reported a gross
loss of $1,012,414 as compared to a gross loss of $1,887,049 for the first nine
months of fiscal 1996. The gross loss for the third fiscal 1997 quarter was
$264,639 compared to a gross loss of $501,247 for the third fiscal 1996
quarter. Gross losses are due to the minimal sales of the FLASHBACK product
while significant fixed manufacturing overhead related to cost of sales
(primarily facility and equipment costs) plus the cost of product continued to
exceed the revenues generated by sales. The first quarter of fiscal 1996 cost
of sales included $980,000 representing the cost of 7,000 discontinued
FLASHBACK units sold in exchange for $1,172,500 of media trade credits. The
Company recognized no prepaid asset nor any revenue in connection with the
trade credits. The second quarter of fiscal 1997 included the write-down of
approximately $178,850 of inventory no longer usable due to technical changes
in FLASHBACK models. In connection with the Company's restructuring, it is
disposing of first generation FLASHBACK materials and inventory, with some
products expected to be sold to OEM licensees of the Company's FLASHBACK
technology. There can be no assurance the Company can achieve positive gross
margins in the future.
Total operating expenses (including research and related expenditures,
selling and administrative, restructuring costs and interest expense less
interest income) were $5.6 million (including a $1.5 million restructuring
charge) for the nine months ended December 31, 1996 as compared to $3.6 million
for the nine months ended December 31, 1995. Total operating expenses for the
third fiscal quarter of 1997 were $2.7 million (including the $1.5 million
restructuring charge) compared to $1.2 million for the second fiscal quarter of
1996. Selling and administrative expenses increased in the first nine months of
fiscal 1997 to $2.5 million compared to $2.6 million for the comparable period
of the prior year. The increase of $0.9 million in the current nine month
period included an increase in personnel and consulting of $510,000 due
primarily to additional sales and marketing personnel, $65,000 costs of an
office in U.K., a $65,000 increase in marketing travel, and a $185,000 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 development costs were $634,254 for the first nine months
of fiscal 1997, as compared to $743,769 for the first nine months of fiscal
1996 which included $370,000 of FLASHBACK pre-production development costs.
Excluding this item, the $260,000 increase in the current period resulted
primarily from a $100,000 increase in personnel costs due to increased staffing
and a $115,000 increase in outside design and consulting cost. Research and
development costs are subject to significant quarterly variations depending on
the use of outside services and the availability of financial resources.
The Company recorded a restructuring charge of $1,495,500 in December
1996 which included a $989,500 inventory writedown, $98,500 in losses on
purchase commitments, $47,000 in severance costs, a $310,500 loss on disposal of
manufacturing equipment and $50,000 related to facility reduction and other
costs. At December 31, 1996 a total of $506,000 was accrued relating to the
restructuring charges which is expected to be substantially completed by fiscal
year end (March 31, 1997). The restructuring charge is a result of the change in
the Company's operations due to the discontinuation of contract manufacturing
services and the decision to focus on OEM and licensing activities related to
the Company's FLASHBACK technology. Licensing to OEMs relates primarily to the
Company's core digital flash memory audio recording technology. The impact of
the discontinuation of the contract manufacturing services is not anticipated
to adversely impact or decrease future revenues and profits, given that the
Company never successfully recaptured contract manufacturing customers after
converting the contract manufacturing operation to exclusively produce the
Company's FLASHBACK product in December 1994.
As a result of the restructuring and reduction in personnel, the
Company has reduced monthly cash operating costs from approximately $450,000
per month to $200,000 per month.
The Company's interest expense for the nine months ended December 31,
1996 was $78,599, a reduction from $290,991 for the prior period resulting from
the retirement of demand loans and other interest bearing debt outstanding
during fiscal 1996 and 1997 and more reliance on equity to finance operations.
The Company reported a net loss of $3.0 million for the third quarter
of fiscal 1997, as compared to an operating loss of $1.7 million for the third
quarter of fiscal 1996 with the increase due primarily to the restructuring
charge and increased research and development expenses offset in part by a
reduced gross loss. For the nine months ended December 31, 1996 the operating
loss was $6.6 million compared to $5.5 million for the prior period.
At December 31, 1996, the Company had working capital of $189,826,
compared to working capital of $1.1 million at March 31, 1996. The Company had
approximately $2.1 million of working capital invested in inventories at
December 31, 1996. As of such date, the recorded value of inventory related to
the Company's FLASHBACK family of products is anticipated to be shipped within
the next nine months to fulfill current contractual private label agreements.
The decrease in working capital is a result of the Company's continuing losses
which consumed working capital during the period. Approximately $5.6 million
in cash was used in operating activities by the Company in the nine months
ended December 31, 1996 which included a $0.7 million reduction in accounts
payable and accrued liabilities and a $0.3 million increase in accounts
receivable.
During the first nine months the Company retired the $2,185,546
obligation related to the demand loan payable to CVD financial Corporation
("CVD"). During the first fiscal quarter, $3 million of long-term convertible
notes, plus accrued interest, were converted into common stock. The Company has
no long-term debt nor any bank lines of credit or related financing facilities.
During the first nine months of fiscal 1997, the Company obtained equity from
the sale of common stock and pre-paid warrants for net cash proceeds of $5.1
million.
Given the Company's cash position and assuming the rate of revenues and
expenditures and level of operations after the restructuring, the Company will
require additional capital within the next 2 months to meet its debts as they
become due and to continue as a going concern. The Company is currently
financing its operations from the sale of equipment and inventory and from funds
received from OEM agreements. The Company estimates that at current expenditure
levels and projected working capital requirements it will require a minimum of
an additional $1 million to continue operating for the next twelve months
without any contribution from operations. The existing OEM and licensing
business may be able to generate some of the additional funding required
depending on the ability of OEM and licensing activities to generate revenues,
however there can be no assurance thereof. The Company is currently pursuing
various alternatives to meet its needs for additional capital. There can be no
assurance the Company will be successful and any such financing may be dilutive
to current shareholders. The failure to raise additional funds could have a
material adverse effect on the Company and could force the Company to further
reduce or curtail operations.
The Company may, from time to time, seek additional funds through lines
of credit, public or private debt or equity financing. The Company estimates
that it will require additional capital to finance future developments and
improvements to its technology. There can be no assurances that additional
capital will be available when needed.
For the nine months ended December 31, 1996, net cash decreased by $2.8
million. Cash used in operating activities was $5.6 million. Major components
using cash were a net loss of $6.6 million after depreciation and a decrease in
other accounts payable and accruals of $0.7 million. The major component of
cash provided by financing activities was proceeds from issuance of common
shares and pre-paid warrants of $5.1 million less $2.2 million used to retire
the obligation on the demand loan payable.
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<PAGE> 24
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 Company's private label 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 OEM markets; and (v) reducing overhead and
operating expenses by discontinuing its contract manufacturing services. 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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<PAGE> 25
The Company is actively developing a number of licensing, private label
and OEM opportunities and has signed agreements, as of May 1997, with Sanyo
Information Systems UK Ltd. and with Lanier Worldwide, Inc. Under the terms of
the Sanyo Agreement, Sanyo is private labeling current Company products
(principally, FLASHBACK, SOUNDCLIP and VOICELINK) under an exclusive arrangement
in the United Kingdom. In March 1997, the Sanyo Agreement was expanded to
provide for sales by Sanyo Buro-Electronic Europa to the rest of Europe. The
agreement, which terminates in October 1999, provides that Sanyo must purchase
at least 500 product units per month (plus or minus 20%) in order to maintain
exclusivity. As of May 1997, the Company has received approximately $220,000 in
orders from Sanyo, of which approximately $108,000 has been shipped and paid
for. Under the terms of the Lanier Agreement, the Company is receiving
non-recurring engineering expenses ("NRE"), upon the satisfaction of certain
milestones, to develop a new portable digital voice recorder and related
accessory products. The Lanier Agreement contemplates that the product to be
developed will be completed in early 1998, with the Company to provide Lanier
with manufactured product thereafter to be sold by Lanier's sales force
worldwide. As of May 1997, the Company is in process of completing its
industrial designs for the product and is beginning the software development
stage with respect to the product to be developed. The Company, as of such date,
in connection therewith, has received NRE of approximately $302,000. The
agreement is for an initial term of three years, terminating January 6, 2000.
The quantity of product to be purchased and sold by Lanier is to be determined
by Lanier according to periodic forecast reports submitted to the Company.
Neither Lanier, nor Sanyo, are affiliates of the Company.
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, and obtaining new revenues from
OEM and licensing agreements with companies like Sanyo and Lanier. 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). The Company is selling a significant portion of its
manufacturing equipment and retiring leases accordingly. Estimated remaining
commitments are included in the cash requirements discussed above. The Company
is currently in arrears and in breach of payment obligations totaling $0.6
million for a capital lease. The Company, however, has not received notice of
default from the lessor and plans to dispose of the equipment.
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. The Company has accrued $98,500
to settle outstanding commitments in this regard. 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 1996 and to date in fiscal 1997 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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<PAGE> 26
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.
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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<PAGE> 27
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.
23
<PAGE> 28
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.
NORRIS FLASH FILE SYSTEM(TM) ("NFFS"): 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 be
available to enter the market on a private label or OEM basis during 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' private labeled 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 similarly private label its consumer products and
proprietary technology to selected name-brand companies in the dictation,
personal computer, consumer electronics, telecommunications, paging, and other
industries.
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 its private label customers to 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.
Manufacturing. 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.
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.
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
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
Michael W. Joe - Mr. Joe was elected as a director in December 1996.
Since January 1997, Mr. Joe has been employed by Fleet Equity Partners, a
private investment firm. From 1994 to January 1997, Mr. Joe was 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> <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) *
All officers and directors
as a group (4 persons) 1,628,496(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
Beneficial Maximum Number Percentage of
Ownership of of Shares of Common Stock After
Common Stock at Common Stock Giving Effect to
Name May , 1997(1) Offered for Sale Proposed Sale (2)
------------------------ ---------------- ----------------- -----------------
<S> <C> <C> <C>
Dina Partners, L.P. 464,824 464,824 0.00
Porter Capital Management 348,618 348,618 0.00
EDJ Ltd. 116,206 116,206 0.00
Irwin Roberts 166,175 166,175 0.00
Stu Zimmerman 87,154 87,154 0.00
Sanwa Bank Trustee 83,004 83,004 0.00
for Joe Wizan IRA
Kamren Ghiasi 52,293 52,293 0.00
Privatim Finanz AG 830,043 830,043 0.00
Jerome Moss 415,021 415,021 0.00
Michael Klein 268,170 268,170 0.00
Michael Klein Trustee Under 83,004 83,004 0.00
Agreement dated 12/22/80
Joyce Faye Klein Trust
FBO Michael Klein
Issue Trust
Gregory Hookstratten 166,009 166,009 0.00
St. Claire Options Trading, 1,162,974 1,162,974 0.00
L.P. (3)
JMG Management, Inc. (3) 1,162,974 1,162,974 0.00
Iacocca Capital Partners, 410,531 410,531 0.00
L.P. (3)
William Elkus (3) 193,830 193,830 0.00
Richard Bertagna (3) 193,830 193,830 0.00
Kolel Zera Kodesh (3) 378,739 378,739 0.00
</TABLE>
33
<PAGE> 38
<TABLE>
<S> <C> <C> <C>
Gross Foundation, Inc. (3) 5,681,085 5,681,085 0.00
Morgen Christiano & Co., LLC (3) 1,893,695 1,893,695 0.00
Milton Klein (3) 227,244 227,244 0.00
U.C. Financial Ltd. (3) 946,848 946,848 0.00
Steve Katznelson (3) 943,957 943,957 0.00
Madison Trading, Inc. (3) 1,283,781 1,283,781 0.00
Klein Investment Group, L.P. (4) 401,924 401,924 0.00
Higham, McConnell & Dunning 150,000 150,000 0.00
Gray Cary Ware & Friedenrich 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 the average sales price per share of Common Stock for the
five trading days preceding the date of exercise (used to determine the
number of shares of Common Stock into which the warrants may be
exercised) equals $0.45, less a discount of 30%. 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
December 31, 1996, there were 22,788,828 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 April 30, 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>
/s/ Elwood G. Norris Chairman of the Board, Chief April 30, 1997
- -------------------------- Executive Officer and Director
Elwood G. Norris (principal executive officer)
/s/ Fred Falk President and Director April 30, 1997
- --------------------------
Fred Falk
/s/ Renee Warden Chief Accounting Officer April 30, 1997
- -------------------------- (principal financial and
Renee Warden accounting officer)
/s/ Robert Putnam Vice President and Director April 30, 1997
- ---------------------------
Robert Putnam
/s/ Michael W. Joe Director April 30, 1997
- ---------------------------
Michael W. Joe
</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 December 31,
1996 and March 31, 1996 (unaudited) F-23
Unaudited Interim Consolidated Statements of Operations for the three
and nine months ended December 31, 1996 and 1995 F-24
Unaudited Interim Consolidated Statements of Cash Flows for the
nine months ended December 31,1996 and 1995 F-25
Notes to Unaudited Interim Consolidated Financial Statements F-26
38
<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>
DECEMBER 31, 1996 MARCH 31, 1996
$ $
------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash 31,039 2,843,540
Accounts receivable, less allowance for doubtful
accounts of $11,647 and $11,647, respectively 393,166 94,619
Inventory (note 3) 2,108,759 3,243,245
Prepaid expenses and other 125,399 226,436
------------------------------------------
Total current assets 2,658,363 6,407,840
Property and equipment, net 1,197,200 1,359,791
Other intangible assets, net of accumulated amortization of
$30,480 and $24,896 respectively 43,929 49,513
------------------------------------------
TOTAL ASSETS 3,899,492 7,817,144
==========================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Demand loan payable (note 4) -- 2,185,546
Accounts payable, trade 1,633,946 2,554,209
Other accounts payable and accrued liabilities 667,284 443,225
Current portion of capital lease obligations 167,307 168,831
------------------------------------------
TOTAL CURRENT LIABILITIES 2,468,537 5,351,811
------------------------------------------
Convertible notes payables -- 3,000,000
------------------------------------------
TOTAL LIABILITIES 2,468,537 8,351,811
------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $.001 par value, 5,000,000 shares authorized;
none issued. -- --
Common stock, $.001 par value, authorized 60,000,000 and
30,000,000 respectively; 22,788,828 and 15,103,703 shares
outstanding, respectively (note 5) 26,964,647 21,762,337
Pre-paid Warrants (note 6) 3,396,505 --
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (30,522,513) (23,889,320)
------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 1,430,955 (534,667)
------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 3,899,492 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 NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
1996 1995 1996 1995
$ $ $ $
-------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
REVENUES 463,167 573,095 764,710 1,379,698
Cost of sales 727,806 1,074,342 1,777,124 3,266,747
-------------------------------- ----------------------------------
Gross profit (loss) (264,639) (501,247) (1,012,414) (1,887,049)
-------------------------------- ----------------------------------
OPERATING EXPENSE (INCOME)
Selling and administration 1,016,455 924,793 3,466,105 2,620,525
Research and related expenditures 226,569 139,679 634,254 743,769
Restructuring cost (note 8) 1,495,500 -- 1,495,500 --
Interest expense 1,077 109,051 78,599 290,991
Interest income (3,898) (7,232) (28,679) (27,641)
Gain on sale of investment (25,000) -- (25,000) --
-------------------------------- ----------------------------------
2,710,703 1,166,291 5,620,779 3,627,644
-------------------------------- ----------------------------------
Operating loss (2,975,342) (1,667,538) (6,633,193) (5,514,693)
Provision for income taxes (note 9) -- -- -- --
-------------------------------- ----------------------------------
NET LOSS (2,975,342) (1,667,538) (6,633,193) (5,514,693)
================================ ==================================
Net loss per share (note 10) (0.13) (0.12) (0.31) (0.45)
================================ ==================================
Weighted average shares 22,424,573 13,748,152 21,610,362 12,381,062
================================ ==================================
</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 NINE MONTHS ENDED
DECEMBER 31
$ $
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
$ $
Net loss (6,633,193) (5,514,693)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 314,700 373,049
Loss on disposal of property and equipment - 38,550
Gain on sale of investment (25,000)
Interest paid by issuance of common stock 33,773 -
Professional services paid by issuance of common stock 305,953 -
Legal settlement paid by issuance of common stock 127,500 -
Changes in assets and liabilities:
Accounts receivable (298,547) (219,876)
Inventory 1,134,486 (762,444)
Prepaid expenses and other 101,037 (30,077)
Accounts payable, trade (920,263) 950,731
Other accounts payable and accrued liabilities 224,059 (329,489)
----------------- -----------------
Cash used in operating activities (5,635,495) (5,494,249)
----------------- -----------------
INVESTING ACTIVITIES
Purchase of property and equipment (146,525) (35,506)
Proceeds on disposal of property and equipment - 28,300
Proceeds on sale of investment 25,000
Investment in patents and intangibles - (3,937)
----------------- -----------------
Cash used in investing activities (121,525) (11,143)
----------------- -----------------
FINANCING ACTIVITIES
Repayments under demand loan payable (2,185,546) (296,354)
Principal payments on capital lease obligations (1,524) (24,245)
Proceeds from issuance of shares and warrants 5,131,589 3,912,586
----------------- -----------------
Cash provided by financing activities 2,944,519 3,591,987
----------------- -----------------
Net decrease in cash (2,812,501) (1,913,405)
Cash, beginning of period 2,843,540 3,291,203
----------------- -----------------
Cash, end of period 31,039 1,377,798
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest 78,599 290,991
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
December 31, 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 developing, manufacturing and exploiting
proprietary electronic technology and products.
2. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Norris Communications, Inc.
("NCI"), a California corporation, based in San Diego County, California.
The interim consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future. The
Company has incurred significant losses and negative cash flow from operations
in each of the last three fiscal years and for the three and nine month periods
ended December 31, 1996 and has an accumulated deficit of $30,522,513 at
December 31, 1996. The Company's operational plan involves reducing operating
expenditures and focusing on licensing and product development on a contract
basis and for the Company's own account. See Note 8. The Company's ability to
continue as a going concern is in substantial doubt and is dependent upon
obtaining additional financing and achieving a profitable level of operations.
These interim consolidated financial statements do not give effect to any
adjustments which would be necessary should the Company be unable to continue as
a going concern and therefore be required to realize its assets and discharge
its liabilities in other than the normal course of business and at amounts
different from those reflected in the accompanying interim consolidated
financial statements.
These interim consolidated financial statements have been prepared in accordance
with accounting principles generally accepted 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 nine month periods ended December 31, 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>
December 31, 1996 March 31, 1996
------------------ --------------
<S> <C> <C>
Raw material $1,141,471 $1,569,812
Work in process 147,748 194,437
Finished goods 819,540 1,478,996
---------- ----------
$2,108,759 $3,243,245
========== ==========
</TABLE>
As of December 31, 1996, the recorded value of inventory related to the
Company's FLASHBACK family of products is anticipated to be shipped within the
next nine months to fulfill current contractual private label agreements.
4. DEMAND LOAN PAYABLE
The demand loan payable to CVD Financial Corporation plus accrued interest was
retired on July 31, 1996.
F-26
<PAGE> 69
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1996
5. COMMON STOCK
The following table summarizes shares issued during the nine month period ended
December 31, 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 2,240,143 1,534,817
Stock issued for cash at $0.69125 per share net of
offering costs of $5,373 245,931 164,627
Stock issued for accounts payable at $0.4375
to $0.87 per share 460,000 233,953
Stock issued to executives at $0.594 per share 60,000 35,640
- ---------------------------------------------------------------------------------------
Balance, December 31, 1996 22,788,828 $26,964,647
=======================================================================================
</TABLE>
6. PRE-PAID WARRANTS
Represents proceeds from warrants pre-paid for cash net of offering costs of
$409,395. 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 $3,000,000 of warrants) or a 30% discount to the 5 day
moving average bid price of the common shares on the day prior to exercise. The
exercise price of the warrants will be further discounted by 7% per year and for
other events until the warrants are exercised. At December 31, 1996 these
warrants were exercisable into approximately 5.5 million common shares.
7. OPTIONS AND WARRANTS
At December 31, 1996 warrants were outstanding into the following listed
shares:
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ 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 0.9875 July 2001
Warrants(a) 150,000 0.65625 October 2001
Warrants(a) 128,067 1.25 October 2005
- ---------------------------------------------------------------------------------------
Total 1,770,071
- -======================================================================================
</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.
<PAGE> 70
NORRIS COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 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 December 31, 1996 1,422,658
=========
</TABLE>
Options outstanding are exercisable at prices ranging from $0.90 to $6.01 and
expire over a period from 1997 to 2000.
8. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $1,495,500 in December 1996 which
included a $989,500 inventory writedown, $98,500 in losses on purchase
commitments, $47,000 in severance costs, a $310,500 loss on disposal of
manufacturing equipment and $50,000 related to facility reduction and other
costs. At December 31, 1996 a total of $506,000 was accrued relating to the
restructuring charges which is expected to be substantially completed by fiscal
year end (March 31, 1997). The restructuring charge is a result of the change
in the Company's operations due to the discontinuation of contract manufacturing
services due to a decision to focus on OEM and licensing activities related to
the Company's FLASHBACK technology. The impact of the discontinuation of the
contract manufacturing services is not anticipated to adversely impact or
decrease future revenues and profits, given that the Company never successfully
recaptured contract manufacturing customers after converting the contract
manufacturing operation to exclusively produce the Company's FLASHBACK product
in December 1994.
9. 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.
10. 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.
11. CONTINGENT LIABILITY
The Company may have a liability to certain security holders due to a
possible violation of federal and state securities laws prohibiting an issuer
from selling securities in a private placement by any form of general
solicitation or advertising. Section 5 of the Securities Act of 1933 prohibits
the sale of securities pursuant to a prospectus that does not satisfy the
requirements of the Securities Act. Such violation, if deemed to have occurred,
could give rise to a private right of action by the affected security holders
for rescission of recently issued securities in the amount of $5.67 million and
for damages. Management of the Company has provided notice to each of the
affected security holders of the possible violation and has obtained from
affected security holders, representing $5.42 million of the above issued
shares, written release and waivers with respect thereto. It is possible that
the release and waiver agreements could be challenged at some later date by an
affected security holder on grounds of enforceability. Although Management of
the Company has no present reason to believe that the release and waiver
agreements are not enforceable, a contrary finding by a federal or state court
may result in a continuing risk of potential liability. Management of the
Company believes the likelihood of a future event occurring to confirm the
contingent liability is remote.
F-28
<PAGE> 71
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> 72
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> 73
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> 74
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> 75
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> 76
<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> 77
<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, filed as an Exhibit to the
Registration Statement.
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> 78
<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> 79
<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> 80
<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., filed as an Exhibit to the
Registration Statement.
10.27 Agreement dated July 30, 1996 between the Company and Greystone
Capital, Ltd., filed as an Exhibit to the Registration Statement.
10.28 OEM Purchase Agreement dated October 18, 1996 between the Company and
Sanyo Information Systems (U.K.) Ltd., filed as an Exhibit to the
Registration Statement.
10.29 Release and Waiver Agreement between the Company and certain Selling
Shareholders, filed as an Exhibit to the Registration Statement.
10.30 Agreement dated January 6, 1997 between the Company and Lanier
Worldwide, Inc.* [Portions of this Exhibit have been omitted (based
upon a request for confidential treatment) and have been filed
separately with the Securities & Exchange Commission pursuant to Rule
406].
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, filed
as an Exhibit to the Registration Statement.
23.2 Consent of Ernst & Young.*
</TABLE>
_____________________________________________
* Each exhibit marked with an asterisk is filed concurrently herewith. Each
exhibit not marked with an asterisk has either been previously filed as an
exhibit to the Registration Statement or is incorporated by reference to an
exhibit previously filed by the Company as indicated above.
II-10
<PAGE> 1
EXHIBIT 10.30
AGREEMENT
between
NORRIS COMMUNICATIONS INC.
and
LANIER WORLDWIDE, INC.
* Portions of this Exhibit have
been omitted (based upon a request
for confidential treatment) and have
been filed separately with the
Securities and Exchange Commission
pursuant to Rule 406.
DATE: 12/2/96
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Article Title
------- -----
<S> <C>
1. Development Phase
2. Lanier's Marketing Rights
3. Purchase Price
4. Orders
5. Terms of Payment
6. Delivery
7. Inspection and Acceptance
8. Safety Standards and Regulations
9. Warranty
10. Servicing and Spare Parts
11. Trademarks
12. Patents, etc.
13. Indemnification
14. Duration of the Agreement
15. Termination of the Agreement
16. Printed Materials
17. Disclosure of Information
18. Assignment
19. Notices
20. Exceptions
21. Entire Agreement
22. Arbitration
23 Governing Law and Trade Terms
24. Miscellaneous
Appendix I - Product Requirements
Appendix II - Price
Appendix III - Inspection Standards
Appendix IV - Milestone and Payment Schedule
Appendix V - Lanier Exclusive Features
Appendix VI - Escrow Agreement
</TABLE>
2
<PAGE> 3
AGREEMENT
THIS AGREEMENT ("the Agreement") is made and entered into this
_____________ day of _________________, 19____, by and between NORRIS
COMMUNICATIONS, INC., a corporation duly organized and existing under the laws
of the State of Delaware with its principal place of business at 12725 Stowe
Drive, Poway, California 92064 (hereinafter referred to as "Norris") and LANIER
WORLDWIDE, INC., a Delaware corporation, having its principal place of business
at 2300 Parklake Drive, N.E., Atlanta, Georgia 30345 (hereinafter referred to
as "Lanier",) (collectively referred to as "the Parties").
WITNESSETH:
WHEREAS, Lanier and Norris desire to work together to develop certain
products; and
WHEREAS, Norris will develop certain products in accordance with the
terms and conditions set forth in this Agreement; and
WHEREAS, Lanier desires to purchase from Norris, and Norris is willing
to sell to Lanier, certain products manufactured by Norris under the Lanier
brand, for resale in certain territories; and
WHEREAS, Lanier shall at its own expense direct its activities for the
sale of the products under Lanier's name and trademarks.
NOW, THEREFORE, in consideration of the mutual promises contained
herein the Parties hereto agree as follows:
<PAGE> 4
Article 1. DEVELOPMENT PHASE
(a) The period of time between the execution of this Agreement and
the completion of the milestones described in Appendix IV
("the Milestones") shall constitute the initial phase of this
Agreement ("the Initial Phase"). During the Initial Phase,
Norris will develop the Lanier Digital Portable Recorder
without ***** the Lanier Digital Portable Recorder with *****
and the Lanier Portable Digital ***** ("the Products") in
accordance with the Product Requirements as set forth in
Appendix I hereto ("the Product Requirements"), and will
further meet all of the Milestones on or before the completion
date specified on Appendix IV for each Milestone ("the
Milestone Completion Dates"). If modifications or changes to
the Product Requirements affect the Purchase Price, as
defined in Article 3 of this Agreement, the parties shall
negotiate the price change in good faith.
(b) If Norris fails to either (i) develop the Product in
accordance with the Product Requirements or (ii) meet all of
the Milestones on the Milestone Completion Dates, and fails to
cure such failure within ten (10) days after written notice of
such failure, Norris will be in breach of this Agreement, and
Lanier will be entitled to all of its rights and remedies set
forth in this Agreement.
(c) Norris hereby conveys to Lanier all rights, title and interest
in any and all tooling, fixtures, and all other tools and test
devices used in the manufacturing, assembly and testing of the
Products ("the Product Tooling"). Norris will submit to
Lanier contemporaneously with the execution of this Agreement
a list of all Product Tooling
*This portion of the Exhibit has been
omitted (based upon a request
for confidential treatment) and have
been filed separately with the
Securities and Exchange Commission
pursuant to Rule 406.
2
<PAGE> 5
("the Product Tooling List"). The Product Tooling List shall include the
following information: (1) the vendor and the manufacturer of the Product
Tooling; (2) the cost of the Product Tooling; (3) the date purchased; (4) the
serial number of the Product Tooling, if applicable; and (5) the physical
location of the Product Tooling. This Product Tooling List shall be regularly
updated by Norris to include any changes, additions or deletions to the
information contained therein, and Norris shall provide Lanier with an updated
Product Tooling List within five (5) days of the date on which the Product
Tooling List is amended.
Article 2. LANIER'S MARKETING RIGHTS
Lanier shall have the exclusive right to sell and distribute the
Products throughout the entire world ("the Territory").
Article 3. PURCHASE PRICE
The purchase price for the Products ("Purchase Price") is set forth in
Appendix II hereto. The Purchase Price may only be modified by mutual
written consent of both Parties to this Agreement. The Parties agree
that if market conditions change in any part of the Territory such
that a reduction of the Purchase Price is necessary in order for
Lanier to be competitive in a particular marketplace, the Parties
agree to reduce the Purchase Price by an amount sufficient to allow
Lanier to compete in that particular market. The parties further
agree that to the extent that market conditions dictate an increase of
the Purchase Price, the Purchase Price shall not exceed the then
current Consumer Price Index, as reported by the Federal Government.
3
<PAGE> 6
Article 4. ORDERS
(a) Lanier shall provide Norris with a forecast report ("Forecast
Report") via Lanier's standard purchase order. The Forecast
Report shall reach Norris no later than the fifteenth (15th)
calendar day (3) months before the month in which the Products
forecasted on the Forecast Report are to be delivered. Lanier
shall state in the Forecast Report the product name, model
number, description, quantity, price, payment terms, shipment
month and date, and destination of the Products to be
purchased by Lanier.
(b) Lanier shall be committed to purchase the number of units of
each model of the Products set forth in the Forecast Report
for the first three (3) months of any period forecasted for
pursuant to Article 4(a) ("the Firm Period"). Such commitment
is hereinafter referred to as the "Firm Quantify." The Firm
Quantity for any given month within the first three (3) months
of a Firm Period may not be reduced or increased by Lanier in
any subsequent purchase order without the consent of Norris.
The number of units of each model of the Products forecasted
for month four (4) may be adjusted by +100% as it moved to
firm month three (3) and month five (5) forecast may be
adjusted by +100% as it becomes month four (4) forecast.
(c) Any terms or conditions printed on the face or the reverse
side of the Lanier purchase order sheet and/or Norris's
acknowledgment form shall not be part of this Agreement nor
shall they constitute the terms and conditions of the Sales
Contract for the Products, even in case such purchase order
sheet or Norris's acknowledgment form is signed and returned
by Norris to Lanier or Lanier to Norris.
(d) Products purchased by Lanier's subsidiaries and affiliates
will be deemed to be Lanier's purchases for purposes of
tracking Lanier's yearly purchases.
4
<PAGE> 7
Article 5. TERMS OF PAYMENT
(a) The payment schedule for the Initial Phase of this Agreement
shall be in accordance with Appendix IV hereto.
(b) With respect to payment for purchase of the Products, Norris
shall render invoice upon shipment of the Products. Norris
shall state in the invoice the product name, model number,
description, destination, quantity, and payment term of the
Products. Payment shall be due within thirty (30) days from
either: (1) the date of receipt by Lanier of Norris's correct
invoice, or (2) Lanier's receipt of the Products, whichever is
later.
Article 6. DELIVERY
Norris will deliver the Products to Lanier by the date specified in
the applicable purchase order. Delivery terms shall be F.O.B.
Fontana, California.
Article 7. INSPECTION AND ACCEPTANCE
(a) Lanier shall have the right to conduct, at Lanier's expense,
an inspection of the Products in Norris's factory in
accordance with the inspection standards and procedures set
forth in Appendix III attached hereto and made an integral
part hereof. The inspection before delivery will be carried
out, at Lanier's option, by Lanier during a designated
inspection period not exceeding five (5) working days each
time. Norris shall give Lanier a minimum of fourteen (14)
days' advance notice that the Products will be ready for
conducting acceptance tests.
(b) If Lanier rejects any of the Products, Lanier may, at its sole
discretion, require Norris to:
5
<PAGE> 8
i) Rework the rejected Products, or
ii) Replace same with acceptable Products, or
iii) Rework itself the rejected Products. In this case,
Norris will furnish to Lanier at no charge repair or
replacement parts necessary for the rework of the
rejected Products performed by Lanier. In any case,
Lanier conducts a 100% inspection of the lot in which
the rejected Products are included, Norris agrees to
pay Lanier the labor charge at the rate separately
agreed upon between the Parties hereto.
Lanier's remedies set forth in this Article 7 are in addition
to, and not in lieu of, Lanier's rights and remedies otherwise
set forth in this Agreement.
Article 8. SAFETY STANDARDS AND REGULATIONS
Norris shall, at its cost and responsibility, take all necessary steps
so that the Products shall comply with the safety standards
established by UL (the "Standards") effective as of the date of
shipment of the Products. Additionally, Norris shall, at Lanier's
request, take all necessary steps so that the Products comply with the
safety standards established by CSA, FCC and CE (the "Additional
Standards").
Article 9. WARRANTY
(a) Norris warrants that title to the Products, when conveyed to
Lanier on an F.O.B. basis, is good, that the transfer is
lawful, that the Products are delivered free from any security
interest or encumbrance except as otherwise agreed upon
between the Parties in writing, and that the Products meet the
Product Requirements set forth in Appendix I.
6
<PAGE> 9
(b) Norris warrants to Lanier that the Products delivered under
this Agreement are free from defects and failures in design,
material and workmanship as well as in full compliance with
the Product Requirements.
(c) Norris's product warranty period is one year after Lanier's
receipt of the Products or according to Norris's written
product warranty, if longer. Conditions and remedies for
epidemic failure of the Products under this Agreement shall be
the following:
If any of the Products or component parts thereof exhibit
defects of the same kind and nature at the same place in the
Products and at an unusual frequency of not less than four
percent (4%) or different defects of not less than six percent
(6%) of the total quantity of the Products sold by Lanier in
the Territory and such defects are the result of faulty
workmanship or design defects on the part of Norris or defects
in materials arising from any cause for which Norris is
responsible, then Norris agrees to give compensation, or
render assistance, to Lanier to such extent as is specified
below.
i) Free supply (freight prepaid) by Norris of
replacement components parts for the component parts
found to be defective, and
ii) Rendition of technical assistance or advice to Lanier
in repairing such defective Products or component
parts thereof as may be decided by Norris from time
to time, and
iii) Payment of reasonable charges for labor as agreed
between Norris and Lanier.
Provided, however, that the foregoing Lanier's remedy shall
only be available subject always to the following conditions
being met, and in the
7
<PAGE> 10
event of failure of Lanier to so meet, Lanier's right to claim
remedy as provided in subparagraphs i), ii), and iii) above
shall lapse:
i) Any particulars as to the Products or the component
parts thereof alleged or found to be defective shall
be furnished to Norris in writing within 30 days of
discovery by Lanier of such defect,
ii) The contents of defects stated in i) immediately
above shall be subject to Norris's verification, and
iii) Defective Products or component parts shall forthwith
be returned to Norris by Lanier, freight payable at
destination, if Norris so requests.
(c) Except as provided in this Article 9, THERE IS NO WARRANTY
THAT THE PRODUCTS SOLD HEREUNDER SHALL BE MERCHANTABLE OR FIT
FOR ANY PARTICULAR PURPOSE, NOR IS THERE ANY OTHER WARRANTY,
EXPRESS OR IMPLIED, CONCERNING THE PRODUCTS.
IN NO EVENT SHALL NORRIS OR LANIER BE LIABLE FOR ANY INDIRECT,
INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR
LOSS, INCLUDING LOSS OF PROFIT.
8
<PAGE> 11
Article 10. SERVICING AND SPARE PARTS
(a) Norris shall provide spare parts for the Products ("the Spare
Parts") in accordance with the terms and conditions of this
Article 10. Norris shall provide Lanier with a list of the
Spare Parts necessary to maintain the Products, together with
the prices (F.O.B. Fontana, California) in adequate lead time
to ensure initial Spare Parts shipment to coincide with the
delivery of the first volume production of Products.
Norris shall consecutively provide to Lanier with a list of
all other Spare Parts necessary to maintain Products two (2)
calendar months prior to the first volume production of
Products.
Norris agrees to stock a reasonable quantity of Spare Parts
required to provide service and maintenance for the Products
in the Territory (in the reasonable judgment of Lanier). The
Parties hereto agree that the prices of the Spare Parts
referred to in the Spare Parts List provided by Norris to
Lanier separately shall not be changed during the term of the
production of Products to which such Spare Parts relate, but,
after the last production of each Product shall be reviewed
annually and adjusted, if necessary, based upon information in
writing from time to time which is provided to Lanier by
Norris; provided, however, that such prices shall not increase
at a rate of exceeding seven percent (7%) per annum. Lanier
must be given a 90- day notice prior to any price change.
(b) The initial price of all Spare Parts including packaging shall
be quoted in the Spare Parts List provided by Norris to Lanier
separately so that total of all the unit prices of components
which compose the complete unit of the Products, shall not
exceed one hundred and twenty-five percent (125%) of the
initial price of the Products shown in Appendix II hereof.
9
<PAGE> 12
(c) Lanier shall have the right to purchase from Norris Spare
Parts for units of the Products delivered hereunder during the
term of this Agreement and for a period of five (5) years
following the shipment of the last unit of each Product.
(d) The purchase order for Spare Parts shall be placed monthly
during the term of production of each Product, except in the
case of emergency. Such purchase order shall be placed on the
10th day of each calendar month for the shipment to be made
within the lead time specified in the Spare Parts List.
(e) After the last delivery of each Product, purchase order for
Spare Parts shall be placed maximum six (6) times a year
during the next five (5) years unless the Parties otherwise
agree in writing.
(f) Lanier shall place a package order at a price mutually agreed
among the Parties (with package price not to exceed the sum of
the prices of the Spare Parts then in effect) three (3) months
prior to the expiration date of the retention period for each
Product Spare Parts.
(g) The Spare Parts shall be packed in individual industrial vinyl
pack and the pack shall be labeled with appropriate Lanier
part number, Norris part number, and description.
Article 11. TRADEMARKS
The Products shall, in accordance with instructions of Lanier, bear
the trademark of Lanier. Lanier agrees that any disputes or troubles
filed by any third party with respect to the said trademark or other
trademarks directed by Lanier for use onto the Products shall be
settled at Lanier's sole responsibility and expense, provided Norris
notifies Lanier promptly of such claims and cooperates fully at
Lanier's
10
<PAGE> 13
expense in Lanier's defense. Where it is required by any laws or
regulations in any country of the Territory to manifest the name of
the manufacturers of the Products, Norris may place the name or symbol
of Norris or any contraction, abbreviation, or simulation thereof or
other necessary marks onto the Products in a manner approved by
Lanier. Nothing herein shall grant Norris any rights in and to the
trademark "Lanier."
Article 12. PATENTS,/COPYRIGHTS, TRADE SECRETS AND OTHER INTELLECTUAL
PROPERTY RIGHTS
(a) As used in this Agreement, the following terms shall have the
following meanings:
1. "Norris Base Technology" means all patents, design
rights, trade secrets, copyrights and other
intellectual property and industrial property rights
of Norris existing as of the Effective Date which is
embodied within or used in the manufacture and
production of the Products, including without
limitation hardware design, know-how, ideas,
techniques, concepts, processes, apparatus,
algorithms, software programs, software source
documents, formulae and other proprietary technology,
but expressly excluding therefrom Developed
Technology.
2. "Lanier Base Technology" means all patents, design
rights, trade secrets, copyrights and other
intellectual property and industrial property rights
of Lanier existing as of the Effective Date which is
embodied within or used in the manufacture and
production of the Products, including without
limitation hardware design, know-how, ideas,
techniques, concepts, processes, apparatus,
algorithms, software programs, software source
documents, formulae and other proprietary technology,
but expressly excluding therefrom
11
<PAGE> 14
Developed Technology.
3. "Developed Technology" means all patents, design
rights, trade secrets, copyrights and other
intellectual property and industrial property rights
developed pursuant to and during the term of this
Agreement by either party and capable of being
embodied within or used in the manufacture and
production of the Products, including without
limitation hardware design, know-how, ideas,
techniques, concepts, processes, apparatus,
algorithms, software programs, software source
documents, formulae and other proprietary technology.
4. "Triggering Event" means any event of default by
Norris and expiration of period of cure, as is more
particularly described in subparagraph (e) below.
(b) 1. Lanier acknowledges that all right, title, and
interest in and to any and all Norris Base
Technology, or any portion thereof including material
or things furnished, supplied or delivered by Norris
to Lanier are and shall remain the sole property of
Norris and that Lanier shall not at any time during
or after the term of this Agreement do or cause to be
done, directly or indirectly, any act or thing which
impairs or tends to impair such rights, title or
interest of Norris to or in each Norris Base
Technology.
2. Norris acknowledges that all right, title and
interest in and to any and all Lanier Base
Technology, or any portion thereof including material
or things furnished, supplied or delivered by Lanier
to Norris are and shall remain the sole property of
Lanier and that Norris shall not at any time during
or after the term of this Agreement do or cause to be
done, directly or indirectly, any act or
12
<PAGE> 15
thing which impairs or tends to impair such rights,
title or interest of Lanier to or in each Lanier Base
Technology.
3. Norris acknowledges that all right, title and
interest in and to any and all Developed Technology
is the sole property of Lanier, and that Norris shall
not at any time during or after the term of this
Agreement to or cause to be done, directly or
indirectly, any act or thing which impairs or tends
to impair such rights, title or interest of Lanier to
or in such Developed Technology. Norris agrees to
assign and hereby assigns and transfers over to
Lanier the Developed Technology. Norris will provide
Lanier with all current versions of the source code
for all Developed Technology. Norris will also
provide Lanier with copies of all documentation
relating to the Developed Technology. Norris and its
employees and agents shall execute any and all
applications, assignments or other instruments which
Lanier shall deem necessary to apply for and obtain
patents or other protection in United States or any
foreign country and/or to protect otherwise Lanier's
interests in the Developed Technology. Norris will
do all things necessary or proper to assist Lanier in
obtaining patent or other protection, and in vesting
title to Developed Technology in Lanier.
(c) During the term of this Agreement, Lanier agrees to and hereby
grants to Norris a fully paid-up, royalty-free, worldwide,
non- exclusive license to the Developed Technology (1) to use
the Developed Technology to design, make, produce, repair
(including making Spare Parts), and distribute the Products as
more particularly described herein, and (2) to make, use,
copy, modify, enhance and otherwise use for such purposes as
Norris shall deem necessary or appropriate, and to sublicense
such rights, so long as Norris does not in so doing breach
other provisions of this Agreement (including without
limitation the exclusivity provisions of Article 3).
13
<PAGE> 16
Nothwithstanding the license granted herein, Norris shall not,
without the express written consent of Lanier, use the Lanier
Base Technology, nor the Developed Technology, including, but
not limited to, the Lanier Exclusive Features listed in
Appendix V hereto, in any product which Norris develops for or
sells to any party other Lanier, or in any product, or the
development of any product other than the Products.
(d) Norris grants to Lanier, its subsidiaries, and its and their
respective customers, during and following the term hereof a
nontransferable and royalty-free immunity from suit under any
patent or patent application owned by Norris, to the extent
that such patent or patent application is part of the Base
Technology to the extent that any claim of such patent or
patent application reads on Products supplied by Norris to
Lanier or made by or on behalf of Lanier in accordance with
the terms of this Agreement. Norris further grants Lanier a
fully paid-up, royalty free, non-exclusive license in
perpetuity to use the Vendor Base Technology.
(e) If, at any time during the term of this Agreement, any of the
following events shall occur, such event, upon the expiration
of the applicable period of time for cure, shall constitute a
"Triggering Event" hereunder:
1. Any bankruptcy, reorganization, debt arrangement, or
other case or proceeding under any bankruptcy or
insolvency law, or any dissolution or liquidation
proceedings commenced by or against Norris, and if
such case or proceeding is not commenced by Norris,
it is acquiesced in or remains undismissed for sixty
(60) days; or
2. Norris fails or is unable to meet each one of the
milestones set forth in Appendix IV as they become
due, upon the expiration of sixty (60) days written
notice from Lanier specifying in reasonable detail
the nature of such failure without such failure
having been cured by
14
<PAGE> 17
Norris.
3. Norris is unable to meet Lanier's order requirements
as set forth in paragraph 5(b) of the Agreement,
where Lanier accurately forecast such order
requirements under Article 5(a) and where Norris's
failure to meet such order requirements is material
and chronic; or
4. Norris breaches this Agreement in material respects,
upon the expiration of sixty (60) days written notice
from Lanier specifying in reasonable detail the
nature of such material breach without such material
breach having been cured by Norris or without Norris
having commenced cure and is diligently proceeding to
completion.
Norris agrees to place the source code for Norris
Base Technology and Developed Technology into an
escrow account with an escrow agent and under the
Escrow Agreement which is attached hereto as Appendix
VI, and Lanier shall have access to all source codes
from and after the occurrence of a Triggering Event.
Upon the occurrence of a Triggering Event, and upon
the release of the source code to the Norris Base
Technology from the escrow, Norris hereby grants to
Lanier the license to Norris Base Technology
described in paragraph (f) below.
(f) Upon the occurrence of a Triggering Event, and upon the
release of the source code to the Norris Base Technology from
the escrow, Norris agrees to and hereby grants to Lanier, in
perpetuity, a royalty-bearing, worldwide exclusive license to
the Norris Base Technology to use the Norris Base Technology
to design, make, have made, produce, repair (including making
Spare Parts) and distribute the Products, and Norris and
Lanier will negotiate in good faith to determine appropriate
royalty payments Lanier shall make to Norris in exchange for
such right; provided, however, that
15
<PAGE> 18
the license granted to Lanier in this paragraph shall be
royalty-free if the Triggering Event is one set forth in
Article 12(e)(1), or is the result of bad faith or willful
misconduct on the part of Norris. If the Parties are unable
to reach an agreement regarding royalty payments under this
Article 12(f) within ninety (90) days after the Triggering
Event, they agree to submit the dispute to arbitration
pursuant to Article 22 of this Agreement.
(g) Upon the occurrence of a Triggering Event, and upon the
release of the source code to the Norris Base Technology from
the escrow, Norris shall relinquish all Product Tooling to
Lanier, and Lanier shall have the right to continue and
proceed to design, make, have made, produce, repair (including
making Spare Parts) and distribute the Products during royalty
negotiations.
(h) Lanier acknowledges and agrees that use of the Norris Base
Technology is furnished to Lanier on a confidential basis for
the purposes described in paragraphs (f) and (g) above.
Lanier may disclose portions of the Norris Base Technology to
third Parties as may be required in carrying out the purposes
described in paragraph (f) and (g) above.
Article 13. INDEMNIFICATION
(a) Infringement - Norris shall defend, indemnify and hold Lanier
harmless from and against all damages, liability, losses and
expenses, including reasonable attorney's fees and court costs
incurred by Lanier as a result of any claim, lawsuit, action
or proceeding against Lanier in which it is determined by
judgment or settlement that Products infringe any United
States patent, copyright, trademark, trade name, trade secret,
or other proprietary right of any third party. Norris's
obligation to indemnify Lanier pursuant to Article 13 (a) is
subject to the exceptions set forth in Article 13 (c) of this
Agreement.
16
<PAGE> 19
(b) Product Liability - Norris shall defend, indemnify and hold
Lanier harmless from and against all damages, liabilities,
losses and expenses, including reasonable attorney's fees and
court costs incurred by Lanier as a result of any claim,
lawsuit, action or proceeding against Lanier arising from any
defect in the Products attributable to Norris, as determined
by judgment or settlement.
(c) In the event of any such judgment under Sections 13(a) or
13(b), Norris shall have the right to appeal such judgment to
and through such appellate levels as Norris shall determine --
provided Norris shall bear the cost of such appeal and posts
such appropriate bond or bonds as necessary to stay the
execution of any such judgment pending such appeal. Lanier
shall notify Norris in writing within five (5) business days
of first learning of any such claim, lawsuit, action or
proceeding. Each party shall provide the other with
reasonable assistance in defending such matters. Norris shall
have the exclusive right to contest, defend, or litigate any
matter in respect of which indemnification is claimed. Norris
shall have the exclusive right to settle -- either before or
after the initiation of litigation -- any matter in respect of
which indemnification is claimed.
VENDOR will maintain general liability and errors and
omissions insurance coverage for the term of this Agreement,
and will submit certificates of insurance evidencing said
coverage if so requested by Lanier.
Article 14. DURATION OF THE AGREEMENT
This Agreement shall be deemed to come into force on the __________
day of _____________, 1996 and unless earlier terminated in accordance with the
provision of this Agreement shall continue in force and effect until and
including the __________ day of _______________, 2000. This Agreement shall be
automatically renewed for one (1)
17
<PAGE> 20
year and thereafter from year to year, unless either of the Parties hereto
gives the other party at least six (6) months prior written notice to terminate
this Agreement before the expiration of the initial or any renewed term of this
Agreement. If such prior written notice is sent by either party, then this
Agreement shall terminate on the initial or, as the case may be, duly renewed
expire date hereof.
Article 15. TERMINATION OF THE AGREEMENT
(a) In the event of happening of any of the following events to
either party, the other party may forthwith terminate, wholly
or partly, this Agreement and/or Sales Contract and/or any
other contract concluded under or in connection with this
Agreement by sending a written notice to the first party.
i) If either party hereto continues in default of any
obligation imposed on it herein and/or therein for
more than two (2) months or for more than any other
applicable cure period set forth in this Agreement,
after written notice has been dispatched by
registered airmail by the other party requesting the
party in default to remedy such default;
ii) If either party hereto is subjected to compulsory
execution, public auction, coercive collection for
its arrearage of taxes or public imposts, or
suspension of business by public authorities, or
appointment of any receiver or trustee of itself or
any substantial portion of its property, or if an
application or petition is submitted for bankruptcy,
corporate arrangement or commencement of corporate
reorganization under statutes for the relief of
debtors, or if either party hereto files voluntarily
against it an application or petition for bankruptcy,
corporate arrangement or commencement of corporate
reorganization or composition under statutes for the
18
<PAGE> 21
relief of debtors, or if either party hereto adopts a
resolution for discontinuance of this business or
transfers to another company all or an important part
of its assets or business or for a substantial
decrease of its capital or for dissolution, or makes
a general assignment for the benefit of creditors, or
if either party hereto admits in writing its
inability to pay debts as they become due, or if
either party is declared in default of any material
contract between it and the other hereto.
(b) In the event of termination or cancellation of this Agreement
for any reason whatsoever:
i) Either party may cancel any Sales Contract of the
Products which have been unshipped at the date of
such termination or cancellation. If any Sales
Contract is canceled for any reason whatsoever,
Norris may sell or otherwise dispose of the Products
covered under the Sales Contract so canceled
elsewhere in any manner by removing, at Lanier's cost
and expense, any Lanier signs, marks, and/or labels
from the Products, and
ii) Each party hereto shall promptly return to the other
any materials or property in its possession or
custody, supplied by and belonging to the other party
in connection with this Agreement. Lanier shall have
all ownership of and rights to all Product Tooling,
as set forth in Section 1(c) of this Agreement.
iii) All rights, title and interest in and to any and all
patents, design rights, copyrights, and other
industrial property rights relating to the Products
shall be handled in accordance with Article 12 of
this Agreement.
19
<PAGE> 22
(c) Except as otherwise clearly provided herein, any termination
of this Agreement shall be without prejudice to any right
which shall have accrued to either party hereunder prior to
such termination.
Article 16. PRINTED MATERIALS
(a) Norris will supply units operating instructions (the
"Operating Instructions") or at Lanier's option, Lanier may
prepare, at Lanier's expense, operating instructions for the
Products. Norris will supply Operating Instructions in both
electronic and hard copy formats. Lanier may supply, at
Lanier's option, either camera-ready "stats" or operating
instructions ("Printed Materials") to Norris who shall, at its
sole cost, reproduce and package these Printed Materials with
each unit of the Products delivered to Lanier. Lanier may
elect to package these Operating Instructions at Lanier's
delivery site, based upon their requirements.
(b) At Lanier's option, Lanier may prepare (but not print), at
Lanier's expense, Installation and Setup Instructions for the
Products. Lanier may supply a camera-ready "stat" of these
materials to Norris. Otherwise, Norris shall develop and, in
all instances, reproduce and pack these Installation and Setup
Instructions with each unit of the Products sold to Lanier.
(c) Lanier shall prepare and print, at Lanier's expense, Field
Service Documentation for use by Lanier Service Technicians,
and other persons specifically authorized by Lanier.
(d) Norris shall supply to Lanier true and correct technical
information required by Lanier for Lanier to create the
Printed Materials referenced in subsections (a), (b), and (c)
above. Norris will supply all information in both electronic
and hard copy formats. In the case of Products of which
Norris has identical or similar models, the technical
information provided
20
<PAGE> 23
by Norris to Lanier can be, in part, Norris's existing
documentation, provided such documentation is amended or
otherwise modified to reflect the specifications of the
Products sold to Lanier. In the case of Products being
exclusive to Lanier, Norris will create the necessary
technical information.
(e) Lanier shall have a copyright on the Printed Materials
prepared by Lanier in subsections (a), (b), and (c) above.
(f) Norris grants Lanier the right to reproduce any copyright
materials, provided they are used only for and within Lanier
Printed Materials.
(g) Lanier grants Norris the right to reproduce any copyright
materials, provided they are used only for and within Lanier
Printed Materials.
(h) Subject to the provisions of this paragraph, Norris may review
and approve all user documentation, technical documentation,
and product brochures which Lanier will provide to its
customers along with the Products ("the Product
Documentation"). Norris' approval of the Product
Documentation shall not be unreasonably withheld. Norris
shall have seven (7) days from the date Lanier provides Norris
with the Product Documentation to review the Product
Documentation and submit comments to Lanier. If Lanier is not
notified by Norris within seven (7) days after providing the
Product Documentation to Norris for its approval, the Product
Documentation shall be deemed approved by Norris.
Article 17. DISCLOSURE OF INFORMATION
(a) All information, suggestions, or ideas transmitted by either
party to the other party in connection with this Agreement or
the performance hereunder and designated by the transmitting
party as secret or confidential
21
<PAGE> 24
shall be treated as secret or confidential by the receiving
party and shall not be divulged or disclosed to any third
party, provided that Lanier may disclose portions of the
information designated confidential to third Parties as may be
required in selling and distributing the Products in the
manner contemplated by the Agreement. It is specifically
agreed that any technical know-how and marketing information
(such as specifications, design, manufacturing know how, price
and other sales conditions) shall be hereby regarded as secret
and confidential per se without making such designation.
(b) Prior written approval of press release and any other
publicity in reference to this Agreement shall be obtained by
the releasing party from the other party.
(c) Unless otherwise agreed in writing by the Parties, neither
party hereto shall advertise, publicize, or otherwise disclose
the commercial terms of this Agreement, except for disclosure
to the United States and the Territory's governmental
authorities as may be required by applicable laws or
regulations to the minimum extent required and to the related
Parties as required for the performance of this Agreement or
for the mutual benefit of the Parties.
(d) The provisions of this Article 17 will survive for a period of
two (2) years from the date of expiration or termination of
this Agreement.
Article 18. ASSIGNMENT
Neither party shall assign, transfer, or otherwise dispose of this
Agreement in whole or in part or of any right or obligation hereunder
to any third party without the prior written consent of the other
party, which shall not be reasonably withheld. If there is a change
in control or ownership of either party, the party must obtain written
consent from the other party prior to assigning or transferring
22
<PAGE> 25
this Agreement to the party under new control or ownership.
Article 19. NOTICES
(a) Except as otherwise provided herein, all notices to be given
or made under this Agreement shall be in writing and be deemed
duly given when personally delivered or sent by registered or
certified air mail, postage prepaid, with information copy by
facsimile transmission or by facsimile, and addressed to the
principal office of the Parties as indicated hereinabove or to
such other address as either party may hereafter furnish to
the other party in writing.
(b) All notices shall be deemed to have been given or made on the
day of dispatch.
Article 20. EXCEPTIONS
(a) Neither party (the "Affected Party") shall be liable to the
other in any manner for failure or delay to fulfill all or
part of this Agreement, directly or indirectly, owing to Act
of God, governmental orders or restriction, war, threat of
war, warlike conditions, hostilities, sanctions, mobilization,
blockade, embargo, detention, revolution, riot, strike,
lockout, accident, or any other causes for circumstances
beyond its control.
(b) In the event of any delay or failure due to the cause or
causes given in the preceding paragraph (a), the affected
party shall send by cable or telex or otherwise a written
notice stating the reasons therefor to the other party (the
"Unaffected Party") as promptly as possible. The performance
of the Affected Party shall be deemed suspended as long as,
and to the extent that, any such cause(s) continues, but this
Agreement and/or Sales Contract and/or any other contract
concluded under or in connection with this Agreement then
executory shall not be regarded terminated, frustrated,
23
<PAGE> 26
or canceled simply as a result of such delay or failure and
the Parties hereto shall continue once more with their
performance when the cause or causes of such delay or failure
have ceased or have been eliminated; provided, however, that
if such delay or failure extends or is reasonably anticipated
to extend for a period of more than three (3) months, the
Unaffected Party may without any liability on its part
terminate or cancel this Agreement and/or the said Sales
Contract and/or any other contract concluded under or in
connection with this Agreement by sending a written notice to
the affected party.
c) It is specifically understood and agreed that if a party
cancels any Sales Contract pursuant to paragraph (b) above,
Norris may sell the Products elsewhere and in any manner by
removing any Lanier signs, marks, and labels on the Products
destined for Lanier.
Article 21. ENTIRE AGREEMENT
This Agreement and the Appendices attached hereto constitutes the
entire agreement between the Parties as to the subject matter hereof for all
matters arising on or after the execution of this Agreement. This Agreement
supersedes all previous understandings, commitments, and agreements whether
oral or written relating to the subject matter hereof with respect to
transactions arising hereunder. No modification, amendment, or supplement of
this Agreement shall be binding upon the Parties hereto except by mutual
express written consent of subsequent date by an authorized representative or
officer of each of the Parties hereto.
24
<PAGE> 27
Article 22. ARBITRATION
All disputes and differences between Norris and Lanier arising out of
or under this Agreement shall be settled amicably through
negotiations. In case such dispute or difference cannot be settled
amicably, it shall be referred to arbitration consisting of three (3)
arbitrators. Such arbitration shall be held in Atlanta, Georgia, in
accordance with the rules of the American Arbitration Association.
Article 23. GOVERNING LAW AND TRADE TERMS
(a) It is mutually agreed that, except as otherwise required by
mandatory provisions of applicable laws of the Territory, the
terms of this Agreement and the performance hereunder shall in
all respects be governed, construed, and interpreted in
accordance with the internal (as opposed to the conflicts of
laws provisions) laws of the State of Georgia, U.S.A.
Article 24. MISCELLANEOUS
(a) WAIVER: A waiver by a party hereto of any particular
provision hereof shall not be deemed to constitute a waiver in
the future of the same or any other provision of this
Agreement.
(b) SEPARABILITY: The Parties hereto agree that, in the event of
one or more of the provisions hereof being subsequently
declared invalid or unenforceable by court or administrative
decision, such invalidity or unenforceability or any of the
provisions shall not in any way affect the validity or
enforceability of any other provisions hereof except those
invalidated or unenforceable provisions which comprise an
integral part of or are otherwise clearly inseparable from
such other provisions.
25
<PAGE> 28
(c) TITLES: The Article titles in this Agreement have been
inserted for convenience only and shall in no way be used in
the interpretation hereof.
(d) EXPENSES: Unless otherwise expressly agreed herein or
otherwise in writing by the Parties hereto, each party shall
bear all expenses and disbursements incurred or made by itself
or any other investment made by itself in connection with or
in pursuant of this Agreement, and neither party shall be
entitled to compensation from the other party for the said
expenses, disbursements, or investment, whether on termination
of this Agreement for any reason whatsoever or otherwise,
unless otherwise expressly agreed upon in writing by the other
party.
(e) BINDING EFFECT: This Agreement shall inure to the benefit of
and be binding upon Norris and Lanier and their respective
successors and assigns.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be signed
by their respective representatives or officers duly authorized thereunto as of
the date first above written.
NORRIS COMMUNICATIONS, INC. LANIER WORLDWIDE, INC.
By: /s/ PETER W. GORRIE By: /s/ BRIAN R. BERGIN
------------------------- -------------------------
Peter W. Gorrie Brian R. Bergin
- ---------------------------- ----------------------------
Name Name
Chief Operating Officer V.P. Product Marketing
- ---------------------------- ----------------------------
Title Title
12/ 26 /96 01/ 06 /97
- ---------------------------- ----------------------------
Date Date
26
<PAGE> 29
APPENDIX I - PRODUCT REQUIREMENTS
VERSION 1.8
DECEMBER 13, 1996
OVERVIEW
Below are the Product Requirements for the Lanier Digital Portable Recorder
without ***** and the Lanier Digital Recorder with ***** (the "Recorder
Products").
PHYSICAL REQUIREMENTS:
1. The Recorder Products will be hand held portable units with dimensions not
to exceed a width of ***** a height of ***** and a length of *****.
2. The Recorder Products construction will be able to withstand a drop of 3
feet on to a hard concrete surface without sustaining damage which
results in their inability to operate as specified.
3. The Recorder Products will be designed and constructed of materials which
allows for the ***** by qualified and trained Lanier service personnel.
4. The Recorder Products will be designed for access and serviceability to
***** and around any ***** and/or knobs. This function will be performed
by a qualified and trained Lanier field service technician.
5. The Recorder Products will comply with FCC part 15 class B radiated
emissions standards and be so marked by the manufacturer.
6. The Recorder Products will be compliant with the European CE standard and
be so marked by the manufacturer.
7. The playback specifications using the Lanier ***** plugged into the *****
will have the following characteristics: Frequency Response ***** Signal to
Noise Ratio ***** Total Harmonic Distortion *****.
8. The Recorder Products will have a ***** with the following
characteristics: Frequency Response ***** Signal to Noise Ratio *****,
and a Total Harmonic *****.
9. The Recorder Products will be able to withstand a ***** without damage or
the loss of function or data.
*This portion of the Exhibit has
been omitted (based upon a request
for confidential treatment) and
filed separately with the Securities
and Exchange Commission pursuant to
Rule 406.
1
<PAGE> 30
10. The Operating Environmental Limits will be as follows: a temperature
range of ***** and a humidity range between ***** maximum. The Storage
Environmental Limits will be as follows: a temperature range of ***** and a
humidity range between ***** maximum.
11. The Recorder Products will be made of high grade material that will
withstand a temperature range of ***** relative humidity (non-condensing)
without affecting the color, labeling, and shape. When the Recorder
Products' temperature returns to that which is within the Operating
Environmental Limits, the Recorder Products will again be required to
operate as specified.
12. The Recorder Products' weight distribution will be ***** of the Recorder
Products is *****.
13. The Recorder Products will have a high degree of fit and finish providing
for a high quality product. This is to be worked out and agreed upon by
both parties during the design phase.
14. ***** will be located on the top of the Recorder Products to be ***** of a
***** or ***** operation in progress.
15. A ***** will be located on the ***** the Recorder Products ***** that the
Recorder Products are *****.
16. A ***** will be located on the Recorder Products ***** and will be used
to ***** either the ***** and/or ***** function.
17. ***** will be located on the ***** of the Recorder Products in order for it
to *****. The Recorder Products should operate under ***** when no *****
are ***** in the Recorder Products. When ***** are installed in the
Recorder Products, power from *****.
18. A ***** will be located on the ***** of the Recorder Products. When viewing
the ***** of the Recorder Products, the current ***** corresponding to the
***** will be indicated in some way from the side of the Recorder Products.
The functions associated with the ***** will be ***** and are typically
labeled: *****.
19. The ***** will ***** between ***** from the ***** with the exception of
the *****. To engage the *****.
*This portion of the Exhibit has
been omitted (based upon a request
for confidential treatment) and
filed separately with the Securities
and Exchange Commission pursuant to
Rule 406.
2
<PAGE> 31
20. The Recorder Products will have a *****. The ***** is enabled when the
*****. If there is a ***** then the ***** will be *****.
21. The ***** for setting the ***** will be located on the ***** of the
Recorder Products and will be labeled ***** for the *****: ***** and
*****.
22. ***** will be incorporated into the design to accommodate both *****
usage.
23. ***** will be located on the ***** the Recorder Products in order to
accommodate the *****. The ***** will be ***** when the ***** is being
used.
24. ***** will be located on the ***** the Recorder Products in order to
accommodate a ***** with *****. When the ***** is inserted into the hand
held Recorder Products, the *****.
25. Provisions for an ***** will be made in order to *****. The ***** for *****
will be at a ***** between ***** between the ***** is ***** in and the
***** of the Recorder Products. The operational ***** for ***** will be
***** about the ***** of the *****.
26. The Recorder Products will have a ***** with the ***** occupying the *****
located just below the *****. Additionally, ***** such as ***** and *****
will be specified in industrial design proposals to be reviewed during
"Stage I: Concepts". The design proposals for the ***** and for needed
***** will be based on ***** of the user performing the specified functions
and tasks. *****
27. The Recorder Products will contain a *****. The minimum or standard
configuration will be one with at least *****.
28. The Recorder Products will have a ***** with an area for *****. In
addition, specific areas ***** will be used for the *****.
*This portion of the Exhibit has
been omitted (based upon a request
for confidential treatment) and
filed separately with the Securities
and Exchange Commission pursuant to
Rule 406.
3
<PAGE> 32
29. The Recorder Products will have one or more ***** to be used as the *****
the Recorder Products and the ***** will make use of the ***** for their
required purposes.
30. The Recorder Products will ***** the ***** for ***** or ***** and *****.
See *****.
31. A ***** will be located on the Recorder Products to be used for *****. The
***** will be labeled with an ***** or a recognizable symbol or graphic.
32. ***** the Recorder Products and the ***** will make use of a *****. The
decision of which to use will be based on an evaluation of *****
constraints.
33. The ***** used in the Recorder Products, *****.
34. The Recorder Products will operate on ***** will depend on the *****
selection. ***** should be utilized to ***** when the Recorder Products are
*****.
35. The Recorder Products should be able to ***** with ***** present for a
period of ***** using *****.
36. The ***** will automatically begin ***** Products *****.
37. The ***** will be allowed without the loss of *****.
REQUIREMENTS:
38. The selection of the ***** to be used in the Recorder Products will be
contingent on the ***** which will ***** on the *****.
39. Voice encoding and decoding will be done using *****.
*This portion of the Exhibit has
been omitted (based upon a request
for confidential treatment) and
filed separately with the Securities
and Exchange Commission pursuant to
Rule 406.
4
<PAGE> 33
40. The selection of the ***** will include a ***** conducted by *****.
REQUIREMENTS:
41. The ***** memory space will be used for the *****.
42. ***** will be ***** via the *****. The required amount of ***** will be
based on the ***** specifications pertaining to ***** the number of *****,
the specified ***** the number of *****.
43. All system parameters relating to the ***** will be *****. This will allow
***** to be ***** rather than *****.
44. An ***** will be ***** into the *****. The ***** will be made up of *****.
45. Initially, the maximum allowed length of a ***** will be *****. The
maximum length should be *****.
46. Initially, the ***** will be *****. The total number should be ***** from
the ***** based on *****.
47. The Recorder Products will ***** and ***** used in the ***** to be *****
based on a *****.
48. Initially, the Recorder Products will be configured to *****. However, the
***** will ultimately be the ***** on the ***** that will be *****.
49. Initially, the ***** will be *****.
*This portion of the Exhibit has
been omitted (based upon a request
for confidential treatment) and
filed separately with the Securities
and Exchange Commission pursuant to
Rule 406.
5
<PAGE> 34
50. The ***** for the user will follow a *****.
51. Appropriate *****. The user will *****.
END USER FUNCTIONALITY
52. The user will be able to perform the *****.
53. The standard controls supported are *****.
54. While in *****.
55. When in *****.
56. When the ***** the Recorder Products will ***** when configured to do so.
This will act as *****.
57. When configured to do so, the user will ***** and will *****. When all
***** the Recorder Products *****.
*This portion of the Exhibit has
been omitted (based upon a request
for confidential treatment) and
filed separately with the Securities
and Exchange Commission pursuant to
Rule 406.
6
<PAGE> 35
58. An optional, ***** will ***** to indicate that the Recorder Products is
*****.
59. The ***** will be ***** only when the *****.
60. When the user places the ***** will begin and the ***** relation to the
***** and a *****.
61. When the user places the *****.
62. The user will be able to ***** by using *****.
63. In order to listen to ***** the user will *****. This is noted by *****.
64. The user will be able to ***** the Recorder Products will *****. Taking
the Recorder Products out of ***** the Recorder Products *****.
65. Whenever the Recorder Products is in *****.
66. The user will be able to ***** the Recorder Products is ***** and a
Recorder Products is ***** will be *****.
*This portion of the Exhibit has
been omitted (based upon a request
for confidential treatment) and
filed separately with the Securities
and Exchange Commission pursuant to
Rule 406.
7
<PAGE> 36
67. When entering the ***** will ***** used on the ***** of the ***** is
within the *****.
68. The user will be able to *****.
69. The user will be able to *****.
70. The user will be able to ***** when the Recorder Products is *****. The
***** will be updated at the time the ***** information. ***** the same
***** will ***** the ***** to ***** will be ***** information.
71. The user will be able to ***** for ***** by ***** the ***** and the *****
followed by the *****. To *****, the user must first ***** in the *****
where the *****. Secondly, the user must ***** and perform a *****. The
actual ***** will be performed on the ***** by *****.
72. The user will be able to *****. The user will simply *****. The *****
information ***** will be updated to indicate *****.
73. The current ***** will be ***** whenever ***** the Recorder Products. When
the *****.
*This portion of the Exhibit has
been omitted (based upon a request
for confidential treatment) and
filed separately with the Securities
and Exchange Commission pursuant to
Rule 406.
8
<PAGE> 37
*****
74. The user will be able to ***** whenever the Recorder Products are *****.
75. When ***** the Recorder Products will ***** as defined in the function
matrices.
76. A ***** will be allowed to ***** and have ***** to be ***** or ***** to
be *****.
77. A ***** will determine if the user will *****.
78. A ***** will determine if the ***** and any other ***** will be *****
whenever a *****.
79. The Recorder Products will be ***** as to what ***** is placed on the
*****.
80. The ***** will be allowed to be ***** if and only if it has been *****.
The ***** will result in the ***** being placed in a *****.
81. The next level of ***** is one in which the current ***** user will be
able to *****.
82. The level ***** is one in which the user will be able to ***** the user is
solely responsible for the *****.
*This portion of the Exhibit has
been omitted (based upon a request
for confidential treatment) and
filed separately with the Securities
and Exchange Commission pursuant to
Rule 406.
9
<PAGE> 38
LANIER DIGITAL PORTABLE RECORDER
*****
PRODUCT REQUIREMENTS
VERSION 1.1
DECEMBER 2, 1996
OVERVIEW
The Lanier Digital Portable Recorder *****.
REQUIREMENTS
1. A ***** will be located on *****.
2. The ***** will provide ***** the Recorder Products in order ***** the
Recorder Products to ***** and ***** the Recorder Products *****.
3. The ***** construction will be able to ***** without ***** operate as
specified.
4. The ***** will be ***** which allows for the ***** by qualified and
trained Lanier service personnel.
5. The ***** will comply with ***** standards and be so marked by the
manufacturer.
6. The ***** will be compliant with the European CE standard and be so marked
by the manufacturer.
7. The ***** will be able to withstand a ***** without damage or the loss of
function or data.
*This portion of the Exhibit has
been omitted (based upon a request
for confidential treatment) and
filed separately with the Securities
and Exchange Commission pursuant to
Rule 406.
10
<PAGE> 39
8. The Operating Environmental Limits will be as follows: a temperature range
of ***** and a humidity range between ***** maximum. The Storage
Environmental Limits will be as follows: a temperature range of ***** and
a humidity range between ***** maximum.
9. The ***** will be made of high grade material that will withstand a
temperature range of ***** and humidity levels of ***** relative humidity
(non-condensing) without affecting the color, labeling, and shape. When the
***** temperature returns to that which is within the Operating
Environmental Limits, the ***** will again be required to operate as
specified.
10. A ***** will accommodate the ***** from a ***** will be ***** when the
***** is being used *****.
11. The ***** will have a ***** which will *****.
12. The ***** will have an ***** which will *****.
13. The ***** will have a ***** which will *****.
14. The ***** will interpret the ***** and will *****.
15. The ***** will have a ***** to be used for *****.
16. ***** the Recorder Products ***** will make use of a *****. The decision
***** will be based on *****.
17. The ***** will have ***** to be used as the ***** Recorder Products. *****
will make use of the ***** for their required purposes.
*This portion of the Exhibit has
been omitted (based upon a request
for confidential treatment) and
filed separately with the Securities
and Exchange Commission pursuant to
Rule 406.
11
<PAGE> 40
APPENDIX II - PRICE
I. Initial Phase Pricing
A. NON-RECURRING ENGINEERING EXPENSES
1. Industrial Design (Recorder ********************):
Concept/Research/Sketches/Vol models
o Renderings/Mock-ups
o User Interface evaluation
o Detailing
o Color Study
o Model
o Layout
o Part Files
o Prototype
o Liaison
o Misc. Liaison Activity/Meetings
NRE $*******
2. Software:
o *********************(customized to Lanier
specifications i.e., *****)
o ********************** Testing
o Modifications to the ************** to support
Lanier feature set
o Modification of the ***** and ***** to reflect
the ***** **********
NRE $*******
3. Hardware (Digital Portable Recorder *****):
Design
o Development
o **********
5 Debug PCBs (fabrication and tooling)
o 10 Prototype PCBs (fabrication and tooling)
o 10 Production PCBs (fabrication and tooling)
o SLA models
o 20 Soft tooling models
* This portion of the Exhibit has been omitted (based
upon a request for confidential treatment) and
filed separately with the Securities and Exchange
Commission pursuant to Rule 406.
12
<PAGE> 41
o************
o 5 Debug PCBs (fabrication and tooling)
o 10 Prototype PCBs (fabrication and tooling)
o 10 Production PCBs (fabrication and tooling)
o 3 SLA models
o 20 Soft tooling models
25 LCDs (includes tooling and fabrication)
o FCC and CE Testing
Does not include development of manufacturing
assembly and test fixtures which will be
part of our joint identification, qualification
and selection of a manufacturer.
NRE $*******
4. Other Non-Recurring Expenses
Project Management
o Technical Writer
o Quality & Manufacturing Engineer
o Internal Test Engineering (hardware and software)
o Alpha Test Labor (*****)
NRE $*******
5. Manufacturing:
Tooling for Plastics (assuming that we can use the *****
for both recorder models) Recorder: $*****
(assumes a ***** case configuration)
Final tooling prices will depend on the final industrial
design selection
NRE $********
6. TOTAL NON-RECURRING ENGINEERING EXPENSE $********
*This portion of the Exhibit has been omitted (based upon
a request for confidential treatment) and filed
separately with the Securities and Exchange Commission
pursuant to Rule 406.
13
<PAGE> 42
II. PRODUCT PRICE
Lanier Digital Portable ***** $*****
Includes:
*******************************************
Lanier Digital Portable ***** $*****
Includes:
*******************************************
Lanier Digital Portable ***** $*****
Includes:
*******************************************
*This portion of the Exhibit has been omitted (based upon
a request for confidential treatment) and filed
separately with the Securities and Exchange Commission
pursuant to Rule 406.
14
<PAGE> 43
APPENDIX III - INSPECTION STANDARDS
1.0 Purpose
2.0 Reference Documentation
3.0 Sample Plans and AQL Levels
4.0 Definitions
5.0 Inspection
6.0 Rejection
7.0 Changes of Revisions
8.0 Source Inspection
9.0 Corrective Action
10.0 Charges
11.0 AQL by Product category
15
<PAGE> 44
1.0 PURPOSE
The primary purpose is to establish;
1.1 Receiving (Incoming) Inspection standards for
all products.
1.2 ANSI/ASQC Z1.4-1993 as the standard for Buyer
incoming Inspection unless specified otherwise in this
document. The term used in this document;
"Authorized Representative", or in ANSI/AS QC Z1.4-1993,
"Responsible Authority", shall be Buyer's Quality
Assurance.
1.3 Classification of Major and Minor defects and
the AQL for each class.
1.4 The acceptance of products under this document
does not in way release Seller of warranty
responsibility for said products.
2.0 REFERENCE DOCUMENTATION
The list is an addition to the specifications required by the
contract. Any conflict between these documents and the specific product
specification, the product specification takes precedence.
2.1 ANSI/IPC-A-610 Acceptability of PWB Assemblies
2.2 ANSI/ASQC Z1.4-1993 Sampling Procedures and
Tables for Inspection by Attributes
2.3 IPC-R-700 Modification and Repair of PWB
Assemblies
3.0 SAMPLE PLANS AND AQL LEVELS
3.1 Inspection on a lot by lot basis shall be made
in compliance with ANSI/ASQC Z1.4-1993.
3.2 Sample size, accept/reject criteria for each
received lot shall be governed by ANSI/ASQC Z1.4-1993.
3.3 Single sample plans for Normal, Reduced and
Tightened inspection shall be at General
Inspection Level II.
3.4 Destructive inspection shall be single
sample Special Inspection Level S-3.
3.5 Two defect classes only shall be used for
Sample Plan
3.5.1 Major defect class. (See 11.0)
3.5.2 Minor defect class. (See 11.0)
3.6 Defect classes and applicable AQL will be
established for each product category.
16
<PAGE> 45
4.0 DEFINITIONS
4.1 Safety or Hazard Defect; All
shipments must be certified by Seller to
be defect free of any defect that is, or
may generate, a condition that is a
safety or hazard defect. Any Safety or
Hazard defect shall be cause for
rejection of lot.
4.2 Major Defect; Major defect is a defect,
mechanical, electrical functional or appearance that
will or is likely to result in failure to operate or
to perform outside of acceptable limits for the
intended end use or application. Major defect is
a defect, packaging or labeling that will result in
inability of buyer to ship product through their
distribution channels.
4.3 Minor Defect; Minor defect is a defect,
other than Major, that is not likely to result in
failure, but "down grades" the product in terms of
the intended end use or application.
4.4 "Defect" and "Defective" - Definition and
application to sampling plans shall be per ANSI/ASQC
Z1.4-1993. Accept/Reject criteria shall be per
"Defective" definition.
5.0 LOT INSPECTION
Each lot shall be inspected within 14 days from the date of receipt by
Buyer or Buyer's authorized agent, at Buyer's authorized agent, at
Buyer's expensive. The 14 day period shall be waived if conditions
beyond Buyer's control make it unreasonable or impossible to perform
the lot inspection within the 14 day period.
5.1 Inspection reports; Buyer agrees to furnish one
copy of buyer's inspection reports on a lot by lot basis
to Seller Corporate Quality Assurance.
5.2 Rejected Lot; Buyer shall notify Seller
promptly when a lot is rejected. See paragraph 6.0
herein.
5.3 Repairs. See paragraph 10.0 herein.
<PAGE> 46
6.0 LOT REJECTION
6.1 Buyer shall have the right to reject any lot that
fails to meet the AQL levels specified in paragraph 3.0
herein.
6.2 Seller shall notify Buyer of return method within
5 days of notification of lot rejection. After 5 days,
Buyer shall return lot at the method of their choosing.
6.3 All additional inspection, handling , etc.
created by this rejection shall be charged to Seller.
See paragraph 10.0 herein.
6.4 If Seller requests space to rework/repair
rejected lot and buyer agrees, see paragraph 10.2 herein.
7.0 CHANGES OR REVISIONS
Engineering changes will be implemented in accordance with the "Class
of Engineering Change" specified in Engineering Standard ES005.
8.0 SOURCE INSPECTION
8.1 These same AQL provisions apply if Buyer elects to
perform source inspection at Seller's facility.
8.2 Seller agrees to hold shipments for source
inspection provided Buyer performs said inspection within 10
days of shipment availability notice to Buyer.
8.3 Source inspection constitutes final acceptance
when used and is an alternate to paragraph 5.0.
8.4 Source inspection does not release Seller of
warranty responsibility on individual units found
defective during warranty period.
<PAGE> 47
9.0 CORRECTIVE ACTION
9.1 If 3 consecutive lots of like product is rejected,
Seller shall hold all shipments of the product until written approval
has been given to Seller's "corrective plan" to improve the quality
of submitted products, by the Buyers Authorized Representative.
10.0 CHARGES
10.1 Seller agrees to pay an additional expenses for labor,
materials, handling, etc. required for additional inspection of
products, created by rejected shipments.
10.1.1 Charge for labor shall be $50.00 per person per hour.
10.2 If Seller requests, and Buyer agrees, space will be provided
to Seller for repairs of rejected shipments at the rate of $200.00
per day.
10.2.1 See paragraph 10.1.1 herein for additional charges.
10.2.2 Hours available are 8 am to 4 pm Monday through Friday only.
10.2.3 It shall be Sellers responsibility to furnish all tools and
supplies.
11.0 ACCEPTABLE QUALITY LEVELS (AQL)
Unless otherwise specified, the following AQL'S will apply to incoming
material.
CRITICAL DEFECT - NO AQL- PRODUCT MUST BE 100%
DEFECT FREE MAJOR DEFECT will be inspected at 1% AQL.
MINOR DEFECT will be inspected at 2.5% AQL.
If there are any questions pertaining to this document, contact
LANIER WORLDWIDE INC.
Voice Products Division
Manager, Quality Assurance
4667 N. Royal Atlanta Dr.
Tucker, Ga. 30084
404-493-2118
<PAGE> 48
APPENDIX IV
MILESTONE AND PAYMENT SCHEDULE
MILESTONES Milestone
Completion
Milestone 1 - Lanier will pay Norris 25% of Non-recurring Date
Engineering Expenses ("NRE"), as set forth in Appendix II,
when, in Lanier's reasonable opinion, Norris has completed
all of Norris' requirements with respect to Gate 4 (as set
forth in Attachment 1 hereto) for Lanier Digital Portable
******************************************* Effective
******************************************************** Date of
*************. Agreement
Milestone 2 - LANIER will pay Norris 15% of NRE when, in
Lanier's reasonable opinion, Norris has completed all of
Norris' requirements with respect to Gate 5 (as set forth 3/14/97
in Attachment 1 hereto).
Milestone 3 - LANIER will pay Norris 17.5% of NRE when, in
Lanier's reasonable opinion, Norris has completed all of 4/1/97
Norris' requirements with respect to Gate 6 (as set forth
in Attachment 1 hereto).
Milestone 4 - Lanier will pay Norris 10% of NRE when, in
Lanier's reasonable opinion, Norris has completed all of 11/14/97
Norris' requirements with respect to Gate 7 (as set forth
in Attachment 1 hereto).
*THIS PORTION OF THE EXHIBIT HAS BEEN OMITTED (BASED UPON
A REQUEST FOR CONFIDENTIAL TREATMENT) AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO RULE 406.
<PAGE> 49
Milestone 5 - LANIER will pay Norris 17.5% of NRE when, in 12/31/97
Lanier's reasonable opinion, Norris has completed all of
Norris' requirements with respect to Gate 8 (as set forth
in #Attachment 1 hereto).
Milestone 6 - LANIER will pay Norris 15% of NRE when, in *****
Lanier's reasonable opinion, Norris has completed all of
Norris' requirements with respect to Gate 10 (as set forth
in Attachment 1 hereto).
*This portion of the Exhibit has been omitted (based upon
a request for confidential treatment) and filed
separately with the Securities and Exchange Commission
pursuant to Rule 406.
<PAGE> 50
ATTACHMENT 1 TO APPENDIX IV
LANIER PRODUCT TO MARKET PROCESS
DEVELOPMENT METHODOLOGY
DESCRIPTION OF TERMS
GATE 4 DELIVERABLES
1. PRODUCT REQUIREMENTS DOCUMENT
(As defined in Lanier's Product To Market Handbook ("The PTM Handbook")
incorporated herein by reference).
2. PRELIMINARY PROJECT PLAN
(As defined in the PTM Handbook).
GATE 5 DELIVERABLES
1. PRODUCT CHARACTERISTIC DOCUMENT
(as defined in the PTM Handbook).
2. FINAL PROJECT PLAN
(As defined in the PTM Handbook).
GATE 6 DELIVERABLES
1. DESIGN DOCUMENT
(As defined in the PTM Handbook).
GATE 7 DELIVERABLES
1. WORKING PROTOTYPE
(As defined in the PTM Handbook).
2. FINAL ALPHA TEST PLAN
(As defined in the PTM Handbook).
3. ALPHA TEST SCRIPTS
(As defined in the PTM Handbook).
GATE 8 DELIVERABLES
1. ALPHA TESTED PRODUCT
(As defined in the PTM Handbook).
2. FINAL BETA TEST PLAN
(As defined in the PTM Handbook).
GATE 10 DELIVERABLES
1. BETA TESTED PRODUCT
(As defined in the PTM Handbook).
<PAGE> 51
APPENDIX V
Lanier Exclusive Features
DIGITAL PORTABLE
o Built-in *****
o Built-in *****
o Ability to ***** the Digital Portable with any/all *****
o Each dictated job can *****, including, but not limited to:
@ *****
@ *****
@ *****
@ *****
@ *****
@ *****
@ *****
@ *****
o *****
o *****
o ***** - Allows user to *****
o ***** - The ability to use ***** features of the portable
o *****
o *****
o *****
*This portion of the Exhibit has
been omitted (based upon a request
for confidential treatment) and
filed separately with the Securities
and Exchange Commission pursuant to
Rule 406.
1
<PAGE> 52
*****
DIGITAL PORTABLE
o ***** the digital portable *****
o ***** the digital portable *****
*****
o *****
o ***** the digital portable *****
o ***** the digital portable *****
@ *****
@ *****
@ *****
@ *****
@ *****
*****
o ***** digital portable *****
o ***** the digital portable *****. User then has a *****
o User can then *****
o ***** provides the capability of ***** which includes but not limited
to *****
*This portion of the Exhibit has been omitted (based upon
a request for confidential treatment) and filed
separately with the Securities and Exchange Commission
pursuant to Rule 406.
2
<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. 5 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 18,313,943 shares of its
Common Stock.
ERNST & YOUNG
Vancouver, Canada, Chartered Accountants
May 5, 1997.
