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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
Commission file number 0-20734
NORRIS COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
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Delaware None
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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13114 Evening Creek Drive South
San Diego, California 92128
(619) 679-1504
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No[ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $1,079,645
The aggregate market value of the issue's Common Stock held by non-affiliates as
of June 1, 1998 (assuming for this purpose that only directors and officers of
registrant are affiliates of registrant), based on the average of the closing
bid and asked prices on that date, was approximately $7,291,000.
As of June 1, 1998 there were 58,846,549 shares of Norris Communications, Inc.
Common Stock, par value $.001, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TABLE OF CONTENTS
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PART I
ITEM 1. Description of Business 2
ITEM 2. Description of Property 10
ITEM 3. Legal Proceedings 10
ITEM 4. Submission of Matters to a Vote of Security Holders 10
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters 11
ITEM 6. Management's Discussion and Analysis or Plan of Operation 11
ITEM 7. Financial Statements 20
ITEM 8. Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure 20
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; 20
Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation 21
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 23
ITEM 12. Certain Relationships and Related Transactions 25
ITEM 13. Exhibits and Reports on Form 8-K 25
SIGNATURES 55
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FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE
"SAFE HARBOR" PROVISIONS THEREOF. THEREFORE, THE COMPANY IS INCLUDING THIS
STATEMENT FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH
SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE COMPANY'S CURRENT VIEWS
WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE
DISCUSSED HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS REPORT, THE WORDS
"ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND SIMILAR
EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED TO
CONSIDER THE SPECIFIC RISK FACTORS DESCRIBED BELOW AND NOT TO PLACE UNDUE
RELIANCE ON THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY
ARISE AFTER THE DATE HEREOF.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Norris Communications, Inc., a Delaware corporation (the "Company" or "Norris")
is a holding company which, through its wholly owned California subsidiary,
Norris Communications, Inc. ("NCI"), is an innovator in developing and marketing
advanced electronic product designs and technologies employing a rapidly growing
non-volatile storage media (Flash memory) for the portable computing, digital
recording, mobile office and telecommunication markets.
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The Company is involved in (i) marketing its MicroOS(TM) operating system
technology, a proprietary method of information storage, manipulation and
retrieval and (ii) developing and manufacturing products sold to OEM (Original
Equipment Manufacturer) customers of digital sound recording and processing
technology using Flash storage media.
The address of the Company's principal executive office is 13114 Evening Creek
Drive South, San Diego, California and its telephone number is (619) 679-1504.
The Company's primary operating facilities are located at that address. Its
Internet site is located at WWW.NORRISCOMM.COM.
HISTORY
The Company was started in 1988 based on technology that its founder, Elwood G.
Norris, developed while researching and developing headset/microphone
alternatives for NASA. The successful combination of a speaker and microphone
was developed into the EarPHONE product line, now owned by JABRA Corporation
("JABRA") in which the Company holds an equity investment. The Company was
incorporated under the Company Act (British Columbia), Canada on February 11,
1988 under the name 340520 B.C. Ltd. The Company changed its name to Norris
Communications Corp. on April 7, 1988 and on November 22, 1994 the Company
continued its jurisdiction of incorporation from British Columbia to the Yukon
Territory. The Company further continued its jurisdiction of incorporation to
Wyoming on August 30, 1996 and on September 4, 1996 reincorporated into Delaware
under the name Norris Communications, Inc.
In August 1989, the Company acquired Advanced Surface Mounted Devices, Inc.,
subsequently merged into NCI, establishing the Company as a regional
full-service independent supplier of turnkey manufacturing of circuit board
assemblies, systems and subsystems, to OEM's in the computer, defense,
telecommunications and medical industries. The Company invested over $2.5
million in equipping a 31,000 square foot manufacturing and administrative
facility. Prior to the late fiscal 1995 launch of the Company's first
information storage and retrieval technology product, a personal digital
recorder, ASMD's contract manufacturing services accounted for substantially all
of the Company's revenues. In January 1996, due to the startup of the
manufacturing of the Company's proprietary FlashBack(R) recorder in the
facility, the Company scaled back outside contract manufacturing services.
During fiscal 1997, the Company substantially reduced FlashBack(R) production
and terminated contract manufacturing taking a $2.2 million restructuring
charge. The Company during the same period also discontinued retail marketing of
FlashBack(R) products in favor of private labeling for OEM customers to sell.
During fiscal 1998, the Company completed its restructuring by selling most of
its contract manufacturing equipment, moving to a smaller facility more suited
for its current operations and disposing of or making allowances for excess and
obsolete inventory. The Company has dramatically reduced its monthly operating
expenditures from an average of $414,000 during fiscal 1997 to approximately
$116,000 during fiscal 1998.
In November 1996, the Company entered into an OEM contract with Sanyo
Information Systems U.K. Ltd. (extended into the rest of Europe with Sanyo
Buro-Electronic Europa in January, 1997) (collectively, "Sanyo"). In May 1998,
due to market changes affecting portable digital recorders, the Company
discontinued production and supply under the Sanyo agreement.
In January 1997, the Company entered into a development contract with Lanier
Worldwide, Inc. ("Lanier") to develop a new portable digital voice recorder and
related accessory products. Substantially all of the Company's engineering and
development resources are currently devoted to completing the Lanier digital
recorder. The Lanier digital recorder is scheduled for delivery in late calendar
1998. 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. There can be no assurance the product can be successfully produced in
the future or that it will meet with market acceptance or provide positive
margins to the Company.
Management believes it has substantially completed the transition from a
manufacturing and sales organization to an OEM provider of technology, product
development services, and technology licensing. The Company, as a consequence,
anticipates that the majority of its future revenues will be from license and
royalty fees, private label agreements for products employing the Company's
MicroOS(TM) technology and from contract development services for custom digital
products.
The Company also holds as an investment 58,600 common shares (less than 3%) of
JABRA. JABRA is a former wholly-owned subsidiary of which control was sold in
1993. JABRA is a developer and manufacturer of communication products for
desktop, mobile and wireless applications. There is no assurance these shares,
carried at zero value, will have any future value.
FLASH MEMORY INDUSTRY
The Company's technology employs flash ("Flash") memory as the storage media.
The traditional data storage market encompasses several types of memory and
storage devices designed primarily for specific components of computer systems.
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Dynamic random access memory ("DRAM") provides main system memory; static random
access memory ("SRAM") provides specialized and high speed memory; hard disk
drives provide high capacity data storage; and floppy disk drives permit low
capacity removable data storage.
In recent years, digital processing has expanded beyond the boundaries of
desktop computer systems to include an array of electronic systems. These new
devices include hand-held data collection terminals, medical monitors, mobile
communication systems, highly portable computers, digital cameras, cellular
telephones, communications switches, wireless base stations, network computers,
pay telephones, digital audio recorders and other electronic systems. These
emerging applications have storage requirements that are not well addressed by
traditional storage solutions. Important requirements include small form factor,
high reliability, low power consumption and the capability to withstand high
levels of shock and vibration and extreme temperature fluctuations. In the late
1980s, a new memory technology, known as Flash memory, was developed as an
extension of ultraviolet erasable programmable read-only memory ("EPROM"). Flash
memory is non-volatile, unlike DRAM and SRAM, requiring no power to retain data
and is electrically reprogrammable, unlike EPROM.
Flash memory-based products are solid-state devices, making them very reliable.
Flash products are non-volatile, meaning that no on-going source of power is
required in order for the products to retain data, images or audio indefinitely.
Flash is noiseless, considerably lighter, more rugged and consumes less than 10
percent of the power required by a rotating disk drive. The use of Flash memory
is seen by the Company as the most practical solution for storing data on
removable and interchangeable modules, given that other memory technologies
either require battery back-up, draw too much power, are physically too large,
or are mechanically or magnetically sensitive.
Flash memory is complicated to use and requires a sophisticated flash file
system. A flash file system is a software driver which is used to make Flash
memory components more closely emulate a disk drive and allow an understood
mechanism for storing data.
Flash products are produced by a large number of firms including Intel Corp.,
SanDisk Corporation, AMD, M-Systems, Samsung, TDK, Toshiba and others. Industry
estimates indicate Flash cartridge shipments exceeded 1.3 million units in 1996
and are projected to exceed 15 million units in 1999 according to Disk/Trend,
Inc. Recent product applications by the Company have focused on CompactFlash a
product of SanDisk Corporation. CompactFlash products provide full PC Card ATA
functionality but are only one-fourth the size of a standard Type II PCMCIA
card. CompactFlash is compact, rugged and has low-power requirements.
CompactFlash is available in capacities ranging from 2 megabyte to 48 megabyte
with higher capacities expected to be available during calendar 1998 and at
reduced unit costs over time.
CompactFlash is being promoted as a standard form factor by 70+ corporations,
including the Company, who are members of the CompactFlash Association ("CFA").
The CFA is actively promoting the development of products using CompactFlash.
Founding members of the CFA were SanDisk Corporation, Apple Computer, Inc.,
Canon Inc., Eastman Kodak Co., Hewlett-Packard Company, LG Semicon, Matsushita
Electric Industrial Co. (Panasonic), Motorola, NEC Corporation ("NEC"), Polaroid
Corp., Seagate Technology, Inc. ("Seagate") and Seiko Epson Corp.
The Company's technology also supports the Intel Miniature Card format offering
customers design flexibility and choices among Flash memory. Intel, SanDisk and
other large manufacturers are aggressively promoting high volume use of Flash
memory in a variety of new product concepts.
As a developer of advanced electronic products and technologies employing Flash
memory, the Company's success is in part dependent upon the continued growth and
use of various forms of Flash memory. New product applications are also premised
on continued reductions in the per-megabyte cost of Flash memory.
CORE TECHNOLOGY - MICROOS(TM) FLASH FILE SYSTEM
The Company's core technology is its efficient Flash memory file management
system. This patent-pending software technology takes a unique approach to flash
file management that is robust, high-speed and efficient. The Company's approach
is suited for the high-speed portable product market as it requires minimal
micro-controller support. Management believes the Company's technology provides
superior product functionality, reliable product performance, reduced new
product development time and faster time to market for OEM customers.
For developers of voice and data recording devices, digital cameras and other
multimedia products, the intricacies of incorporating full-featured Flash memory
can add costly obstacles to a successful product release. These products require
a
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software system that will deliver Flash-based features and functionality to
users managing digital data for reliability in operations such as play, record,
edit, delete, insert, and rewind.
The MicroOS(TM) software was developed specifically for embedded systems, with
features designed to maximize performance and minimize system requirements. The
Company's design caters to ultra-miniature applications by reducing the need for
a high power CPU by paring down code to fit and run efficiently on low-cost
micro controllers while preserving memory for other functions. The software
stores and manipulates compressed voice, image or video as well as conventional
files. It supports NAND or NOR Flash memory, CompactFlash, Intel Miniature Card
and IDE hard disks. Memory management transparently deals with bad blocks, erase
blocks, wear leveling, and is independent of data and erase block sizes. The
MicroOS(TM) is highly fault tolerant and recovers well from "high fatigue"
applications. These sophisticated features offer high Mean Time Between Failure
(MTBF) and long useful life of Flash memory employed in applications.
Unlike less robust systems, MicroOS(TM) can support an unlimited number of
files, directories, and subdirectories and is fully MS-DOS compatible. The
system is written in the programming language "C" to facilitate porting to other
environments, and a redirector is available for MS-DOS(TM) applications. The
MicroOS(TM) software consists of a component-oriented, modular architecture that
offers a maximum of cross-platform compatibility, which can be combined to
address specific vertical industry requirements.
FLASHBACK AUDIO(TM) TECHNOLOGY
FlashBack Audio(TM) is a new technology developed by the Company for proposed
implementation into various product concepts. It provides the means for
high-bandwidth, near CD-quality, stereo audio playback from a CompactFlash(R)
(CF(R)) cartridge, other removable flash memory or embedded flash memory in a
portable electronic unit. Record, edit and playback functions are encoded in the
unit and a PC interface links the portable unit to the computer. The FlashBack
Audio(TM) technology is based on the MicroOS(TM) operating system for Flash
memory.
FlashBack Audio's features include instant access to recorded material,
computer/internet compatible files, a computer standard interface and
adaptability to various industry standard removable flash memory. The advantages
of the FlashBack Audio stereo technology over portable CD players include its
small size, low power consumption, use of recordable media, inexpensive computer
interface/compatibility and no moving parts operation. In addition to being a
stand-alone, ultra compact, portable stereo, FlashBack Audio units can be
integrated into a variety of products, such as laptop or hand-held PC's, pagers,
cellular phones, and other portable devices under OEM agreements with
manufacturers.
The higher sampling rate and frequency range of the FlashBack Audio(TM)
technology is also designed for advanced voice-to-text applications in portable
recording and playback. The Company is developing and exploring a number of
product concepts to exploit the advantages offered by this technology. However,
there is no assurance this technology can be successfully exploited by the
Company.
In March 1998, the Company announced that it had produced a reference design and
prototype for an adjustable bandwidth digital recording device incorporating the
MicroOS(TM) flash management system based on the FlashBack Audio(TM) technology.
The prototype employs variable bandwidth allowing voice-to-text demonstrations
as well as music download, compression and playback. Just as MicroOS(TM) is
functional with various Flash memories, the Company's strategy is to interface
with the variety of compression schemes currently being promoted by major
corporations including Lucent, AT&T, Dolby and others.
LANIER DEVELOPMENT AGREEMENT
The Company has a development contract with Lanier to develop a new portable
digital voice recorder and related accessory products. Substantially all of the
Company's engineering and development resources are devoted to completing the
Lanier digital recorder. The Lanier recorder is targeted at the health care
industry and to interface with Lanier's existing dictation technology. The
Lanier digital recorder contains a number of innovative and custom features.
Based in Atlanta, Lanier Worldwide, Inc. is a $1.2 billion wholly-owned
subsidiary of Harris Corporation. Lanier is the world's largest single
distributor of office equipment - with over 1,600 sales and service centers in
more than 100 countries worldwide. Lanier globally markets, sells and services
an array of office solutions including copiers, facsimile systems, document
imaging solutions, analog and digital dictation systems, multifunctional
devices, continuous recording systems and PC-based records management systems.
For many years Lanier has been a leader in providing healthcare solutions
including digital dictation transcription, chart management and document
imaging.
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The Lanier digital recorder being developed by the Company is scheduled for
delivery in late calendar 1998 pursuant to a January 1997 development and
manufacturing agreement. Under the terms of the Lanier development agreement,
the Company is receiving non-recurring engineering payments ("NRE"), upon the
satisfaction of certain milestones. The Lanier agreement contemplates that the
Company will provide Lanier with manufactured product to be sold by Lanier's
sales force worldwide. As of March 31, 1998, the Company in connection with the
contract, had received NRE of approximately $514,000. The agreement, as amended,
extends to December 2001 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.
There can be no assurance the Company can successfully complete development of
the Lanier recorder or the timing thereof. Should the Company successfully
produce the product, there can be no assurance of future orders or positive
margins from this agreement.
DISCONTINUED PRODUCTS
In early 1996 the Company introduced the FlashBack(R) digital hand-held voice
recorder, a 3 ounce, palm sized unit used to record ideas, conversations, and
voice memos. The Company believes it was the first digital recorder to feature
removable, reusable Flash memory cartridges for significant recording times. The
Company holds a U.S. patent for the product with additional software patents
pending on the MicroOS(TM).
The technology was further advanced in 1996 with the creation of VoiceLink(TM),
a software/hardware combination which utilized the PC Card Type II format to
download, record, edit and play back digital voice files from a SoundClip(TM)
removable Flash cartridge or computer hard drive.
The FlashBack(R) VoiceLink(TM) turned a PC into a long-length audio recorder and
allowed users to download voice messages from SoundClip(TM) cartridges directly
onto a computer hard drive. The VoiceLink(TM) plugged directly into the PC card
slot of a notebook or a desktop computer and permitted connection of either a
wired or wireless microphone for recording directly to the hard disk at a
compressed rate of 18 minutes per megabyte of storage. Users could send
compressed files over the Internet saving time and money. With a headset,
keyboard and the VoiceLink(TM) software, users could manipulate sound files for
controlled record, play, fast forward, reverse and edit functions. The
VoiceLink(TM) product was selected as an Innovations '97 award winner at the
1997 International Winter Consumer Electronics Show.
Interchangeable SoundClip(TM) Flash cartridges are compatible with both the
FlashBack(R) and the VoiceLink(TM). Users can remove SoundClips(TM) and add new
ones thereby extending recording time. SoundClips(TM) store digitally recorded
FlashBack(R) voice messages and transfers them to the VoiceLink(TM) for
downloading into a computer. Available in 18 or 36 minute capacities or longer
capacities on special order, they feature a write-protect switch to protect
important recordings. Users can store SoundClip(TM) cartridges indefinitely, and
use them repeatedly. They are not affected by magnets, X-rays, heat or cold.
In October, 1996 the Company discontinued direct sales of the above products and
elected to distribute the products on an OEM basis through Sanyo. In March,
1998, due to recent market developments, the Company discontinued production of
additional FlashBack(R) and VoiceLink(TM) units from existing parts inventory.
Accordingly the Company took a fourth quarter non-cash charge of $1.3 million to
obsolete inventory.
The Company has no plans to produce additional FlashBack(R) products.
INDUSTRY AND MARKET FORCES IMPACTING THE COMPANY'S TECHNOLOGY
The consumer electronics market is undergoing a major technology convergence in
ever smaller products which combine multiple functions. Palm-type computers are
tiny PCs that allow users to access their e-mail from remote locations. Cellular
phones are incorporating PC features and pagers are combining with cellular
phones and voice-mail systems. Consumer electronic manufacturers are integrating
functions and devices at an extremely fast pace, and technology consumers are
eager to take advantage of "convergence" products.
The older analog dictation market is evolving to fully digital systems
interfacing with computers and the emerging voice-to-text technology market. The
Company believes these movements will impact all types of portable products and
technologies. The automatic dictation segment of the emerging voice-to-text
market is expected to grow from $410 million worldwide in 1997 to an estimated
$4.3 billion in 2001 according to Voice Information Associates, a market
research firm.
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The Internet is impacting business and technology in unparalleled ways. Voice
and text mail is burgeoning. Music and audio books can be downloaded through the
Internet to the PC creating a market for portable devices that interface
digitally with the PC. Jupiter Communications projects that on-line music sales
will grow from $47 million in 1997 to $1.6 billion by 2002.
In addition to the Internet, the data broadcast market is developing a need for
portable products. Data broadcasting is a new means for information
distribution. It is a system that sends large amounts of data to a huge number
of people simultaneously. The first wave of data broadcasting is expected to use
VHF channels to overcome the network bandwidth limitations. While not a
replacement for the Internet, data broadcasting is designed for downloadable
audio and video and could impact the consumer electronics industry, including
portable products.
Flash memory prices are dropping improving the outlook for portable devices that
employ such memory. Current Flash prices are $4 to $6 per megabyte (MB), down
from $15 two years ago and are projected to be down to $1 per MB within a couple
years. These moves along with newer lower voltage flash are expected to expand
the market for Flash memory. Industry estimates indicate Flash cartridge
shipments exceeded 1.3 million units in 1996 and are projected to exceed 15
million units in 1999 according to Disk/Trend, Inc.
Flash memory is a potential digital replacement for analog cassettes. Music
cassettes represent a $1.4 billion market and account for 29% of all retail
music sales. The replacement of cassettes requires an economic portable
replacement which is not being achieved by digital tape, mini-disc technology or
other approaches. Flash memory has the advantages of no-moving parts and low
power requirements. The added feature of computer compatibility provides a
further advantage for Flash memory based portable products. The domestic market
for such devices according to the Consumer Electronics Manufacturers Association
(including portable CD players) exceeds 45 million units each year.
OEM STRATEGY AND CURRENT CUSTOMERS
The Company's strategy is to build upon its proprietary technology to develop
long-term strategic relationships with key manufacturers in various industries.
The core technology offered is the MicroOS(TM) Flash file system development
tool created to overcome the intricacies of dealing with Flash memory. The
Company believes Flash memory is rapidly becoming the most popular form of
memory for portable digital devices. In addition, the Company's FlashBack
Audio(TM) technology, designed around the MicroOS(TM), is a new technology
providing the means of near CD-quality, stereo audio and high-bandwidth speech
playback from a CompactFlash(R) cartridge, other removable Flash memory or
embedded memory.
The Company is actively seeking licensing, private label, and OEM opportunities
for the digital sound recording and playback market. The Company's efforts are
focused to:
1. Develop custom products for OEMs under contract. In January 1997, the
Company entered into an OEM and development contract with Lanier as
described above. The Company's strategy is to arrange for outside
contract manufacturing of this product on a turnkey basis.
In June, 1997 the Company began to integrate elements of its
FlashBack(R) recorder into a hand-held tactical signal homing system
developed by VisiCom Laboratories, Inc. for evaluation by the United
States Marine Corps. This development has resulted in additional small
orders of product.
In early 1997, the Company began working with ADAMLAB, a subsidiary of
the Wayne County, Michigan school district, to develop a Voice Recorder
Sub-Assembly for their SuperHawk product. The SuperHawk is an
educational device designed for students that are voice impaired. Based
on FlashBack(R) technology, the Norris sub-assembly expanded the
SuperHawk's storage capability nearly ten fold and enhanced the basic
functionality of the product for better ease of use. The contract
included engineering and manufacturing fees.
The Company will continue to pursue business with similar companies
seeking to develop other products to meet OEM customer needs.
2. Develop products for licensing to or private labeling by OEM customers.
The Company is continuing to develop in-house proprietary products,
features or technologies that may be private labeled or licensed to one
or more OEMs. The Company has developed a reference design and prototype
of a FlashBack Audio(TM) featuring variable band-width and voice-to-text
and music capabilities.
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The Company's strategy is to seek additional product development
opportunities with a number of consumer product companies.
3. Expand the technology base through continued enhancements of the
FlashBack(R) technology and new inventions. The Company's engineering
team continues to enhance and update the FlashBack(R) technology,
specifically the OEM technology components described above. The Company
also devotes resources to expanding the technology to new applications.
In addition to improved voice recorders, management believes the
Company's proprietary technology may have applications in a wide range
of products including voice pagers, answering machines, cellular phones,
computers, compact disc quality sound devices and for the storage of
pictures and video images.
MANUFACTURING, PRODUCTION AND DISTRIBUTION
During fiscal 1997, the Company ceased contract manufacturing services and also
substantially reduced in-house manufacturing of FlashBack(R) products. By the
end of fiscal 1998 the Company had discontinued the sale of FlashBack(R)
products. FlashBack(R) products accounted for 34% of consolidated revenues
during fiscal 1998 and 47% in fiscal 1997.
The Company is reviewing alternatives for contracting with independent
manufacturing facilities to produce products for its OEM customers (including
the Lanier recorder and future developed products) and will select, when
warranted, organizations who will provide a secondary source of supply, and/or
additional capacity. The Company's strategy is to arrange for the production of
products for its OEM customers on a turn-key basis, when possible. In other
instances the Company may enter into licensing and royalty agreements with OEM
customers who have existing manufacturing abilities or arrangements.
The Company believes, but there is no assurance, that it can provide
manufacturing for its customers through contract manufacturing relationships on
terms that will not require substantial financial risk or the provision of
significant working capital by the Company.
MAJOR CUSTOMERS AND EXPORT SALES
During the fiscal year ended March 31, 1997 three customers, Martin Decker,
Sanyo and Alan Marketing accounted for 31%, 17% and 12%, respectively, each of
total revenues. During fiscal 1998, two customers, Lanier and Sanyo accounted
for 58% and 32%, respectively of total revenues. No other customer accounted for
more than 10% of revenues. For the fiscal years ended March 31, 1997 and 1998,
export sales aggregated $155,000 and $359,157, respectively. At March 31, 1998,
the Company had no material backlog.
COMPETITION
The Company believes it has a leading comprehensive Flash file operating system
capable of customization for individual customer requirements. Other companies
offering Flash file operating systems include M-Systems Flash Disk Pioneers
Ltd., Intel and Datalight Inc. In addition to licensing file management systems,
some customers develop their own file management systems for a particular
product, either in total or by adapting from one of the competitive vendors.
Although, the Company was successful in competing against other systems in its
selection by Lanier, there is no assurance the Company can compete against other
providers of digital recording solutions, many of which have substantially
greater resources than that of the Company.
The Company's technology is frequently compared to that employed in the "note
taker" type of products which offer very limited recording capabilities and
feature sets. There is less product competition with regard to hand-held digital
voice recorders that offer the ability to download recorded sound and data
information to a computer in compressed format. Accordingly, the primary
competition, in general, for the Company's technology are analog tape products
and traditional dictation equipment. The Company and its OEM customers,
therefore, compete with a wide range of consumer and business product suppliers
producing a wide variety of products and solutions. The electronics product
market is highly competitive with many large international companies competing
for the consumer and business market.
The Company believes its existing know-how, contracts, pending patent
applications, existing copyrights, trade secrets and potential future patents
and copyrights, will be significant in enabling it to compete successfully in
the field of digital sound recording and processing technology for Flash memory
and related media.
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.
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PATENTS, TRADENAMES AND COPYRIGHTS
The Company owns one patent protecting its technology. The Company has filed
multiple additional patent applications with multiple claims which are pending
on innovations in audio and other forms of recording. The Company's software is
subject to copyrights and pending patent applications. The patent position of
any item for which the Company has filed a patent application is uncertain and
may involve complex legal and factual issues. Although the Company is currently
prosecuting multiple patent and trademark applications with the U.S. Patent and
Trademark Office and also has filed certain international patent applications
corresponding to its U.S. patent applications, the Company does not know whether
any of its applications will result in the issuance of patents, or, for any
patents issued, whether they will provide significant proprietary protection or
will be circumvented or invalidated. Additionally, since an issued patent does
not guarantee the right to practice the claimed invention, there can be no
assurance others will not obtain patents that the Company would need to license
or design around in order to practice its patented technologies, or that
licenses that might be required would be available on reasonable terms. Further
there can be no assurance that any unpatented manufacture, use, or sale of the
Company's technology or products will not infringe on patents or proprietary
rights of others. The Company, however, has made reasonable efforts in the
design and development of its products not to infringe on other known patents.
The Company also relies on trade secret laws for protection of its intellectual
property, but there can be no assurance others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can protect its rights to unpatented trade secrets.
The Company also has filed a number of trademark applications with the U.S.
Patent and Trademark Office. The Company has received notification of allowance
from the United States Patent Office for use of FlashBack(R) as a registered
trade name.
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 June 1, 1998 the Company, employed approximately 17 employees of which
three were production, eight were research, development and engineering, three
were accounting/administrative and three were executive officers. None of the
Company's employees are represented by a labor union, and the Company is not
aware of any current efforts to unionize the employees. Management of the
Company considers the relationship between the Company and its employees to be
good.
The Company also engages consultants or leases engineering personnel on a
temporary basis from time to time and uses other outside consultants for various
services.
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, 1998 and 1997, the Company spent $261,619 and
$922,954, respectively, on research and development. The Company anticipates it
will continue to devote substantial resources to research and development
activities. During fiscal 1998, approximately $581,577 of research and
development was borne by Lanier Worldwide, Inc., a contract development customer
and included in cost of services.
MISCELLANEOUS
No material portion of the Company's business is subject, at the election of the
United States government, to renegotiation or termination of contracts or
subcontracts.
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<PAGE> 10
Compliance with federal, state and local provisions enacted or adopted
regulating the discharge of materials into the environment, or otherwise related
to the protection of the environment, has not had and is not expected to have
material effect on the Company's capital expenditures, earnings and competitive
position.
ITEM 2. DESCRIPTION OF PROPERTY
Commencing July 11, 1997, the Company jointly entered into a three year lease
with American Technology Corporation ("ATC"), an affiliated company (see
"Certain Transactions"), for an aggregate of 12,925 square feet of office and
engineering office space at 13114 Evening Creek Drive South, San Diego,
California with an unaffiliated landlord. The Company occupies approximately
5,500 square feet of the jointly leased space at a cost of $5,800 per month for
the Company's share.
From April 1996 to July 1997, the Company provided approximately 2,407 square
feet of space at the Company's 12725 Stowe Drive, Poway, California leased
facility and certain support services to ATC at the rate of $3,095 per month.
The Company and ATC share certain services and a limited number of personnel
from time to time at agreed upon rates.
The Company believes that the terms of the above arrangements are no less
favorable than could be obtained from an independent and unaffiliated party. The
Company's former facility was sublet by the landlord and the Company, effective
on September 30, 1997, entered into a three year term note for $182,129
representing a settlement of unpaid rentals and termination of the prior lease
agreement.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to the conduct of its
business. There are currently no material pending legal proceedings to which the
Company is a party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's fiscal 1997 Annual Meeting of Stockholders held on January 5,
1998 the following individuals, constituting all of the members of the Board of
Directors: Elwood G. Norris, Alfred H.
Falk and Robert Putnam.
The following proposals were approved at the Company's Annual Meeting of
Stockholders:
1. Election of Directors:
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C> <C>
Elwood G. Norris 51,002,976 -0- 529,496
Alfred H. Falk 51,002,976 -0- 377,946
Robert Putnam 51,002,976 -0- 1,840,716
</TABLE>
2. Authorization to approve an amendment to the Company's 1994 Stock
Option Plan to increase the number of shares reserved for issuance
thereunder by 6,000,000 to an aggregate of 10,000,000 shares.
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C>
29,428,720 3,026,154 339,643
</TABLE>
3. Authorization to approve an increase in the number of shares of
Common Stock that the Corporation is authorized to issue from 60,000,000
to 120,000,000.
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C>
43,356,307 1,058,159 306,598
</TABLE>
4. Authorization to ratify the appointment of Ernst & Young as
independent accountants for the Company for fiscal year ending March 31,
1998.
<TABLE>
<CAPTION>
Affirmative Votes Negative Votes Votes Withheld
----------------- -------------- --------------
<S> <C> <C>
50,763,984 114,000 197,218
</TABLE>
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock was quoted on the National Association of Securities
Dealers Automated Quotation System (NASDAQ) (symbol NCII) from April 6, 1993
until August 20, 1997. Since August 20, 1997 the Company's Common Stock has been
traded in the over-the-counter market on the OTC Bulletin Board. The following
table sets forth, for the periods indicated, the high and low closing bid prices
for the Common Stock, as reported by NASDAQ or the OTC Bulletin Board, for the
quarters presented. Bid prices represent inter-dealer quotations without
adjustment for markups, markdowns, and commissions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal year ended March 31, 1997
First quarter $ 1.8125 $ 1.00
Second quarter $ 1.1875 $ 0.75
Third quarter $0.90625 $ 0.375
Fourth quarter $ 1.00 $0.40625
Fiscal year ended March 31, 1998
First quarter $0.40625 $ 0.125
Second quarter $ 0.25 $ 0.10
Third quarter $ 0.18 $ 0.07
Fourth quarter $ 0.09 $ 0.05
</TABLE>
At June 1, 1998, there were 58,846,549 shares of Common Stock outstanding, which
were held by approximately 453 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 on its common stock in the foreseeable future, but instead intends
to have the Company retain all earnings, if any, for use in the Company's
business.
RECENT SALES OF UNREGISTERED SECURITIES
None other than previously reported in quarterly filings.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW AND UNDER THE SUB-HEADING,
"BUSINESS RISKS."
GENERAL
The Company has completed the transition from a manufacturing and sales
organization to an OEM provider of technology, product development services, and
technology licensing. The Company, as a consequence, anticipates that the
majority of its future revenues will be from license and royalty fees and from
contract development services for and sales to OEMs of custom digital products.
The Company is actively developing licensing, private label, and OEM
opportunities seeking to penetrate the digital sound recording and playback
market. The Company has a development and manufacturing agreement with Lanier.
Under the terms of the Lanier development agreement, the Company is receiving
NRE (non-recurring engineering expenses) ,upon the satisfaction of certain
milestones, to develop a new portable digital voice recorder and related
accessory products. The Lanier agreement contemplates that the products to be
developed will be completed in late calendar 1998, with the Company to provide
Lanier with manufactured product thereafter to be sold by Lanier's sales force
worldwide. As of March 31, 1998, the Company was on schedule, as amended by
Lanier, with respect to the product to be developed. The Company, as of such
date, in connection therewith, had received NRE of approximately $497,100. The
agreement, as amended, is for an initial term
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<PAGE> 12
terminating December 2001. 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.
During fiscal 1998 the Company supplied approximately $348,000 of FlashBack(R)
related products pursuant to a private label agreement with Sanyo. In March
1998, due to market changes, the Company discontinued production and supply
under the Sanyo agreement.
As a result of the restructuring and change in the source of revenues,
comparisons to prior results are less meaningful and prior results are not
necessarily indicative of future results.
The Company has incurred operating losses in each of the last three fiscal years
and these losses have been material. The Company incurred an operating loss of
$8.7 million in fiscal 1997 (including a restructuring charge of $2.2 million)
and $2.7 million in fiscal 1998 (including an inventory write-off of $1.3
million). The Company has reduced its monthly cash operating costs from an
average of approximately $414,000 per month in fiscal 1997 to approximately
$116,000 per month during fiscal 1998. However, the Company may increase
expenditure levels in future periods to support its new FlashBack(TM) Audio
technology and support OEM customers. Accordingly, the Company's losses are
expected to continue until such time as the Company is able to obtain supply,
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.
Management is focused on OEM licensing with respect to the MicroOS(TM) file
system 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, and
future product supply arrangements, if any, are expected to be subject to
significant month to month variability resulting from the limited market
penetration and license activity to date, the timing and delays associated with
OEM new product introductions and the seasonal nature of demand for consumer
electronic products. Development and OEM contracts may be delayed or terminated
by customers and are subject to a number of factors beyond the Company's
control. The termination of the Lanier agreement would have a material adverse
effect on operations. The markets for consumer electronic products are subject
to rapidly changing customer tastes and a high level of competition. Demand for
the Company's products is expected to be influenced by OEM market success,
technological developments and general economic conditions. Because these
factors can change rapidly, customer demand for the Company's technology can
also shift quickly. The Company may not be able to respond to technical
developments by competitors because of the time required and risks involved in
the development or introduction of new or improved technology and due to limited
financial resources.
RESULTS OF OPERATIONS
For the fiscal year 1998, the Company reported revenues of $1,079,645, a 65%
increase over revenues of $653,700 for fiscal 1997. Fiscal 1998 revenues
consisted of $454,473 of product revenues and $625,172 of service revenues
primarily from the Lanier contract. Fiscal 1997 revenues were primarily from
product sales. Two customers accounted for 90% of fiscal 1998's revenues. While
product shipments to Sanyo have essentially terminated, the Company is highly
reliant on the Lanier contract for service revenue and anticipated future
product revenues. The loss of the Lanier relationship would have a material
adverse impact on the Company.
The Company's development arrangements are designed to produce limited current
revenues while creating proprietary OEM products to be sold to OEM customers or
to be produced under long-term license or royalty arrangements. The Company's
future revenues are expected to consist primarily of product sales to OEM
customers and development, license and royalty fees.
For the fiscal year 1998, the Company reported a gross loss of $1,265,981 as
compared to a gross loss of $1,526,832 for the fiscal year 1997. Included in
cost of products sold in fiscal 1998 was a $1.3 million inventory writedown
which accounted for substantially all of the gross loss. Cost of sales consisted
of $1,764,049 of product costs (including the $1.3 million inventory writedown)
and $581,577 of contract services consisting mostly of research and development
labor being funded primarily by the Lanier development agreement. There can be
no assurance the Company can attain positive gross margins in the future.
12
<PAGE> 13
Total operating expenses (consisting of research and related expenditures and
selling and administrative expenses) for the fiscal year ended March 31, 1998
were $1,394,504 as compared to $4,970,181 for the fiscal year ended March 31,
1997 (excluding a fiscal 1997 restructuring charge of $2,228,001). In connection
with and resulting from its restructuring, the Company dramatically reduced the
number of personnel and related operating costs. Accordingly, comparisons of
costs with prior periods are less meaningful. Selling and administrative costs
aggregated $1,132,885 during fiscal 1998 compared to $4,047,227 in the prior
period. The $2.9 million reduction was comprised primarily of a $1.1 million
decrease in compensation costs, a $637,000 decrease in legal and related costs,
a $335,000 decrease in depreciation and amortization, a $614,000 decrease in
advertising and related costs, and a $164,000 reduction in occupancy related
costs.
Research and related expenditures for fiscal 1998 were $261,619 as compared to
$922,954 for fiscal 1997. An aggregate of $581,577 of development costs were
incurred for contract development work during fiscal 1998 and are included in
cost of revenues. This included approximately $384,000 of personnel costs which
were included in research and related expenditures in the prior comparable
period. Research and development costs are subject to significant quarterly
variations depending on the use of outside services, the assignment of engineers
to development projects and the availability of financial resources.
The Company reported an operating loss of $2,660,485 for fiscal year ended March
31, 1998, as compared to an operating loss of $8,725,014 for the fiscal year
ended March 31, 1997 with the decreased loss resulting primarily from the
reduction in operating expenses described above. In addition to variances in
operating expenses, the Company's operating losses have been impacted by the
timing and amount of OEM product sales and the recognition of contract service
revenues. Accordingly, there is substantial uncertainty about future operating
results and the results for prior periods are not necessarily indicative of
operating results for future periods.
The Company's interest expense for the fiscal year 1998 was $59,953, a reduction
from the $79,518 for the prior period resulting from the retirement of demand
loans and other interest bearing debt outstanding during fiscal 1997. The
Company also received a $153,000 payment from a former vendor in the first
fiscal 1998 quarter resulting from prior year overpayments by the Company. This
payment has been included in other income.
The Company reported a net loss for the fiscal year 1998 of $2,563,597 compared
to a net loss of $9,597,102 for the prior year. The Company anticipates reduced
losses during the current fiscal year as compared to fiscal 1998, however there
can be no assurance of future profitability.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had a working capital deficit of $911,041
compared to a working capital deficit of $564,503 at March 31, 1997. The Company
had approximately $180,751 of working capital invested in inventories at March
31, 1998. The decrease in working capital is a result of continuing losses and
the inventory write-off.
In June 1997, the Company sold $500,000 of convertible long-term 12% secured
notes due September 30, 1999 with stock purchase warrants issuable on conversion
to nine investors. In September and October 1997, the Company sold 99,500 shares
of Series A Preferred Stock at $10.00 per share for net proceeds of $962,500.
The proceeds were applied to reduce debt and for working capital.
During fiscal 1998, the Company paid accrued liabilities or operating expenses
aggregating $575,622 through the issuance of Common Stock. The Company also
obtained $74,067 of proceeds from equipment disposals during fiscal 1998.
For the year ended March 31, 1998, net cash decreased by $113,788. Cash used in
operating activities was $1,590,727. Major components using cash were a net loss
of $2,563,597 reduced by $97,779 of aggregate depreciation and amortization and
$575,622 of expenses paid in shares and increased by $4,798 of equipment sale
gains, or a net loss use of cash of $1,894,994. The major change in assets and
liabilities providing net cash used in operating activities was a reduction in
inventory of $1,468,112. The major changes in assets and liabilities using
operating cash was an increase in accounts receivable of $24,562, a reduction in
payables and accrued liabilities of $786,721 and a change in development
contract components of $342,322.
At March 31, 1998, the Company had $590,084 in long term debt. The Company has
no bank lines of credit or related financing facilities. 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 twelve months to meet its debts as they become due and to
continue as a going concern. In May and June of 1998, the Company obtained
$1,000,000 of new financing from the sale of 12% Convertible Promissory Notes
with Limited Guaranty ("Notes") due May 15, 1999. The
13
<PAGE> 14
Notes and interest are convertible into shares of Common Stock at $0.0875 per
share subject to certain adjustments. Given these proceeds and assuming current
expenditure levels and projected working capital requirements the Company will
require an additional estimated $400,000 to continue operating for the next
twelve months assuming no new revenues. 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 failure to raise additional funds, if required,
could have a material adverse effect on the Company and could force the Company
to further reduce or curtail operations.
The Company may, from time to time, seek additional funds through lines of
credit, public or private debt or equity financing. The Company estimates that
it will require additional capital to finance future developments and
improvements to its technology. There can be no assurances that additional
capital will be available when needed.
MANAGEMENT'S PLANS FOR IMPROVING OPERATIONS
Management has 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 (i) focusing sales and marketing on the OEM markets, (ii)
focusing on the completion of the Lanier development agreement and planned OEM
products manufacturing and (iii) controlling overhead and expenses. There can be
no assurance the Company can attain profitable operations in the future.
FUTURE COMMITMENTS AND FINANCIAL RESOURCES
The Company was in arrears on an operating equipment lease obligation to
Comdisco, Inc. during fiscal 1997, but has negotiated a settlement providing for
future payments of approximately $515,000 from time to time based on agreed upon
percentages of future equity raised.
The Company expects to commence production during fiscal 1999 pursuant to future
Lanier purchase orders for the portable digital recorder currently under
development. The Company may require significant working capital funds for the
production of these anticipated orders, if realized. The amount of such funds is
subject to a variety of factors including some beyond the Company's control.
These factors include the size and frequency of Lanier purchase orders, if any,
and the terms of any future contract manufacturing arrangement, lead times on
components and a variety of other factors.
The Company's plans for its FlashBack Audio(TM) technology are to continue to
develop the technology and seek OEM partnerships to exploit the technology. The
Company may require additional funds to continue development of this and other
technologies and the extent of such requirements is not presently determinable
by management.
If, in the future, operations of the Company increase significantly, the Company
may require additional funds. The Company might also require additional capital
to finance future developments, acquisitions or expansion of facilities. The
Company currently has no plans, arrangements or understandings regarding any
acquisitions.
INFLATION
Inflation has not had any significant impact on the Company's business.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" and SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits." SFAS No. 130 establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 131 supersedes SFAS
No. 14 "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosure
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. SFAS No. 132 standardizes the disclosure requirements for pensions
and other post-retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis.
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<PAGE> 15
SFAS No. 130 and No. 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. SFAS No. 132 is effective for years beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated, unless such information is not readily available. Management
believes the adoption of these statements will have no material impact on the
Company's financial statements and that results of operations and financial
position will be unaffected by their implementation.
YEAR 2000 COMPLIANCE
The Company, like most owners of computer software, will be required to modify
significant portions of its software so that it will function properly in the
year 2000. Preliminary estimates of the total costs to be incurred by the
Company to resolve this problem range from $10,000 to $20,000. Since the Company
mainly uses third party "off-the-shelf" software, it does not anticipate a
problem in resolving the year 2000 problem in a timely manner. Maintenance or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.
BUSINESS AND OTHER RISKS
This report contains a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed below, that could cause actual results to differ
materially from historical results or those anticipated. In this report, the
words "anticipates," "believes," "expects," "intends," "future" and similar
expressions identify forward-looking statements. Readers are cautioned to
consider the specific risk factors described below and not to place undue
reliance on the forward-looking statements contained herein, which speak only as
of the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements, to reflect events or circumstances that may
arise after the date hereof.
DEPENDENCE UPON NEW PRODUCTS - The scale and scope of the Company's
business is changing. Historically, a majority of the Company's revenues
were derived from its contract manufacturing business. The Company's
future growth is greatly dependent upon the OEM relationship already in
place and new relationships yet to be established. The Company's
performance will be dependent upon the risks that are inherent in any
business venture that is undergoing a major change in the scope of its
operations, future events and developments, and changes in the Company's
policies and methods of operations in the future.
SIGNIFICANT LOSSES FROM OPERATIONS. The Company has incurred operating
losses in seven of its past eight fiscal years with operating losses
from continuing operations of $2,660,000, $8,725,000, $7,945,000,
$7,142,000, $2,442,000, $4,427,000 and $236,000 for the fiscal years
ended March 31, 1998, March 31, 1997, March 31, 1996, March 31, 1995,
March 31, 1994, March 31, 1993 and March 31, 1991, respectively. The
Company's losses are expected to continue until such time as the Company
is able to generate license and royalty fees from OEM customers and/or
development and product supply arrangements. 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, losses from operations and cash flow deficits, (ii)
substantial inventory write-offs, (iii) material net losses and cash
flow deficits from operations during fiscal 1998 and fiscal 1997 and
(iv) the possibility that the Company may be unable to meet its debts as
they come due, raise substantial doubt about the Company's ability to
continue as a going concern. The Company's ability to continue as a
going concern is dependent upon its ability to obtain adequate financing
and achieve a level of revenues, adequate to support the Company's
capital requirements, as to which no assurance can be given. In the
event the Company is unable to continue as a going concern, it may elect
or be required to seek protection from its creditors by filing a
voluntary petition in bankruptcy or may be subject to an involuntary
petition in bankruptcy. To date, management has not considered this
alternative, nor does management view it as a likely occurrence.
POTENTIAL TAX LIABILITY. The Company has been notified by the Internal
Revenue Service ("IRS") of a potential tax liability of approximately
$450,000 plus interest relating to the imposition of withholding taxes
on imputed interest from purported loans from the Company's former
Canadian parent to operating subsidiaries. The Company intends to
vigorously contest this proposed liability and believes it has a number
of valid defenses including that the
15
<PAGE> 16
purported loans were capital contributions. The Company also believes
that should the liability ultimately be sustained through various
appeals that the former Canadian parent may have valid claims for
refunds of such withheld taxes if imputed from the subsidiaries. This
matter is in the early stages and the Company has engaged legal counsel
to vigorously contest this matter.
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 technologies or products with features which
render the Company's technology or products obsolete or less marketable,
or could develop means of producing competitive products at a lower
cost. The ability of the Company to compete successfully will depend in
large measure on its ability to maintain its capabilities in connection
with upgrading its products and quality control procedures and to adapt
to technological changes and advances in the industry. There can be no
assurance that the Company will be able to keep pace with the
technological demands of the marketplace or successfully enhance its
products or develop new products which are compatible with the products
of the electronics industry.
RELIANCE ON MAJOR CUSTOMERS. A substantial portion of the Company's
revenues have been derived primarily from a limited number of customers.
For the year ended March 31, 1998, sales of the Company's FlashBack(R)
product to Sanyo and provision of contract development services to
Lanier accounted for approximately 90% of its revenues. The Company does
not anticipate any significant new shipments to Sanyo and upon
completion of the Lanier development there is no assurance of timing or
amount of future orders, if any. The loss of the Lanier relationship or
a decline in the economic prospects of such customer would have a
material adverse effect on the Company.
DEPENDENCE ON CONTRACT MANUFACTURER/SUPPLIERS. During fiscal 1998, the
Company's sales of FlashBack(R) products to Sanyo were made from
existing inventory assembled by the Company. The sale of future products
pursuant to the Lanier development agreement, if any, requires that the
Company establish a contract manufacturing arrangement with one or more
assemblers of electronic components. Thereafter, the Company will be
dependent on such party or parties to assemble products for the
Company's customers. Failure to establish a relationship on acceptable
terms could have a material adverse effect 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 component suppliers and, accordingly, will be dependent on the
future ability to purchase components, either directly or through a
contract manufacturer. Failure or delay by such suppliers in supplying
necessary components to the Company or its contract manufacturer could
adversely affect the Company's ability to deliver products on a timely
and competitive basis in the future.
LIMITED MARKETING CAPABILITY. The Company has limited marketing
capabilities and resources and is primarily dependent upon in-house
employees for the marketing of 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 technology. There can be no assurance that the Company's
marketing efforts will be successful or result in future development
contracts or other 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 an officer and 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 engineers, 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, Chief Executive Officer and a Director of the Company, is
also a director of ATC and Chairman and Director of Patriot Scientific
Corporation ("Patriot"). He is the beneficial owner of approximately 28%
of the shares of ATC and 13% of Patriot.
16
<PAGE> 17
Robert Putnam, the Secretary and a Director of the Company, is also a
Vice President, Treasurer and Assistant Secretary of ATC and Secretary
of Patriot. Mr. Putnam is the beneficial owner of approximately 4% of
the issued and outstanding shares of ATC.
As a result of their ownership and involvement with ATC and Patriot, 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
UNPREDICTABLE PRODUCT ACCEPTANCE. The Company's sales and marketing
strategy contemplates sales of its developed products (upon completion
of their development), to the electronics and computer software markets,
by its OEM customers. The failure of the Company's OEM customers to
penetrate their projected markets would have a material adverse effect
upon the Company's operations and prospects. Market acceptance of the
Company's OEM customer's products will depend in part upon the ability
of the Company to demonstrate and maintain the advantages of its
technology 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(R) technology, 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(R) as a registered trade name. Other trade
names are owned by the Company and applications for registration of
additional trade names are pending. The Company does not own any
copyrights. The Company treats its technical data as confidential and
relies on internal nondisclosure safeguards, including confidentiality
agreements with employees, and on laws protecting trade secrets, to
protect its proprietary information. There can be no assurance that
these measures will adequately protect the confidentiality of the
Company's proprietary information or that others will not independently
develop products or technology that are equivalent or superior to those
of the Company. With respect to patented products, there can be no
assurance that the Company will be able to identify, and successfully
prosecute, infringements of such patents. The Company may receive in the
future communications from third parties asserting that the Company's
products infringe the proprietary rights of third parties. There can be
no assurance that any such claims would not result in protracted and
costly litigation. There can be no assurance that any particular aspect
of the Company's technology will not be found to infringe the products
of other companies. Other companies may hold or obtain patents on
inventions or may otherwise claim proprietary rights to technology
useful or necessary to the Company's business. The extent to which the
Company may be required to seek licenses under such proprietary rights
of third parties and the cost or availability of such license, cannot be
predicted. While it may be necessary or desirable in the future to
obtain licenses relating to one or more of its proposed products or
relating to current or future technologies, there can be no assurance
that the Company will be able to do so on commercially reasonable terms.
LACK OF DIVIDENDS. The Company has never paid any cash dividends on its
Common Stock and does not anticipate paying any cash dividends in the
future. The Company currently intends to retain any future earnings to
fund the development and growth of its business.
RECENT SALES OF SECURITIES; POSSIBLE FUTURE DILUTION. At March 31, 1998
the Company had 57,171,119 shares of Common Stock outstanding with
120,000,000 authorized shares of Common Stock. The Company also has
existing obligations and agreements that require the Company to issue
additional shares both without further payment and with further payment
of funds. These obligations are described below:
Prepaid Warrants - In June-August 1996, the Company sold
warrants ("Prepaid Warrants") with a face value of $3,805,900.
Through March 31, 1998, Prepaid Warrant holders exercised
Prepaid Warrants with a face value of $2,792,944 into 30,980,553
shares of Common Stock (inclusive of penalties and discounts).
17
<PAGE> 18
The balance of the remaining three Prepaid Warrants outstanding
at March 31, 1998 was $1,012,956 (face value). The Prepaid
Warrants are exercisable, without further cash payment, into
shares of the Common Stock of the Company at $0.0875 per share
subject to certain adjustments. In determining the number of
shares of Common Stock to be issued upon exercise, the Company
adjusts the face value of the Prepaid Warrants upward to reflect
penalties and the 7% annual discount. The adjusted value of the
Prepaid Warrants was approximately $1.287 million at March 31,
1998 and exercise at that date would have required the issuance
of 14,710,859 Common Shares. The Prepaid Warrants expire in
January 2000 at which time they convert to Common Shares if not
previously converted. Assuming the Prepaid Warrant holders hold
to term, the Company will be required to issue 15,329,463 Common
Shares at that time.
The fixed exercise price of $0.0875 per share may be adjusted
down (i) to 80% of the market price following certain changes in
the Company's Common Stock including a reverse stock split, and
(ii) to the price at which new securities are issued if at a
price below $0.0875 per share.
Secured Promissory Notes with Warrants on Conversion - In June
1997, the Company issued $500,000 of 12% secured promissory
notes ("Secured Notes") for cash with the proceeds used to
assist the Company to complete its financial restructuring.
Interest is payable quarterly in cash and the Secured Notes are
due on September 30, 1999. The Secured Notes are collateralized
by the Company's issued and pending patents and the FlashBack(R)
technology. The Secured Notes are convertible at the lowest
conversion price of the Prepaid Warrants, which is currently
fixed at $0.0875 per share. Upon a distribution in shares,
subdivision, split-up, combination, reclassification or other
change in the Common Stock the conversion price of the Secured
Notes is the lesser of $0.0875 (or lower amount effective at the
time) or 70% of the average closing bid price of the Common
Stock for the 20 trading days after each such event.
The Secured Notes are currently convertible into 5,714,286
shares of Common Stock. The Company may force conversion of the
Secured Notes if the closing bid price of the Company's Common
Stock is greater than $0.75 per share for ten (10) consecutive
days and certain other conditions are met. Upon conversion, the
Company is obligated to issue to each holder a warrant
exercisable into the number of shares so converted at the
conversion price, such warrants exercisable for a period of
three years from issuance.
Series A Redeemable Convertible Preferred Stock - In September
1997, the Company filed a Certificate of Designation of
Preferences, Rights and Limitations of Series A Redeemable
Convertible Preferred Stock with the Delaware Secretary of
State, designating 100,000 shares of its preferred stock
("Series A Stock"). A total of 99,500 shares of Series A Stock
were sold for cash at $10.00 per share for gross proceeds of
$995,000.
The Series A Stock has voting rights equal to the number of
shares of Common Stock into which the Series A Stock is
convertible. Dividends of 8% per annum are cumulative and may be
payable in cash or shares of Common Stock, at the Company's
election. The Series A Stock has a liquidation preference of
$10.00 per share, plus accrued and unpaid dividends, with no
participation after the preference is paid.
The Series A Stock is convertible into shares of Common Stock
computed by dividing $10.00 plus accrued and unpaid dividends by
the lesser of (i) $0.0875 or (ii) 80% of the average closing bid
price for the Common Stock for the ten (10) trading days
immediately following any and each distribution in shares,
subdivision, split up, combination, reclassification, or other
change in Common Stock.
The Company is required to redeem the Series A Stock on
September 1, 2000 ("Mandatory Redemption Date") and upon the
occurrence of certain other events. The Company may redeem the
Series A Stock earlier. The redemption price is $10.00 per share
plus accrued and unpaid dividends.
18
<PAGE> 19
Based on the 99,500 shares of Series A Stock outstanding, at
March 31, 1998 the Series A Stock was convertible into
11,830,411 Common Shares. Assuming the Series A Stock is held to
term (September 1, 2000) the maximum number of shares issuable
is 14,036,206.
Warrants and Stock Options - At March 31, 1998 the Company had
stock purchase warrants outstanding for the purchase of up to
1,918,911 shares of Common Stock at prices ranging from $0.15625
to $4.00 per share. The Company also had stock options
outstanding exercisable into 2,735,340 common shares at prices
ranging from $0.0875 to $3.65 per share.
Potentially Dilutive Securities Issued After March 31, 1998 - In
May and June of 1998, the Company completed the sale of
$1,000,000 of 12% Convertible Promissory Notes with Limited
Guaranty ("Notes") due May 15, 1999. The Notes and interest are
convertible into shares of Common Stock at $0.0875 per share,
subject to certain adjustments. Accordingly, if converted at
issue, these Notes would have been convertible into 11,428,571
shares of Common Stock. In connection with this sale, the
Company issued warrants on 571,429 shares of Common Stock
exercisable at $0.0875 per share and granted warrants to Mr.
Norris and Mr. Putnam on an aggregate of 2,000,000 common shares
exercisable at $0.10 per share for certain guarantees and
inducements granted to purchasers of the Notes. Subsequent to
March 31, 1998 the Company granted stock options to employees
and others exercisable into 1,852,660 shares of Common Stock at
$0.0875 per share.
The conversion or exercise of the above securities that have already
been paid for would be materially dilutive to existing stockholders and
the exercise of unpaid options and warrants could be potentially
dilutive in the future and such dilution could be material.
The Board of Directors has no current plans to effect a reverse stock
split and any such action would require the approval of the
stockholders. However, any such reverse stock split in the future could
have a material adverse effect on existing shareholders.
LIMITED AUTHORIZED AND UNRESERVED STOCK. At March 31, 1998 the Company
had 57,171,119 shares of Common Stock outstanding with 120,000,000
authorized shares of Common Stock. However, assuming the conversion of
all convertible securities outstanding at March 31, 1998 and
subsequently issued securities as described in "Recent Sales of
Securities; Possible Future Dilution" above the Company would have
approximately 115,650,000 shares of Common Stock outstanding.
Accordingly, the Company has limited unissued or unreserved (for prepaid
warrants, warrants and options) shares of Common Stock. This factor
severely limits the Company's ability to obtain additional sources of
financing, to respond to potential business opportunities or to attract
and retain talented employees through the grant of stock options and
other stock-based incentives.
NO ACTIVE TRADING MARKET; VOLATILITY OF STOCK PRICE. The Company's
shares are traded on the OTC Bulletin Board, an electronic, screen-based
trading system operated by the National Association of Securities
Dealers, Inc. ("NASD"). Securities traded on the OTC Bulletin Board are,
for the most part, thinly traded and are subject to special regulations
not imposed on securities listed or traded on the NASDAQ system or on a
national securities exchange. As a result, an investor may find it
difficult to dispose of, or to obtain accurate quotations as to the
price of, the Company's Common Stock. Sales of substantial amounts of
the Company's outstanding Common Stock in the public market could
materially adversely affect the market price of the Common Stock. To
date, the price of the Company's Common Stock has been extremely
volatile. The Company believes that future announcements concerning the
Company, its competitors or its principal customers, including
technological innovations, new product introductions, governmental
regulations, litigation or changes in operating results, may cause the
market price of the Common Stock to fluctuate substantially in the
future. Further, in recent years the stock market has experienced
extreme price and volume fluctuations that have particularly affected
the market prices of equity securities of many high technology companies
and that often have been unrelated or disproportionate to the operating
performance of such companies. These fluctuations as well as general
economic, political and market conditions such as recessions or
international currency fluctuations, may materially adversely affect the
market price of the Common Stock. See "Risk Factors Recent Sales of
Securities; Possible Future Dilution."
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED
RISKS. This annual report contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act and
19
<PAGE> 20
Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act")
and the Company intends that such forward-looking statements be subject
to the safe harbors created thereby. These forward-looking statements
include the plans and objectives of management for future operations,
including plans and objectives relating to the products and future
economic performance of the Company.
The forward-looking statements 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 development partners
and key management personnel, that future 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.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company required to be included in
this Item 7 are set forth in a separate section of this report and commence on
Page F-1 immediately following page 29.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Elwood G. Norris 59 Chairman of the Board, Chief Executive Officer and Director
Alfred H. Falk 43 President and Director
Robert Putnam 39 Vice President, Secretary and Director
Renee Warden 34 Controller
</TABLE>
ELWOOD G. NORRIS - Mr. Norris has been Chairman of the Board of
Directors of the Company since 1988. From 1988 to October 1995, he was President
and Chief Executive Officer. In October 1995 he was appointed Chief Technology
Officer and in January, 1997 was re-appointed as Chief Executive Officer. Since
1980, Mr. Norris has also been a Director of ATC and served as its President and
Chief Executive Officer until February 1994. He is currently Chief Technology
Officer of
20
<PAGE> 21
ATC. 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
and served as Chairman and Chief Executive Officer until June 1994. From June
1995 until June 1996, when he was re-appointed Chairman, Mr. Norris served as
temporary President and Chief Executive Officer of Patriot. 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 20 hours per week.
ALFRED H. FALK - Mr. Falk was appointed President and a Director of the
Company in January 1997. From March, 1995, prior to his appointment as
President, he served as Vice President, Business Development and Vice President
of OEM and International Sales of the Company. Before joining the Company, Mr.
Falk was with Resources Internationale where he served as Director of U.S. Sales
from 1993 to 1995. From 1988 to 1993, Mr. Falk was the Manager of OEM Sales and
Technology Licensing for Personal Computer Products, Inc. in San Diego. From
1978 to 1988 Mr. Falk held several management positions at DH Technology and was
instrumental in its successful start up. 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 served as a Director of ATC from 1984 to September 1997 and
served as Secretary/Treasurer until February 1994, President and Chief Executive
Officer from February 1994 to September 1997 and currently serves as Vice
President, Treasurer and Assistant Secretary of ATC. He has also served as
Secretary/Treasurer of Patriot since 1989 and from 1989 to March 1998 was a
director of Patriot. Mr. Putnam obtained a B.A. degree in mass
communications/advertising from Brigham Young University in 1983. Mr. Putnam
devotes only part-time services to the Company, approximately ten hours per
week.
RENEE WARDEN - Ms. Warden was appointed Controller of the Company in
June 1997. From November 1991 to June 1997 she was Accounting Manager for the
Company. Since 1993 she has attended Palomar College and most recently the
accounting program at the University of Phoenix, San Diego.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Act") requires the
Company's officers, directors and persons who own more than 10% of a class of
the Company's securities registered under Section 12(g) of the Act to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors and greater than 10% shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on a review of copies of such reports furnished to the Company and
written representations that no other reports were required during the fiscal
year ended March 31, 1998, the Company believes that all persons subject to the
reporting requirements pursuant to Section 16(a) filed the required reports on a
timely basis with the SEC, except as follows: Form 4's, each reporting one item,
for a March 1998 transaction was filed late with the April 1998 report by Robert
Putnam, Alfred H. Falk and Elwood G. Norris.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth for the years ended March 31, 1998, 1997
and 1996, the cash compensation of the Chief Executive Officer. No person who
served as an Executive Officer of the Company during the fiscal year ended March
31, 1998 received total salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term
-------------------------------------------------- Compensation
Name and Fiscal Other Options All Other
Principal Position Year Salary Bonus Annual (# of Shares) Compensation
---- -------- ----- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Elwood G. Norris, Chairman 1998 $ 68,666 -0- -0- 1,457,500(2) -0-
and Chief Executive Officer (1) 1997 $105,788 -0- -0- -0- $ 5,940(3)
1996 $163,500 -0- -0- 400,000(4) -0-
</TABLE>
21
<PAGE> 22
(1) In September 1995, the Company entered into an employment agreement with
Elwood G. Norris, the Company's Chief Executive Officer. The employment
agreement provides for payment of a base salary of $115,000 per year
until October 31, 1997, when the base salary automatically increased 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 Company's bonus pool
and health insurance plan. From time to time, Mr. Norris has waived
certain compensation due him under this employment agreement. There are
no deferred amounts payable to Mr. Norris.
(2) A total of 250,000 of these options were voluntarily canceled during
fiscal 1998 to allow warrant exercise by prepaid warrant holders.
(3) Represents bonus paid by issuance of 10,000 shares of Common Stock
valued at $5,940.
(4) These options were voluntarily canceled during fiscal 1998 to allow
warrant exercise by prepaid warrant holders. Mr. Norris also canceled an
additional 107,500 options granted in previous years.
OPTION GRANTS
Shown below is further information on grants of stock options to the Named
Executive Officers reflected in the Summary Compensation Table shown above.
OPTION GRANTS FOR FISCAL YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Percent of Total
Number of Options Granted Exercise Expiration
Name Options Granted to Employees in Fiscal Year Price Date
--------- --------------------------- ------------ ---------
<S> <C> <C> <C> <C>
Elwood G. Norris 700,000(1) 23% $ 0.0875 6/20/2002
757,500 25% $ 0.0875 3/18/2003
</TABLE>
(1) A total of 250,000 of these options were voluntarily canceled during the
1998 fiscal year to allow warrant exercise by prepaid warrant holders.
On March 18, 1998 the balance of these options for 450,000 shares,
originally set at an exercise price of $0.15625 per share were reset to
$0.0875 per share. A total of 50% of these shares vest and become
exercisable on June 20, 1998 and the balance on June 20, 1999.
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, 1998. The following table provides information on
unexercised options at March 31, 1998:
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
-----------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Options At In-the-Money Options At
March 31, 1998 March 31, 1998
-------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Elwood G. Norris 757,500(1) 450,000(1) $-0- $-0-
</TABLE>
(1) The last sale price at March 31, 1998 was $0.084 per share.
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
Securities and Exchange Commission regulations. The Company has no defined
benefit or actuarial plans covering any person.
On March 18, 1998, the Board of Directors repriced an aggregate of 1,539,684
stock options previously granted to a total of 17 employees and others on June
20, 1997 from an exercise price of $0.15625 per share to an exercise price of
$0.0875 per share. Included in this repricing were options on 450,000 shares
granted to Mr. Norris as described above. The Board of Directors repriced the
options on the basis of the decline in market price and the need to provide
incentives to engineering and other personnel remaining with the Company during
its restructuring. The management and engineering team are critical to the
completion of the Lanier contract and the pursuit of other business. The
California market in general and the San Diego
22
<PAGE> 23
County market in particular are extremely competitive markets for technical and
engineering personnel and in lieu of large salary increases, the Board of
Directors determined that a repricing of the options was appropriate in the
circumstances.
COMPENSATION OF DIRECTORS
No direct or indirect remuneration has been paid or is payable by the Company to
the directors in their capacity as directors. It is anticipated that during the
next twelve months that the Company will not 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 of attending directors' or
committee meetings. However, directors have received in the past, and may
receive in the future, stock options.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The following table sets forth, as of June 1, 1998, information regarding
ownership of the Common Stock, by each person known by the Company to be the
beneficial owner of more than 5% of the Company's outstanding Common Stock, by
each director and by all executive officers and directors of the Company as a
group. All persons named have sole voting and investment power over their shares
except as otherwise noted.
<TABLE>
<CAPTION>
NUMBER OF PERCENT
NAME SHARES OWNED OF CLASS
--------------- --------
<S> <C> <C>
Elwood G. Norris 1,884,838 (1)(6) 3.1%
Robert Putnam 465,000 (2)(6) 0.8%
Alfred H. Falk 815,158 (3) 1.4%
Gross Foundation, Inc. 5,825,808 (4) 9.2%
Madison Trading, Inc. 4,180,008 (5) 6.7%
All officers and directors
as a group (4 persons) 3,196,996 (6)(7) 5.2%
</TABLE>
* Less than 1%
(1) Includes 225,300 shares owned by ATC as a result of Mr. Norris' 28%
beneficial ownership and options exercisable within 60 days to purchase
1,175,000 shares. Excludes unvested options to purchase 225,000 shares.
(2) Includes options exercisable within 60 days to purchase 425,000 shares.
Excludes unvested options to purchase 75,000 shares.
(3) Consists entirely of options exercisable within 60 days. Excludes
unvested options to purchase 184,842 shares.
(4) Includes 1,490,000 shares owned at June 1, 1998 as reported to the
Company by the holder and the maximum number of shares issuable on
exercise of Prepaid Warrants or 4,335,808. The terms of the Prepaid
Warrants being held preclude exercise beyond 9.9% beneficial ownership.
Assuming all of the face value of $600,000 of Prepaid Warrants were
exercisable at June 1, 1998, the shares issuable would be 8,799,781.
(5) Includes 340,000 shares owned at June 1, 1998 as reported to the Company
by the holder and 3,840,008 shares issuable on the exercise of face
value of $262,509 of Prepaid Warrants.
(6) Excludes warrants to purchase 1,500,000 and 500,000 shares granted to
Mr. Norris and Mr. Putnam, respectively, on June 12, 1998 and after the
date of this table.
(7) Includes options exercisable within 60 days to purchase 2,447,158 shares
and the 225,300 shares owned by ATC and attributable to Mr. Norris.
The above table does not include ownership of over 5% of the Company's
outstanding Common Stock that may beneficially exist by holders of Prepaid
Warrants, convertible debt or preferred stock exercisable into Common Stock. The
Company has no current information regarding the beneficial holdings of such
holders, other than described above, but has not been advised by any holders,
other than the Gross Foundation, Inc., that they beneficially own more than 5%
of the Company's Common Stock.
PREFERRED STOCK
The following security ownership information is set forth as of June 1, 1998,
with respect to certain persons or groups known to the Company to be beneficial
owners of more than 5% of the Company's outstanding Series A Stock, the only
class of preferred stock outstanding. Other than as set forth below, the Company
is not aware of any other person who may be deemed to be a beneficial owner of
more than 5% of the Company's preferred stock.
23
<PAGE> 24
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficia l Percent of
Name and address of Beneficial Owner Ownership(1)(3) Class
------------------------------------ --------------- ----------
<S> <C> <C>
CCL PACIFIC LTD. 20,000 20.1%
David Chang, Director (2)
1005A Lippo Tower
89 Queensway, Central
Hong Kong
TAISHIN COMPANY (HONG KONG) LTD 15,000 15.1%
Bunsei Ko, Director (2)
Room 605 Central Building
No. 1 Pedder Street, Central
Hong Kong
CANUSA TRADING LTD. 7,500 7.5%
W.A. Manuel, Director (2)
37 Reid Street, 2nd Flr., Armoury
Bldg.
Hamilton, Bermuda
NEO OPTICS LTD. 7,500 7.5%
Douglas Tufts, Director (2)
1600-555 Burrard Street
Vancouver, B.C. V7X1S6 Canada
PARIL HOLDING 7,500 7.5%
Josef Goldenberg, Director (2)
137 Martastrasse
Zurich 8040 Switzerland
R. KIRK AVERY 5,000 5.0%
6121 Vista de la Mesa
La Jolla, California 92037
JERRY E. POLIS FAMILY TRUST 5,000 5.0%
Jerry E. Polis, Trustee (2)
3188 Bel Air Drive
Las Vegas, Nevada 89109
BARBARA C. ROEMER 5,000 5.0%
7175 Eads Avenue
La Jolla, California 92037
TIA LTD.
David Roberts, Director (2)
1600-555 Burrard Street 5,000 5.0%
Vancouver, B.C. V7X1S6 Canada
ARCADIA MUTUAL FUND INC. 5,000 5.0%
Nancy Lake, President (2)
55 Frederick Street
Box CB 13029
Nassau, Bahamas
</TABLE>
(1) Represents number of shares of Series A Stock, held as of May 31, 1998.
At such date an aggregate of 99,500 shares of preferred stock were
issued and outstanding convertible into an aggregate of 11,982,457
shares of Common Stock.
(2) The Company believes that the representative named has the authority to
vote the shares on behalf of the preferred stockholder.
(3) The Company has no additional information regarding beneficial ownership
of Common Stock by the holders of preferred stock.
24
<PAGE> 25
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Elwood Norris, Chairman and Chief Executive Officer of the Company, is also a
Director of ATC. He is the beneficial owner of 2,934,634 shares of ATC
(representing approximately 28% of its issued and outstanding capital) and
Robert Putnam, the Vice President/Secretary and a Director of the Company is
also Vice President, Treasurer and Assistant Secretary of ATC. He is the
beneficial owner of 420,000 shares of ATC (representing approximately 4% of its
issued and outstanding shares).
Commencing July 11, 1997 the Company jointly leased with ATC an aggregate of
12,925 square feet of engineering office space at 13114 Evening Creek Drive
South, San Diego, California of which the Company occupies approximately 5,500
square feet at a cost of $5,800 per month. From April 1, 1996 to July 1, 1997,
the Company provided approximately 2,407 square feet of space at the Company's
12725 Stowe Drive, Poway, California facility and certain support services to
ATC at the rate of $3,095 per month. As of September 30, 1997, the Stowe Drive
lease was terminated. The Company believes that the terms of these arrangements
are no less favorable than could be obtained from an independent and
unaffiliated party.
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 Vice President, Treasurer and Assistant
Secretary of ATC, a company effectively controlled by Mr. Norris. The
possibility exists that these other relationships could affect Mr. Putnam's
independence as a director of the Company. The Company has not provided a method
of resolving this conflict and probably will not do so, partly due to inevitable
extra expenses and delay any measures would occasion. Mr. Norris and Mr. Putnam
are obligated to perform their duties in good faith and to act in the best
interest of the Company and its stockholders, 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.
On June 12, 1998, the Company granted Mr. Norris a stock purchase warrant to
purchase 1,500,000 shares of Common Stock at $0.10 per share until June 12, 2003
in consideration of Mr. Norris providing a limited personal guarantee
(consisting of up to 200,000 shares of ATC stock owned by Mr. Norris) to
facilitate the offering and sale by the Company of the Notes. The Company also
granted to Mr. Putnam a stock purchase warrant to purchase 500,000 shares at
$0.10 per share until June 12, 2003 in consideration of Mr. Putnam providing
purchasers of the Notes an option to purchase up to 25,000 shares of ATC stock
owned by him. The Company believes the Company would have been unable to obtain
the Note financing without the inducement provided by Mr. Norris and Mr.
Putnam.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Each exhibit marked with an asterisk is filed with this Annual Report on Form
10-KSB. Each exhibit not marked with an asterisk is incorporated by reference to
the exhibit of the same number (unless otherwise indicated) previously filed by
the Company as indicated below.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<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.
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
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, CAD 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.
3.1.1 Certificate of Amendment of Certificate of Incorporation of Norris
Communications, Inc. filed with the State of Delaware on January 14,
1998 and filed as Exhibit 3.1.1 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1997.
3.2 Bylaws of Norris Communications, Inc., filed as Exhibit C to the
Company's July 3, 1996 Proxy Statement.
3.3 Certificate of Designation of Preferences, Rights and Limitations of
Series A Redeemable Convertible Preferred Stock filed with the State
of Delaware on September 19, 1997 and filed as Exhibit 3.3 to the
Company's Current Report on Form 8-K dated October 3, 1997.
4.1 Certificate of Incorporation of Norris Communications, Inc. (as
amended through May 28, 1996),filed as Exhibit B to the Company's
July 3, 1996 Proxy Statement.
4.2 Bylaws of Norris Communications, Inc., filed as Exhibit C to the
Company's July 3, 1996 Proxy Statement.
4.3 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.
4.3.1 Form of Amendment No. 1 to Common Stock Warrant between the Company
and three Warrant Holders holding an aggregate of $1,154,409 face
value of warrants granted in July and August 1996 (Each Amendment is
identical except for the dates and the name of the Warrant Holder),
filed as Exhibit 4.11.1 to the Company's Form 8-K, dated September
10, 1997.
4.4 Warrant Agreement for 401,924 shares of Common Stock between the
Company and Klein Investment Group, L.P. (formerly known as Iacocca
Capital Partners, L.P.) dated August 7, 1997 and filed previously as
an Exhibit to the Company's Current Report on Form 8-K dated August
29, 1996.
4.4.1 First Amendment to Common Stock Warrant, Termination of January 7,
1997 Letter Agreement and Amendment to Consulting Agreement dated
September 29, 1997 between the Company and Klein Investment Group,
L.P., filed as Exhibit 4.12.1 to the Company's Form 10-QSB for the
quarter ended September 30, 1997.
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
4.5 Note Agreement and Form of Note between the Company and nine
investors dated August 23, 1997 and filed previously as Exhibit 10.33
to the Company's Annual Report on Form 10-KSB dated March 31, 1997.
*4.6 Form of Series 98A 12% Convertible Promissory Note with Limited
Guaranty ("Notes") due May 15, 1999 between the Company and 6
investors for an aggregate of $1,000,000 (individual notes vary as to
date, amount and payee)
*4.7 Stock Purchase Warrant dated June 3, 1998 for 571,429 Common Shares
between the Company and Renwick Corporate Finance, Inc.
*4.8 Form of Stock Purchase Warrant dated June 12, 1998 entered into
between the Company and Elwood G. Norris and Robert Putnam for an
aggregate of 2,000,000 shares (1,500,000 shares as to Mr. Norris and
500,000 shares as to Mr. Putnam)
10.1 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.
10.2 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.
10.2.1 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.
10.2.2 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.
10.3 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.
10.3.1 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.
10.3.2 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.
10.4 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.
10.4 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.
10.5 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.
10.5.1 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.
10.5.2 First Amendments to Warrant Agreements No. 1, 2 and 3 between the
Company and Pennsylvania Merchant Group Ltd. dated as of September
29, 1997, filed as Exhibit 4.7.3 to the Company's Form 10-QSB for the
quarter ended September 30, 1997.
10.6 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.
10.6.1 First Amendment to Warrant Agreement between the Company and First
Bermuda Securities Ltd. dated as of September 30, 1997, filed as
Exhibit 4.10.1 to the Company's Form 10-QSB for the quarter ended
September 30, 1997.
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
10.7 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.
10.7.1 Form of Amendment No. 1 to Common Stock Warrant between the Company
and three Warrant Holders holding an aggregate of $1,154,409 face
value of warrants granted in July and August 1996 (Each Amendment is
identical except for the dates and the name of the Warrant Holder),
filed as Exhibit 4.11.1 to the Company's Form 8-K, dated September
10, 1997.
10.8 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.
10.9 Placement Agent's Warrant Agreement between Auerback, Pollack &
Richardson, Inc. and the Company, filed as Exhibit 10.17 to the
Company's Form 8-K dated November 13, 1995.
10.10 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.
10.10.1 Release and Termination of Right of First Refusal and Amendment to
Warrant between the Company and Auerbach, Pollak & Richardson, Inc.
dated May 13, 1996 and filed previously as an Exhibit to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1996.
10.10.2 Form of Amendment to Warrant Certificate and Warrant Agreement
between the Company and Auerbach, Pollack & Richardson, Inc. and six
individual assignees (identical amendments except as to the number of
shares (total of 128,067 shares) and the name of holder) dated as of
September 30, 1997, filed as Exhibit 10.18.2 to the Company's Form
10-QSB for the quarter ended September 30, 1997.
10.11 Warrant Agreement for 150,000 Common Shares between the Company and
Higham, McConnell & Dunning dated October 10, 1996 and filed
previously as an Exhibit to Registration Statement No. 333-13779.
10.11.1 Amendment No. 1 to Stock Purchase Warrant Agreement between the
Company and Higham, McConnell & Dunning dated September 30, 1997,
filed as Exhibit 4.13.1 to the Company's Form 10-QSB for the quarter
ended September 30, 1997.
10.12 Note Agreement and Form of Note between the Company and nine
investors dated August 23, 1997 and filed previously as Exhibit 10.33
to the Company's Annual Report on Form 10-KSB dated March 31, 1997.
10.13 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.
10.14 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.
*10.14.1 First Amendment to Stock Option Plan adopted by the Company on
January 26, 1996
*10.14.2 Second Amendment to Stock Option Plan adopted by the Company on
September 3, 1997
10.15 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.
10.16.1 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.
10.17 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.
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
10.18 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.
10.19 First Amendment to Placement Agreement dated May 20, 1996 between the
Company and Iacocca Capital Partners, L.P., filed as an Exhibit to
Registration Statement No. 333-7709.
10.20 Agreement dated July 30, 1996 between the Company and Greystone
Capital, Ltd., filed as an Exhibit to Registration Statement No.
333-7709
10.21 OEM Purchase Agreement dated October 18, 1996 between the Company and
Sanyo Information Systems (U.K.) Ltd., filed as an Exhibit to
Registration Statement 333-7709.
10.22 Release and Waiver Agreement between the Company and certain Selling
Shareholders, filed as an Exhibit to Registration Statement No.
333-7709.
10.23 Agreement dated January 6, 1997 between the Company and Lanier
Worldwide, Inc., filed as an Exhibit to Registration Statement No.
333-7709 [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].
10.24 Controlled Liquidation and Lock Up Agreement dated March 1997 between
the Company and certain Selling Shareholders filed as Exhibit 10.31
to Registration Statement 333-7709.
10.25 Consulting Agreement (with Warrants) between the Company and Klein
Investment Group, L.P. dated January 7, 1997, filed as an Exhibit to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1997.
10.25.1 Amendment to the Consulting Agreement (with Warrants between the
Company and Klein Investment Group, L.P. dated January 7, 1997, filed
as an Exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1997.
10.25.2 First Amendment to Common Stock Warrant, Termination of January 7,
1997 Letter Agreement and Amendment to Consulting Agreement dated
September 29, 1997 between the Company and Klein Investment Group,
L.P., filed as Exhibit 4.12.1 to the Company's Form 10-QSB for the
quarter ended September 30, 1997.
10.26 Note Agreement and form of Note between the Company and nine
investors dated June 13, 1997 for an aggregate of $500,000, filed as
an Exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 1997.
10.26.1 Collateral Patent Assignment between the Company and nine investors
dated June 13, 1997, filed as an Exhibit to the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1997.
10.27 Lease Settlement Agreement and Promissory Note dated as of September
30, 1997 between the Company and Pomerado Properties, filed as
Exhibit 10.13.1 to the Company's Form 10-QSB for the quarter ended
September 30, 1997.
*21.1 List of subsidiaries.
*23.2 Consent of Ernst & Young.
*27.1 Financial Data Schedule.
</TABLE>
* Filed concurrently herewith.
(b) REPORTS ON FORM 8-K.
The Company filed the following report on Form 8-K during the last fiscal
quarter ended March 31, 1998: NONE
29
<PAGE> 30
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 and 1997
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
Report of Independent Auditors F-1
Consolidated Balance Sheets as at March 31, 1998 F-2
and 1997
Consolidated Statements of Operations for the years F-3
ended March 31, 1998 and 1997
Consolidated Statements of Common Stockholders' Equity (Deficiency) for F-4
the years ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the years F-5
ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements F-6
</TABLE>
30
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
We have audited the accompanying consolidated balance sheets of NORRIS
COMMUNICATIONS, INC. AND SUBSIDIARY as of March 31, 1998 and 1997 and the
related consolidated statements of operations, common stockholders' equity
(deficiency) and cash flows for the years then ended. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Norris
Communications, Inc. and subsidiary at March 31, 1998 and 1997 and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the company has suffered recurring losses
from operations and has an accumulated deficit. These conditions raise
substantial doubt about the company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Vancouver, Canada,
June 2, 1998 (except as to Note 18[b] /s/ ERNST & YOUNG
which is as of June 12, 1998). Chartered Accountants
F-1
<PAGE> 32
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(See Note 1 - Nature of Operations and Basis of Presentation)
As at March 31
<TABLE>
<CAPTION>
1998 1997
$ $
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 62,370 176,158
Accounts receivable, less allowance for doubtful
accounts of $953 and $36,330, respectively 54,659 30,097
Amounts receivable on research and development contract [note 11] 167,981 --
Inventory [note 6] 180,751 1,648,863
Prepaid expenses and other 10,240 --
Property and equipment held for sale -- 68,567
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 476,001 1,923,685
- ----------------------------------------------------------------------------------------------------------------
Property and equipment [note 7] 137,890 199,320
Intangible assets, net of accumulated amortization
of $9,764 and $32,341, respectively [note 10] 14,645 42,068
- ----------------------------------------------------------------------------------------------------------------
628,536 2,165,073
================================================================================================================
LIABILITIES, PREFERRED STOCKHOLDERS' EQUITY
AND COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable, trade 682,927 1,264,150
Other accounts payable and accrued liabilities [note 17] 655,781 1,049,697
Advances on research and development contract [note 11] -- 174,341
Current portion of term note payable [note 9] 48,334 --
- ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,387,042 2,488,188
- ----------------------------------------------------------------------------------------------------------------
Term note payable [note 9] 90,084 --
Secured notes payable [note 10] 500,000 --
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,977,126 2,488,188
- ----------------------------------------------------------------------------------------------------------------
Commitments and contingencies [notes 1, 14 and 15]
PREFERRED STOCKHOLDERS'
EQUITY Series A, convertible voting preferred stock, $.001 par value,
redeemable at $10 plus accrued and unpaid dividends at
8% cumulative, 100,000 shares authorized, 99,500
outstanding [note 13] 100 --
Additional paid-in capital 1,002,562 --
- ----------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKHOLDERS' EQUITY 1,002,662 --
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock, $.001 par value, authorized 120,000,000
[1997 - 60,000,000], 57,171,119 and 23,370,008 shares
outstanding, respectively [notes 13 and 18] 57,171 23,370
Additional paid-in capital [note 13] 31,333,437 28,459,269
Prepaid warrants [notes 13 and 16] 903,996 3,276,505
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (36,238,172) (33,674,575)
- ----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) (2,351,252) (323,115)
- ----------------------------------------------------------------------------------------------------------------
628,536 2,165,073
================================================================================================================
</TABLE>
See accompanying notes
F-2
<PAGE> 33
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31
<TABLE>
<CAPTION>
1998 1997
$ $
- --------------------------------------------------------------------------------
<S> <C> <C>
REVENUES - products 454,473 613,791
- services [note 11] 625,172 39,909
- --------------------------------------------------------------------------------
1,079,645 653,700
- --------------------------------------------------------------------------------
Cost of sales - products 1,764,049 2,111,999
- services [note 11] 581,577 68,533
- --------------------------------------------------------------------------------
2,345,626 2,180,532
- --------------------------------------------------------------------------------
Gross profit (loss) (1,265,981) (1,526,832)
- --------------------------------------------------------------------------------
OPERATING EXPENSE
Selling and administrative 1,132,885 4,047,227
Research and related expenditures 261,619 922,954
Restructuring charge [note 17] -- 2,228,001
- --------------------------------------------------------------------------------
1,394,504 7,198,182
- --------------------------------------------------------------------------------
Operating loss (2,660,485) (8,725,014)
- --------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (59,953) (79,518)
Non-cash interest expense [note 2] -- (1,097,561)
Interest income 11,731 28,691
Gain on sale of property and equipment 4,798 --
Gain on sale of investment [note 8] -- 276,300
Write-down of intangible assets (19,978) --
Other income 160,290 --
- --------------------------------------------------------------------------------
96,888 (872,088)
- --------------------------------------------------------------------------------
Loss before provision for income taxes (2,563,597) (9,597,102)
Provision for income taxes [note 12] -- --
- --------------------------------------------------------------------------------
LOSS FOR THE YEAR (2,563,597) (9,597,102)
================================================================================
LOSS PER SHARE (.06) (0.44)
================================================================================
</TABLE>
See accompanying notes
F-3
<PAGE> 34
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
Year ended March 31
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN PREPAID CONTRIBUTED ACCUMULATED
SHARES AMOUNT CAPITAL WARRANTS SURPLUS DEFICIT
# $ $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1996 15,103,703 21,762,337 -- -- 1,592,316 (24,077,473)
Stock issued on legal settlement 85,000 127,500 -- -- -- --
Stock issued on conversion of convertible
notes payable 4,366,050 4,319,486 -- -- -- --
Issuance of common stock for cash 2,666,075 1,699,444 -- -- -- --
Transfer from common stock to additional
paid-in capital resulting from change to
$.001 par value shares from no par value
shares [note 13] -- (27,886,546) 27,886,546 -- -- --
Stock issued as directors' fees 60,000 60 35,580 -- -- --
Issuance of prepaid warrants for cash -- -- -- 3,396,505 -- --
Stock issued on exercise of prepaid warrants 392,702 393 119,607 (120,000) -- --
Stock issued as payment for professional
services rendered 696,478 696 417,536 -- -- --
Loss for the year -- -- -- -- -- (9,597,102)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 23,370,008 23,370 28,459,269 3,276,505 1,592,316 (33,674,575)
Stock issued on legal settlement 400,000 400 87,100 -- -- --
Stock issued as compensation 387,175 387 124,149 -- -- --
Stock issued on exercise of prepaid warrant 30,587,851 30,588 2,341,921 (2,372,509) -- --
Stock issued pursuant to private placement fees 457,484 457 (457) -- -- --
Stock issued as payment for professional
services rendered 1,968,601 1,969 361,617 -- -- --
Loss for the year -- -- -- -- -- (2,563,597)
Dividends on Series A preferred stock [note 13] -- -- (40,162) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 57,171,119 57,171 31,333,437 903,996 1,592,316 (36,238,172)
=================================================================================================================================
</TABLE>
See accompanying notes
F-4
<PAGE> 35
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended March 31
<TABLE>
<CAPTION>
1998 1997
$ $
- -------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Loss for the year (2,563,597) (9,597,102)
Adjustments to reconcile loss to net cash used by
operating activities:
Depreciation and amortization 77,801 412,416
Loss (gain) on disposal of property and equipment (4,798) 365,864
Write-down of property and equipment -- 376,538
Professional services paid by issuance of common stock 363,586 418,232
Directors' fees paid by issuance of common stock -- 35,640
Compensation paid by issuance of common stock 124,536 --
Legal settlement paid by issuance of common stock 87,500 127,500
Interest charges on convertible notes payable paid by issuance
of common stock -- 33,772
Non-cash interest expense -- 1,097,561
Gain on sale of investment -- (276,300)
Write-down of intangible assets 19,978 --
Changes in assets and liabilities:
Accounts receivable (24,562) 64,522
Amounts receivable on research and development contract (167,981) --
Inventory 1,468,112 1,594,382
Prepaid expenses and other (10,240) 226,436
Accounts payable, trade (581,223) (1,290,059)
Other accounts payable and accrued liabilities (205,498) 437,641
Advances on research and development contract (174,341) 174,341
- -------------------------------------------------------------------------------------------------
CASH (USED IN) OPERATING ACTIVITIES (1,590,727) (5,798,616)
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment (9,628) (153,644)
Proceeds on disposal of property and equipment 74,067 98,175
Proceeds on sale of investment -- 276,300
- -------------------------------------------------------------------------------------------------
CASH PROVIDED BY INVESTING ACTIVITIES 64,439 220,831
- -------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments under demand loan payable -- (2,185,546)
Repayment of term note payable (50,000) --
Proceeds from issuance of secured notes payable 500,000 --
Proceeds from sale of redeemable preferred stock 962,500 --
Proceeds from issuance of prepaid warrants -- 3,396,505
Proceeds from issuance of shares -- 1,699,444
- -------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 1,412,500 2,910,403
- -------------------------------------------------------------------------------------------------
DECREASE IN CASH DURING THE YEAR (113,788) (2,667,382)
Cash and cash equivalents, beginning of year 176,158 2,843,540
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 62,370 176,158
=================================================================================================
</TABLE>
See accompanying notes
F-5
<PAGE> 36
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
The Company operates in one major line of business, the development, manufacture
and marketing of electronic products.
On August 30, 1996, Norris Communications Corp. continued its jurisdiction to
the State of Wyoming, then on September 4, 1996, to the State of Delaware.
During the continuation process, Norris Communications Corp. changed its name to
Norris Communications, Inc. (the "Company").
The consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States on
a going concern basis, which contemplates the realization of assets and the
discharge of liabilities in the normal course of business for the foreseeable
future.
The Company has incurred significant losses and negative cash flow from
operations in each of the last three years and has an accumulated deficit of
$36,238,172 at March 31, 1998 [1997 - $33,674,575]. 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
operations with the goal of sustaining Company operations for the next twelve
months and beyond. These steps include (i) focusing sales and marketing on the
OEM markets; (ii) focusing on the completion of the research and development
contract and planned manufacturing; and (iii) controlling overhead and expenses.
There can be no assurance the Company can attain profitable operations in the
future.
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> 37
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Norris Communications, Inc. ("NCI") (a company
incorporated in the State of California). All significant intercompany accounts
and transactions have been eliminated.
RECLASSIFICATIONS
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform with the 1998 presentation.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable, trade,
other accounts payable and accrued liabilities, term note payable and secured
notes payable approximate their fair values.
CASH EQUIVALENTS
Cash equivalents, consisting of commercial paper with maturities of less than 90
days, certificates of deposit and money market funds, are recorded at cost,
which approximates market value.
TRANSLATION OF FOREIGN CURRENCIES
Monetary assets and liabilities are translated into U.S. dollars at the rate in
effect at the balance sheet date. Other balance sheet items and revenues and
expenses are translated into U.S. dollars 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.
F-7
<PAGE> 38
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
LOSS PER SHARE
The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." Previously the Company followed the provisions of
Accounting Principles Board Opinion ("APB") 15, "Earnings Per Share." SFAS No.
128 provides for the calculation of "Basic" and "Diluted" earnings per share
("EPS"). Basic EPS includes no dilution and is computed by dividing income
available to common stockholders, after deduction for cumulative unpaid
dividends, by the weighted average number of common shares outstanding for the
period. The weighted average number of common shares outstanding during 1998 was
47,419,643 [1997 - 21,205,287]. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. The Company's losses for the years presented cause
the inclusion of potential common stock instruments outstanding to be
antidilutive and, therefore, in accordance with SFAS No. 128, the Company is not
required to present a diluted EPS. Stock options, warrants, convertible secured
notes payable, redeemable convertible preferred stock and prepaid warrants
exercisable into 41,084,409 shares of common stock were outstanding as at March
31, 1998 and stock options, warrants and prepaid warrants exercisable into
18,259,528 shares of common stock were outstanding as at March 31, 1997. These
securities were not included in the computation of diluted EPS because of the
losses, but could potentially dilute EPS in future years. All prior year loss
per share data is presented in conformity with the requirements of SFAS No. 128.
INVESTMENT
The Company's 58,600 shares or approximately 2.5% investment in JABRA
Corporation ("JABRA"), a private corporation, is accounted for using the cost
method [see Note 8].
REVENUE RECOGNITION
Revenue is recognized on the basis of shipment of products or delivery of
services. Research and development contract revenue is recognized in the period
the related research and development expenditures are incurred. Funds received
in advance of meeting the criteria for revenue recognition are deferred and are
recorded as revenue as they are earned.
RESEARCH AND RELATED EXPENDITURES
Research and related expenditures are charged to operations as incurred.
F-8
<PAGE> 39
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
INVENTORY
Inventory of raw materials, work in process and finished goods is recorded at
the lower of cost and net realizable value. Cost is determined on a first-in,
first-out basis.
PROPERTY AND EQUIPMENT HELD FOR SALE
Property and equipment held for sale are recorded at their net realizable
amount.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization are
provided on the straight-line method over the estimated useful lives of the
related assets, ranging from 3 to 7 years or, in the case of leasehold
improvements, over the lesser of the useful life of the related asset or the
lease term. When assets are sold or retired, the cost and accumulated
depreciation are removed from the respective accounts and any gain or loss on
the disposition is credited or charged to income. Maintenance and repair costs
are charged to operations when incurred.
INTANGIBLE ASSETS
Intangible assets include 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-9
<PAGE> 40
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
STOCK OPTIONS GRANTED
The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees. In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), Accounting for Stock-Based Compensation, which encourages
companies to recognize compensation expense for stock-based awards based on
their estimated fair value on the date of the grant. SFAS 123, effective for the
period ended March 31, 1997, does not require companies to change their existing
accounting for stock-based awards, but if the new fair value method is not
adopted, pro forma income and earnings per share data must be provided in the
footnotes to the consolidated financial statements. The Company supplementally
discloses the required pro forma information as if the fair value method had
been adopted effective April 1, 1995 [see Note 13].
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" and SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 130 establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 131 supersedes SFAS
No. 14 "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosure
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. SFAS No. 132 standardizes the disclosure requirements for pensions
and other postretirement benefits and requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis.
F-10
<PAGE> 41
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONT'D.)
SFAS No. 130 and No. 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. SFAS No. 132 is effective for years beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated, unless such information is not readily available. The adoption
of these statements will have no material impact on the Company's consolidated
financial statements and the results of operations and financial position will
be unaffected by their implementation.
3. CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and trade
receivables. 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.
An amount owing from one major customer comprises 80% of accounts receivable at
March 31, 1998.
4. MAJOR CUSTOMERS AND EXPORT SALES
The Company operates in one major line of business, the development, manufacture
and marketing of electronic products. Sales to two major customers comprise 58%
and 32%, respectively, of revenues in 1998. Sales to three major customers
comprise 31%, 17% and 12%, respectively, of revenues in 1997. During 1998, the
Company had export sales of approximately $359,000 [1997 - $155,000].
F-11
<PAGE> 42
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
5. STATEMENT OF CASH FLOWS
The Company had non-cash operating and financing activities and made cash
payments as follows:
<TABLE>
<CAPTION>
1998 1997
$ $
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Non-cash financing activities:
Professional services paid by issuance of common stock 363,586 418,232
Compensation paid by issuance of common stock 124,536 --
Directors' fees paid by issuance of common stock -- 35,640
Legal settlement paid by issuance of common stock 87,500 127,500
Interest charges on convertible notes payable paid by
issuance of common stock -- 33,772
Common stock issued on conversion of convertible notes
payable -- 4,285,714
Common stock issued on exercise of prepaid warrants 2,372,509 120,000
Cash payments for interest and income taxes were as follows:
Interest 58,800 45,746
Income taxes -- --
==========================================================================================
</TABLE>
6. INVENTORY
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------
$ $
<S> <C> <C>
Raw materials 109,960 666,634
Work in process -- 179,967
Finished goods 70,791 802,262
- -----------------------------------------------------
180,751 1,648,863
=====================================================
</TABLE>
During 1995, the Company introduced a new electronic product for sale in the
retail market. The amount of revenues to date from the sale of the electronic
product have not been significant. In addition, the Company's experience with
sales returns and warranty provisions has been limited. At March 31, 1997,
inventory of the Company is substantially all comprised of three successive
models of the electronic product. During 1998, the Company wrote-off all
remaining raw materials used in the manufacture of the electronic product. At
March 31, 1998, finished goods is substantially comprised of the two latest
models of the electronic product.
F-12
<PAGE> 43
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
6. INVENTORY (CONT'D.)
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, 1998 and inventory as at March 31, 1998. 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 costs.
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
$ $ $
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Computer hardware and software 192,109 102,421 89,688
Furniture and equipment 48,258 46,265 1,993
Machinery and equipment 177,883 135,678 42,205
Leasehold improvements 4,664 660 4,004
- --------------------------------------------------------------------------------
422,914 285,024 137,890
================================================================================
1997
Computer hardware and software 187,645 64,962 122,683
Furniture and equipment 55,758 46,738 9,020
Machinery and equipment 177,883 110,266 67,617
- --------------------------------------------------------------------------------
421,286 221,966 199,320
================================================================================
</TABLE>
8. INVESTMENT IN JABRA
The Company owns 58,600 common shares of JABRA or approximately 2.5% of JABRA's
common shares with a carrying value of $Nil on the Company's consolidated
balance sheets. During 1997, the Company sold 859,266 common shares of JABRA for
cash proceeds of $276,300 and recorded a gain on sale of investment of $276,300.
F-13
<PAGE> 44
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
9. TERM NOTE PAYABLE
<TABLE>
<CAPTION>
1998
$
- --------------------------------------------------------------------------------
<S> <C>
Term note payable, unsecured, interest at 10% per
annum, with monthly payments of principal and
interest of $5,000, maturing November 1, 2000 138,418
Less current portion 48,334
- --------------------------------------------------------------------------------
90,084
================================================================================
Principal repayments under the term note payable are:
$
- --------------------------------------------------------------------------------
1999 48,334
2000 53,395
2001 36,689
- --------------------------------------------------------------------------------
138,418
================================================================================
</TABLE>
10. SECURED NOTES PAYABLE
In June 1997, the Company issued $500,000 of 12% secured notes payable ("Secured
Notes") for cash with the proceeds used to assist the Company to complete its
financial restructuring. Interest is payable quarterly in cash and the Secured
Notes are due on September 30, 1999. The Secured Notes are collateralized by the
Company's issued and pending patents and Flashback technology. The Secured Notes
are convertible at the lowest conversion price of the prepaid warrants [see Note
16], which is currently fixed at $0.0875 per share. Upon a distribution in
shares, subdivision, split-up, combination, reclassification or other change in
the common stock, the conversion price of the Secured Notes is the lesser of
$0.0875 (or lower amount effective at the time) or 70% of the average closing
bid price of the common stock for the 20 trading days after each such event.
The Secured Notes are currently convertible into 5,714,286 shares of common
stock and 5,714,286 warrants to acquire common stock. Each warrant is
exercisable at the conversion price into one share of common stock for a
period of three years from issuance of the warrants. The Company may force
conversion of the Secured Notes if the closing bid price of the Company's common
stock is greater than $0.75 per share for ten (10) consecutive days and certain
other conditions are met.
F-14
<PAGE> 45
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
11. RESEARCH AND DEVELOPMENT CONTRACT
The Company has entered into a long-term contract with an independent company to
provide research and development services. The Company will receive cash of up
to $860,000 for engineering services. Costs not specified in the contract are
the responsibility of the independent company. The contract requires the Company
to produce a working prototype by October 1998 which conforms to the product
specifications defined in the contract. To date, the Company has incurred
$650,110 [1997 - $68,533] in direct costs of initial development work and has
recorded $665,081 [1997 - $39,909] of revenue related to the contract. Total
payments received to date on the contract are $497,100 [1997 - $214,250]. At
March 31, 1998, amounts receivable on research and development contract includes
$44,174 billed and $123,807 unbilled.
12. INCOME TAXES
The Company accounts for income taxes under the liability method required by
FASB Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. For financial
statement purposes, a change in valuation allowance of $1,984,000 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>
1998 1997
$ $
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Tax over book depreciation 440,000 301,000
- --------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITIES 440,000 301,000
- --------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Bad debt reserve -- 15,000
Inventory capitalization 10,000 70,000
Inventory reserve 56,000 210,000
Net operating loss carryforwards 10,274,000 8,169,000
Warranty reserve 11,000 14,000
Other 293,000 43,000
- --------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSETS 10,644,000 8,521,000
Valuation allowance for deferred tax assets (10,204,000) (8,220,000)
- --------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS 440,000 301,000
- --------------------------------------------------------------------------------
NET DEFERRED TAX -- --
================================================================================
</TABLE>
F-15
<PAGE> 46
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
12. INCOME TAXES (CONT'D.)
The net provision for income taxes in 1998 and 1997 is $Nil as the Company
incurred losses in those years. Pre-tax income (loss) from Canadian operations
was $Nil in 1998 and approximately $681,000 in 1997.
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
----------------
1998 1997
% %
- --------------------------------------------------------------------
<S> <C> <C>
U.S. federal statutory rate 35.0 35.0
U.S. federal net operating loss rate (35.0) (35.0)
U.S. state tax rate -- --
Canadian statutory rate -- 45.6
Canadian non-capital loss rate -- (45.6)
- --------------------------------------------------------------------
Effective rate on operating loss -- --
====================================================================
</TABLE>
The Company has U.S. net operating loss carryforwards available at March 31,
1998 of approximately $27,386,000 and $11,980,000 for federal and state tax
purposes, respectively, to offset income in future years. These carryforwards
will begin to expire in the years 2005 and 1999, respectively, unless previously
utilized.
The tax losses of the Company identified above may be subject to limitation
arising from changes of ownership over the three year statutory testing period.
13. CAPITAL STOCK
AUTHORIZED CAPITAL
The authorized capital of the Company consists of 120,000,000 common shares
[1997 - 60,000,000 common shares] with a par value of $.001 per share and
5,000,000 preferred shares with a par value of $.001 per share.
F-16
<PAGE> 47
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
13. CAPITAL STOCK (CONT'D.)
COMMON STOCK
The issued common stock of the Company consisted of 57,171,119 and 23,370,008
common shares as of March 31, 1998 and 1997, respectively.
During 1998, prepaid warrants were converted into 30,587,851 shares of common
stock. In addition, subsequent to March 31, 1998, prepaid warrants having a face
value of $114,848 were converted into 1,675,430 shares of common stock. If these
conversions had occurred on May 15, 1997, the first day conversion was possible,
the reported loss per share for the year ended March 31, 1998 would have
decreased $0.01 to $0.05.
REDEEMABLE PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of $.001 par value preferred
stock in one or more series from time to time by action of the Board of
Directors. During September 1997, the first series, consisting of up to 100,000
shares, was designated by the Board of Directors as Series A (the "Series A
stock"). During September and October 1997, the Company sold 99,500 shares of
Series A stock at $10 per share for gross proceeds of $995,000 and net proceeds
of $962,500. The Series A stock has voting rights equal to the number of shares
of common stock into which the Series A stock is convertible. Dividends of 8%
($0.4036 per share) per annum are cumulative and may be payable in cash or
shares of common stock, at the Company's election. The cumulative amount of
unpaid dividends at March 31, 1998 is $40,162, which has been recorded as an
increase in the carrying value of the Series A stock. The Series A stock has a
liquidation preference of $10 per share, plus accrued and unpaid dividends, with
no participation after the preference is paid.
F-17
<PAGE> 48
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
13. CAPITAL STOCK (CONT'D.)
Each share of Series A stock is currently convertible into 118.90 shares of
common stock computed by dividing $10 plus accrued and unpaid dividends by the
lesser of (i) $0.0875 or (ii) 80% of the average closing bid price for the
common stock for the ten trading days immediately following any and each
distribution in shares, subdivision, split-up, combination, reclassification or
other change in common stock. At March 31, 1998, the Series A stock would have
been convertible into approximately 11.8 million common shares. The Company is
required to redeem the Series A stock on September 1, 2000 and upon the
occurrence of certain other events. The Company may redeem the Series A stock
earlier only if there are sufficient shares available for conversion of the
Series A stock. The redemption price is $10 per share plus accrued and unpaid
dividends if there are sufficient shares available for the conversion of the
Series A stock, otherwise the redemption price is equal to the greater of (i)
$10 per share plus accrued interest and unpaid dividends or (ii) an amount equal
to a five day market price multiplied by the number of common shares into which
the Series A stock would be convertible if shares were authorized, plus a 10%
premium.
STOCK OPTIONS
The Company maintains two stock option plans. The 1992 Stock Option Plan is a
non-qualified stock option plan which entitles certain directors and key
employees to purchase common shares of the Company. A maximum of 10% of
outstanding common shares are authorized for grant under the Plan. Options are
granted at a price not less than fair market value at the date of grant, and are
subject to approval of the Board of Directors. The 1994 Stock Option Plan
entitles certain directors, key employees and consultants of the Company to
purchase common shares of the Company. The 1994 Plan covers a maximum aggregate
of 10,000,000 shares, as amended and approved by shareholders on July 25, 1996
and January 5, 1998. The 1994 Plan provides for the granting of options which
either qualify for treatment as incentive stock options or non-statutory stock
options.
During 1998, 2,987,656 options were granted at an exercise price of $0.1562 per
share. No options were granted during 1997. Options granted during 1998 were
under the 1994 Stock Option Plan.
F-18
<PAGE> 49
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
13. CAPITAL STOCK (CONT'D.)
The following table summarizes stock option transactions:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
- ----------------------------------------------------------------------------------
# $
<S> <C> <C>
BALANCE, MARCH 31, 1996 1,493,658 2.71
Granted -- --
Exercised -- --
Expired (73,000) 3.08
Cancelled (250,000) 1.70
- ----------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 1,170,658 2.89
Granted 2,987,656 0.0875*
Exercised -- --
Expired (347,818) 2.22
Cancelled (1,075,156) 1.57
- ----------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 2,735,340 .222
==================================================================================
</TABLE>
* 2,972,656 repriced from $0.1562 to $0.0875.
The following table summarizes the number of options exercisable at March 31,
1998 and the weighted average exercise prices and remaining contractual lives of
the options.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED EXERCISE PRICE
RANGE OF NUMBER NUMBER WEIGHTED AVERAGE OF OPTIONS
EXERCISE OUTSTANDING AT EXERCISABLE AT AVERAGE REMAINING EXERCISABLE AT
PRICES MARCH 31, 1998 MARCH 31, 1998 EXERCISE PRICE CONTRACTUAL MARCH 31, 1998
$ # # $ LIFE $
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
0.0875 to 0.1562 2,607,340 1,067,656 0.0879 4.4 years 0.0875
1.98 to 3.65 128,000 128,000 2.96 1.4 years 2.96
- -----------------------------------------------------------------------------------------------------------------
2,735,340 1,195,656
=================================================================================================================
</TABLE>
The non-exercisable options vest over a period of two years.
F-19
<PAGE> 50
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
13. CAPITAL STOCK (CONT'D.)
The Company adopted Statement of Financial Accounting Standard No. 123 entitled
Accounting for Stock-Based Compensation ("SFAS 123") as of April 1, 1995. The
provisions of SFAS 123 allow companies to either expense the estimated fair
value of stock options or to continue their current practice but disclose the
pro forma effects on net income and earnings per share had the value of the
options been expensed. The Company has elected to continue its practice of
recognizing compensation expense for its stock option and warrant incentive
plans using the intrinsic value based method of accounting [see Note 2] and to
provide the required pro forma information for stock options and warrants
granted after April 1, 1995. Under the terms of the intrinsic value method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date, or other measurement date, over the amount an employee must
pay to acquire stock. Had compensation expense for the Company's stock options
and warrants granted after April 1, 1995 been determined based on the fair value
at the grant dates for awards under those plans, the Company's pro forma loss
for the year and loss per share for the reported years would have been as
follows:
<TABLE>
<CAPTION>
1998 1997
$ $
- --------------------------------------------------------------------------------
<S> <C> <C>
Loss for the year 2,563,597 9,597,102
Compensation expense 171,953 107,377
- --------------------------------------------------------------------------------
Pro forma net loss 2,735,550 9,704,479
- --------------------------------------------------------------------------------
Pro forma loss per share 0.06 0.45
================================================================================
</TABLE>
The effects on pro forma loss per share of expensing the estimated fair value of
stock options and warrants are not necessarily representative of the effects on
reported net income for future years due to such things as the potential for
issuance of additional stock options and warrants in future years.
The fair value of options and warrants granted after April 1, 1995, used as a
basis for the above pro forma disclosures, was estimated at the date of grant
using the Black-Scholes option pricing model. The option and warrant pricing
assumptions include a dividend yield of 0% [1997 - 0%]; and expected volatility
of 1.460 [1997 - 1.390]; a risk free interest rate of 5.80% [1997 - 6.17%]; and
an expected life of half the period from grant to expiration.
F-20
<PAGE> 51
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
13. CAPITAL STOCK (CONT'D.)
SHARE WARRANTS
The Company has outstanding share warrants as of March 31, 1998, in connection
with private placements, convertible debentures, equipment leasing and
establishing and amending previous loans, 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
20,570 0.25* February 2000
25,000 0.25* March 2000
27,500 0.25* March 2001
401,924 0.25* July 2001
400,000 0.25* August 2001
150,000 0.15625* October 2001
128,067 0.25* October 2005
- --------------------------------------------------------------------------------
1,918,911
================================================================================
</TABLE>
* During the year, the Company amended the terms of these warrants to adjust
and fix the exercise price in conjunction with a reduction in the number of
shares subject to exercise and/or to eliminate future adjustments for certain
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, 1998.
F-21
<PAGE> 52
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
14. COMMITMENTS
The Company and American Technology Corporation, a company related through
common management and ownership, have a joint lease for office space in San
Diego, California. The lease expires on July 31, 2000. Office rent expense
recorded by the Company for the years ended March 31, 1998 and 1997 was $148,950
and $312,442, respectively.
The total commitments under the joint lease for office space are $410,498 of
which the Company's share of minimum commitments are as follows:
<TABLE>
<CAPTION>
$
- --------------------------------------------------------------------------------
<S> <C>
1999 76,699
2000 80,175
2001 27,111
- --------------------------------------------------------------------------------
183,985
================================================================================
</TABLE>
15. CONTINGENT LIABILITY
The Company has been notified by the Internal Revenue Service of a potential tax
liability of approximately $450,000 plus interest relating to the imposition of
withholding taxes on imputed interest from purported loans from the Company's
former Canadian parent company to operating subsidiaries. The Company intends to
vigorously contest this proposed tax liability and believes it has a number of
valid defenses, including that the purported loans were capital contributions.
The Company also believes that should the liability ultimately be sustained
through various appeals that the former Canadian parent company may have claims
for refunds of such withheld taxes if imputed from the subsidiaries. This matter
is in the early stages and the Company has engaged legal counsel to vigorously
contest this matter.
F-22
<PAGE> 53
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
16. PREPAID WARRANTS
During 1997, the Company received cash from prepaid warrants of $3,396,505, net
of offering costs of $409,395. The face amount of the warrants of $3,805,900 was
exercisable, without further cash payment, into common shares of the Company at
the lesser of $0.70 per common share (with respect to $805,900 of warrants) and
$0.69125 per common share (with respect to $3,000,000 of warrants) or a 30%
discount to the 5 day moving average bid price of the common shares on the day
prior to exercise. The exercise price of the warrants is to be further
discounted by 7% per year and for other events until the warrants are exercised.
During 1998, the holders of prepaid warrants exercised the option and converted
$2,672,944 [1997 - $120,000] of prepaid warrants into 30,587,851 common shares
[1997 - 392,702] of the Company at conversion prices ranging from $0.0875 to
$0.254 [1997 - $0.305]. During September 1997, the Company reached agreement
with the prepaid warrantholders to fix the price at which the prepaid warrants
are exercisable, without further cash payment, into common shares of the Company
at $0.0875 per share subject to certain adjustments.
The fixed exercise price of $0.0875 per share may be adjusted down (i) to 80% of
the market price following certain changes in the Company's common stock
including a reverse stock split, and (ii) to the price at which new securities
are issued if at a price below $0.0875 per share.
In determining the number of shares of common stock to be issued upon exercise,
the Company adjusts the face value of the prepaid warrants upward to reflect
penalties and the 7% annual discount. The adjusted value of the prepaid warrants
was approximately $1.287 million at March 31, 1998 and exercise at that date
would have required the issuance of 14,710,859 common shares. The prepaid
warrants expire in January 2000 at which time they convert to common shares if
not previously converted. Assuming the prepaid warrant holders hold to term, the
Company will be required to issue 15,329,463 common shares at that time.
F-23
<PAGE> 54
NORRIS COMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998 and 1997
17. RESTRUCTURING CHARGE
During 1997, the Company recorded a restructuring charge of $2,228,001 as
follows:
<TABLE>
<CAPTION>
$
- --------------------------------------------------------------------------------
<S> <C>
Write-down of inventory 1,290,039
Losses on cancellation of purchase commitments 98,295
Severance costs 47,265
Write-down of property and equipment to net realizable amount 376,538
Loss on disposal of property and equipment 365,864
Facility reduction and other 50,000
- --------------------------------------------------------------------------------
2,228,001
================================================================================
</TABLE>
At March 31, 1997, a total of $162,423 was included in other accounts payable
and accrued liabilities relating to the restructuring, which was substantially
completed by June 1997. The restructuring charge is as a result of the change in
the Company's operations due to the discontinuation of contract manufacturing
services arising from a decision to focus on Original Equipment Manufacturing
and licensing activities related to the Company's FLASHBACK technology.
18. SUBSEQUENT EVENTS
[a] On April 22, 1998, 1,852,660 common stock options were granted to employees
and others at an exercise price of $0.0875 per share. The stock options vest
over a two year period and expire April 22, 2003.
[b] In June 1998, the Company completed the sale of $1,000,000 of 12%
Convertible Promissory Notes with Limited Guaranty ("Notes") due May 15,
1999. The Notes and interest are convertible into shares of common stock at
$0.0875 per share, subject to certain adjustments. If converted at issue,
these Notes would have been convertible into 11,428,571 shares of common
stock. If converted April 1, 1997, the reported loss per share for the year
ended March 31, 1998 would have decreased $0.02 to $0.04. In connection with
the sale of Notes, the Company issued warrants on 571,428 common shares
exercisable at $0.0875 per share and granted warrants to two officers and
shareholders of the Company, on an aggregate of 2,000,000 common shares
exercisable at $0.10 per share, for certain guarantees and inducements
granted to purchasers of the Notes.
F-24
<PAGE> 55
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORRIS COMMUNICATIONS, INC.
By: /s/ Elwood G. Norris
----------------------------------------
Elwood G. Norris
Chairman and Chief Executive Officer
Date: June 26, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Position Date
---- -------- ----
<S> <C> <C>
/s/ Elwood G. Norris Chairman of the Board, Chief June 26, 1998
- ------------------------------- Executive Officer and Director
Elwood G. Norris (principal executive officer)
/s/ Alfred H. Falk President and Director June 26, 1998
- -------------------------------
Alfred H. Falk
/s/ Renee Warden Controller June 26, 1998
- ------------------------------- (principal financial officer)
Renee Warden
/s/ Robert Putnam Vice President, Secretary and Director June 26, 1998
- -------------------------------
Robert Putnam
</TABLE>
55
<PAGE> 1
EXHIBIT 4.6
NOTE 98-A__
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAWS, AND IS A
"RESTRICTED SECURITY" AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT. THIS
NOTE MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT
OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.
THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN THAT
CERTAIN SUBSCRIPTION AGREEMENT THEREFOR BETWEEN THE COMPANY AND THE ORIGINAL
HOLDER HEREOF.
(ALL AMOUNTS IN U.S. DOLLARS)
NORRIS COMMUNICATIONS, INC.
12% CONVERTIBLE PROMISSORY NOTE WITH LIMITED GUARANTY
SERIES 98A
Due May 15, 1999
Note Date: _________________ US$_____________. 00
San Diego, California
FOR VALUE RECEIVED, Norris Communications, Inc., the undersigned
Delaware corporation (together with all successors, the "Company"), hereby
promises to pay to the order of
Payee: _______________________________
or his, her or its successors or assigns
(collectively, "Noteholder") at
Address:
or at such other address or addresses as Noteholder may subsequently designate
in writing to the Company, the principal sum of ________________ and NO/100
Dollars ($______________.00), due and payable in one installment on May 15, 1999
("Maturity Date"), plus simple interest thereon at the rate of twelve percent
(12.00%) per annum, in lawful monies of the United States of America. If the
Maturity Date should fall on a weekend or national holiday, payment shall be due
on the following business day. This Note is one of a duly authorized issue of
Notes of the Company designated as its 12% Convertible Promissory Notes with
Limited Guaranty (herein called the "Notes"), limited in aggregate principal
amount to $1,000,000.
1. Any payment shall be deemed timely made if received by Noteholder
within ten (10) calendar days of the due date. Payments received shall be
imputed first to late or penalty charges, if any, then due, next to interest
payments then due, and next to the remaining unpaid principal balance.
An "Event of Default" occurs if (a) the Company does not make the
payment of interest or principal of this Note when the same becomes due and
payable and such default shall continue for a period of ten (10) calendar days
(a "Payment Default"), (b) the Company fails to comply with any of its other
agreements, representations or warranties in this Note or in the Subscription
Agreement and such failure continues for the period and after the notice
specified below,
<PAGE> 2
(c) it is subsequently determined that any representation or warranty of the
Company contained in the Subscription Agreement is not true and correct in all
material respects as of the date such representation and warranties were made,
(d) pursuant to or within the meaning of any Bankruptcy Law (as hereinafter
defined), the Company: (i) commences a voluntary case; (ii) consents to the
entry of an order for relief against it in an involuntary case; (iii) consents
to the appointment of a Custodian (as hereinafter defined) of it or for all or
substantially all of its property or (iv) makes a general assignment for the
benefit of its creditors or (v) a court of competent jurisdiction enters an
order or decree under any Bankruptcy Law that: (A) is for relief against the
Company in an involuntary case; (B) appoints a Custodian of the Company or for
all or substantially all of its property or (C) orders the liquidation of the
Company, and any order or decree remains unstayed and in effect for a period of
sixty (60) days. As used herein, the term "Bankruptcy Law" means Title 11 of the
United States Code or any similar federal or state law for the relief of
debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator
or similar official under any Bankruptcy Law.
A default other than a Payment Default under section (a) above is not an
Event of Default until the holders of at least 25% in aggregate principal amount
of the Notes then outstanding notify the Company of such default and the Company
does not cure it within thirty (30) days after receipt of such notice, which
must specify the default, demand that it be remedied and state that it is a
"Notice of Default." If an Event of Default occurs and is continuing, the
Noteholder hereof by notice to the Company, may declare the principal of and
accrued interest on this Note to be due and payable immediately; provided,
however, that the holders of at least 51% in aggregate principal amount of the
Notes then outstanding, by written notice to the Company, may rescind and annul
such declaration and its consequences.
Upon an uncured Event of Default, the Company shall issue to the
Noteholder the number of shares which would have been issued in accordance with
the conversion provisions in Section 4. Additionally, the Noteholder shall have
the additional remedies of recovery provided in the Guarantee and Pledge
Agreement between the Company, Elwood G. Norris (Limited Guarantor) and each
Noteholder. Should the Noteholder be satisfied pursuant to the terms of the
Guarantee and Pledge Agreement then the Company shall have no further
obligation. However should there be a deficiency, as defined in the Guarantee
and Pledge Agreement, the Company shall remain obligated for the deficiency and
any interest and penalties thereon and the Noteholder shall have such remedies
prescribed herein and by law.
2. The Company may not prepay any of the Notes at any time without the
prior written agreement of the Noteholders.
3. "Senior Indebtedness" means the principal of and premium, if any, and
interest on indebtedness of the Company or any subsidiary, whether outstanding
on the date of issuance of this Note or thereafter created, incurred or assumed
for money borrowed from (a) banks, insurance companies, financial institutions
or other persons which regularly engage in the business of lending money, unless
the instrument creating such indebtedness shall specifically designate such
indebtedness as not being senior in right of payment to the Notes, (b) the
$500,000 of Secured Notes currently outstanding, or (c) such other persons as to
which indebtedness the Board of Directors of the Company shall designate as
senior in right of payment to the Notes.
The Company agrees, and each Noteholder, by acceptance hereof likewise
agrees, expressly for the benefit of the present and future holders of Senior
Indebtedness, that, except as otherwise provided herein, upon (i) an event of
default under any Senior Indebtedness, or (ii) any dissolution, winding up or
liquidation of the Company, whether or not in bankruptcy, insolvency or
receivership proceeding, the Company shall not pay, and the Noteholder shall not
be entitled to receive, any amount in respect of the principal and interest of
this Note unless and until the Senior Indebtedness shall have been paid or
otherwise discharged. Upon (A) an event of default under any Senior
Indebtedness, or (B) any dissolution, winding up or liquidation of the Company,
any payment or distribution of assets of the Company, which the Noteholder would
be entitled to receive but for the provisions hereof, shall be paid by the
Custodian directly to the holders of Senior Indebtedness ratably according to
the aggregate amounts remaining unpaid on Senior Indebtedness after giving
effect to any concurrent payment or distribution to the holders of any Senior
Indebtedness. Subject to the payment in full of the Senior Indebtedness and
until this Note is paid in full, the Noteholder shall be subrogated to the
rights of the holders of the Senior Indebtedness (to the extent of payments or
distributions previously made to the holders of Senior Indebtedness pursuant
hereto) to receive payments or distributions of assets of the Company applicable
to the Senior Indebtedness.
<PAGE> 3
In the event that any Event of Default shall occur and as a result this
Note is declared due and payable, and such declaration shall not have been
rescinded or annulled, the Company shall not make any payment on account of the
principal of or interest on this Note unless at least thirty (30) days shall
have elapsed after said declaration and unless all principal of and interest on
Senior Indebtedness due at the time of such payment (whether by acceleration of
the maturity thereof or otherwise) shall first be paid in full.
Nothing contained in this Note is intended to impair, as between the
Company, its creditors (other than the holders of Senior Indebtedness) and the
Noteholder of this Note, the unconditional and absolute obligation of the
Company to pay the principal of and interest on this Note or affect the relative
rights of the holder of this Note and the other creditors of the Company, other
than the holders of Senior Indebtedness. Nothing in this Note shall prevent the
holder of this Note from exercising all remedies otherwise permitted by
applicable law upon default under this Note, subject to the rights, if any, of
the holders of Senior Indebtedness in respect to cash, property or securities of
the Company received upon the exercise of any such remedy.
Nothing in this Section 3 shall in any way impair or affect the Noteholder's
rights under the Guarantee and Pledge Agreement.
4. Conversion, Mandatory Conversion and Registration
(a) The outstanding principal amount of this Note (or increments thereof
of at least $25,000 or the balance if less) and any capitalized interest
may, at any time and from time to time, be converted at the option of
the Noteholder into fully paid, nonassessable shares of common stock
("Common Stock") of the Company, $.001 par value per share (the
"Conversion Shares"), at the Conversion Price per share as hereinafter
defined, subject to restrictions and limitations set forth herein. The
Conversion Price shall be $0.0875 per share with one adjustment on each
of any reverse stock split or similar adjustment to the lesser of (i)
$0.0875 (as adjusted as defined below in 4(c)) per share, or (ii) 80% of
the average closing bid price for ten days after each and any reverse
stock split or similar common adjustment (including any and each
distribution in shares, subdivision, split-up, combination,
reclassification or other change in the Common Stock).
(b) Conversion shall be effected by Noteholder's writing which
unequivocally expresses Noteholder's intent to effect the conversion and
states the amount of principal being converted and tender of such
writing (in the form of Exhibit A or other similar form) and this
original Note to the Company. Conversion shall be deemed to occur on the
date such writing is presented to Company by fax or other means as long
as the original Note is received promptly thereafter. Upon such
conversion duly made, Company shall execute a new Note of like tenor for
the balance of the principal amount of this Note not converted to common
stock, and deliver such new Note and Common Stock to Noteholder and any
obligation to repay (or guarantee repayment) of the converted amount
shall cease. The Company shall bear all expenses and charges of issuing
and delivering the Conversion Shares. Not less than $25,000 of principal
and interest owed under this Note may be converted at any one time;
provided, that if the aggregate of principal and interest owed is less
than that amount, then all amounts owed under the Note must be converted
at the same time.
(c) The conversion rate set forth in paragraph 4(a) will be subject to
adjustment if the Company is reorganized, merged, consolidated or party
to a plan of exchange with another corporation pursuant to which
shareholders of the Company receive any shares of stock or other
securities, or in the event of any sale or other transfer of all or
substantially all of the Company's assets, or in case of any
reclassification of Common Stock. Noteholder shall be entitled, after
the occurrence of any such event, to receive on conversion thereof the
kind and amount of shares of stock or other securities, cash or other
property receivable upon such event by a holder of the number of shares
of common stock into which the principal balance of this Note at such
time might have been converted immediately prior to occurrence of the
event. In addition, the conversion rate set forth in paragraph 4(a) of
this Note will be appropriately adjusted if the Common Stock is split or
combined.
(d) Upon conversion of this Note, the Company shall use its best efforts
to issue and deliver to Noteholder a certificate or certificates for the
number of Conversion Shares to which Noteholder shall be entitled within
ten (10) business days after Noteholder has fulfilled all conditions
required for conversion as set forth in this Note.
<PAGE> 4
The Company understands that a delay in the issuance of Conversion
Shares could result in economic loss to Noteholder. As compensation to
Noteholder for such loss, and not as a penalty, Company agrees to pay to
Noteholder for late issuance of Conversion Shares in the amount of one
percent (1.0%) of the requested conversion amount per week, beginning on
the twelfth (12th) business day from receipt by the Company of a duly
executed notice of conversion of the Note, provided that the original
Note to be converted has been delivered to the Company within such time
period, all in accordance with this Note agreement and the requirements
of the Company's transfer agent. Said liquidated damages shall accrue
each week through the date the Conversion Shares are issued to the
Noteholder, and shall be paid to the Noteholder upon the earlier to
occur of (i) issuance of said Conversion Shares to Noteholder, or (ii)
each monthly anniversary of the receipt by Company of such Noteholder's
notice of conversion. Nothing herein shall waive the Company's
obligations to deliver Conversion Shares or limit Noteholder's right to
pursue actual damages for the Company's unexcused failure to issue and
deliver Conversion Shares to Noteholder in accordance with the terms of
this Note agreement. The damage provisions of this paragraph shall not
apply to any delay caused by the Noteholder, his agents, successors, or
assigns or resulting from circumstances reasonably beyond the Company's
control or if in the Company's judgment the conversion would be contrary
to law or violate its corporate charter.
(e) The Company is entitled, at its option, at any time when the closing
bid price of the Common Stock has equaled or exceeded 200% of the
Conversion Price per share for ten (10) consecutive trading days during
which market sales occurred, upon ten (10) days' prior written notice
("Notice of Mandatory Conversion") to the holders of this Note, to
require the holder of this Note to convert all of the principal
outstanding and all interest accrued thereon through the date of the
Notice of Mandatory Conversion into fully paid and nonassessable shares
of Common Stock at the Conversion Price then in effect; provided, that
the Conversion Shares issuable are registered under the Securities Act
of 1933, as amended. The Company shall notify the Noteholder of
Company's intent to force conversion by giving written notice to the
Noteholder by facsimile or other electronic means, if possible, with
original notice to follow by two (2) day courier. Conversion pursuant to
this Section 4(d) shall be effective with respect to each Noteholder on
the fifth (5th) day (the "Mandatory Conversion Effective Date")
following the confirmed receipt by the Noteholder or any other person at
the Noteholder's designated address of the original notice referred to
in the preceding sentence.
Upon the effective date of forced conversion, this Note shall be
deemed void and no longer shall constitute an obligation of Company or
evidence of an obligation, irrespective of when surrendered to Company.
This provision requires the Company to convert all principal and
interest owing under this Note outstanding at the time of forced
conversion. The Noteholder shall in such event be required to surrender
the original of this Note as promptly as possible to the Company, which
shall mark the Note "canceled" upon receipt and retain permanent custody
of it. Upon the Company's receipt of this Note, the Company shall
deliver to the Noteholder the Conversion Shares called for by this
provision. If the Conversion Shares are not registered then the shares
shall contain the appropriate restrictive legend.
(f) The Company shall by August 31, 1998 ("Filing Date") prepare and
cause a registration statement on Form S-3, Form SB-2 or other
appropriate form to be filed with the Securities and Exchange Commission
for the purpose of registering the Conversion Shares under the Act for
issuance to Noteholders upon conversion of this Note including to the
extent appropriate the resale of such securities by the holders thereof.
The Company shall use its best efforts to update such registration
statement to remain effective for a period of nine months after it
becomes effective. Noteholder shall, in connection with such
registration, make such representations and warranties to the Company
and furnish such information as the Company shall reasonably request.
No demand or request for such registration by Noteholder shall be
necessary, and such registration shall be automatic. The Company shall
use its best efforts to cause such registration to become effective as
soon as practicable. All expenses of registering the Conversion Shares
shall be borne by the Company. The Company shall furnish to the
Noteholder and all other Noteholders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably
request.
The Company shall register or qualify the Conversion Shares under the
securities or "blue sky" laws of
<PAGE> 5
such jurisdictions as the Noteholders reasonably request. The Company
shall not be required to register the Notes under the Act or otherwise
for resale, nor to register under the Act or otherwise for resale any
Conversion Shares obtained upon conversion of a Note prior to
effectiveness of such registration statement.
If Noteholder fails to convert the Note and obtain the Conversion
Shares after the effective date of such registration statement and
during the period the registration statement remains current, the
Company shall have no obligation to amend such registration statement or
file any further registration statement concerning such shares.
The Conversion Shares shall, upon due conversion of this Note, be
issued without restrictive legend and without entry of any stop transfer
notation in the Company's records, provided that at the time of issuance
the registration statement is effective and current and is not subject
of a stop order, and further provided that the Conversion Shares have
been duly registered or qualified under applicable state blue-sky laws.
In the event that such registration statement is not filed by August
31, 1998 or declared effective within 90 days of the Filing Date ("Due
Date"), then the principal payable under this Note shall increase an
additional one percent (1%) from such date for the first thirty (30)
days following the Due Date and three percent (3%) each thirty (30) day
period thereafter until effectiveness of the registration statement or
until May 15, 1999.
Each Noteholder of Conversion Shares to be sold pursuant to any
Registration Statement (each, a "Distributing Holder") shall severally,
and not jointly, indemnify and hold harmless the Company, its officers
and directors, each underwriter and each person, if any, who controls
the Company and such underwriter, against any loss, claim, damage,
expense or liability, joint or several, as incurred, to which any of
them may become subject under the Securities Act or any other statute or
at common law, in so far as such loss, claim, damage, expense or
liability (or actions in respect thereof) arises out of or is based upon
any untrue statement or alleged untrue statement of any material fact
contained in any such Registration Statement, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement
thereto, or any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written
information furnished to the Company by such Distributing Holder
specifically for use therein. Such Distributing Holder shall reimburse
the Company, such underwriter and each such officer, director or
controlling person for any legal or other expenses reasonably incurred
by any of them in connection with investigating or defending any such
liability, as incurred. Notwithstanding the foregoing, such indemnity
with respect to such preliminary prospectus or such final prospectus
shall not inure to the benefit of the Company, its officers or
directors, or such underwriter (or such controlling person of the
Company or the underwriter) if the person asserting any such loss,
claim, damage, expense or liability purchased the securities that are
the subject thereof and did not receive a copy of the final prospectus
(or the final prospectus as then amended, revised or supplemented) at or
prior to the time such furnishing is required by the Securities Act in
any case where any such untrue statement or omission of a material fact
contained in the preliminary prospectus was corrected in the final
prospectus (or, if contained in the final prospectus, was subsequently
corrected by amendment, revision or supplement).
The Company shall indemnify and hold harmless each Distributing Holder
against any loss, claim, damage, expense or liability, joint or several,
as incurred, to which any of them may become subject under the
Securities Act or any other statute or at common law, in so far as such
loss, claim, damage, expense or liability (or actions in respect
thereof) arises out of or is based upon any untrue statement or alleged
untrue statement of any material fact contained in any such Registration
Statement, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, or any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company
shall reimburse each Distributing Holder, such underwriter and each such
officer, director or controlling person for any legal or other expenses
reasonably incurred by any of them in connection with investigating or
defending any such liability, as incurred. Notwithstanding the
foregoing, such indemnity with respect to such
<PAGE> 6
preliminary prospectus or such final prospectus shall not inure to the
benefit of the Company, its officers or directors, or such underwriter
(or such controlling person of the Company or the underwriter) if the
person asserting any such loss, claim, damage, expense or liability
purchased the securities that are the subject thereof and did not
receive a copy of the final prospectus (or the final prospectus as then
amended, revised or supplemented) at or prior to the time such
furnishing is required by the Securities Act in any case where any such
untrue statement or omission of a material fact contained in the
preliminary prospectus was corrected in the final prospectus (or, if
contained in the final prospectus, was subsequently corrected by
amendment, revision or supplement).
5. If this Note becomes worn, defaced or mutilated but is still
substantially intact and recognizable, the Company or its agent may issue a new
Note in lieu hereof upon its surrender. Where the Noteholder claims that the
Note has been lost, destroyed or wrongfully taken, the Company shall issue a new
Note of like tenor in place of the original Note if the Noteholder so requests
by written notice to the Company together with an affidavit of the Noteholder
setting forth the facts concerning such loss, destruction or wrongful taking and
such other information in such form with such proof or verification as the
Company may request. The Company in addition may require, at its sole
discretion, indemnification and/or an indemnity bond in such amount and issued
by such surety as the Company deems satisfactory.
6. If the indebtedness represented by this Note or any part thereof is
collected in bankruptcy, receivership or other judicial proceedings or if this
Note is placed in the hands of attorneys for collection after default, the
Company agrees to pay, in addition to the principal and interest payable
hereunder, reasonable attorneys' fees and costs incurred by the Noteholder.
7. Any notice, demand, consent or other communication hereunder shall be
in writing addressed to the Company at its principal office or, in the case of
Holder, at Holder's address appearing above, or to such other address as such
party shall have theretofore furnished by like notice, and either served
personally, sent by express, registered or certified first class mail, postage
prepaid, sent by facsimile transmission, or delivered by reputable commercial
courier. Such notice shall be deemed given (a) when so personally delivered, or
(b) if mailed as aforesaid, five (5) days after the same shall have been posted,
or (c) if sent by facsimile transmission, as soon as the sender receives written
or telephonic confirmation that the message has been received and such facsimile
is followed the same day by mailing by prepaid first class mail, or (d) if
delivered by commercial courier, upon receipt.
8. The Company hereby waives present, demand for performance, notice of
non-performance, protest, notice of protest and notice of dishonor. No delay on
the part of Noteholder in exercising any right hereunder shall operate as a
waiver of such right or any other right.
9. This Note shall be governed by and construed in accordance with the
laws of the State of California applicable to contracts between residents of
such state entered into and to be performed entirely within such state.
10. Each provision of this Note shall be interpreted in such manner as
to be effective and valid under applicable law, but if any provision of this
Note is held to be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of this Agreement.
IN WITNESS WHEREOF, the undersigned Company has executed this Note and has
affixed hereto its corporate seal.
NORRIS COMMUNICATIONS, INC.
By /s/ ROBERT PUTNAM
--------------------------------------
AUTHORIZED OFFICER
<PAGE> 1
EXHIBIT 4.7
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933 ("ACT"), AND THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT.
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE 571,429 SHARES OF COMMON STOCK
THIS CERTIFIES THAT Renwick Corporate Finance, Inc. and all registered and
permitted assigns (collectively, "Holder") is entitled to purchase, on or before
June 3, 2001, five hundred seventy one thousand four hundred twenty nine
(571,429) shares of the common stock ("Common Stock") of Norris Communications,
Inc. (the "Corporation" or "Company") upon exercise of this Warrant along with
presentation of the full purchase price as provided herein. The purchase price
of the common stock upon exercise of this Warrant ("Warrant Shares") is equal to
eight and three-quarter cents ($0.0875) per share (the "Exercise Price"). The
purchase price of this Warrant is $100.00.
1. Exercise of Warrant.
(a) This Warrant may be exercised in whole or in part on any business day on or
before the expiration date listed above by presentation and surrender hereof to
the Company at its principal office of an exercise request and the Exercise
Price in lawful money of the United States of America in the form of a wire
transfer or check, subject to collection, for the number of Warrant Shares
specified in the exercise request. If this Warrant should be exercised in part
only, the Company shall, upon surrender of this Warrant, execute and deliver a
new Warrant evidencing the rights of the Holder thereof to purchase the balance
of the Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant and an exercise request and representations, together with proper
payment of the Exercise Price, at such office, the Holder shall be deemed to be
the holder of record of the Warrant Shares, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered to the
Holder. The Company shall pay any and all transfer agent fees, documentary stamp
or similar issue or transfer taxes payable in respect of the issue or delivery
of the Warrant Shares.
(b) At any time during the Exercise Period, the Holder may, at its option,
exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the
number of Warrant Shares determined in accordance with this Section (1)(b), by
surrendering this Warrant at the principal office of the Company, accompanied by
a written notice stating such Holder's intent to effect such exchange, the
number of Warrant Shares to be exchanged and the date on which the Holder
requests that such Warrant Exchange occur (the "Notice of Exchange"). The
Warrant Exchange shall take place on the date the Notice of Exchange is received
by the Company or such later date as may be specified in the Notice of Exchange
(the "Exchange Date"). Certificates for the shares issuable upon such Warrant
Exchange and, if applicable, a new Warrant of like tenor evidencing the balance
of the shares remaining subject to this Warrant, shall be issued as of the
Exchange Date and delivered to the Holder within seven (7) days following the
Exchange Date. In connection with any Warrant Exchange, this Warrant shall
represent the right to subscribe for and acquire the number of Warrant Shares
(rounded to the next highest integer) equal to (i) the number of Warrant Shares
specified by the Holder in its Notice of Exchange (the "Total Number") less (ii)
the number of Warrant Shares equal to the quotient obtained by dividing (A) the
product of the Total Number and the existing Exercise Price by (B) the current
market value of a share of Common Stock. Current market value shall be the
average closing price for the 5-day period prior to the Exchange Date.
2. Adjustment of Exercise Price and Number of Shares Deliverable Upon Exercise
of Warrant.
1
<PAGE> 2
The Exercise Price and the number of Shares purchasable upon the exercise of
this Warrant are subject to adjustment from time to time upon the occurrence of
the events enumerated in this paragraph.
(a) In case the Corporation shall at any time after the date of this Warrant:
(i) Pay a dividend of its shares of its Common Stock or make a
distribution in shares, or rights or warrants to purchase shares of its Common
Stock with respect to its outstanding Common Stock;
(ii) Subdivide its outstanding shares of Common Stock;
(iii) Combine its outstanding shares of Common Stock; or
(iv) Issue any other shares of capital stock by reclassification of its
shares of Common Stock
the Exercise Price in effect and the number of Warrant Shares purchasable at the
time of the record date of such dividend, subdivision, combination, or
reclassification shall be proportionately adjusted so that Holder shall be
entitled to receive the aggregate number and kind of shares which, if this
Warrant had been exercised prior to such event, Holder would have owned upon
such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination, or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) In case of any reorganization of the Corporation, or in case of any
reclassification or change of outstanding Common Stock issuable upon exercise of
this Warrant (other than a change in par value. or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
split-up or combination of the Common Stock), or in case of any consolidation or
merger of the Company with or into another entity (other than a consolidation or
merger with a subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the property of the
Corporation, then, as a condition of such reorganization, reclassification,
change, consolidation, merger, sale, or conveyance, the Corporation or such
successor or purchasing entity, as the case may be, shall forthwith provide to
Holder a supplemental warrant (the "Supplement Warrant") which will make lawful
and adequate provision whereby Holder shall have the right thereafter to
receive, upon exercise of such Supplemental Warrant, the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification, change, consolidation, merger, sale, or
conveyance by a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon exercise of this Warrant immediately prior to such
reorganization, reclassification, change, consolidation, merger, sale, or
conveyance. Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph. The above provisions of this paragraph shall
similarly apply to successive consolidations, mergers, sales, or conveyances.
3. Registration Rights.
If the shares underlying this Warrant can be registered within the same
registration statement selected by the Company for the securities issued in
connection with the Private Placement Memorandum dated May 8, 1998 then the
Company shall include such Warrant Shares, Otherwise;
(1) The Company shall advise the Holder of this Warrant or of the Warrant Shares
or any then holder of Warrants or Warrant Shares (such persons being
collectively referred to herein as "holders") by written notice at least two
weeks prior to the filing of any new registration statement ("Registration
Statement") under the Securities Act of 1933 (the "Act") covering securities of
the Company, other than a Registration Statement filed with respect to any
employee benefit plan or an offering solely related to an acquisition for which
such Warrant Shares cannot be appropriately registered or which does not permit
registration of the Warrants or Warrant Shares, and will for a period of five
years, from the date of this Warrant upon the request of any such holder,
include in any such registration statement the number of Warrant Shares holder
desires to include in the Registration Statement. In the event the managing
underwriter for any said registration advises the Company that the inclusion of
the Warrant
2
<PAGE> 3
Shares would be detrimental to the offering, then such Warrant Shares shall be
included in the Registration Statement only if the Holder agrees in writing, for
a period of up to 120 days following such offering, not to sell or otherwise
dispose of the Warrant Shares. The Company shall supply prospectuses and other
documents as the Holder may request in order to facilitate the public sale or
other disposition of the Warrant Shares for sale in such states where the
Company qualifies its other securities pursuant to the Registration Statement
for sale and do any and all other acts and things which may be necessary or
desirable to enable such Holders to consummate the public sale or other
disposition of the Warrant or Warrant Shares. The Holder need not exercise the
Warrant to have the Warrant Shares included in a registration statement. Nothing
in this Section shall be construed to extend the expiration date of this
Warrant.
(2) The following provision of this Section shall also be applicable:
(A) The Company shall bear the entire cost and expense of any
registration of securities initiated by it notwithstanding that Warrants Shares
subject to this Warrant may be included in any such registration. Any holder
whose Warrant Shares are included in any such registration statement shall,
however, bear the fees of his own counsel, transfer taxes or underwriting
discounts or commissions applicable to the Warrant Shares sold by him pursuant
thereto.
(B) Neither the giving of any notice by any holder nor making of any
request for prospectus shall impose upon such holder or owner making such
request any obligation to sell any Warrant Shares, or exercise any Warrants.
The Company's agreements with respect to Warrant Shares in this Section
shall continue in effect regardless of the exercise and surrender of this
Warrant.
4. Assignment or Loss of Warrant.
(a) Any sale, transfer, assignment, hypothecation or other disposition of this
Warrant or of the Warrant Shares shall only be made if any such transfer,
assignment or other disposition will comply with the rules and statutes
administered by the Securities and Exchange Commission and (i) a Registration
Statement under the Act including such Shares is currently in effect, or (ii) in
the opinion of counsel, which counsel and which opinion shall be reasonably
satisfactory to the Company, a current Registration Statement is not required
for such disposition of the shares. Each stock certificate representing Warrant
Shares issued upon exercise or exchange of this Warrant shall bear the following
legend (unless, in the opinion of counsel, which counsel and which opinion shall
be reasonably satisfactory to the Company, such legend is not required):
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED EXCEPT UPON DELIVERY TO THE CORPORATION OF AN
OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO IT THAT
SUCH TRANSFER WILL NOT VIOLATE THE SECURITIES ACT OF 1933, AS
AMENDED."
(b) The Holder understands that the Company may place, and may instruct any
transfer agent or depository for the Shares to place, a stop transfer notation
in the securities records in respect of the Shares.
(c) Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnification satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.
5. Reservation of Shares.
The Company hereby agrees that at all times there shall be reserved for issuance
and delivery upon exercise or
3
<PAGE> 4
exchange of this Warrant all shares of its Common Stock or other shares of
capital stock of the Company from time to time issuable upon exercise or
exchange of this Warrant. All such shares shall be duly authorized and, when
issued upon the exercise or exchange of the Warrant in accordance with the terms
hereof, shall be validly issued, fully paid and nonassessable, free and clear of
all liens, security interests, charges and other encumbrances or restrictions on
sale (other than as provided in the Company's articles of incorporation and any
restrictions on sale set forth herein or pursuant to applicable federal and
state securities laws) and free and clear of all preemptive rights.
6. Notices to Warrant Holders, No Shareholder Rights.
So long as this Warrant shall be outstanding, (i) if the Company shall pay any
dividend or make any distribution upon the Common Stock or (ii) if the Company
shall offer to the holders of Common Stock for subscription or purchase by them
any share of any class or any other rights or (iii) if any capital
reorganization of the Company, reclassification of the capital stock of the
Company, consolidation or merger of the Company with or into another
corporation, sale, lease or transfer of all or substantially all of the property
and assets of the Company to another corporation, or voluntary or involuntary
dissolution, liquidation or winding up of the Company shall be effected, then in
any such case, the Company shall cause to be mailed by certified mail to the
Holder, at least fifteen days prior the date, as the case may be, a notice
containing a brief description of the proposed action and stating the date on
which such action is to take place and the date, if any is to be fixed, as of
which the holders of Common Stock or other securities shall receive cash or
other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
Nothing in this Warrant shall be construed as conferring upon the Holder or its
transferees any rights as a stockholder in the Company, including the right to
vote, receive dividends, consent or receive notices as a stockholder in respect
to any meeting of stockholders.
7. Arbitration.
In the event that a dispute arises between the Corporation and the Holder of
this Warrant as to any matte relating to this Warrant, the matter shall be
settled by arbitration in San Diego, California in accordance with the Rules of
the American Arbitration Association and the award rendered by such
arbitrator(s) shall not be subject to appeal and may be entered in any federal
or state court located in California having jurisdiction thereof, and actions or
proceedings shall be brought in no other forum or venue.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers effective this 3rd day of June 1998.
NORRIS COMMUNICATIONS, INC.
BY /s/ FRED FALK
Fred Falk, President
BY /s/ ROBERT PUTNAM
Robert Putnam, Secretary
ACKNOWLEDGMENT OF REPRESENTATION:
- -------------------------------
Warrant Holder
4
<PAGE> 1
EXHIBIT 4.8
THIS WARRANT AND THE SHARES ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933 ("ACT"), AND THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT.
STOCK PURCHASE WARRANT
RIGHT TO PURCHASE __________ SHARES OF COMMON STOCK
THIS CERTIFIES THAT ________________ and all registered and permitted assigns
(collectively, "Holder") is entitled to purchase, on or before June 12, 2003,
_______________ (________) shares of the common stock ("Common Stock") of Norris
Communications, Inc. (the "Corporation" or "Company") upon exercise of this
Warrant along with presentation of the full purchase price as provided herein.
The purchase price of the common stock upon exercise of this Warrant ("Warrant
Shares") is equal to ten cents ($0.10) per share (the "Exercise Price"). The
purchase price of this Warrant is $100.00.
1. Exercise of Warrant.
(a) This Warrant may be exercised in whole or in part on any business day on or
before the expiration date listed above by presentation and surrender hereof to
the Company at its principal office of an exercise request and the Exercise
Price in lawful money of the United States of America in the form of a wire
transfer or check, subject to collection, for the number of Warrant Shares
specified in the exercise request. If this Warrant should be exercised in part
only, the Company shall, upon surrender of this Warrant, execute and deliver a
new Warrant evidencing the rights of the Holder thereof to purchase the balance
of the Warrant Shares purchasable hereunder. Upon receipt by the Company of this
Warrant and an exercise request and representations, together with proper
payment of the Exercise Price, at such office, the Holder shall be deemed to be
the holder of record of the Warrant Shares, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered to the
Holder. The Company shall pay any and all transfer agent fees, documentary stamp
or similar issue or transfer taxes payable in respect of the issue or delivery
of the Warrant Shares.
(b) At any time during the Exercise Period, the Holder may, at its option,
exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the
number of Warrant Shares determined in accordance with this Section (1)(b), by
surrendering this Warrant at the principal office of the Company, accompanied by
a written notice stating such Holder's intent to effect such exchange, the
number of Warrant Shares to be exchanged and the date on which the Holder
requests that such Warrant Exchange occur (the "Notice of Exchange"). The
Warrant Exchange shall take place on the date the Notice of Exchange is received
by the Company or such later date as may be specified in the Notice of Exchange
(the "Exchange Date"). Certificates for the shares issuable upon such Warrant
Exchange and, if applicable, a new Warrant of like tenor evidencing the balance
of the shares remaining subject to this Warrant, shall be issued as of the
Exchange Date and delivered to the Holder within seven (7) days following the
Exchange Date. In connection with any Warrant Exchange, this Warrant shall
represent the right to subscribe for and acquire the number of Warrant Shares
(rounded to the next highest integer) equal to (i) the number of Warrant Shares
specified by the Holder in its Notice of Exchange (the "Total Number") less (ii)
the number of Warrant Shares equal to the quotient obtained by dividing (A) the
product of the Total Number and the existing Exercise Price by (B) the current
market value of a share of Common Stock. Current market value shall be the
average closing price for the 5-day period prior to the Exchange Date.
2. Adjustment of Exercise Price and Number of Shares Deliverable Upon Exercise
of Warrant.
1
<PAGE> 2
The Exercise Price and the number of Shares purchasable upon the exercise of
this Warrant are subject to adjustment from time to time upon the occurrence of
the events enumerated in this paragraph.
(a) In case the Corporation shall at any time after the date of this Warrant:
(i) Pay a dividend of its shares of its Common Stock or make a
distribution in shares, or rights or warrants to purchase shares of its Common
Stock with respect to its outstanding Common Stock;
(ii) Subdivide its outstanding shares of Common Stock;
(iii) Combine its outstanding shares of Common Stock; or
(iv) Issue any other shares of capital stock by reclassification of its
shares of Common Stock
the Exercise Price in effect and the number of Warrant Shares purchasable at the
time of the record date of such dividend, subdivision, combination, or
reclassification shall be proportionately adjusted so that Holder shall be
entitled to receive the aggregate number and kind of shares which, if this
Warrant had been exercised prior to such event, Holder would have owned upon
such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination, or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) In case of any reorganization of the Corporation, or in case of any
reclassification or change of outstanding Common Stock issuable upon exercise of
this Warrant (other than a change in par value. or from par value to no par
value, or from no par value to par value, or as a result of a subdivision or
split-up or combination of the Common Stock), or in case of any consolidation or
merger of the Company with or into another entity (other than a consolidation or
merger with a subsidiary or a continuing corporation), or in case of any sale or
conveyance to another entity of all or substantially all of the property of the
Corporation, then, as a condition of such reorganization, reclassification,
change, consolidation, merger, sale, or conveyance, the Corporation or such
successor or purchasing entity, as the case may be, shall forthwith provide to
Holder a supplemental warrant (the "Supplement Warrant") which will make lawful
and adequate provision whereby Holder shall have the right thereafter to
receive, upon exercise of such Supplemental Warrant, the kind and amount of
shares and other securities and property which would have been received upon
such reorganization, reclassification, change, consolidation, merger, sale, or
conveyance by a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon exercise of this Warrant immediately prior to such
reorganization, reclassification, change, consolidation, merger, sale, or
conveyance. Such Supplemental Warrant shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph. The above provisions of this paragraph shall
similarly apply to successive consolidations, mergers, sales, or conveyances.
3. Registration Rights.
If the shares underlying this Warrant can be registered within the same
registration statement selected by the Company for the securities issued in
connection with the Private Placement Memorandum dated May 8, 1998 then the
Company shall include such Warrant Shares, Otherwise;
(1) The Company shall advise the Holder of this Warrant or of the Warrant Shares
or any then holder of Warrants or Warrant Shares (such persons being
collectively referred to herein as "holders") by written notice at least two
weeks prior to the filing of any new registration statement ("Registration
Statement") under the Securities Act of 1933 (the "Act") covering securities of
the Company, other than a Registration Statement filed with respect to any
employee benefit plan or an offering solely related to an acquisition for which
such Warrant Shares cannot be appropriately registered or which does not permit
registration of the Warrants or Warrant Shares, and will for a period of five
years, from the date of this Warrant upon the request of any such holder,
include in any such registration statement the number of Warrant Shares holder
desires to include in the Registration Statement. In the event the managing
underwriter for any said registration advises the Company that the inclusion of
the Warrant
2
<PAGE> 3
Shares would be detrimental to the offering, then such Warrant Shares shall be
included in the Registration Statement only if the Holder agrees in writing, for
a period of up to 120 days following such offering, not to sell or otherwise
dispose of the Warrant Shares. The Company shall supply prospectuses and other
documents as the Holder may request in order to facilitate the public sale or
other disposition of the Warrant Shares for sale in such states where the
Company qualifies its other securities pursuant to the Registration Statement
for sale and do any and all other acts and things which may be necessary or
desirable to enable such Holders to consummate the public sale or other
disposition of the Warrant or Warrant Shares. The Holder need not exercise the
Warrant to have the Warrant Shares included in a registration statement. Nothing
in this Section shall be construed to extend the expiration date of this
Warrant.
(2) The following provision of this Section shall also be applicable:
(A) The Company shall bear the entire cost and expense of any
registration of securities initiated by it notwithstanding that Warrants Shares
subject to this Warrant may be included in any such registration. Any holder
whose Warrant Shares are included in any such registration statement shall,
however, bear the fees of his own counsel, transfer taxes or underwriting
discounts or commissions applicable to the Warrant Shares sold by him pursuant
thereto.
(B) Neither the giving of any notice by any holder nor making of any
request for prospectus shall impose upon such holder or owner making such
request any obligation to sell any Warrant Shares, or exercise any Warrants.
The Company's agreements with respect to Warrant Shares in this Section
shall continue in effect regardless of the exercise and surrender of this
Warrant.
4. Assignment or Loss of Warrant.
(a) Any sale, transfer, assignment, hypothecation or other disposition of this
Warrant or of the Warrant Shares shall only be made if any such transfer,
assignment or other disposition will comply with the rules and statutes
administered by the Securities and Exchange Commission and (i) a Registration
Statement under the Act including such Shares is currently in effect, or (ii) in
the opinion of counsel, which counsel and which opinion shall be reasonably
satisfactory to the Company, a current Registration Statement is not required
for such disposition of the shares. Each stock certificate representing Warrant
Shares issued upon exercise or exchange of this Warrant shall bear the following
legend (unless, in the opinion of counsel, which counsel and which opinion shall
be reasonably satisfactory to the Company, such legend is not required):
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED EXCEPT UPON DELIVERY TO THE CORPORATION OF AN OPINION
OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO IT THAT SUCH
TRANSFER WILL NOT VIOLATE THE SECURITIES ACT OF 1933, AS
AMENDED."
(b) The Holder understands that the Company may place, and may instruct any
transfer agent or depository for the Shares to place, a stop transfer notation
in the securities records in respect of the Shares.
(c) Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of indemnification satisfactory to the Company, and upon surrender
and cancellation of this Warrant, if mutilated, the Company shall execute and
deliver a new Warrant of like tenor and date.
5. Reservation of Shares. The Company hereby agrees that at all times there
shall be reserved for issuance and delivery upon exercise or exchange of this
Warrant all shares of its Common Stock or other shares of capital stock of the
Company from time to time issuable upon exercise or exchange of this Warrant.
All such shares shall be duly
3
<PAGE> 4
authorized and, when issued upon the exercise or exchange of the Warrant in
accordance with the terms hereof, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale (other than as provided in the
Company's articles of incorporation and any restrictions on sale set forth
herein or pursuant to applicable federal and state securities laws) and free and
clear of all preemptive rights.
6. Payment of Withholding Taxes. The exercise of this Warrant is subject to the
condition that if at any time the Company shall determine, in its discretion,
that the satisfaction of withholding tax or other withholding liabilities under
any federal, state or local law is necessary or desirable as a condition of, or
in connection with, such exercise or a later lapsing of time or restrictions on
or disposition of the shares of Common Stock received upon such exercise, then
in such event, the exercise of this Warrant shall not be effective unless such
withholding shall have been effected or obtained in a manner acceptable to the
Company.
7. Notices to Warrant Holders. No Shareholder Rights. So long as this Warrant
shall be outstanding, (i) if the Company shall pay any dividend or make any
distribution upon the Common Stock or (ii) if the Company shall offer to the
holders of Common Stock for subscription or purchase by them any share of any
class or any other rights or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then in any such case, the Company shall cause
to be mailed by certified mail to the Holder, at least fifteen days prior the
date, as the case may be, a notice containing a brief description of the
proposed action and stating the date on which such action is to take place and
the date, if any is to be fixed, as of which the holders of Common Stock or
other securities shall receive cash or other property deliverable upon such
reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
Nothing in this Warrant shall be construed as conferring upon the Holder or its
transferees any rights as a stockholder in the Company, including the right to
vote, receive dividends, consent or receive notices as a stockholder in respect
to any meeting of stockholders.
8. Arbitration. In the event that a dispute arises between the Corporation and
the Holder of this Warrant as to any matte relating to this Warrant, the matter
shall be settled by arbitration in San Diego, California in accordance with the
Rules of the American Arbitration Association and the award rendered by such
arbitrator(s) shall not be subject to appeal and may be entered in any federal
or state court located in California having jurisdiction thereof, and actions or
proceedings shall be brought in no other forum or venue.
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
its duly authorized officers effective this 12th day of June 1998.
NORRIS COMMUNICATIONS, INC.
BY /s/ FRED FALK
Fred Falk, President
BY /s/ ROBERT PUTNAM
Robert Putnam, Secretary
ACKNOWLEDGMENT OF REPRESENTATION:
- -------------------------------
Warrant Holder
4
<PAGE> 1
EXHIBIT 10.14.1
NORRIS COMMUNICATIONS CORP.
1994 STOCK OPTION PLAN
FIRST AMENDMENT
On January 26, 1996 the Board of Directors authorized this first amendment of
the 1994 Stock Option Plan which was originally adopted by the Company on
September 29, 1994. The 1994 Stock Option Plan is hereby amended by deleting
Section 5 in its entirety to be replaced by the following Section 5:
5. SHARES SUBJECT TO THE PLAN.
For purposes of the Plan, the Committee is authorized to grant Options for up to
four million (4,000,000) shares of the Company's common stock, $.001 par value
per share ("Common Stock"), either treasury or authorized but unissued shares,
or the number and kind of shares of stock or other securities which, in
accordance with Section 13, shall be substituted for such shares of Common Stock
or to which such shares shall be adjusted. The Committee is authorized to grant
Options under the Plan with respect to such shares. Any or all unsold shares
subject to an Option which for any reason expires or otherwise terminates
(excluding shares returned to the Company in payment of the exercise price for
additional shares) may again be made subject to grant under the Plan.
Consistent with Section 3.2 all options granted under this Plan in excess of
options on 500,000 common shares previously ratified by the stockholders of the
Company, are subject to, and may not be exercised before, the approval of this
First Amendment by the holders of a majority of the Company's outstanding shares
on or before the expiration of twelve months from the date of this First
Amendment of this Plan by the Board, and if such approval is not obtained, all
Options previously granted in excess of options on 500,000 common shares, shall
be void.
* * * *
By signature below, the undersigned officer of the Company hereby certifies that
the foregoing is a true and correct copy of the First Amendment to the 1994
Stock Option Plan of the Company.
DATED: January 26, 1996
NORRIS COMMUNICATIONS CORP.
By /s/ ROBERT PUTNAM
-----------------------------
ROBERT PUTNAM, SECRETARY
<PAGE> 2
CERTIFICATION OF FIRST AMENDMENT ADOPTION BY THE SHAREHOLDERS OF
NORRIS COMMUNICATIONS, CORP.
I, the undersigned Secretary of this Corporation, hereby certify that the
foregoing First Amendment to the 1994 Stock Option Plan was duly approved by the
requisite number of holders of the issued and outstanding common stock of this
corporation as of the below date.
Date of Shareholder Approval of First Amendment : JULY 25, 1996.
/s/ ROBERT PUTNAM
- -----------------------------
ROBERT PUTNAM, SECRETARY
<PAGE> 1
EXHIBIT 10.14.2
NORRIS COMMUNICATIONS, INC.
1994 STOCK OPTION PLAN
SECOND AMENDMENT
On September 3, 1997 the Board of Directors authorized this second amendment of
the 1994 Stock Option Plan which was originally adopted by the Company on
September 29, 1994 and amended on January 26, 1996. The 1994 Stock Option Plan
is hereby amended by deleting Section 5, as previously amended, in its entirety
to be replaced by the following Section 5:
5. SHARES SUBJECT TO THE PLAN.
For purposes of the Plan, the Committee is authorized to grant Options for up to
ten million (10,000,000) shares of the Company's common stock, $.001 par value
per share ("Common Stock"), either treasury or authorized but unissued shares,
or the number and kind of shares of stock or other securities which, in
accordance with Section 13, shall be substituted for such shares of Common Stock
or to which such shares shall be adjusted. The Committee is authorized to grant
Options under the Plan with respect to such shares. Any or all unsold shares
subject to an Option which for any reason expires or otherwise terminates
(excluding shares returned to the Company in payment of the exercise price for
additional shares) may again be made subject to grant under the Plan.
Consistent with Section 3.2 all options granted under this Plan in excess of
options on 4,000,000 common shares previously ratified by the stockholders of
the Company, are subject to, and may not be exercised before, the approval of
this Second Amendment by the holders of a majority of the Company's outstanding
shares on or before the expiration of twelve months from the date of this Second
Amendment of this Plan by the Board, and if such approval is not obtained, all
Options previously granted in excess of options on 4,000,000 common shares,
shall be void.
* * * *
By signature below, the undersigned officer of the Company hereby certifies that
the foregoing is a true and correct copy of the Second Amendment to the 1994
Stock Option Plan of the Company.
DATED: September 3, 1997
NORRIS COMMUNICATIONS, INC.
By /s/ ROBERT PUTNAM
-----------------------------
ROBERT PUTNAM, SECRETARY
<PAGE> 2
CERTIFICATION OF SECOND AMENDMENT ADOPTION BY THE SHAREHOLDERS OF
NORRIS COMMUNICATIONS, INC.
I, the undersigned Secretary of this Corporation, hereby certify that the
foregoing Second Amendment to the 1994 Stock Option Plan was duly approved by
the requisite number of holders of the issued and outstanding common stock of
this corporation as of the below date.
Date of Shareholder Approval of Second Amendment : JANUARY 5, 1998.
/s/ ROBERT PUTNAM
- -------------------------------
ROBERT PUTNAM, SECRETARY
<PAGE> 1
EXHIBIT 21.1
NORRIS COMMUNICATIONS, INC.
LIST OF SUBSIDIARIES
Norris Communications, Inc.
13114 Evening Creek Drive South
San Diego, CA 92128
619.679.1504
(A California Corporation)
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-46619, Form S-3 No. 33-81212, Form S-3 No. 33-92032, Form S-3
No. 33-92978, Form S-3 No. 333-4880, Form S-8 No. 333-13779, Form S-8 No.
333-17959, Form S-8 No. 333-24405 and Form S-8 No. 333-26561) of Norris
Communications, Inc. and in the related Prospectuses of our Report of
Independent Auditors dated June 2, 1998 (except as to Note 18[b] which is as of
June 12, 1998), with respect to the consolidated financial statements of Norris
Communications, Inc. and subsidiary included in the Annual Report (Form 10-KSB)
for the year ended March 31, 1998.
Vancouver, Canada,
June 25, 1998. /s/ ERNST & YOUNG
Chartered Accountants
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10KSB FOR THE FISCAL YEAR
ENDED MARCH 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 62,370
<SECURITIES> 0
<RECEIVABLES> 221,687
<ALLOWANCES> 953
<INVENTORY> 180,751
<CURRENT-ASSETS> 476,001
<PP&E> 422,914
<DEPRECIATION> 285,024
<TOTAL-ASSETS> 628,536
<CURRENT-LIABILITIES> 1,387,042
<BONDS> 590,084
1,002,662
0
<COMMON> 57,171
<OTHER-SE> (2,408,423)
<TOTAL-LIABILITY-AND-EQUITY> 628,536
<SALES> 454,473
<TOTAL-REVENUES> 1,079,645
<CGS> 1,764,049
<TOTAL-COSTS> 2,345,626
<OTHER-EXPENSES> 1,394,504
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,953
<INCOME-PRETAX> (2,563,597)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,563,597)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,563,597)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
