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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AUGUST 28, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NORRIS COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
-------------------------
DELAWARE NONE
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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13114 EVENING CREEK DRIVE SOUTH
SAN DIEGO, CALIFORNIA 92128
(619) 679-1504
(Address and telephone number of principal executive offices
and principal place of business)
-------------------------
ELWOOD G. NORRIS, CHAIRMAN
NORRIS COMMUNICATIONS, INC.
13114 EVENING CREEK DRIVE SOUTH
SAN DIEGO, CALIFORNIA 92128
(619) 679-1504
(Name, address and telephone number of agent for service)
Copy to:
CURT C. BARWICK, ESQ.
HIGHAM, MCCONNELL & DUNNING LLP
28202 CABOT ROAD, SUITE 450
LAGUNA NIGUEL, CA 92677
COUNSEL FOR THE COMPANY
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
IF THE ONLY SECURITIES REGISTERED ON THIS FORM ARE BEING OFFERED PURSUANT
TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING BOX: [ ]
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED
ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT
OF 1933, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND OR
INTEREST REINVESTMENT PLANS, CHECK THE FOLLOWING BOX: [X]
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE FEE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 19,017,705 Shares $0.08(1) $1,521,416(1) $ 449
Total Registration Fee $ 449
Total Due $ 449
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</TABLE>
(1) These figures are estimates made solely for the purpose of calculating the
registration fee pursuant to Rule 457(c). The average of the bid and asked
prices for the Common Stock on August 25, 1998, as reported by the OTC Bulletin
Board, was $0.08.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
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PROSPECTUS
19,017,705 SHARES OF COMMON STOCK ($.001 PAR VALUE)
NORRIS COMMUNICATIONS, INC.
This Prospectus relates to 19,017,705 shares of Common Stock, $.001
par value ("Common Stock") of Norris Communications, Inc., a Delaware
corporation (the "Company"), heretofore issued to the persons listed as the
Selling Shareholders. Such shares of Common Stock are being offered for the
respective accounts of the Selling Shareholders, and will be sold from time to
time by the Selling Shareholders in the national over-the-counter market or
otherwise at their prevailing prices, or in negotiated transactions. The Company
will receive no proceeds from the sale of such shares of Common Stock by the
Selling Shareholders. The expenses of preparing and filing the Registration
Statement of which this Prospectus forms a part are being paid by the Company.
The shares of Common Stock offered hereby includes, without
limitation, the resale of such presently indeterminate number of shares of
Common Stock as shall be issued in respect of (i) 12,731,992 shares of Common
Stock (subject to adjustment) issuable upon the conversion of 12% Convertible
Promissory Notes with Limited Guaranty due March 31, 2000 (the "Convertible
Notes") and (ii) 6,285,713 shares of Common Stock (subject to adjustment)
issuable upon the exercise of stock purchase warrants issued or issuable upon
conversion of 12% Secured Promissory Notes due September 30, 1999 (the "Secured
Notes") or other outstanding warrants (collectively, the "Warrants"). The number
of shares issuable in such transactions is subject to adjustment and could be
more or less than the estimated amount depending on factors which cannot be
predicted by the Company at this time, including, among others, the market price
of Common Stock which may be issued in the future and actual dates of exercise
and conversion.
The shares of Common Stock registered for resale hereby have been
registered pursuant to the Company's obligations contained in written agreements
with the Selling Shareholders. The Selling Shareholders may elect to sell all, a
portion or none of the Common Stock offered by them hereunder which is only
obtainable through the conversion of all or a portion of the Warrants or the
Convertible Notes.
------------------------------------
THE COMMON STOCK OFFERED HEREBY IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. THE COMPANY HAS A HISTORY OF OPERATING LOSSES AND BASED ON
THE CURRENT LEVEL OF EXPENDITURES AND ANTICIPATED ADDITIONAL EXPENDITURES, THE
COMPANY DOES NOT HAVE SUFFICIENT FUNDS FOR THE NEXT TWELVE MONTHS. SEE "RISK
FACTORS" AT PAGE 6 OF THIS PROSPECTUS.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------
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The shares offered hereby were acquired by the Selling Shareholders
from the Company in private transactions and are "restricted securities" under
the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus
has been prepared for the purpose of registering the shares under the Act to
allow for future sales by the Selling Shareholders to the public without
restriction. To the knowledge of the Company, the Selling Shareholders have made
no arrangement with any brokerage firm for the sale of the shares. The Selling
Shareholders may be deemed to be "underwriters" within the meaning of the
Securities Act. Any commissions received by a broker or dealer in connection
with resales of the shares may be deemed to be underwriting commissions or
discounts under the Securities Act. See "Plan of Distribution."
Information contained herein is subject to completion or amendment.
A Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The Common Stock is traded on the National Association of Securities
Dealers, Inc. ("NASD") Electronic Bulletin Board ("OTC Bulletin Board") under
the symbol "NCII." On August 25, 1998, the bid and asked prices per share, as
reported by the OTC Bulletin Board were $0.075 and $0.08, respectively.
-------------------------------------
The date of this Prospectus is August 28, 1998.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission. Reports, proxy statements and other information filed by
the Company with the Securities and Exchange Commission may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: 75 Park Place, New York, New York 10007; and the
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60621; and copies of such material may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W. Judiciary Plaza, Washington,
D.C. 20549 at prescribed rates. In addition, such information may be accessed
electronically at the Commission's web site on the Internet at www.sec.gov.
The Company intends to distribute to its stockholders annual reports
containing audited consolidated financial statements with a report thereon by
independent public accountants after the end of each fiscal year. In addition,
the Company will furnish to its shareholders quarterly reports for the first
three quarters of each fiscal year containing unaudited financial and other
information after the end of each fiscal quarter, upon written request to the
secretary of the Company.
The Company has filed with the Commission a registration statement
on Form S-3 (herein, together with all amendments and exhibits, referred to as
the "Registration Statement") under the Securities Act. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFERING CONTEMPLATED HEREBY, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE SELLING SHAREHOLDERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED
BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company with the
Securities and Exchange Commission and are incorporated herein by reference:
(a) The Company's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 1998;
(b) The Company's Quarterly Report on Form 10-QSB for the period
ended June 30, 1998; and
(c) The description of the Company's Common Stock contained in the
Registration Statement on Form 10 filed with the Securities and Exchange
Commission on December 13, 1992 pursuant to Section 12(g) of the Exchange Act,
together with all amendments or reports filed for the purpose of updating such
description.
All documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and
prior to the termination of the Offering of Common Stock offered hereby shall be
deemed to be incorporated by reference into this Prospectus and to be part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is incorporated or deemed to be incorporated herein modifies
or supersedes such
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statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents referred to above which have been incorporated into this Prospectus by
reference (other than exhibits to such documents). Requests for such copies
should be directed to Alfred H. Falk, President, Norris Communications, Inc.,
13114 Evening Creek Drive, San Diego, California, 92128 (Telephone:
619/679-1504).
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TABLE OF CONTENTS
The Company............................................................... 5
Risk Factors...............................................................6
Plan of Distribution......................................................12
Selling Shareholders......................................................14
Dividend Policy...........................................................15
Description of Securities.................................................15
Legal Matters.............................................................16
Experts...................................................................16
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THE COMPANY
THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY. SEE "RISK FACTORS -
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS."
The Company is a holding company which, through its wholly owned
California subsidiary, Norris Communications, Inc. ("NCI"), is an innovator in
developing and marketing advanced electronic product designs and technologies
employing a rapidly growing non-volatile storage media (flash memory) for the
portable computing, digital recording, mobile office and telecommunication
markets. The Company is engaged in a single industry segment: the development,
manufacture and marketing of electronic products and technologies. The Company
is involved in (i) researching, developing and manufacturing products sold to
major OEM (original equipment manufacturer) customers of digital voice recording
and processing technology using flash storage media and (ii) marketing its
MicroOS(TM) operating system technology, a proprietary method for information
storage, manipulation and retrieval.
The Company was started in 1988 based on technology that its
founder, Elwood G. Norris, developed while researching and developing
headset/microphone alternatives for NASA. The successful combination of a
speaker and microphone was developed into the EarPHONE(TM) product line, now
owned by JABRA Corporation ("JABRA") in which the Company holds an equity
investment. The Company was incorporated under the Company Act (British
Columbia), Canada on February 11, 1988 under the name 340520 B.C. Ltd. The
Company changed its name to Norris Communications Corp. on April 7, 1988 and on
November 22, 1994 the Company continued its jurisdiction of incorporation from
British Columbia to the Yukon Territory. The Company further continued its
jurisdiction of incorporation to Wyoming on August 30, 1996 and on September 4,
1996 reincorporated into Delaware under the name Norris Communications, Inc.
In August 1989, the Company acquired 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 recorder in the facility,
the Company scaled back outside contract manufacturing services. During fiscal
1997, the Company substantially reduced FLASHBACK production and terminated
contract manufacturing taking a $2.2 million restructuring charge. The Company
during the same period also discontinued retail marketing of FLASHBACK products
in favor of private labeling for OEM customers to sell.
As of the date hereof, the Company has completed its restructuring
by selling most of its contract manufacturing equipment, moving to a smaller
facility more suited for its operations and disposing of or making allowances
for excess and obsolete inventory. The Company has dramatically reduced its
monthly operating expenditures from an average of $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) (collectively "Sanyo"). In May 1998, due to changes
affecting portable digital recorders, the Company discontinued production and
supply under the Sanyo agreement. In January 1997, the Company entered into an
OEM and 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 voice 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 is no
assurance that the product can be successfully produced in the future or that it
will meet with market acceptance or provide positive margins to the Company. In
August 1998, the Company entered into a development contract with Intel
Corporation ("Intel") to design and develop a digital voice recorder. Under the
terms of the agreement, Intel will provide one-time development funding for the
design. The project is expected to take approximately six months to complete.
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Management believes it 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, private label agreements for products employing the Company's
MicroOS(TM) technology and from contract development services for and sales to
OEMs of 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.
The address of the Company's principal executive office is 13114
Evening Creek Drive South, San Diego, California 92128, 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.
RISK FACTORS
THE SECURITIES WHICH ARE OFFERED HEREBY ARE SPECULATIVE IN NATURE,
INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE PURCHASED BY PERSONS WHO CAN AFFORD
TO LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY
THE FOLLOWING FACTORS INHERENT IN AND AFFECTING THE BUSINESS OF THE COMPANY, IN
ADDITION TO THE INFORMATION CONCERNING THE COMPANY AND ITS BUSINESS CONTAINED IN
THIS PROSPECTUS, BEFORE PURCHASING THE SECURITIES OFFERED HEREBY.
Dependence Upon New Product and Technology. An investment in the
securities offered hereby must be considered an investment risk due to the
nature of the Company's business, the industry in which it is operating, and the
present stage of its development. The scale and scope of the Company's business
is changing. Historically, a majority of the Company's revenues have been
derived from its contract manufacturing business, which was discontinued in
fiscal 1997, and from direct sales of the Company's FLASHBACK family of
products. 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's future growth, as a
consequence, is greatly dependent upon (i) the Lanier OEM relationship currently
in place, (ii) the successful marketing of the MicroOS(TM) technology (through
existing OEM relationships and new relationships) and (iii) contract development
services for custom digital products. The Company's performance will be
dependent upon the risks that are inherent in any business venture that is
undergoing a major change in the scope of its operations, certain specific risks
that are discussed below, future events and developments, and changes in the
Company's policies and methods of operations in the future.
No Established Market for New Products. The Company has developed a
proprietary technology which it previously sought to use in its FLASHBACK
products. The FLASHBACK "MOBILE OFFICE" was sold on an OEM basis through Sanyo
in the United Kingdom, Germany, France and elsewhere in Europe until May 1998
when, due to market changes affecting portable digital recorders, such sales
were discontinued. As of June 30, 1998, no established market for the Company's
FLASHBACK products exist. As of August 28, 1998, substantially all of the
Company's engineering and development resources are 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 forecasts submitted
to the Company. There can be no assurance that the product can be successfully
produced in the future or that such products will be favorably accepted by the
marketplace or that significant sales of such product will occur.
Significant Losses From Operations. The Company has incurred
operating losses in 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,
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March 31, 1994, March 31, 1993 and March 31, 1991, respectively. The Company,
additionally, has reported an operating loss for the period ended June 30, 1998
of $388,187. 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.
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.
Substantial Working Capital Requirements. At June 30, 1998, the
Company had a working capital deficit of $1.3 million, compared to working
capital deficit of $0.9 million at March 31, 1998. The Company had approximately
$0.2 million of working capital invested in inventories at June 30, 1998 and
March 31, 1998. The decrease in working capital is a result of the Company's
continuing losses which consumed working capital. At June 30, 1998, the Company
had no bank lines of credit or related financing facilities and $565,000 in long
term debt. 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. The Company is currently
financing its operations from funds received from OEM and contract development
agreements. The Company estimates that at current expenditure levels and
projected working capital requirements it will require a minimum of an
additional $750,000 to continue operating for the next twelve months. The
existing OEM and licensing business may be able to generate some of the
additional funding required depending on the ability of OEM and licensing
activities to generate revenues, however there can be no assurance thereof. The
Company is currently pursuing various alternatives to meet its needs for
additional capital. There can be no assurance the Company will be successful and
any such financing may be dilutive to current shareholders. The failure to raise
additional funds could have a material adverse effect on the Company and could
force the Company to further reduce or curtail operations. The Company may, from
time to time, seek additional funds through lines of credit, public or private
debt or equity financing. The Company estimates that it will require additional
capital to finance future developments and improvements to its technology. There
can be no assurances that additional capital will be available when needed.
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 when domiciled in Canada
to its operating subsidiaries in the United States. The Company intends to
vigorously contest this proposed 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 it 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.
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Competition. The market for electronics products is intensely
competitive and has been affected by foreign competition. The Company competes
and expects to compete with a number of large foreign companies with U.S.
operations and a number of domestic companies, many of which have substantially
greater financial, marketing, personnel and other resources than the Company. In
addition, the industry in which the Company competes has been characterized in
recent years by rapid and significant technological changes and frequent new
product introductions. Current competitors or new market entrants could
introduce new or enhanced products with features which render the Company's
technology or products obsolete or less marketable, or could develop means of
producing competitive products at a lower cost. The ability of the Company to
compete successfully will depend in large measure on its ability to maintain its
capabilities in connection with upgrading its products and quality control
procedures and to adapt to technological changes and advances in the industry.
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. The Company has recently completed a
transition from a manufacturing and sales organization to an OEM provider of
technology, product development services and technology licensing. As a result
of this restructuring and change in the source of revenues, comparisons to prior
results are less meaningful and prior operating results are not indicative of
future results. 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 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 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 products and technology.
There can be no assurance that the Company's marketing efforts will be
successful or result in significantly increased levels of revenues.
Reliance on Key Employees. The Company is currently dependent upon
the continued support and involvement of existing management, some of whom do
not have employment contracts. The loss of members of existing management would
severely curtail the Company's ability to operate and implement its business
plan. Elwood Norris serves as a director of two other companies. As such, he
currently devotes only part-time services to the Company (approximately 20 hours
per week). The Company may need to hire additional skilled personnel, including
additional 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 and a Director of the Company, is also a director of
American Technology Corporation ("ATC"). He is the beneficial owner of
approximately 28% of the issued and outstanding shares of ATC. Robert Putnam,
the Secretary and a Director of the Company, is also a Vice President and
Treasurer of ATC. Mr. Putnam is the beneficial owner of approximately 4% of the
issued and outstanding
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<PAGE> 12
shares of ATC. As a result of their ownership and involvement with ATC, Mr.
Norris and Mr. Putnam have in the past, and may in the future, devote a
substantial portion of their time to their other endeavors.
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 such OEM 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 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 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.
NASDAQ Listing Requirements; Risk of Low-Price Securities. The
Securities and Exchange Commission (the "Commission") approved rules imposing
more stringent criteria for the listing of securities on NASDAQ, including total
assets and net worth requirements of $4,000,000 and $2,000,000, respectively.
The Company does not currently satisfy NASDAQ's listing criteria and trading is
and will be conducted in the over-the-counter market in the so-called "pink
sheets" or the OTC Bulletin Board. As a consequence, investors could find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Company's securities.
In addition, the Common Stock is subject to Rules 15g1-15g6
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") that
imposes additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally, a person with assets in excess of $1,000,000
9
<PAGE> 13
or annual income exceeding $200,000 or $300,000 together with his or her
spouse). For transactions covered by this rule, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, the
rule may affect the ability of broker-dealers to sell the Company's securities
and may affect the ability of investors to sell their securities in the
secondary market.
The Commission has also adopted regulations which define a "penny
stock" to be any equity security that has a market price (as defined) of less
than $5.00 per share or an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless
exempt, the regulations require the delivery, prior to the transaction, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. The broker-dealer must also disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock in the account and information on the limited
market in penny stocks. While many NASDAQ-listed securities are covered by the
definition of penny stock, transactions in a NASDAQ-listed security are exempt
from all but the sole market-maker provision for (i) issuers who have
$2,000,000 in tangible assets ($5,000,000 if the issuer has not been in
continuous operation for three years), (ii) transactions in which the customer
is an institutional accredited investor, or (iii) transactions that are not
recommended by the broker-dealer. In addition, transactions in a NASDAQ security
directly with a NASDAQ market-maker for such security are subject only to the
sole market-maker disclosure, and the disclosure with respect to commissions to
be paid to the broker-dealer and the registered representative.
Recent Sales of Securities; Possible Future Dilution. At July 31,
1998 the Company had 59,867,842 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 June
30, 1998, Prepaid Warrant holders exercised Prepaid Warrants with a
face value of $2,917,792 into 32,802,975 shares of Common Stock
(inclusive of penalties and discounts). The balance of the remaining
Warrants outstanding at June 30, 1998 was $888,108 (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 $1,143,942 at June 30, 1998 and exercise at that
date would have required the issuance of 13,073,628 shares of Common
Stock. The Prepaid Warrants expire in January 2000 at which time
they convert to shares of Common Stock if not previously converted.
Assuming the Prepaid Warrant holders hold to term, the Company will
be required to issue 14,161,877 shares of Common Stock 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 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
10
<PAGE> 14
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. Based on the 99,500
shares of Series A Stock outstanding, at June 30, 1998 the Series A
Stock was convertible into 12,057,223 Common Shares. Assuming the
Series A Stock is held to term (September 1, 2000) the maximum
number of shares issuable is 14,036,206.
12% Convertible Notes - 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 on
June 30, 1998, these Notes would have been convertible into
11,533,401 shares of Common Stock and if held to term (May 15, 1999)
the maximum shares issuable is 12,731,992. In connection with this
sale, the Company issued warrants on 571,428 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 shares of Common Stock
exercisable at $0.10 per share for certain guarantees and
inducements granted to purchasers of the Notes.
Warrants and Stock Options - At June 30, 1998 the Company had stock
purchase warrants (inclusive of those described above) outstanding
for the purchase of up to 4,776,054 shares of Common Stock at prices
ranging from $0.10 to $4.00 per share. The Company also had stock
options outstanding exercisable into 4,588,000 shares of Common
Stock at prices ranging from $0.0875 to $3.65 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.
11
<PAGE> 15
Volatility of Stock Price. 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.
Trading in the Company's Common Stock is currently conducted in the
over-the-counter market on the OTC Bulletin Board or in what are commonly
referred to as the "pink sheets." 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. 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 Prospectus contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act") and the Company intends
that such forward-looking statements be subject to the safe harbors created
thereby. These forward-looking statements include the plans and objectives of
management for future operations, including plans and objectives relating to the
products and future economic performance of the Company. The forward-looking
statements included herein are based upon current expectations that involve a
number of risks and uncertainties. These forward-looking statements are based
upon assumptions that the Company will continue to design, manufacture, market
and ship new products on a timely basis, that competitive conditions within the
computer peripheral and telephony markets will not change materially or
adversely, that the computer peripheral and telephony markets will continue to
experience steady growth, that demand for the Company's products will increase,
that the Company will obtain and/or retain existing distributors and key
management personnel, that 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.
PLAN OF DISTRIBUTION
Each Selling Shareholder is free to offer and sell his or her shares
of Common Stock at such times, in such manner and at such prices as he or she
shall determine. The Selling Shareholders have advised the Company that sales of
shares of Common Stock may be effected from time to time in one or more types of
transactions (which may include block transactions) in the over-the-counter
market, in negotiated transactions, through the writing of options on the Common
Stock or a combination of such methods of sale, at market prices prevailing at
the time of sale, or at negotiated prices. Such transactions may or may not
involve brokers, dealers or cash transactions. The Selling Shareholders have
advised the Company that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-
12
<PAGE> 16
dealers regarding the sale of their securities, nor is there an underwriter or
coordinating broker acting in connection with the proposed sale of shares by the
Selling Shareholders. The Selling Shareholders may effect such transactions by
selling Common Stock directly to purchasers or to or through broker-dealers
which may act as agents or principals. Such broker-dealers may receive
compensation in the form of discounts, concessions, or commissions from the
Selling Shareholders and/or the purchasers of Common Stock for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). The Selling Shareholders and any broker-dealers that act
in connection with the sale of the Common Stock might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and any profit on the resale of the shares of
Common Stock as principal might be deemed to be underwriting discounts and
commissions under the Securities Act. The Selling Shareholders may agree to
indemnify any agent, dealer or broker-dealer that participates in transactions
involving sales of the shares of Common Stock against certain liabilities
including liabilities arising under the Securities Act.
Because Selling Shareholders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the Selling
Shareholders will be subject to prospectus delivery requirements under the
Securities Act. Selling Shareholders also may use Rule 144 under the Securities
Act to sell such securities, if they meet the criteria and conform to the
requirements of such Rule.
The Selling Shareholders are not restricted as to the price or
prices at which they may sell their shares of Common Stock. Sales of shares at
less than market prices may depress the market price of the Company's Common
Stock. Moreover, the Selling Shareholders are not restricted as to the number of
shares which may be sold at any one time, and it is possible that a significant
number of shares could be sold at the same time.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the shares may not bid for or purchase
shares of Common Stock during a period which commences one business day (5
business days, if the Company's public float is less than $25 million or its
average daily trading volume is less than $100,000) prior to such person's
participation in the distribution, subject to exceptions for certain passive
market making activities. In addition and without limiting the foregoing, each
Selling Shareholder will be subject to applicable provisions of the Exchange Act
and the rules and regulations thereunder, including, without limitation,
Regulation M which provisions may limit the timing of purchase and sales of
shares of the Company's Common Stock by such Selling Shareholder. The Company
will not receive any proceeds from any sales of the shares.
13
<PAGE> 17
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to
the Selling Shareholders. Except as set forth below, none of the Selling
Shareholders is currently an affiliate of the Company, and none of them has had
a material relationship with the Company during the past three years.
<TABLE>
<CAPTION>
Common Shares
Beneficially Maximum Common Shares Maximum Common Shares
Owned Before Issuable to Holders of Number Beneficially Owned After
Name Offering (1) --------------------------- of Shares Offering (5)
--------------- Convertible Common Stock Offered ------------------------
Number % Notes(2) Warrants(3) For Sale(4) Number %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CCL Holdings (USA) Ltd. 285,714 0.4% 0 285,714 285,714 285,714 0.3%
R. Kirk Avery 285,714 0.4% 0 285,714 285,714 285,714 0.3%
Canusa Trading Ltd. 1,428,571 2.2% 0 1,428,571 1,428,571 1,428,571 1.4%
ZZYZX Technology Ltd. 1,142,857 2.2% 0 1,142,857 1,142,857 1,142,857 1.2%
Neo Optics Ltd. 1,142,857 2.2% 0 1,142,857 1,142,857 1,142,857 1.2%
D.J. Melvin & Associates Inc. 302,873 0.5% 0 285,714 285,714 302,873 0.3%
James C. Zolin & Josephine M. Zolin 462,500 0.7% 0 400,000 400,000 462,500 0.5%
Wayne Opperman 285,714 0.4% 0 285,714 285,714 285,714 0.3%
Richard G. Daniels & Mary E. Daniels 457,143 0.7% 0 457,143 457,143 457,143 0.5%
SoundShore Partners L.P. 0 0.0% 3,186,849 0 3,186,849 0 0.0%
The Advent Fund LLC 0 0.0% 952,673 0 952,673 0 0.0%
Renwick Special Situation Fund L.P. 0 0.0% 634,740 0 634,740 0 0.0%
Hull Overseas, Ltd 0 0.0% 3,182,153 0 3,182,153 0 0.0%
J. M. Hull Associates, L.P. 0 0.0% 3,186,849 0 3,186,849 0 0.0%
Charles Ziegler 0 0.0% 1,588,728 0 1,588,728 0 0.0%
Renwick Corporate Finance, Inc. 0 0.0% 0 571,429 571,429 0 0.0%
Total 12,731,992 6,285,713 19,017,705
</TABLE>
(1) Based upon a review of a shareholder transcript prepared by the Company as
of July 22, 1998 and assuming conversion of $450,000 of the Secured Notes at a
price of $0.0875 per share. There can be no assurance that Selling Shareholders
do not beneficially own shares in addition to those listed herein. This column
excludes any shares beneficially owned which are issuable upon exercise of the
Warrants (as described below) or conversion of the Convertible Notes.
(2) Represents shares of Common Stock issuable upon the conversion of $1,000,000
of the Convertible Notes due May 15, 1999 beneficially owned by such persons
assuming a fixed exercise price of $0.0875 per share, or 11,428,572 shares of
Common Stock. Includes up to 1,303,420 shares issuable as interest assuming the
Convertible Notes are held to the end of their term to May 15,1999. The actual
number of shares of Common Stock issuable for interest may be less if conversion
occurs prior to the due date. The Conversion Price of $0.0875 per share may be
adjusted on each of any reverse stock split or similar adjustment to the lesser
of (i) $0.0875 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). In such case the shares
issuable on conversion and for interest would increase.
(3) Includes 5,714,284 shares of Common Stock issuable upon exercise of the
Warrants issued or issuable upon conversion of the Secured Notes. The warrants
are exercisable at $0.0875 per common share. The Secured Note conversion price
(and the warrant exercise price of the balance of warrants issuable on
conversion of the Secured Notes) of $0.0875 per common share may be adjusted
down to 70% of the average market price upon a distribution in shares,
subdivision, split-up, combination, reclassification or other change in common
stock. In such case the exercise price of any warrants not theretofore issued
would decrease and the number of common shares issuable on exercise of the
warrants would increase. Also includes 571,428 common shares issuable upon
exercise of a stock purchase warrant at an exercise price of $0.0875 per share.
(4) Includes issuance of the maximum shares on conversion of the Convertible
Notes and exercise of the Warrants, assuming a price of $0.0875 per share (see
Notes 2 and 3).
14
<PAGE> 18
(5) Assumes the issuance by the Company and sale of all shares of Common Stock
covered by this Prospectus. There can be no assurance that any of the Selling
Shareholders will exercise or convert the securities or sell any or all of the
shares of Common Stock offered by them hereunder.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its
Common Stock and does not currently intend to do so. The Company intends to
retain any future earnings to support the development and growth of its
business. Any future determination to pay cash dividends will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's financial condition, results of operations, cash requirements, plans
for expansion, contractual restrictions, if any, and other factors deemed
relevant by the Board of Directors.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 120,000,000
shares of Common Stock $.001 per share par value, and 5,000,000 shares of
preferred stock, $.001 per share par value ("Preferred Stock"). As of July 31,
1998 there were 59,867,842 shares of Common Stock issued and outstanding and
99,500 shares of Preferred Stock are outstanding.
Common Stock. Holders of Common Stock are entitled to one vote per
share on matters to be voted upon by the shareholders of the Company. Holders of
Common Stock do not have cumulative voting rights; therefore, the holders of a
simple majority of the outstanding shares of Common Stock will have the right to
elect all of the Company's directors. Holders of Common Stock will be entitled
to receive dividends when, as and if declared by the Company's Board of
Directors and to share ratably in the assets of the Company legally available
for distribution to its shareholders in the event of the liquidation,
dissolution or winding up of the Company, in each case subject to the rights of
the holders of any Preferred Stock issued by the Company. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights.
Preferred Stock. The Company's Board of Directors has the authority
without further action by the stockholders of the Company to issue shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions of those shares. The issuance of Preferred Stock
could adversely affect the voting power and economic rights of holders of Common
Stock and could have the effect of delaying, deferring or preventing a change in
control of the Company.
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
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 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 only if there are sufficient
shares available for conversion of the Series A Stock. The redemption price is
$10.00 per share plus accrued and unpaid dividends.
California Law. The Company may be a "quasi-California corporation"
within the meaning of Chapter 21 of the California Corporations Code. This would
be the case if the average of its property factor, payroll factor and sales
factor (as defined in the California Revenue and Taxation Code) is more than
fifty percent (50%), and more than one-half of its outstanding voting securities
are held of record by persons having addresses in California. If a corporation
is a quasi-California corporation, California law provides that certain portions
of the California Corporations Code shall govern
15
<PAGE> 19
it, to the exclusion of the law of the true jurisdiction of incorporation
(Delaware). One such provision is Section 708, pertaining to cumulative voting
for directors.
Under Section 708, if any shareholder gives notice at a meeting,
prior to voting for directors, of his intention to cumulate his votes, all
shareholders may cumulate their votes in the election for directors; i.e., give
one candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the shareholder's shares are normally
entitled, or distribute the shareholder's votes on the same principle among as
many candidates as the shareholder thinks fit. The candidates receiving the
highest number of affirmative votes, up to the number of directors to be
elected, are the winners.
Transfer Agent. The transfer agent and registrar for the Common
Stock is Interwest Transfer Co., Salt Lake City, Utah.
LEGAL MATTERS
The validity of the securities offered will be passed on for the
Company by Higham, McConnell & Dunning LLP, Laguna Niguel, California. Higham,
McConnell and Dunning LLP owns 447,714 shares of Common Stock and warrants to
acquire 150,000 shares of Common Stock.
EXPERTS
The Consolidated Financial Statements of the Company for the years
ended March 31, 1998 and March 31, 1997, respectively, have been audited by
Ernst & Young, independent auditors, as set forth in their report thereon
included therein and included herein by reference. Such financial statements are
incorporated herein by reference in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
16
<PAGE> 20
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Expenses payable in connection with the distribution of the
securities being registered (estimated except for the registration fee), all of
which will be borne by the Registrant, are as follows:
<TABLE>
<S> <C>
Registration Fee $ 449
Blue Sky Fees and Expenses $ 1,000
Legal Fees and Expenses $ 8,000
Accounting Fees and Expenses $ 2,500
Miscellaneous Expenses $ 2,000
Total $13,949
=======
</TABLE>
Item 15. Indemnification of Directors and Officers.
Article TENTH of the Certificate of Incorporation of the Company
provides:
"TENTH: The corporation shall, to the fullest extent legally
permissible under the provisions of the Delaware General Corporation Law, as the
same may be amended and supplemented, shall indemnify and hold harmless any and
all persons whom it shall have power to indemnify under said provisions from and
against any and all liabilities (including expenses) imposed upon or reasonably
incurred by him in connection with any action, suit or other proceeding in which
he may be involved or with which he may be threatened, or other matters referred
to in or covered by said provisions both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director or officer of the
corporation. Such indemnification provided shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under any Bylaw,
Agreement or Resolution adopted by the shareholders entitled to vote thereon
after notice."
The Company's Bylaws provide that an officer, director, employee or
agent of the Company is entitled to be indemnified for the expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred by him by
reason of any action, suit or proceeding brought against him by virtue of his
acting as such officer, director, employee or agent, provided he acted in good
faith or in a manner he reasonably believed to be in or not opposed to the best
interests of the Company and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful.
The Company has directors and officers liability insurance. The
insurance policy covers liability for claims made against directors and officers
for their wrongful acts involving errors, misstatements, misleading statements
or acts or omissions or neglect or breach of duty, while acting in their
individual or collective capacities for any matter claimed against them solely
by reason of their being directors or officers of the Company. The coverage
includes damages, judgment, settlements and costs of legal actions, claims or
proceedings and appeals therefrom but does not include fines or penalties
imposed by law for matters which may be deemed uninsurable under the law.
If Delaware law and California law are in conflict with regard to
the Company's power or obligation to indemnify, and the issue were to be
contested in the Delaware and/or California, the legal outcome is unpredictable.
II-1
<PAGE> 21
Item 16. Exhibits.
The exhibits are listed in the Exhibit Index commencing at page II-4
hereof.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this Registration
Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
Provided however, that paragraphs (1)(i) and (1)(ii) shall not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective
amendment to this Registration Statement any of the securities being registered
which remain unsold at the termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
issuer's Annual Report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the Registrant pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-2
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California on August 27, 1998.
NORRIS COMMUNICATIONS, INC.
By: /s/ Elwood G. Norris
------------------------------------
ELWOOD G. NORRIS,
CHAIRMAN OF THE BOARD
----------------------------
POWER OF ATTORNEY
Each person whose signature to this Registration Statement appears
below hereby appoints Elwood G. Norris, Alfred H. Falk and Robert Putnam, and
each of them, as his attorney-in-fact to sign on his behalf individually and in
the capacity stated below and to file all amendments and post-effective
amendments to this Registration Statement as such attorney-in-fact may deem
necessary or appropriate.
--------------------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Position Date
---- -------- ----
<S> <C> <C>
/s/ Elwood G. Norris Chairman of the Board, President, August 27, 1998
- --------------------------------- Chief Executive Officer and Director
Elwood G. Norris
/s/ Alfred H. Falk President and Director August 27, 1998
- ---------------------------------
Alfred H. Falk
/s/ Renee Warden Controller August 27, 1998
- --------------------------------- (principal financial and
Renee Warden accounting officer)
/s/ Robert Putnam Vice President and Director August 27, 1998
- ---------------------------------
Robert Putnam
</TABLE>
II-3
<PAGE> 23
EXHIBIT INDEX
EXHIBIT SEQUENTIAL DESCRIPTION
NUMBER ----------------------
- -------
2.1 Share Exchange Agreement among the Company, Norcom Communications
Corporation, and American Technology Corporation, dated for reference
March 23, 1988 and filed as an Exhibit to the Company's Registration
Statement on Form 10, as amended.
2.1.1 Amendment of Agreement among the Company, Norcom Communications
Corporation, and American Technology Corporation, dated for reference
March 23, 1988 and filed as an Exhibit to the Company's Registration
Statement on Form 10, as amended.
2.2 Plan and Agreement of Reorganization among the Company, American
Surface Mounted Devices, Inc. and ASMD, Inc.,dated August 11, 1989 and
filed as an Exhibit to the Company's Registration Statement on Form
10, as amended.
2.3 Plan and Agreement of Reorganization among the Company, Sage
Microsystems, Inc., and Sage Micro, Inc., dated November 7, 1991 and
filed as an Exhibit to the Company's Registration Statement on Form
10, as amended.
2.4 Plan and Agreement of Reorganization among the Company, C.A.D. Co.
Engineering, Inc. and CADCO Design Group, Inc., dated June 1, 1992 and
filed as an Exhibit to the Company's Registration Statement on Form
10, as amended.
2.5 Plan and Agreement of Reorganization between American Surface Mounted
Devices, Inc. and Comp General Corporation, Inc., dated March 31 1995
and filed previously as an Exhibit to Registration Statement No.
33-92978.
2.6 Plan of Reorganization and Agreement of Merger, dated July , 1996 and
filed as Exhibit A to the Company's July 3, 1996 Proxy Statement.
3.1 Certificate of Incorporation of Norris Communications, Inc. (as
amended through May 28, 1996) and filed as Exhibit B to the Company's
July 3, 1996 Proxy Statement.
3.2 Bylaws of Norris Communications, Inc., filed as Exhibit C to the
Company's July 3, 1996 Proxy Statement.
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
II-4
<PAGE> 24
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.
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 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); filed as Exhibit 4.6 to the Company's Annual Report on Form
10-KSB dated March 31, 1998.
4.7 Stock Purchase Warrant dated June 3, 1998 for 571,429 shares of Common
Stock between the Company and Renwick Corporate Finance, Inc., filed
as Exhibit 4.7 to the Company's Annual Report on Form 10-KSB dated
March 31, 1998.
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), filed as Exhibit 4.8 to the
Company's Annual Report on Form 10-KSB dated March 31, 1998.
5.1 Opinion of Higham, McConnell & Dunning LLP.*
23.1 Consent of Higham, McConnell & Dunning LLP, included in Exhibit 5.1.
23.2 Consent of Ernst & Young.*
- ----------
* Each exhibit marked with an asterisk is filed concurrently herewith.
Each exhibit not marked with an asterisk is incorporated by reference
to an exhibit previously filed by the Company as indicated above.
II-5
<PAGE> 1
EXHIBIT 5.1
HIGHAM, MCCONNELL & DUNNING LLP
28202 CABOT ROAD, SUITE 450
LAGUNA NIGUEL, CALIFORNIA 92677
(714) 365-5515
August 28, 1998
Norris Communications, Inc.
12725 Stowe Drive
Poway, California 92064
Re: Registration on Form S-3 of
19,017,705 Shares of Common Stock
of Norris Communications, Inc.
Gentlemen:
We have acted as counsel to Norris Communications, Inc., a Delaware
corporation (the "Company"), in connection with the Company's filing with the
Securities and Exchange Commission (the "Commission") of a registration
statement on Form S-3 (the "Registration Statement") under the Securities Act of
1933, as amended (the "1933 Act"), with respect to 19,017,705 shares ("Shares")
of its Common Stock, no par value, which may be sold from time to time by
certain shareholders of the Company described in the Registration Statement.
In connection with the opinion expressed below, we have examined and relied
upon, as to factual matters, originals and photostatic or certified copies of
such corporate records, including, without limitation, minutes of the meetings
of the Board of Directors of the Company and other instruments, certificates or
corporate officers, and such other documents as we have deemed necessary or
appropriate as a basis for the opinions hereinafter expressed. In making such
examinations, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals, and the conformity
to original documents of all documents submitted to us as certified or
photostatic copies. We also have assumed that appropriate action will be taken
prior to the offer and sale of the Common Stock to register and qualify the
Common Stock for issuance and sale under any applicable state "Blue Sky" or
securities laws.
<PAGE> 2
Norris Communications, Inc.
August 28, 1998
Page 2
We have examined and relied upon, as matters of law, such considerations of
law as we, in our judgment, have deemed necessary or appropriate to render the
opinion expressed below. This opinion is limited to federal law and the
corporate laws of the States of California and Delaware, and we can assume no
responsibility for the law of any other jurisdiction.
Based upon the foregoing, we are of the opinion that the Shares of the
Company's Common Stock being registered under the 1933 Act pursuant to the
Registration Statement, upon exercise of warrants or convertible notes described
therein, will be legally issued, fully paid and nonassessable shares of Common
Stock of the Company.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to all references to our firm in the Registration
Statement. In giving this opinion, we do not hereby admit that we are acting
within the category of persons whose consent is required under Section 7 of the
1933 Act or the rules and regulations of the Commission promulgated thereunder.
This opinion is being delivered solely in regard to the transactions
contemplated by the Registration Statement and is intended for use solely in
connection with the consummation of such transactions. This opinion should not
be relied upon for any other purpose without our prior written consent; this
opinion should not be quoted in whole or in part or distributed in any way.
Very truly yours,
HIGHAM, McCONNELL & DUNNING LLP
<PAGE> 1
EXHIBIT 23.2
CONSENT OF
INDEPENDENT AUDITORS
We consent to the reference to our Firm under the caption "Experts" and to the
use of our report dated June 2, 1998 (except as to Note 18[b] which is as of
June 12, 1998) relating to the consolidated financial statements of Norris
Communications, Inc. for the years ended March 31, 1998 and March 31, 1997
incorporated by reference in the Form S-3 Registration Statement and related
Prospectus of Norris Communications, Inc. for the registration of 19,017,705
shares of its Common Stock.
/s/ ERNST & YOUNG
-----------------------------------
Chartered Accountants
Vancouver, Canada
August 28, 1998.
