<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED DECEMBER 31, 1998
Commission File Number 0-20734
e.DIGITAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware None
<S> <C>
(State or other jurisdiction of (I.R.S. Empl. Ident.No.)
incorporation or organization)
13114 Evening Creek Drive South, San Diego, California 92128
(Address of principal executive offices) (Zip Code)
</TABLE>
(619) 679-1504
(Registrant's telephone number, including area code)
Norris Communications, Inc.
(Former name)
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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, par value $0.001 83,741,764
(Class) (Outstanding at February 11, 1999)
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X ]
<PAGE> 2
e.DIGITAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of December 31, 1998 and
and March 31, 1998 3
Consolidated Statements of Operations for the three and nine
months ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the nine
months ended December 31, 1998 and 1997 5
Notes to Interim Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
e.Digital Corporation and subsidiary
CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
$ $
----------- -----------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents 20,849 62,370
Accounts receivable, net 94,599 54,659
Accounts receivable on research and development contracts 134,903 167,981
Inventory [note 4] 87,572 180,751
Prepaid expenses and other 12,289 10,240
----------- -----------
TOTAL CURRENT ASSETS 350,212 476,000
----------- -----------
Property and equipment, net 79,356 137,890
Other intangible assets, net of accumulated amortization of
$12,001 and $9,764 respectively 12,408 14,645
----------- -----------
91,764 152,535
----------- -----------
TOTAL ASSETS 441,976 628,536
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Accounts payable, trade 650,303 682,927
Other accounts payable and accrued liabilities 704,897 655,781
Current portion of term note payable [note 5] 48,334 48,334
15% Promissory notes, net of unamortized discount of $22,000 [note 5] 78,000 --
12% Convertible promissory notes, net of unamortized
discount of $72,728 [notes 5 and 12] 902,272 --
----------- -----------
Total current liabilities 2,383,806 1,387,042
----------- -----------
LONG-TERM [NOTE 5]
12% Secured notes payable 450,000 500,000
Term note payable, net of current portion 54,322 90,084
----------- -----------
504,322 590,084
----------- -----------
TOTAL LIABILITIES 2,888,128 1,977,126
=========== ===========
Commitments and contingencies [note 11]
PREFERRED STOCKHOLDERS' EQUITY [NOTE 6]
Series A, convertible voting preferred stock, $0.001 par value, redeemable at
$10 plus accrued and unpaid dividends at 8% cumulative,
100,000 shares authorized, 92,500 and 99,500 shares outstanding, respectively 93 100
Additional paid-in-capital 980,900 1,002,562
----------- -----------
TOTAL PREFERRED STOCKHOLDERS' EQUITY 980,993 1,002,662
----------- -----------
COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) [NOTE 7] Common stock, $0.001 par
value, authorized 200,000,000,
66,402,169 and 57,171,119 shares outstanding, respectively 66,402 57,171
Additional paid-in capital 32,069,759 31,333,437
Prepaid warrants [note 8] 453,454 903,996
Contributed surplus 1,592,316 1,592,316
Accumulated deficit (37,609,076) (36,238,172)
----------- -----------
TOTAL COMMON STOCKHOLDERS' EQUITY (DEFICIENCY) (3,427,145) (2,351,252)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 441,976 628,536
=========== ===========
</TABLE>
See notes to interim consolidated financial statements
3
<PAGE> 4
e.DIGITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1998 1997 1998 1997
$ $ $ $
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Product sales 80,323 60,224 154,218 330,338
Development services 76,910 128,394 258,456 562,683
----------- ----------- ----------- -----------
Total revenues 157,233 188,618 412,674 893,021
----------- ----------- ----------- -----------
COST OF REVENUES:
Cost of product sales 56,819 58,280 127,132 301,062
Cost of development services 166,782 116,848 433,874 358,760
----------- ----------- ----------- -----------
Total cost of revenues 223,601 175,128 561,006 659,822
----------- ----------- ----------- -----------
Gross profit (loss) (66,368) 13,490 (148,332) 233,199
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling and administrative 196,710 237,581 561,242 811,357
Research and related expenditures 141,079 99,232 433,568 203,631
----------- ----------- ----------- -----------
Total operating expenses 337,789 336,814 994,810 1,014,988
----------- ----------- ----------- -----------
Operating loss (404,157) (323,324) (1,143,142) (781,789)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 519 6,604 6,026 9,486
Interest expense (16,943) (16,695) (53,330) (39,308)
Non-cash interest [note 12] (28,586) -- (140,075) --
Loss on disposal of property and equipment -- -- (11,233) --
Other -- -- (29,150) 153,000
----------- ----------- ----------- -----------
Other income (expense) (45,010) (10,091) (227,762) 123,178
----------- ----------- ----------- -----------
Loss before provision for income taxes (449,167) (333,415) (1,370,904) (658,612)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss (449,167) (333,415) (1,370,904) (658,612)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE (0.01) (0.01) (0.02) (0.02)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES 65,213,902 56,119,927 61,456,038 44,823,993
=========== =========== =========== ===========
</TABLE>
See notes to interim consolidated financial statements
4
<PAGE> 5
e.DIGITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
For the nine months ended
December 31,
1998 1997
OPERATING ACTIVITIES $ $
---------- ----------
<S> <C> <C>
Net loss (1,370,904) (658,612)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 38,506 59,946
(Gain) loss on disposal of property and equipment 11,233 (12,088)
Services paid by issuance of common stock or warrants 30,000 42,708
Non-cash interest expense 140,075 --
Changes in assets and liabilities:
Accounts receivable (39,940) (69,858)
Accounts receivable on research and development contracts 33,078 (60,928)
Inventory 93,179 65,095
Prepaid expenses and other (2,049) (11,849)
Accounts payable, trade (32,624) (84,472)
Other accounts payable and accrued liabilities (17,345) (325,420)
Advances on research and development contract -- (174,341)
---------- ----------
Cash (used in) operating activities (1,116,791) (1,229,818)
---------- ----------
INVESTING ACTIVITIES
Purchase of property and equipment (1,077) (7,234)
Proceeds on disposal of property and equipment 12,109 80,654
---------- ----------
Cash provided by investing activities 11,032 73,420
---------- ----------
FINANCING ACTIVITIES
Repayments under term note payable (35,762) (35,000)
Proceeds from secured notes payable -- 500,000
Proceeds from 15% promissory notes 100,000 957,500
Proceeds from convertible promissory notes 1,000,000 --
---------- ----------
Cash provided by financing activities 1,064,238 1,422,500
---------- ----------
Net increase (decrease) in cash (41,521) 266,102
Cash and cash equivalents, beginning of period 62,370 176,158
---------- ----------
Cash and cash equivalents, end of period 20,849 442,260
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash paid during the period for:
Interest 53,329 39,308
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of secured notes payable to common stock 50,000 --
Common stock issued on conversion of prepaid warrants 450,542 2,372,509
Common stock issued on conversion of Series A preferred stock 74,665 --
Accounts payable and accruals paid by issuance of common stock -- 420,885
Services paid by issuance of common stock or warrants 30,000 42,708
Settlement of accrued lease termination by issuance of term note -- 182,633
Stock dividends on Series A preferred stock 52,996 --
Common stock issued on conversion of promissory notes payable 26,545 --
</TABLE>
See notes to interim consolidated financial statements
5
<PAGE> 6
e.DIGITAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1998
1. OPERATIONS
e.Digital Corporation, formerly Norris Communications, Inc., (the "Company") was
incorporated in the Province of British Columbia, Canada on February 11, 1988
and on November 22, 1994, changed its domicile from British Columbia to the
Yukon Territory, Canada. The Company further changed its domicile to Wyoming on
August 30, 1997 and on September 4, 1997 reincorporated into Delaware. The
Company is engaged through its wholly-owned subsidiary in developing and
exploiting advanced electronic product designs and technologies for the portable
computing, digital recording, mobile office and telecommunication markets.
2. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, based in San Diego, California.
The interim consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the discharge of
liabilities in the normal course of business for the foreseeable future. The
Company has incurred significant losses and negative cash flow from operations
in each of the last nine fiscal years and for the nine month period ended
December 31, 1998 and has an accumulated deficit of $37,609,076 at December 31,
1998. The Company's operational plan involves focusing on licensing and product
development on a contract basis and for the Company's own account. The Company's
ability to continue as a going concern is in doubt and is dependent upon
achieving a profitable level of operations, and if necessary, obtaining
additional financing.
These interim consolidated financial statements do not give effect to any
adjustments which would be necessary should the Company be unable to continue as
a going concern and therefore be required to realize its assets and discharge
its liabilities in other than the normal course of business and at amounts
different from those reflected in the accompanying interim consolidated
financial statements.
These interim consolidated financial statements have been prepared in accordance
with accounting principles generally accepted for interim financial information
and the instructions to Form 10-QSB. They do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. The interim consolidated financial statements and notes
thereto should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto for the fiscal year ended March 31, 1998.
The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "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. 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 periods 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
promissory notes payable, redeemable convertible preferred stock and prepaid
warrants exercisable into 45,957,934 shares of Common Stock were outstanding as
at December 31, 1998. These securities were not included in the computation of
diluted EPS because of the losses, but could potentially dilute EPS in future
years.
In the opinion of management, the interim consolidated financial statements
reflect all adjustments of a normal recurring nature necessary for a fair
statement of the results for interim periods. Operating results for the nine
month period ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending March 31, 1999.
6
<PAGE> 7
e.DIGITAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1998
3. RECENT ACCOUNTING PRONOUNCEMENTS
Effective April 1, 1998, the Company adopted the Financial Accounting Standards
Board SFAS No. 130, "Reporting Comprehensive Income". This statement established
standards for reporting and display of comprehensive income and its components
(revenue, expenses, gains and losses) in a full set of general-purpose financial
statements. Reclassification of financial statements for earlier periods
provided for comparative purposes are required. The adoption of this statement
had no material impact on the Company's financial condition or results of
operation as of December 31, 1998 and for the three and nine-month periods ended
December 31, 1998 and 1997. Total comprehensive income did not differ from the
Company's net loss for the three and nine months ended December 31, 1998 or
1997.
The Company has also adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 establishes standards for the way that public companies
report 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
disclosures regarding products and services, geographic areas and major
customers. SFAS 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. Quarterly disclosures are not required in this first year
of adoption. Management believes that SFAS 131 will not have a significant
impact on the Company's disclosure of segment information in the future.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 132,
"Employers' Disclosure about Pensions and Other Post-retirement Benefits" and
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 132 standardizes the disclosure requirements for pensions and other
post-retirement benefits and requires additional information on change in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis. SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair market value. Gains or
losses resulting from changes in the values of those derivatives are accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows.
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. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management believes that
the adoption of SFAS No. 132 and SFAS No. 133 will have no material effect on
its financial statements.
4. INVENTORY
Inventory of raw material and finished goods is recorded at the lower of cost
and net realizable value. Cost is determined on a first-in, first-out basis.
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
----------------- --------------
<S> <C> <C>
Raw material $ 82,932 $109,960
Finished goods 4,640 70,791
-------- --------
$ 87,572 $180,751
======== ========
</TABLE>
5. CONVERTIBLE, SECURED AND TERM DEBT
15% Promissory Notes
In December 1998, the Company issued for cash $100,000 of 15% Promissory Notes
due December 31, 1999. In connection with the issuance the Company granted the
noteholders warrants exercisable into 1,000,000 shares of Common Stock at $0.10
per share until June 30, 2000. The Company calculated the fair value of the
warrants at issuance and is amortizing this amount as non-cash interest expense
over the term of the notes.
In January 1999, the Company issued for cash an additional $400,000 of 15%
Promissory Notes and warrants on 4,000,000 shares of Common Stock on the same
terms.
7
<PAGE> 8
e.DIGITAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1998
12% Convertible Promissory Notes
In June 1998, the Company completed the sale of $1,000,000 of 12% Convertible
Promissory Notes with Limited Guaranty ("CP Notes") due May 15, 1999. The CP
Notes and interest are convertible into shares of Common Stock at $0.0875 per
share, subject to certain future adjustments. During the third fiscal quarter of
1999, a CP Note and interest in the amount of $26,545 was converted into 303,373
shares of Common Stock. At December 31, 1998 the remaining CP Notes would have
been convertible into approximately 11.1 million shares of Common Stock. See
Note 13.
In connection with the issuance of the CP Notes, the Company granted two
directors an aggregate of 2,000,000 warrants exercisable at $0.10 per share for
providing the noteholders certain guarantees and inducements. The Company
calculated the fair value of the warrants at issuance and is amortizing this
amount as non-cash interest expense over the term of the CP Notes.
12% Secured Notes Payable
In June 1997, the Company issued $500,000 of secured notes due September 30,
1999 with interest at 12%, payable quarterly in cash. The notes are
collateralized by the Company's issued and pending patents and FlashBack
technology. The notes are convertible into shares of Common Stock at a
conversion price of $0.0875 per share, subject to certain future adjustments.
Upon conversion, the note holders receive a stock purchase warrant for the
number of converted shares exercisable at the conversion price for a period of
nine years. At December 31, 1998, the $450,000 balance of these notes would have
been convertible into approximately 5.1 million shares of Common Stock with
warrants issuable on conversion and exercisable into a like number of shares at
$0.0875 per share. See Note 13.
Term Note Payable
A 10% unsecured term note was issued effective December 31, 1997 in connection
with the settlement of accrued balances owing related to the Company's former
facility lease. The Company made a principal payment of $25,000 in October 1997.
The note requires monthly payments of principal and interest of $5,000 for 38
months through November 1, 2000. At December 31, 1998, the note obligation was
$102,656 of which $48,334 was the current portion.
6. REDEEMABLE PREFERRED STOCK
The 92,500 shares of Series A Preferred Stock (the "Series A Stock") outstanding
at December 31, 1998 are convertible into shares of Common Stock computed by
dividing $10.00 plus accrued and unpaid dividends at 8% per annum by $0.0875,
subject to certain future adjustments. At December 31, 1998, the Series A Stock
was convertible into approximately 11.6 million shares of Common Stock. The
Company is required to redeem the Series A Stock on September 1, 2000 and upon
the occurrence of certain other events. See Note 7 for Preferred Stock
transactions and Note 13 for Subsequent Conversions.
8
<PAGE> 9
e.DIGITAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1998
7. COMMON STOCKHOLDERS' EQUITY (DEFICIENCY)
The following table summarizes Common Stockholders' equity transactions during
the nine month period ended December 31, 1998:
<TABLE>
<CAPTION>
Additional
paid-in Prepaid Contributed Accumulated
Shares Amount capital Warrants Surplus Deficit Total
------ ------ ------- -------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1998 57,171,119 $ 57,171 $ 31,333,437 $ 903,996 $ 1,592,316 $(36,238,172) $ (2,351,252)
Stock issued on exercise of
prepaid warrants 7,502,930 7,503 443,039 (450,542) -- -- --
Stock issued on conversion of
secured notes payable 571,428 572 49,428 -- -- -- 50,000
Non-cash interest on convertible
notes -- -- 44,797 -- -- -- 44,797
Value assigned to 2,000,000
warrants granted in connection
with issuance of convertible
promissory notes -- -- 100,000 -- -- -- 100,000
Value assigned to 571,489
warrants issued for services -- -- 30,000 -- -- -- 30,000
Stock issued on conversion of
promissory note 303,373 303 26,242 -- -- -- 26,545
Stock issued on conversion of
7,000 shares of Series A
Preferred Stock 853,319 853 73,812 -- -- -- 74,665
Dividends on Series A Preferred
Stock -- -- (52,996) -- -- -- (52,996)
Value assigned to 1,000,000
warrants granted in connection
with issuance of promissory notes -- -- 22,000 -- -- -- 22,000
Net loss -- -- -- -- -- (1,370,904) (1,370,904)
---------- -------- ------------ --------- ----------- ------------ ------------
Balance, December 31, 1998 66,402,169 $ 66,402 $ 32,069,759 $ 453,454 $ 1,592,316 $(37,609,076) $ (3,427,145)
========== ======== ============ ========= =========== ============ ============
</TABLE>
8. PREPAID WARRANTS
At December 31, 1998, the Company had Prepaid Warrants outstanding of $453,454,
net of offering costs. The terms of the Prepaid Warrants, as amended, provide
that the face amount of the warrants or $508,108 is exercisable, without further
cash payment, into shares of Common Stock of the Company at a fixed exercise
price at $0.0875 per share, subject to certain future adjustments. The number of
shares issuable is increased for certain registration penalty shares and by 7%
per annum. At December 31, 1998, the Prepaid Warrants would have been
convertible into approximately 7.6 million shares of Common Stock. The
expiration date of the Prepaid Warrants is January 2000 at which time they
convert to shares of Common Stock. See Note 13.
9
<PAGE> 10
e.DIGITAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1998
9. WARRANTS AND OPTIONS
At December 31, 1998, other warrants, in addition to the Prepaid Warrants, were
outstanding/exercisable into the following listed shares. Also see Note 5 for
additional warrants that may become issuable upon conversion of secured notes
payable and Note 13 for subsequent warrants exercised.
<TABLE>
<CAPTION>
Number of Exercise Price
Description Shares U.S.$ Expiration Date
- ----------- ------ ----- ---------------
<S> <C> <C> <C>
Warrants 33,750 4.00 June 1999
Warrants 450,000 1.75 July 1999
Warrants 82,100 4.00 August 1999
Warrants 20,570 0.25 February 2000
Warrants 25,000 0.25 March 2000
Warrants 1,000,000 0.10 June 30, 2000
Warrants 27,500 0.25 March 2001
Warrants 571,429 0.0875 June 2001
Warrants 571,428 0.0875 July 2001
Warrants 401,924 0.25 July 2001
Warrants 400,000 0.25 August 2001
Warrants 150,000 0.15625 October 2001
Warrants 2,000,000 0.10 June 2003
Warrants 128,067 0.25 October 2005
--------- ---- ----
Total 5,861,768
=========
</TABLE>
The following table summarizes stock option activity for the period:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
<S> <C> <C>
Outstanding at March 31, 1998 2,735,340 $ 0.24
Granted 1,852,660 $ 0.0875
Exercised --
Expired (44,000)
Canceled (50,000)
---------
Outstanding at December 31, 1998 4,494,000 $ 0.15
=========
Exercisable at December 31, 1998 3,624,158 $ 0.166
=========
</TABLE>
Options outstanding are exercisable at prices ranging from $0.0875 to $3.65 and
expire over the period from 1999 to 2003 with an average life of 4.1 years.
10. INCOME TAXES
The Company has not provided a tax provision for the current period, due to
current losses. The Company has U.S. net operating loss carryforwards of
approximately $27,386,000 and $11,980,000 for federal and state tax purposes,
respectively, subject to certain limitations.
11. 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. This matter is in the
early stages and the Company has engaged legal counsel 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
10
<PAGE> 11
e.DIGITAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1998
various appeals that the former Canadian parent company may have claims for
refunds of such withheld taxes if imputed from the subsidiaries.
12. ACCOUNTING FOR CONVERTIBLE SECURITIES AT A DISCOUNT
The position of the Securities and Exchange Commission on convertible preferred
stock and convertible debt that are in the money at the time of issuance
requires recording the discount as a non-cash dividend or interest. The imputed
dividend or interest is recognized beginning with the issuance of the security
to the first date that conversion can occur and is adjusted for certain future
changes. The CP Notes (note 5) issued in June 1998 were convertible at a
discount at the time of issuance. Therefore, the Company recorded $44,797 as
imputed non-cash interest at issuance in the first fiscal quarter.
13. SUBSEQUENT EVENTS
On January 12, 1999, the stockholders approved an increase in authorized common
shares from 120 million shares to 200 millions shares. On January 13, 1999, the
Company filed an amendment to its Certificate of Incorporation to effect the
increase in authorized common shares.
Subsequent to December 31, 1998 and through February 11, 1999, the Company
issued 2,211,442 shares of Common Stock upon the conversion of $145,599 face
value of Prepaid warrants (see Note 8). The Company issued 5,067,143 shares of
Common Stock upon the conversion of 40,000 shares of Series A Stock (see Note
6). The Company also issued 5,103,869 shares of Common Stock upon the conversion
of CP Notes in the principal amount of $413,000 plus related accrued interest
and 4,285,713 shares of Common Stock upon the conversion of 12% secured notes in
the principal amount of $375,000 (see Note 5). The Company also received cash
proceeds of $58,750 upon the exercise of warrants on 671,428 shares of Common
Stock (see Note 9).
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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." SEE ALSO THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED MARCH 31, 1998.
GENERAL
The Company has completed the transition from a manufacturing and sales
organization to an OEM (Original Equipment Manufacturer) 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
licenses, royalty fees, and 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 recently announced $3 million of initial production orders from
Lanier Worldwide, Inc. ("Lanier") resulting from a January 1997 development and
supply agreement (the "Lanier Agreement"). The Company has designed, developed
and intends to supply, through a subcontractor, a new digital voice recorder and
computer docking station targeted for the medical industry. Management
estimates, but there can be no assurance that initial shipments pursuant to
these orders may commence in the fourth quarter ending March 31, 1999. Under the
terms of the Lanier Agreement, the Company is receiving NRE (non-recurring
engineering expenses), 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. From inception through
December 31, 1998 in connection therewith, the Company had received NRE of
approximately $649,000. The Lanier Agreement, as amended, is for an initial term
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. The initial $3 million order is for the first five
months of such forecast.
The Company has also entered into a development agreement with Intel Corporation
("Intel") to design and develop a digital voice recorder. Under the agreement
Intel is paying non-recurring engineering fees for design and development of
prototypes.
The Company is actively pursuing licensing, private label, and OEM opportunities
in an effort to penetrate the digital sound recording and playback market.
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 the level of its monthly cash operating costs
to approximately $120,000 per month. However, the Company may increase
expenditure levels in future periods to support its new MicroOS 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.
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 file system
and contract development of private label and custom-designed products for
computers, dictation systems, and 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.
12
<PAGE> 13
RESULTS OF OPERATIONS
For the first nine months of fiscal 1999, the Company reported revenues of
$412,674, a 54% decrease from revenues of $893,021 for the first nine months of
fiscal 1998. Three customers accounted for 95% of fiscal 1999's first nine
months of revenues and two customers accounted for 75% of total revenue in the
first nine months of fiscal 1998. Any loss of a customer could have a material
adverse impact on the Company.
Revenue for the first nine months of fiscal 1999 included $154,218 of product
sales to OEMs versus $330,338 for the prior comparable period. Product sales are
less in the current period, as the prior year included sales to Sanyo under an
arrangement which has since been discontinued. Product sales for the three
months ended December 31, 1998 were $80,323 compared to the prior year's third
quarter total of $60,224, the increase is primarily due from the shipment of an
Adam Lab order. The Company does not anticipate significant product sales in
future periods until the Company can successfully produce products under the
Lanier Agreement, currently scheduled for production commencing in the fourth
fiscal quarter (ending March 31, 1999).
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. Development
service revenue of $258,456 for the nine months ended December 31, 1998 are less
than the $562,683 for the prior year's first nine months primarily due to the
Company being in the final stage of the Lanier Agreement which accounted for
substantially all development revenues in the prior period. Development services
for the third fiscal 1999 quarter were $76,910 compared to $128,394 for the
prior year's third quarter. The decrease is consistent with the reduction in
Lanier activity. Third quarter fiscal 1999 revenue included $39,096 recognized
under the Intel development agreement.
For the nine months ended December 31, 1998, the Company reported a gross loss
of $148,332 as compared to a gross profit of $233,199 for the first nine months
of fiscal 1998. Cost of sales consisted of $127,132 of product costs and
$433,874 of contract services consisting mostly of research and development
labor being funded in part by the Lanier and Intel development agreements. The
Company has devoted additional resources over a longer than originally estimated
time period to complete the Lanier development without corresponding increases
in development revenues. This has produced the current period gross loss.
Although the Company does not anticipate any significant future contract losses,
there can be no assurance the Company can attain positive gross margins in the
future. Due to the same factors, the gross loss for the three months ended
December 31, 1998 was $66,368, compared to a gross profit of $13,490 for the
prior comparable period.
Total operating expenses (consisting of research and related expenditures and
selling and administrative expenses) for the nine months ended December 31,
1998, were $994,810, as compared to $1,014,988 for the nine months ended
December 31, 1997. Selling and administrative costs aggregated $561,242 in the
first nine months of fiscal 1999 compared to $811,357 in the prior period. The
$250,115 reduction was comprised primarily of a $65,319 decrease in compensation
and related cost, a $53,571 decrease in depreciation, amortization and business
property tax, and a $110,788 reduction in occupancy related costs. The Company
continues its efforts to control operating costs. For the third fiscal 1999
quarter, total operating expenses were $337,789 comparable to $336,814 for the
prior year's third quarter.
Research and related expenditures for the nine months ended December 31, 1998
were $433,568, as compared to $203,631, for the nine months ended December 31,
1997. An aggregate of $433,874 of development costs were incurred for contract
development work during the nine months ended December 31, 1998 and are included
in cost of revenues. 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.
Research related expenditures for the third fiscal 1999 quarter were $141,079, a
$41,847 increase from the comparable third quarter in the prior year. The
increase can be attributed to expanded engineering activities associated with
the development of technology.
The Company reported an operating loss of $1,143,142 for the nine months ended
December 31, 1998, as compared to an operating loss of $781,789 for the nine
months ended December 31, 1997. The operating loss for the third quarter of
fiscal 1999 was $404,157 compared to $323,324 in the third quarter of the prior
year. The increase in operating losses in the current fiscal year are directly
attributable to the gross losses from development activities. Management
believes, but there can be no assurance, that investments in OEM developments
with supply or royalty provisions will provide positive margins in future
periods. The timing and amount of product sales and the recognition of contract
service revenues impact the Company's operating losses. Accordingly, there is
substantial uncertainty about future operating results and the results for the
first nine months are not necessarily indicative of operating results for future
periods or the fiscal year.
13
<PAGE> 14
The Company's cash interest expense for the nine months ended December 31, 1998
was $53,329, an increase from the $39,308 for the prior period resulting from
the interest bearing debt outstanding during fiscal 1999. The Company also
incurred during the first quarter $44,797 as a one time non-cash interest
expense on convertible promissory notes convertible at a discount and recognized
during the second quarter $27,272 as non-cash interest from the amortization of
note discount.
The Company reported a net loss for the first nine months of the current fiscal
year of $1,370,904 compared to a net loss of $658,612 for the prior year's first
nine months.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had a working capital deficit of $2,033,593
compared to a working capital deficit of $911,042 at March 31, 1998. The Company
had approximately $87,500 of working capital invested in inventories at December
31, 1998. The decrease in working capital was a result of the Company's
continuing losses that consumed working capital during the period.
In June 1998, the Company completed the sale of $1,000,000 of 12% Convertible
Promissory Notes with Limited Guaranty due May 15, 1999 and in December 1998
sold $100,000 of 15% Promissory Notes. The proceeds are being applied for
continued operating capital. In January 1999 the Company sold an additional
$400,000 of notes.
For the nine months ended December 31, 1998, net cash decreased by $41,521. Cash
used in operating activities was $1,116,791. Major components using cash were a
net loss of $1,370,904 reduced by $38,506 of aggregate depreciation and
amortization, $11,233 of loss on disposal of property and equipment, $30,000 for
services paid by issuance of warrants and $140,075 of non-cash interest, or a
net loss use of cash of $1,151,089. The major change in assets and liabilities
providing cash from operating activities was a reduction in inventory of $93,179
and a reduction in accounts receivable on research and development contract of
$33,078. The major changes in assets and liabilities using operating cash was a
reduction in accounts payable trade of $32,624 and an increase in accounts
receivable of $39,940.
Other than cash on hand (including the January note sale) and accounts
receivable, the Company has no material unused sources of liquidity at this
time. Based on the Company's cash position assuming (i) continuation of existing
OEM development arrangements, (ii) currently planned expenditures and level of
operation, (iii) no new product sales or new development agreements; the Company
estimates it will require additional capital within the next twelve months to
meet its debts as they become due and to continue as a going concern. Given such
assumptions, the Company estimates that projected working capital requirements
will require a minimum of an additional $500,000 to continue operating for the
next twelve months. Management estimates that margins from supplying product
under the Lanier supply agreement may provide this requirement assuming
shipments commence in the fourth quarter. However actual results could differ
significantly from management plans. The actual future margins to be realized,
if any, and the timing of shipments and the amount and quantities of Lanier
orders and reorders are subject to many factors and risks, many outside the
control of the Company.
The Company's OEM and licensing business may also be able to contribute
additional funding required depending on the success of OEM and licensing
activities, however there can be no assurance thereof. Should additional funds
not be available, the Company may be required to curtail or scale back staffing
or operations and may not be able to meet its obligations as due. There can be
no assurance that additional funding will be available or on what terms.
Potential sources of such funds include exercise of outstanding warrants and
options, loans from shareholders or other debt financing or additional equity
offerings.
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. Any future financings may also be
dilutive to existing shareholders.
FUTURE COMMITMENTS AND FINANCIAL RESOURCES
The Company has an obligation and agreement with Comdisco, Inc. providing for
future payments of approximately $515,000 from time to time based on agreed upon
percentages of future equity raised. Also see Note 11 to the accompanying
interim statements.
14
<PAGE> 15
The Company expects to commence production in early 1999 on the Lanier products.
Management believes it has negotiated a third party contract manufacturing
arrangement to minimize the working capital funds required for the production of
Lanier orders. The Company is subject to the risk that should this arrangement
be modified or not produce the desired results, that it would be required to
supply substantial working capital for the production of the Lanier orders. The
Company will be relying on a third party manufacturer for production of the
Lanier products and will therefore be subject to the substantial risks
associated with using a sole supplier.
The Company's plans for its MicroOS 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.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches. The "Year 2000" problem
is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 problem is pervasive and complex as the computer
operation of virtually every company will be affected in some way.
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. 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.
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. The
Company is currently taking steps to ensure that its computer systems and
services will continue to operate on and after January 1, 2000. However, there
can be no assurance that Year 2000 problems will not occur with respect to the
Company's computer systems. Furthermore, the Year 2000 problem may impact other
entities with which the Company transacts business, and the Company cannot
predict the effect of the Year 2000 problem on such entities or the resulting
effect on the Company. As a result, if preventative and/or corrective actions by
the Company and those the Company does business with are not made in a timely
manner, the Year 2000 issue could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has not yet developed a contingency plan to operate in the event that any
noncompliant critical systems are not remedied by January 1, 2000, but the
Company intends to develop such a plan in the near future.
BUSINESS RISKS
This report contains a number of forward-looking statements that 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
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 and substantial
business risk factors described above and in the Company's Annual Report on Form
10-KSB for the year ended March 31, 1998 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 II. OTHER INFORMATION
ITEM 1. 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.
15
<PAGE> 16
ITEM 2. CHANGES IN SECURITIES
(a) On January 12, 1999, the common stockholders approved an increase in
authorized common shares from 120 million common shares to 200 million
common shares. On January 13, 1999, the Company filed an amendment to
its Certificate of Incorporation to effect the increase in authorized
common shares. The effect of this amendment was to provide sufficient
authorized shares for future issuance pursuant to the 1994 Stock Option
Plan and for other corporate purposes from time-to-time. The amendment
made no other modifications to the rights of common stockholders.
(b) NONE
(c) The following is a description of the equity securities sold by the
Company during the third fiscal quarter ended December 31, 1998 that
were not registered under the Securities Act:
In December 1998, the Company sold for cash $100,000 of 15% Promissory
Notes ("Notes") due December 31, 1999 to three accredited investors. The
Notes are not convertible. In connection with the sale the Company
issued the Noteholders warrants exercisable into 1,000,000 shares of
Common Stock at $0.10 per share until June 30, 2000. These securities
were offered and sold without registration under the Act, in reliance
upon the exemption provided by Regulation D or Regulation S thereunder
and an appropriate legend was placed on the Notes and the Warrants. The
securities were sold by the Company without an underwriter and no
commission was paid.
In January 1999, the Company sold an additional $400,000 of the Notes
and Warrants to one accredited investor on the same terms. The warrant
issued is exercisable into 4,000,000 shares of Common Stock on the same
terms.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
3.1.2 Certificate of Amendment of Certificate of Incorporation of
Norris Communications Inc. filed with the State of Delaware on
January 13, 1999.
4.9 Form of 15% Promissory Note due December 31, 1999 for an
aggregate of $500,000.
4.10 Form of Warrant Exercisable into an aggregate of 5,000,000
shares of Common Stock at $0.10 per share until June 30, 2000.
27 Financial Data Schedule
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
e.DIGITAL CORPORATION
Date: February 12, 1999 By: /s/RENEE WARDEN
--------------------------------
Renee Warden
Controller
(Principal Financial and
Accounting Officer and duly
authorized to sign on behalf of
the Registrant)
17
<PAGE> 1
EXHIBIT 3.1.2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NORRIS COMMUNICATIONS, INC.
(Pursuant to Sections 222 and 242 of the General
Corporation Law of the State of Delaware)
NORRIS COMMUNICATIONS, INC., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:
FIRST: That the Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on February 29, 1996,
and was amended and restated on May 31, 1996 and further amended on January 14,
1998.
SECOND: That the Board of Directors of the Corporation has duly adopted
resolutions setting forth a proposed amendments to the Certificate of
Incorporation of the Corporation, declaring such amendments to be advisable and
directing that such amendments be submitted to the stockholders of the
Corporation for approval. The resolutions setting forth the proposed amendments
are as follows:
"RESOLVED, that the Certificate of Incorporation of the
Corporation be amended by amending Article FIRST to read in full as
follows:
`FIRST: The name of this corporation is e.Digital
Corporation.' "
" FURTHER RESOLVED, that the Certificate of Incorporation of
the Corporation be amended by amending Article FOURTH to read in full
as follows:
`FOURTH: The aggregate number of shares which the Corporation
shall have authority to issue is Two Hundred Five Million
(205,000,000), divided into Two Hundred Million (200,000,000) shares of
common stock of the par value of $.001 per share, and Five Million
(5,000,000) shares of preferred stock of the par value of $.001 per
share.' "
THIRD: That thereafter, pursuant to resolution of the Board of
Directors, the annual meeting of stockholders of said corporation was duly
called and held, upon notice in
<PAGE> 2
accordance with Section 222 of the General Corporation Law of the State of
Delaware at which meeting the necessary number of shares as required by statute
were voted in favor of the amendment.
FOURTH: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FIFTH: The foregoing amendment to the Certificate of Incorporation
shall be effective on and as of the date of filing of this Certificate of
Amendment with the office of the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be executed by Alfred H. Falk, its President, and attested by
Robert Putnam, its Secretary, this 12th day of January, 1999.
NORRIS COMMUNICATIONS, INC.
By: /s/ALFRED H. FALK
-------------------------------------
Alfred H. Falk, President
[SEAL]
ATTEST:
By: /s/ROBERT PUTNAM
----------------------------------
Robert Putnam, Secretary
<PAGE> 1
EXHIBIT 4.9
NOTE SERIES 99-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 PURCHASE AGREEMENT THEREFOR BETWEEN THE COMPANY AND THE ORIGINAL HOLDER
HEREOF.
(ALL AMOUNTS IN U.S. DOLLARS)
NORRIS COMMUNICATIONS, INC.
15% SUBORDINATED PROMISSORY NOTE
Due December 31, 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 December 31,
1999 ("Maturity Date"), plus simple interest thereon at the rate of fifteen
percent (15.00%) per annum, in lawful monies of the United States of America.
Interest shall be computed on a 360 day year and 30 day months and shall accrue
and be payable quarterly on the last day of each calendar quarter, commencing on
March 31, 1999, until this Note is paid in full ("Interest Date"). If an
Interest Date or 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 15% Subordinated
Promissory Notes (herein called the "Notes"), limited in aggregate principal
amount to $500,000.
1. Any payment shall be deemed timely made if received by Noteholder
within fifteen (15) 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 fifteen (15) calendar
<PAGE> 2
days, (b) the Company fails to comply with any of its other agreements in this
Note that do not otherwise have separate remedies or provisions and such failure
continues for the period and after the notice specified below, (c) 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 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 sixty (60) 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.
2. The Company may prepay this Note at any time and from time to time,
in whole or in part, without any penalty or premium and without the prior
written agreement of Noteholder. Any prepayment of this Note shall be applied
first against any accrued interest and then against principal. Upon payment in
full of the principal amount of this Note and interest thereon, the Noteholder
shall surrender this Note for cancellation. The Company shall only make
principal reductions or prepayments pro rata among the Noteholders of this
series. Likewise any Noteholder who receives any payments or proceeds from any
enforcement of a security interest or any distribution in connection with a
bankruptcy, liquidation, reorganization, dissolution, winding-up or similar
proceedings, shall be obligated to pro rate such amounts among the other
Noteholders of this series as provided in the Purchase Agreement between the
Company and the original holder hereof.
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, or (b) 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. This
Note shall be subordinate to $450,000 of 12% Secured Promissory Notes due
September 30, 1999. The Board of Directors have designated this series of 15%
Subordinated Promissory Notes as senior in preference to the $1,000,000 of 12%
Convertible Promissory Notes with Limited Guaranty due May 15, 1999 currently
outstanding.
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
2
<PAGE> 3
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.
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 ninety (90) 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.
4. This Note is being issued in conjunction with certain warrants. A
portion of the original issue price of this investment unit (consisting of this
Note and its associated warrants) has been allocated to these warrants. The
original issue price of this Note is therefore less than its principal amount.
Because the excess of the principal amount of this Note over its original issue
price is less than (a) one-quarter of one percent of this Note's principal
amount (b) multiplied by the number of complete years to this Note's maturity,
this Note will not have "original issue discount" as that phrase is defined for
United States income tax purposes. Any Noteholder may contact the Company's
Chief Financial Officer, Treasurer or Chief Accounting Officer at its principal
office (or such other address as the Company shall subsequently furnish to the
Noteholder) for further information concerning the computation of original issue
discount under the terms of this Note.
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.
3
<PAGE> 4
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/ ALFRED H. FALK
-------------------------------------
AUTHORIZED OFFICER
4
<PAGE> 1
EXHIBIT 4.10
WARRANT SERIES 99W-A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS, AND 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.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER SET FORTH HEREIN AND IN THAT CERTAIN PURCHASE AGREEMENT
THEREFOR BETWEEN THE COMPANY AND THE ORIGINAL HOLDER HEREOF.
NORRIS COMMUNICATIONS, INC.
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, NORRIS COMMUNICATIONS, INC., a
Delaware corporation (the "Company"), hereby grants to
_____________________________________ ("Holder") the right to purchase from the
Company up to __________________ (_____) shares of the Common Stock of the
Company (the "Warrant Shares"), subject to the following terms and conditions:
1. SERIES. This Warrant is one of a duly authorized series of warrants
of the Company (which are identical except for the variations necessary to
express the identification numbers, names of the holder, number of shares of
Common Stock issuable upon exercise thereof and warrant issue dates) designated
as its "1999 Series A Warrants."
2. TERM. This Warrant may be exercised in whole at any time during the
period from the date of issuance of this Warrant until 5:00 p.m., California
time, on June 30, 2000 (the "Exercise Period").
3. PURCHASE PRICE. The purchase price for each Warrant Share
purchasable hereunder shall be ten United States cents (U.S. $0.10) (the
"Warrant Exercise Price").
4. EXERCISE OF WARRANT. The purchase rights represented by this Warrant
may be exercised by the Holder, in whole or in part, at any time and from time
to time before the end of the Exercise Period by surrender of this Warrant at
the principal office of the Company in San Diego, California (or such other
office or agency of the Company as may be designated by notice in writing to the
Holder at the address of the Holder appearing on the books of the Company),
together with the Notice of Exercise annexed hereto duly completed and executed
on behalf of the Holder accompanied by payment in full of the amount of the
aggregate Warrant Exercise Price in immediately available funds in United States
Dollars. Certificates for shares purchased hereunder shall be delivered to the
Holder within thirty (30) business days after the date on which this Warrant
shall have been exercised as aforesaid, but Holder shall be deemed the record
owner of such Warrant Shares as of and from the close of business on the date on
which this Warrant shall be surrendered. The Holder may also designate that the
Company apply any note obligation balance owed Holder by the Company towards the
exercise price of this Warrant.
5. FRACTIONAL INTEREST. The Company shall not be required to issue any
fractional shares on the exercise of this Warrant.
1
<PAGE> 2
6. WARRANT CONFERS NO RIGHTS OF SHAREHOLDER. Holder shall not have any
rights as a shareholder of the Company with regard to the Warrant Shares prior
to actual exercise resulting in the purchase of the Warrant Shares.
7. INVESTMENT REPRESENTATION. Neither this Warrant nor the Warrant
Shares issuable upon the exercise of this Warrant have been registered under the
Securities Act, or under any applicable state securities laws. Holder
acknowledges by acceptance of this Warrant that (a) it has acquired this Warrant
for investment and not with a view toward distribution; (b) it has a
pre-existing personal or business relationship with the Company, or its
executive officers, or by reason of its business or financial experience it has
the capacity to protect its own interests in connection with the transaction;
and (c) except as so notified to the Company in writing, it is an accredited
investor as that term is defined in Regulation D promulgated under the
Securities Act or not a U.S. Person within the definition set forth in
Regulation S and not an affiliate of the Company. Holder agrees that any Warrant
Shares issuable upon exercise of this Warrant will be acquired for investment
and not with a view toward distribution; and acknowledges that to the extent
such Warrant Shares will not be registered under the Securities Act and
applicable state securities laws, that such Warrant Shares may have to be held
indefinitely unless they are subsequently registered or qualified under the
Securities Act and applicable state securities laws; or, based on an opinion of
counsel reasonably satisfactory to the Company, an exemption from such
registration and qualification is available. Holder, by acceptance hereof,
consents to the placement of the following restrictive legends, or similar
legends, on each certificate to be issued to Holder by the Company in connection
with the issuance of such Warrant Shares:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY
STATE SECURITIES LAWS, AND 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 CORPORATION THAT AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER SET FORTH IN THAT CERTAIN PURCHASE AGREEMENT
THEREFOR BETWEEN THE CORPORATION AND THE ORIGINAL HOLDER HEREOF.
8. RESERVATION OF SHARES. The Company agrees at all times during the
Exercise Period to take all reasonable steps to have authorized and reserved,
for the exclusive purpose of issuance and delivery upon exercise of this
Warrant, a sufficient number of shares of its Common Stock to provide for the
exercise of the rights represented hereby. However should insufficient shares be
available for issuance at the time of exercise by the Holder, the Company shall
provide the benefit of the bargain payable in cash to the Holder at the time of
exercise. The benefit shall be computed as the amount equal to the difference
between the average closing bid price for the five trading days prior to notice
of exercise less the Warrant Exercise Price multiplied by the number of Warrant
Shares being exercised.
9. ADJUSTMENT FOR RE-CLASSIFICATION OF CAPITAL STOCK. If the Company at
any time during the Exercise Period shall, by subdivision, combination or
re-classification of securities, change any of the securities to which purchase
rights under this Warrant exist under the same or different number of securities
of any class or classes, this Warrant shall thereafter entitle the Holder to
acquire such number and kind of securities as would have been issuable as a
result of such change with respect to the Warrant Shares immediately prior to
such subdivision, combination or re-classification. If shares of the Company's
Common Stock are subdivided into a greater number of shares of Common Stock, the
purchase price for the Warrant Shares upon exercise of this Warrant shall be
proportionately reduced and the Warrant Shares shall be proportionately
increased; and conversely, if shares of the Company's Common Stock are combined
into a smaller number of Common Stock shares, the price shall be proportionately
increased, and the Warrant Shares shall be proportionately decreased.
2
<PAGE> 3
10. PUBLIC OFFERING LOCK-UP. In connection with any public registration
of this Company's securities, the Holder (and any transferee of Holder) agrees,
upon the request of the Company or the underwriter(s) managing such offering of
the Company's securities, not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of this Warrant, any of the
shares of Common Stock issuable upon exercise of this Warrant or any other
securities of the Company heretofore or hereafter acquired by Holder (other than
those included in the registration) without the prior written consent of the
Company and/or such underwriter(s), as the case may be, for a period of time not
to exceed on hundred eighty (180) days from the effective date of the
registration. Upon request by the Company, Holder (and any transferee of Holder)
agrees to enter into any further agreement in writing in a form reasonably
satisfactory to the Company and such underwriter(s). The Company may impose
stop-transfer instructions with respect to the securities subject to the
foregoing restrictions until the end of said 180-day period. Any shares issued
upon exercise of this Warrant shall bear an appropriate legend referencing this
lock-up provision.
11. REGISTRATION RIGHTS. (a) If, at any time during the Exercise
Period, the Company proposes to prepare and file any registration statements
covering its Common Stock (in either case, other than in connection with a
merger or acquisition, pursuant to Form S-8 or any successor form, or pursuant
to any other form or type of registration in which Registrable Securities (as
defined below) cannot be appropriately included) (collectively, the
"Registration Statements"), it will give written notice as provided herein at
least thirty (30) days prior to the filing of each such Registration Statement
to the Holders of the Warrants and/or Warrant Shares of its intention to do so.
If the Holders of the Warrants and/or Warrant Shares notify the Company within
twenty (20) days after receipt of any such notice of its or their desire to
include the shares of Common Stock issuable upon exercise of the Warrant or the
Warrant Shares (collectively, the "Registrable Securities") in such proposed
registration statement, the Company shall afford the Holders of the Warrant
and/or Warrant Shares the opportunity to have any such Registrable Securities
registered under such registration statement at the Company's sole cost and
expense.
(b) Notwithstanding the provisions hereof, the Company shall have the
right at any time after it shall have given written notice pursuant hereto
(irrespective of whether a written request for inclusion of any such securities
shall have been made) to elect not to file any such proposed registration
statement, or to withdraw the same after the filing but prior to the effective
date thereof.
(c) Notwithstanding any other provision of this Section, if the
underwriter managing such registration notifies the Holders in writing that
market or economic conditions limit the amount of securities which may
reasonably be expected to be sold, the Holders of such Registrable Securities
will be allowed to register their Registrable Securities pro rata based on the
number of shares of Registrable Securities held by such Holders, respectively.
No Registrable Securities excluded from the underwriting by reason of the
underwriter's marketing limitation shall be included in such registration.
(d) Each Holder of Warrants and Warrant 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
3
<PAGE> 4
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).
12. ASSIGNMENT. With respect to any offer, sale or other disposition of
this Warrant or any underlying securities, the Holder will give written notice
to the Company prior thereto, describing briefly the manner thereof, together
with a written opinion of such Holder's counsel, to the effect that such offer,
sale or other distribution may be effected without registration or qualification
(under any applicable federal or state law then in effect). Furthermore, no such
transfer shall be made unless the transferee meets the same investor suitability
standards set forth in Section 7 of this Warrant. Upon receiving such written
notice and reasonably satisfactory opinion, if so requested, the Company, as
promptly as practicable, shall notify such Holder that such Holder may sell or
otherwise dispose of this Warrant or the underlying securities, as the case may
be, all in accordance with the terms of the written notice delivered to the
Company. If a determination has been made pursuant to this Section 12 that the
opinion of counsel for the Holder is not reasonably satisfactory to the Company,
the Company shall so notify the Holder promptly after such determination has
been made. Each Warrant thus transferred shall bear the same legends appearing
on this Warrant, and underlying securities thus transferred shall bear the
legends required by Section 7. The Company may impose stop-transfer instructions
in connection with such restrictions. Subject to any restrictions on transfer
described elsewhere herein, the rights and obligations of the Company and the
Holder of this Warrant shall be binding upon and benefit the successors,
assigns, heirs, administrators and transferees of the parties hereto.
13. NOTICE. Any notice, demand, consent or other communication
hereunder shall be in writing addressed to the other party at its principal
office or, in respect of Holder, as its address as shown on the books of the
Company, 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 (i)
when so personally delivered, or (ii) if mailed as aforesaid, five (5) days
after the same shall have been posted, or (iii) if sent by facsimile
transmission, as soon as 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 (iv) if delivered by commercial courier,
upon receipt.
14. GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, applicable to contracts
between California residents entered into and to be performed entirely within
the State of California.
15. FEES. If any action at law or in equity is necessary to enforce or
interpret the terms of this Warrant, the prevailing party shall be entitled to
reasonable attorneys' fees, costs and disbursements in addition to any other
relief to which such party may be entitled.
16. DESCRIPTIVE HEADINGS. The headings used herein are descriptive only
and for the convenience of identifying provisions, and are not determinative of
the meaning or effect of any such provisions.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
duly authorized officer this ____ day of ____________, 19___.
NORRIS COMMUNICATIONS, INC.
/s/ ALFRED H. FALK
Authorized Officer
4
<PAGE> 5
NOTICE OF EXERCISE
COMMON STOCK PURCHASE WARRANT
TO: NORRIS COMMUNICATIONS, INC.
(1) The undersigned hereby elects to purchase ______ shares of Common
Stock of Norris Communications, Inc., pursuant to the terms of the attached
Warrant, and either tenders herewith payment in full of the purchase price for
such shares or $________ or,
(2) Requests the Company reduce the amount of 15% Subordinated
Promissory Notes due to the undersigned in the amount of $_________ as the
Warrant Exercise Price.
(3) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, for
investment, and that the undersigned will not offer, sell or otherwise dispose
of any such shares of Common Stock except under circumstances that will not
result in a violation of the Securities Act of 1933, as amended, or any state
securities laws.
(4) Please issue a certificate representing said shares of Common Stock
in the name of the undersigned.
(5) Please issue a new Warrant for the unexercised portion of the
attached Warrant in the name of the undersigned.
Date: , 199
------------------ -------------------------------------
(Name)
-------------------------------------
(Signature
-------------------------------------
-------------------------------------
(Print Address)
5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10QSB FOR THE
QUARTERLY PERIOD ENDED DECEMBER 31, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,849
<SECURITIES> 0
<RECEIVABLES> 230,455
<ALLOWANCES> 953
<INVENTORY> 87,572
<CURRENT-ASSETS> 350,212
<PP&E> 283,216
<DEPRECIATION> 203,860
<TOTAL-ASSETS> 441,976
<CURRENT-LIABILITIES> 2,383,806
<BONDS> 504,322
980,993
0
<COMMON> 66,402
<OTHER-SE> (3,493,547)
<TOTAL-LIABILITY-AND-EQUITY> 441,976
<SALES> 154,218
<TOTAL-REVENUES> 412,674
<CGS> 127,132
<TOTAL-COSTS> 561,006
<OTHER-EXPENSES> 994,810
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193,405
<INCOME-PRETAX> (1,370,904)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,370,904)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,370,904)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
